As filed with the Securities and Exchange Commission on April 16, 2018.

Registration No. 333-220372

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

AMENDMENT NO. 5

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

Hancock Jaffe Laboratories, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3841   33-0936180
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

 

 

 

70 Doppler

Irvine, California 92618

(949) 261-2900

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

Robert A. Berman

Chief Executive Officer

Hancock Jaffe Laboratories, Inc.

70 Doppler

Irvine, California 92618

(949) 261-2900

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

 

Copies to:

Michael A. Hedge

K&L Gates LLP

1 Park Plaza

Twelfth Floor

Irvine, California 92614

(949) 253-0900

 

Peter DiChiara

Ross D. Carmel

Carmel, Milazzo & DiChiara LLP

55 West 39 th Street, 18th Floor

New York, New York

(212) 658-0458

 

 

 

Approximate date of commencement of proposed sale to the public:

As soon as practicable after this Registration Statement is declared effective.

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box: ☒

 

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 7(a)(2)(B) of the Securities Act. ☒

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to be Registered   Amount to be
Registered
    Proposed
Maximum
Offering Price per
Share (2)
    Proposed
Maximum
Aggregate
Offering Price (2)
    Amount of
Registration Fee (6)
 
Units, each consisting of one share of common stock, par value $0.00001 per share, and a warrant to purchase one share of common stock     1,314,286 (1)   $ 8.00     $ 10,514,289     $ 1,309  
Common stock included in the units (4)                        
Warrants included in the units (4)                        
Common stock underlying the warrants included in the units     1,314,286     $ 9.60     $ 12,617,146     $ 1,571  
Underwriters’ warrants (3)(4)     65,714                    
Shares of common stock underlying underwriters’ warrants     65,714     $ 10.00     $ 657,140     $ 82  
Common stock, $0.00001 par value per share (5)     2,857,179     $ 8.00     $ 22,857,433     $ 2,846  
Total:     5,617,179           $ 46,646,008     $ 5,808  

 

(1) Includes 171,429 units that the underwriters have the option to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended, or the Securities Act.
(3) Registers warrants to be granted to the underwriters, or designees, for an amount equal to 5% of the number of the units sold to the public, and assuming a per share exercise price equal to 125% of the price per unit in this offering. See “Underwriting” on page 114 of the first appearing prospectus contained within this registration statement for information on underwriting arrangements.
(4)

Included in the price of the units. No registration fee required pursuant to Rule 457(g) under the Securities Act.

(5) Represents 1,388,499 shares of common stock that the Registrant expects could be issuable upon the conversion of certain convertible notes, 1,461,180 shares of common stock that the Registrant expects could be issuable upon exercise of certain warrants to purchase shares of common stock and 7,500 shares of common stock held by a selling stockholder, each of which are being registered for resale as described in this registration statement.
(6) The Registrant previously paid $3,469.

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission acting pursuant to said Section 8(a), may determine.

 

 

 

 
 

 

EXPLANATORY NOTE

 

This Registration Statement contains two forms of prospectuses. The first appearing prospectus is for the initial public offering of our units , which we refer to as the Prospectus, through the underwriter named on the cover page of the Prospectus which consists of an aggregate of (i) 1,314,286 units (including 171,429 units which may be sold upon exercise of the underwriters’ over-allotment option to cover over-allotments, if any ), each unit consists of one share of our common stock, par value $0.00001 per share, and a warrant to purchase one share of our common stock, which we refer to as the Unit, (ii) the 1,314,286 shares of our common stock issuable from time to time upon exercise of such warrant included in the Unit , ( iii ) warrants to be granted to the underwriters, or designees, for an amount equal to 5% of the number of our Units sold to the public, which we refer to as the Underwriters’ Warrants, and (i v ) the shares of our common stock issuable upon exercise of the Underwriters’ Warrants.

 

The second appearing prospectus is to be used in connection with the resale by certain stockholders of our company, which we refer to as the Selling Stockholders, of an aggregate of 2,469,221 shares of our common stock, which we refer to as the Selling Stockholder Prospectus, consisting of (i) 580,232 shares of our common stock, which we refer to as the 2017 Note Shares, issuable upon conversion of our outstanding amended and restated convertible notes, which we refer to as the 2017 Notes, (ii) 609,908 shares of our common stock, which we refer to as the 2018 Note Shares and together with the 2017 Note Shares, the Note Shares, issuable upon conversion of our outstanding convertible notes, which we refer to as the 2018 Notes and together with the 2017 Notes, the Notes, (iii) 1,271,581 shares of our common stock, which we refer to as the Warrant Shares, issuable upon exercise of outstanding warrants, which we refer to as the Warrants, and (iv) 7,500 shares of our common stock held by COVA Capital Partners, LLC, in each case calculated using the midpoint of the price range listed on the cover page of this Prospectus.

 

The Prospectus and Selling Stockholder Prospectus are identical in all respects except for the alternate pages for the Selling Stockholder Prospectus included herein, which are labeled “Alternate Pages for Selling Stockholder Prospectus,” and are set forth below:

 

  they contain different outside and inside front covers;
     
  they contain different “Prospectus Summary” sections;
     
  they contain different “Use of Proceeds” sections;
     
  the “Capitalization” section does not appear in the Selling Stockholder Prospectus;
     
  a “Selling Stockholder” section is included at the beginning of the Selling Stockholder Prospectus;
     
  ●  the Underwriting section set forth in the Prospectus does not appear in the Selling Stockholder Prospectus and instead, a “Plan of Distribution” section is inserted in its place in the Selling Stockholder Prospectus; and
     
  the “Legal Matters” section in the Selling Stockholder Prospectus does not reference counsel for the underwriters.

 

We have included in this Registration Statement, after the financial statements, the Alternate Pages for the Selling Stockholder Prospectus, which reflect the foregoing differences of the Selling Stockholder Prospectus as compared to the Prospectus.

 

The sales of our securities registered in the Prospectus and the shares of our common stock registered in the Selling Stockholder Prospectus may result in two offerings taking place concurrently, which could affect the price and liquidity of, and demand for, our securities. This risk and other risks are included in “Risk Factors” beginning on page 10 of the Prospectus.

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 16 , 2018

 

PRELIMINARY PROSPECTUS

 

 

 

1,142,857 Units

 

Each Unit Consisting of One Share of Common Stock and

 

a Warrant to Purchase One Share of Common Stock

 

This is the initial public offering of our Units. Each Unit consists of one share of our common stock, par value $0.00001 per share, and a common stock purchase warrant to purchase one share of our common stock (and the 1,142,857 shares of our common stock issuable from time to time upon exercise of such warrant). Each warrant will have an exercise price equal to 120% of the initial public offering price per Unit set forth on the cover page of this Prospectus and will be exercisable beginning on the date of issuance and expire on the fifth anniversary of the original issuance date. The shares of our common stock and warrants that are part of the Units are immediately separable, but will be purchased together in this offering. The Units will not be issued or certificated. Purchasers will receive only shares of our common stock and warrants. Prior to this offering there has been no public market for our securities. We are offering 1,142,857 Units. We currently expect the initial public offering price to be between $6.00 and $8.00 per Unit.

 

There is presently no public market for our securities. We have applied to have our common stock and warrants listed on The Nasdaq Capital Market, or Nasdaq, under the symbols “HJLI” and “HJLIW”, respectively. We cannot guarantee that our securities will be approved for listing on the Nasdaq. 

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012, and as such, have elected to take advantage of certain reduced public company reporting requirements.

 

Investing in our securities involves a high degree of risk. Please read “Risk Factors” beginning on page 10 of this prospectus.

 

      Per Share       Total  
Public offering price   $     $  
Underwriting discounts and commissions(1)   $     $  
Proceeds to us, before expenses   $     $  

 

(1)

See “Underwriting” beginning on page 114 of this prospectus for a description of the compensation payable to the underwriters.

 

We have granted to the underwriters an option to purchase up to 171,429 additional Units at the public offering price, less the underwriting discounts and commissions, for 45 days after the date of this prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Delivery of the shares and the warrants are expected to be made on or about           , 2018.

 

  Sole Book-Running Manager  
     
  Network 1 Financial Securities  

 

The date of this prospectus is               , 2018
 

 
 

 

TABLE OF CONTENTS

 

  Page
PROSPECTUS SUMMARY 1
RISK FACTORS 10
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA 46
USE OF PROCEEDS 48
DIVIDEND POLICY 49
CAPITALIZATION 50
DILUTION 52
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 55
BUSINESS 64
MANAGEMENT 85
EXECUTIVE COMPENSATION 93
PRINCIPAL STOCKHOLDERS 101
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS 102
DESCRIPTION OF CAPITAL STOCK 103
SHARES ELIGIBLE FOR FUTURE SALE 109
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS 111
UNDERWRITING 114
LEGAL MATTERS 117
EXPERTS 117
WHERE YOU CAN FIND MORE INFORMATION 117
INDEX TO FINANCIAL STATEMENTS F-1

 

 
 

 

We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only our Units offered hereby, but only under the circumstances and in the jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of our Units . Our business, financial condition, results of operations and prospects may have changed since that date.

 

For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus or any applicable free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus and any applicable free writing prospectus must inform themselves of, and observe any restrictions relating to, the offering of our Units and the distribution of this prospectus outside the United States.

 

Through and including            , 2018 (25 days after the date of this prospectus), all dealers that buy, sell or trade our securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

We use our registered trademarks and trade names, such as VenoValve® and CoreoGraft™, in this prospectus. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations, such as ProCol Vascular Bioprosthesis®. Solely for convenience, trademarks and trade names referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

Unless the context requires otherwise, references in this prospectus to “we,” “us,” “our,” “our company,” or similar terminology refer to Hancock Jaffe Laboratories, Inc. Unless the context requires otherwise, references in this prospectus to “Units” or “securities” refer to the shares of common stock and warrants offered hereby.

 

 
 

 

 

PROSPECTUS SUMMARY

 

This summary highlights selected information contained elsewhere in this prospectus, and does not contain all of the information that you should consider before investing in our securities. This summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. You should read this entire prospectus carefully, including the information set forth in the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes thereto contained in this prospectus, before making an investment decision.

 

Overview

 

We are a development stage medical device company developing biologic-based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three product candidates: the Bioprosthetic Heart Valve, which we refer to as BHV, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Our Product Candidates

 

We are in the process of developing the following bioprosthetic implantable devices for cardiovascular disease:

 

The Bioprosthetic Heart Valve : the BHV is a bioprosthetic, porcine, or pig, heart valve designed to function like a native heart valve, and designed to provide a patient greater functional performance than currently available devices. Early pre-clinical testing has demonstrated improved function over existing surgically implanted devices and, due to these study results, we believe BHV may be suitable for the pediatric population, as it accommodates its performance concomitant with the growth of the patient. Most of the data and studies have been performed to support our submission to the FDA for either a first-in-human study or for an investigational device exemption, or IDE, which we plan to submit in 2018. If we receive approval for an IDE, we plan to proceed with a clinical trial through the FDA standard ISO 5840, which is the international standard for bioprosthetic heart valve testing.
     

The CoreoGraft: the CoreoGraft is an “off the shelf” bioprosthetic, bovine, or cow, derived coronary artery bypass graft with a 3 millimeter, or mm, diameter for use as a coronary vascular conduit in coronary artery bypass procedures. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and to facilitate a more complete revascularization of the injured heart muscle. The CoreoGraft is intended to allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures. We believe we will need to proceed with both pre-clinical and human studies in order to obtain FDA approval. Once we complete the pre-clinical studies, we plan to proceed with a human trial to evaluate this graft in patients in need of cardiac revascularization without any autologous tissue. The human study would likely be a one-year study to evaluate the graft being open by coronary angiography. We intend to start the pre-clinical studies in the United States in 2018.

 

 

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The Venous Valve: the VenoValve is a bioprosthetic, porcine venous valve for patients with lower limb chronic venous insufficiency, or CVI, which occurs because of damage to the valves of the veins in the legs after patients develop blood clots in the deep venous system. An estimated 4.5 million people experience lower limb CVI in the United States and we believe the VenoValve, which is surgically implanted, will result in improvement in venous valve function in the legs of these patients. The VenoValve would replace dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. The VenoValve could allow for surgical insertion into the femoral vein or popliteal vein, thereby re-establishing competence and antegrade venous flow back to the heart and improvement in symptoms. Preclinical prototype testing, including in vivo animal studies by us, and in vitro hemodynamic studies, have demonstrated that the VenoValve mimics the function of a normal functioning venous valve. In preclinical studies, the VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, the VenoValve has functioned normally in acute pre-clinical implementations as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. Ascending and descending venography of the VenoValve in pre-clinical study has demonstrated competency of the valve as well as being open in appropriate flow patterns. Results of eight pre-clinical tests were submitted to the FDA in the third quarter of 2017 in order to commence first-in-human trials in the United States. In the fourth quarter of 2017, we and the FDA discussed the pre-clinical tests submitted by us in the third quarter of 2017 and the FDA recommended we perform an additional 90-day pre-clinical study before commencing a first-in-human testing. We are preparing to commence the additional pre-clinical trial and once completed, we expect to begin first-in-human testing. Once we commence the first-in-human testing, we may seek to obtain reimbursement approval for this product candidate.

 

In addition, we previously manufactured, developed and obtained FDA pre-market approval, or PMA, for the ProCol Vascular Bioprosthesis, a Class III product for hemodialysis vascular access in patients with ESRD. It is a biological graft derived from a bovine mesenteric vein. The ProCol Vascular Bioprosthesis received a PMA for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft implant.

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for its dialysis access line of products for an upfront payment and a three-year royalty of up to $5 million. We continue to provide manufacturing transition services to LMAT from our facility in Irvine, California, and are obligated to do so under an agreement with LMAT until 2019. Our ongoing revenue stream is derived from the sub-contract manufacturing services and royalties earned on LMAT sales pursuant to our agreement with LMAT.

 

Our Industry and Market

 

Our three product candidates currently under development are designed to address three different cardiovascular diseases. The BHV is designed to address diseases relating to the aortic and mitral valves. The CoreGraft is designed to address coronary artery bypass graft surgery, or CABG, and the VenoValve is designed to address lower limb CVI.

 

Aortic and Mitral Valve Diseases

 

Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. They have been shown to be effective, safe and durable. Heart valve replacement can be done with either a mechanical or bioprosthetic (tissue) prosthesis. Patients with mechanical heart valves are at increased risk for embolic stroke and thrombosis of the valve itself, and, therefore, require long-term anticoagulation. Even with anticoagulation, the risk of stroke or valve thrombosis is ~0.9% per year with mechanical mitral valves, ~0.5% per year for mechanical aortic valves, and ~1.2% per year in those with two mechanical valves.

 

We believe that pediatric patients requiring the smallest valve sizes, typically 19 to 21 mm in diameter, are not adequately treated by current market devices. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple successive surgeries to provide a larger valve replacement. The patient outgrows the valve size several times between ages two and twenty, requiring several surgeries before adulthood, also referred to as patient prosthetic mismatch.

 

 

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Congenital heart defects are serious and common conditions that have significant impact on morbidity, mortality, and healthcare costs in children and adults. The most commonly reported incidence of congenital heart defects in the United States is between 4 and 10 per 1,000, clustering around 8 per 1,000 live births. We believe these patients would benefit from a bioprosthetic heart valve that is safer, more cost effective, and with greater functional performance, potentially resulting in fewer surgeries .

 

Coronary Artery Bypass Graft Surgery

 

The current standard procedure for CABG employs the use of the patient’s saphenous vein , internal mammary artery and/or radial artery as conduits to re-establish blood flow. While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. CABG remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. By the end of the last decade, more than 160,000 CABG procedures requiring almost one hundred thousand harvested autologous grafts were performed annually in the United States. In 2015, 150,000 CABG procedures were performed, which accounts for 375,000 bypass grafts.

 

We believe that the recent trend toward off pump coronary graft surgery (surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation, which decreases the surgery time by one hour) and minimally invasive CABG procedures has had considerable bearing on both perioperative and procedural safety and efficacy, and has the potential to significantly impact the future of the procedure. Regardless of the type of bypass procedure, bypass graft harvest remains an invasive and complication prone aspect of the bypass procedure. Present standard-of-care complications are described in recent published reports in major medical journals. The percentage of complications can be as high as 43%.

 

Saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the three mechanisms that lead to venous graft failure. Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure. We believe that the CoreoGraft bioprosthetic bypass graft may eliminate the complications associated with bypass graft harvests, and potentially reduce or eliminate the failure rate of conventional bypass grafts.

 

Lower limb CVI

 

Lower limb CVI is a disease affecting approximately 4.5 million people in the United States, which includes over 600,000 people having ulcers or wounds on their legs, which is generally considered the most severe type of CVI. People with CVI are plagued with marked disability, either from leg swelling, development of non-healing leg ulcers and often adversely impacting mobility . Approximately 1 million people in the United States each year develop blood clots in their legs and many of these patients will go on to develop symptoms of CVI.

 

Once the valves are damaged in the legs, the poor functioning of the valves prevents blood from returning to the heart from the legs and the cascade of symptoms of CVI begins. Presently, no medical or nonsurgical treatment is available other than compression “garments” or constant leg elevation. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected saphenous vein is an option. For the deep system, valve transplants have been attempted but with very-poor results. Another potential option , the creation of valves using fibrous tissue, is only performed in few centers worldwide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI. Currently, however, there is no known device or medicine available that would restore venous flow in the deep venous system.

 

 

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Our Strategy

 

Our business strategy is focused primarily on the research, development and manufacturing of our biomedical device product candidates for use in cardiovascular surgical procedures. We have targeted the relatively large device markets where our biologic technological advances and achievements could provide an opportunity to address patient needs that are not currently being satisfied.

 

Our Competitive Strengths

 

We believe we will offer the cardiovascular device market a compelling value proposition with the launch of our three product candidates, if approved, for the following reasons:

 

  ●  We have extensive experience of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic tissue devices. We believe that our patents, which cover certain aspects of our devices and the processing methods of biologic valvular tissue as a “bioprosthetic” device, may provide an advantage over potential competitors.
     
  ●  We operate a 14,507 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of Class III medical devices and is equipped for research and development, prototype fabrication, current good manufacturing practices, or cGMP, and manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.
     
  ●  We have attracted senior executives who are experienced in research and development and who have the expertise to obtain FDA approval for product candidates like ours that are intended to satisfy patient needs. We also have the advantage of an experienced board of directors and scientific advisory board who will provide guidance as we move towards market launch.

 

Intellectual Property

 

We possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long and trusted relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that enhances device functions and guarantees sterility. Our patents pertaining to the unique design advantages and processing methods of valvular tissue as a bioprosthetic device provide further functional advantages over potential competitors. The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010 and expiring on July 9, 2027. Two patent applications have been filed for the VenoValve with the U.S. Patent and Trademark Office.

 

Implications of Being an Emerging Growth Company

 

We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. For as long as we remain an emerging growth company, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies. These provisions include, but are not limited to:

 

 

  4  
 

 

 

  being permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;
     
  an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act;
     
  reduced disclosure about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and
     
  exemptions from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We chose to “opt out” of this provision. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year following the fifth anniversary of the completion of this offering, (ii) the first fiscal year after our annual gross revenues exceed $1.07 billion, (iii) the date on which we have, during the immediately preceding three-year period, issued more than $1.0 billion in non-convertible debt securities or (iv) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million as of the end of the second quarter of that fiscal year.

 

Summary Risks Related to Our Business

 

Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our common stock. These risks are discussed more fully in “Risk Factors” beginning on page 10 of this prospectus. These risks include, but are not limited to, the following:

 

  We have incurred significant losses since our inception, expect to incur significant losses in the future and may never achieve or sustain profitability.
     
  We currently depend entirely on the successful and timely regulatory approval and commercialization of our three product candidates, which may not receive regulatory approval or, if any of our product candidates do receive regulatory approval, we may not be able to successfully commercialize them.
     
 

We will need to raise additional capital beyond our initial public offering and if we are unable to successfully raise additional capital, we may not be able to complete our future clinical trials and product development could be limited and our long term viability may be threatened.

     
  As a result of our current lack of financial liquidity, our independent registered accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.
     
  We will need to increase the size of our organization, and we may experience difficulties in managing this growth.
     
  Our business and product candidates are subject to extensive governmental regulation and oversight, and our failure to comply with applicable regulatory requirements could harm our business.
     
  The FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.

 

 

  5  
 

 

 

  We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of our product candidates, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.
     
  If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which could harm our business, financial condition and results of operations.
     
  Our collaborations with outside scientists and consultants may be subject to restriction and change.
     
  Our principal stockholders and management own a significant percentage of our capital stock and will be able to exert a controlling influence over our business affairs and matters submitted to stockholders for approval.

 

Corporate Information

 

We were incorporated in Delaware on December 22, 1999. Our principal executive offices are located at 70 Doppler, Irvine, California, 92618, and our telephone number is (949) 261-2900. Our corporate website address is www.hancockjaffe.com. The information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only.

 

 

  6  
 

 

 

THE OFFERING

 

Securities offered by us   1,142,857 Units, each Unit consisting of one share of our common stock, par value $0.00001 per share, and a warrant to purchase one share of our common stock.
     
Common stock outstanding before this offering   9,042,480 shares
     
Exercisability of warrants included in Units  

Each warrant offered as part of a Unit is exercisable for one share of our common stock exercisable beginning on the date of issuance and expiring at 5:00 p.m., New York City time, on the fifth anniversary of the date of issuance.

     
Exercise price of warrants included in Units   Warrants included in the Units are exercisable at a price equal to 120% of the price per Unit sold in this offering
     
Underwriters’ option to purchase additional Units from us   We have granted the underwriters an option for a period of 45 days from the date of this prospectus to purchase an additional 171,429 Units.
     
Common stock to be outstanding after this offering   10,185,337 shares
     
Shares of common stock issuable upon warrants outstanding before this offering   1,438,247 shares
     
Shares of common stock issuable upon warrants outstanding after this offering   2,638,247 shares
     
Use of proceeds   We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund our research and development activities and the regulatory review process for our product candidates, and the remainder for working capital and other general corporate purposes. See “Use of Proceeds” on page 48.
     
Risk Factors   See “Risk Factors” on page 10 for a discussion of certain of factors to consider carefully before deciding to purchase any of our securities.
     
Nasdaq Capital Market proposed symbols  

We anticipate that our common stock and warrants underlying the Units will be listed on the Nasdaq under the symbols “HJLI” and “HJLIW”, respectively.

 

The Units will not be issued or certificated. Purchasers will receive only shares of common stock and warrants. The common stock and warrants may be transferred separately immediately upon issuance.

 

The number of shares of our common stock to be outstanding after this offering is based on 9,042,480 shares of common stock outstanding as of March 31 , 2018, and excludes:

 

  1,438,247 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31 , 2018, at a weighted average exercise price of $ 12.80 per share;
     
  57,143 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $8.75, which represents 5% of the Units being offered hereby and 125% of an assumed initial public offering price of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus;
     
  2,109 shares of our common stock issuable upon the conversion of certain unconverted 2017 Notes outstanding as of March 31, 2018, which number of shares was determined by dividing the total of the aggregate principal and the estimated accrued interest amounts of the outstanding 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units ;
     
  1,422,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Omnibus Incentive Plan, or the 2016 plan, as of March 31, 2018; and
     
  1,078,000 shares of our common stock reserved for future issuance under the 2016 plan.

 

Unless otherwise indicated, all information contained in this prospectus assumes:

 

  no exercise of the warrants offered as part of the Units;
     
  no exercise by the underwriters of their option to purchase additional Units;
     
  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,720,775 shares of our common stock, which includes 90,717 shares of common stock in payment of accrued dividends as of March 31 , 2018, which will occur immediately prior to the closing of this offering;
     
  the automatic conversion of the 2018 Notes outstanding as of March 31 , 2018 into 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the conversion of certain 2017 Notes outstanding as of March 31 , 2018 into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal and the estimated accrued interest amounts of those converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and
     
  a one-for-two reverse stock split of our common stock effected on December 14, 2017.

 

 

  7  
 

 

 

SUMMARY FINANCIAL DATA

 

The following table summarizes our financial data. We have derived the summary balance sheet data as of December 31, 2016 and 2017 and statements of operations data for the years ended December 31, 2016 and 2017 from our audited financial statements included elsewhere in this prospectus. Our historical results are not necessarily indicative of our results in any future period. You should read the following summary financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included elsewhere in this prospectus. The summary financial data in this section are not intended to replace our financial statements and the related notes and are qualified in their entirety by the financial statements and related notes included elsewhere in this prospectus.

 

A one-for-two reverse stock split of our common stock was effected on December 14, 2017, or the reverse stock split. With the exception of the securities that are not affected by the reverse stock split, all share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented.

 

    For The Years Ended  
    December 31,  
    2017     2016  
Statement of Operations Data:            
Revenues   $ 422,111     $ 785,912  
Cost of goods sold     419,659       810,294  
Gross profit (loss)     2,452       (24,382 )
Selling, general and administrative expenses     5,455,963       4,634,801  
Research and development expenses     649,736        
Loss from Operations     (6,103,247 )     (4,659,183 )
                 
Other Expense:     1,688,222       929,075  
                 
Loss from Continuing Operations     (7,791,469 )     (5,588,258 )
Discontinued Operations:                
Loss from discontinued operations, net of tax           (298,286 )
Gain on sale of discontinued operations, net of tax           2,499,054  
Income from Discontinued Operations, net of tax           2,200,768  
                 
Net Loss     (7,791,469 )     (3,387,490 )
Deemed dividend to preferred stockholders     (459,917 )     (342,859 )
Net Loss Attributable to Common Stockholders   $ (8,251,386 )   $ (3,730,349 )

 

 

  8  
 

 

 

    As of December 31 , 2017  
    Actual     Pro
Forma(1)
    Pro Forma as
Adjusted(2)(3)
 
                   
Balance Sheet Data:                        
Cash   $ 77,688     $ 2,404,964     $ 9,119,022  
Working capital (deficit)   $ (8,004,171 )   $ (667,016 )   $ 6,047,042  
Total assets   $ 2,214,888     $ 4,542,164     $ 11,256,222  
Total liabilities   $ 8,174,584     $ 3,164,705     $ 3,164,705  
Additional paid-in capital   $ 24,389,307       38,532,923       45,246,970  
Accumulated deficit   $ (35,519,819 )   $ (37,155,555 )   $ (37,155,555 )
Total stockholders’ deficiency   $ (11,130,451 )   $ 1,377,458     $ 8,091,516  

 

(1) Gives effect to the (i) issuance of $2,897,500 of 2018  Notes subsequent to December 31, 2017 for net proceeds of $2,603,750, and the subsequent automatic conversion of the aggregate principal amount and $91,270 of interest accrued through March 31 , 2018 on the 2018 Notes into 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (ii) conversion of $2,740,500 of aggregate principal amount and $92,351 of interest accrued through March 31 , 2018 on certain converting 2017 Notes into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (iii) automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,630,058 shares of our common stock, which will occur immediately prior to the closing of this offering, (iv) issuance of an estimated 90,717 shares of common stock in payment of accrued but unpaid dividends on shares of our preferred stock based on dividends accruing through March 31, 2018, (v) repayment of $270,038 principal and $6,436 interest on the Leman Note (as described below), (vi) the reclassification of $1,900,553 of warrant derivative liabilities to equity, which will occur immediately prior to the closing of this offering, and (vii) filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the closing of this offering.
   
(2) Reflects, in addition to the pro forma adjustment set forth in footnote 1, the sale of 1,142,857 Units in this offering at an assumed initial public offering price of $7.00 per Unit, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
   
(3) A $1.00 increase or decrease in the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $1.0 million, assuming the number of Units offered by us, as stated on the cover page of this prospectus, remains unchanged and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 100,000 Units we are offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $630,000, assuming the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

  9  
 

 

RISK FACTORS

 

Investing in our securities involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information appearing elsewhere in this prospectus, including our financial statements, the notes thereto and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding to invest in our securities. The occurrence of any of the following risks could have a material and adverse effect on our business, reputation, financial condition, results of operations and future growth prospects, as well as our ability to accomplish our strategic objectives. As a result, the trading price of our common stock could decline and you could lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and stock price.

 

Risks Related to Our Business and Strategy

 

We have incurred significant losses since our inception, expect to incur significant losses in the future and may never achieve or sustain profitability.

 

We have historically incurred substantial net losses, including net losses of $7,791,469 for the year ended December 31, 2017, $3,387,490 for the year ended December 31 , 2016 and $1,604,013 for the year ended December 31, 2015. As a result of our historical losses, we had an accumulated deficit of $35,519,819 as of December 31, 2017. Our losses have resulted primarily from costs related to general and administrative expenses relating to our operations, as well as our research programs and the development of our product candidates. Currently, we are not generating significant revenue from operations, and we expect to incur losses for the foreseeable future as we seek to obtain regulatory approval for our product candidates. Additionally, we expect that our general and administrative expenses will increase due to the additional operational and reporting costs associated with being a public company as well as the projected expansion of our operations. We do not expect to generate significant revenue until any of our product candidates are approved, if ever. We may never generate significant revenue or become profitable. Even if we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve and subsequently sustain profitability could harm our business, financial condition, results of operations and cash flows.

 

We currently depend entirely on the successful and timely regulatory approval and commercialization of our three product candidates, which may not receive regulatory approval or, if any of our product candidates do receive regulatory approval, we may not be able to successfully commercialize them.

 

We currently have three product candidates, the Bioprosthetic Heart Valve, the CoreoGraft, and the VenoValve, and our business presently depends entirely on our ability to obtain regulatory approval for and to successfully commercialize each of our product candidates in a timely manner. Our product candidates are based on technologies that have not been used previously in the manner we propose and must compete with more established treatments currently accepted as the standards of care. Market acceptance of our product candidates will largely depend on our ability to demonstrate their relative safety, efficacy, cost-effectiveness and ease of use. We may not be able to successfully develop and commercialize our product candidates. If we fail to do so, we will not be able to generate substantial revenues, if any.

 

We are subject to rigorous and extensive regulation by the FDA in the United States and by comparable agencies in other jurisdictions, including the European Medicines Agency, or EMA, in the European Union, or EU. Our product candidates are currently in development and we have not received FDA approval for our product candidates. Our product candidates may not be marketed in the United States until they have been approved by the FDA and may not be marketed in other jurisdictions until they have received approval from the appropriate foreign regulatory agencies. Each product candidate requires significant research, development, preclinical testing and extensive clinical investigation before submission of any regulatory application for marketing approval.

 

Obtaining regulatory approval requires substantial time, effort and financial resources, and we may not be able to obtain approval of any of our product candidates on a timely basis, or at all. The number, size, design and focus of preclinical and clinical trials that will be required for approval by the FDA, the EMA or any other foreign regulatory agency varies depending on the device, the disease or condition that the product candidates are designed to address and the regulations applicable to any particular products. Preclinical and clinical data can be interpreted in different ways, which could delay, limit or preclude regulatory approval. The FDA, the EMA and other foreign regulatory agencies can delay, limit or deny approval of a product for many reasons, including, but not limited to:

 

  10  
 

 

  a product candidate may not be shown to be safe or effective;
     
  the clinical and other benefits of a product candidate may not outweigh its safety risks;
     
  clinical trial results may be negative or inconclusive, or adverse medical events may occur during a clinical trial;
     
  the results of clinical trials may not meet the level of statistical significance required by regulatory agencies for approval;
     
  regulatory agencies may interpret data from pre-clinical and clinical trials in different ways than we do;
     
  regulatory agencies may not approve the manufacturing process or determine that the manufacturing is not in accordance with cGMPs;
     
  a product candidate may fail to comply with regulatory requirements;
     
  regulatory agencies might change their approval policies or adopt new regulations.

 

If our product candidates are not approved at all or quickly enough to provide net revenues to defray our operating expenses, our business, financial condition, operating results and prospects could be harmed.

 

If we are unable to successfully raise additional capital, our future clinical trials and product development could be limited and our long-term viability may be threatened.

 

We have experienced negative operating cash flows since our inception and have funded our operations primarily from proceeds received from sales of our capital stock, the issuance of the convertible and non-convertible notes, and the sale of our ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LMAT in March 2016. We expect the proceeds from this offering will be sufficient to fund our operations for the next 9 to 12 months. We will need to seek additional funds in the future through equity or debt financings, or strategic alliances with third parties, either alone or in combination with equity financings to complete our product development initiatives. These financings could result in substantial dilution to the holders of our common stock, or require contractual or other restrictions on our operations or on alternatives that may be available to us. If we raise additional funds by issuing debt securities, these debt securities could impose significant restrictions on our operations. Any such required financing may not be available in amounts or on terms acceptable to us, and the failure to procure such required financing could have a material and adverse effect on our business, financial condition and results of operations, or threaten our ability to continue as a going concern.

 

Our present and future capital requirements will be significant and will depend on many factors, including:

 

  the progress and results of our development efforts for our product candidates;
     
  the costs, timing and outcome of regulatory review of our product candidates;
     
  the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims;
     
  the effect of competing technological and market developments;
     
  market acceptance of our product candidates;

 

  11  
 

 

  our rate of progress in establishing coverage and reimbursement arrangements with domestic and international commercial third-party payors and government payors;
     
  our ability to achieve revenue growth and improve gross margins;
     
  the extent to which we acquire or in-license other products and technologies; and
     
  legal, accounting, insurance and other professional and business-related costs.

 

We may not be able to acquire additional funds on acceptable terms, or at all. If we are unable to raise adequate funds, we may have to liquidate some or all of our assets or delay, reduce the scope of or eliminate some or all of our development programs.

 

If we do not have, or are not able to obtain, sufficient funds, we may be required to delay development or commercialization of our product candidates or license to third parties the rights to commercialize our product candidates or technologies that we would otherwise seek to commercialize ourselves. We also may have to reduce marketing, customer support or other resources devoted to our product candidates or cease operations. Any of these factors could harm our operating results.

 

As a result of our current lack of financial liquidity, our independent registered accounting firm has expressed substantial doubt regarding our ability to continue as a going concern.

 

As a result of our current lack of financial liquidity, the report of our independent registered accounting firm that accompanies our audited financial statements for the years ended December 31, 2017 and 2016, which are included as part of this prospectus, contains going concern qualifications, and our independent registered public accounting firm expressed substantial doubt regarding our ability to continue as a going concern, meaning that we may be unable to continue in operation for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. Our lack of sufficient liquidity could make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain and our public stock price generally.

 

In order to continue as a going concern, we will need to, among other things, achieve positive cash flow from operations and, if necessary, seek additional capital resources to satisfy our cash needs. Our plans to achieve positive cash flow include engaging in offerings of equity and debt securities and negotiating up-front and milestone payments on our product candidates and royalties from sales of our product candidates that secure regulatory approval and any milestone payments associated with such approved product candidates. Our failure to obtain additional capital would have an adverse effect on our financial position, results of operations, cash flows, and business prospects, and ultimately on our ability to continue as a going concern.

 

We are subject to certain covenants set forth in the Notes. Upon an event of default, including a breach of a covenant, we may not be able to make such accelerated payments under the Notes.

 

Under the Notes, so long as at least 33% of the principal amount of either 2017 Notes or 2018 Notes remains outstanding, we are subject to the following covenants, which we refer to as the covenants: we cannot amend our organizational documents in a manner that materially and adversely affects any rights of the holders, pay cash dividends or distributions upon any of our equity securities, enter into a transaction with an affiliate of our company, or enter into an agreement with respect to any of the foregoing. These covenants could limit the operation of our business.

 

In addition, under the Notes, an event of default occurs upon any of the following: (i) any default in the payment of the principal amount of any Note or of interest or other amounts owed to such holder when due and not cured within 15 trading days, (ii) our failure to perform a covenant or agreement, which failure is not cured in 15 trading days, (iii) a material representation or warranty made in the Notes or related transaction document is untrue in any material respect when made, that would cause a material adverse effect, (iv) we become subject to a bankruptcy event, or (v) the Note Shares become ineligible for listing on a trading market.

 

Upon an event of default under the Notes, the outstanding principal amount of the Notes plus any other amounts owed to such holder will become immediately due and payable. Under the 2018 Notes, within 15 trading days after an event of default, the aggregate principal amount of the 2018 Notes will increase by 20%. If an event of default occurs and the holders accelerate the amounts due, we may not be able to make accelerated payments. Further, we may be unable to arrange for additional financing to make the accelerated payments. The occurrence of any one of these events could adversely impact our business, financial condition or results of operations.

 

On February 28, 2018, we amended and restated the 2017 Notes to, among other things, (i) extend the maturity date to May 15, 2018 and (ii) increase the Warrant coverage of the 2017 Notes from 75% to 100% of the shares of common stock issued upon conversion of the 2017 Notes.

 

On February 28, 2018, we amended and restated the 2018 Notes to, among other things, (i) extend the maturity date to May 15, 2018, (ii) eliminate the remedy that adjusts the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes, and (iii) increase the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes. All of the 2018 Notes and substantially all of the 2017 Notes will convert upon the completion of this offering.

 

We will need to increase the size of our organization, and we may experience difficulties in managing this growth.

 

As of March 31, 2018, we had nine full-time employees and three independent contractors. We will need to continue to expand our managerial, operational, finance and other resources to manage our operations, commence clinical trials, obtain approval for and commercialize our product candidates, and continue our development activities. Our management and personnel, systems and facilities currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:

 

  manage any of our future clinical trials effectively;
     
  identify, recruit, retain, incentivize and integrate additional employees;
     
  manage our internal development efforts effectively while carrying out our contractual obligations to third parties; and
     
  continue to improve our operational, financial and management controls, reporting systems and procedures.

 

  12  
 

 

Due to our limited financial resources and our limited experience in managing a company with such anticipated growth, we may not be able to effectively manage the expansion of our operations or recruit and train additional qualified personnel. The physical expansion of our operations may lead to significant costs and may divert our management and business development resources. Any inability to manage growth could delay the execution of our development and strategic objectives, or disrupt our operations.

 

If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.

 

Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operations and access to capital. A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. In addition, our internal financial and accounting team is leanly staffed, which can lead to inefficiencies with respect to segregation of duties. If we fail to properly and efficiently maintain an effective internal control over financial reporting, we could fail to report our financial results accurately.

 

We presently rely on our supply agreement with LMAT for substantially all of our revenue, and once the supply agreement is terminated, a material and adverse effect on our revenue and results of operations could result.

 

In March 2016, we entered into a post-acquisition supply agreement with LMAT, or the supply agreement, to be the contract manufacturer of the ProCol Vascular Bioprosthesis for Hemodialysis Vascular Access concomitant with ESRD. We have generated almost all of our total revenue since March 2016 pursuant to the supply agreement. The supply agreement will terminate upon the earlier of (i) March 18, 2019 and (ii)(A) upon seven days written notice of LMAT to our company for any reason, or (B) upon thirty-five days written notice of our company to LMAT if LMAT is in material breach of any of its representations, warranties or covenants under the supply agreement, and the breach cannot be cured or is not cured by LMAT within thirty calendar days of receipt of such notice of breach. When the supply agreement is terminated, or if either party becomes unable to perform their respective obligations under the supply agreement, we will no longer be able to generate revenue until one of our product candidates is approved, if ever. As a result, once the supply agreement is terminated, a material and adverse effect on our revenue and results of operations could result.

 

We may never be able to generate sufficient revenue from the commercialization of our product candidates to achieve and maintain profitability.

 

Our ability to operate profitably in the future will depend upon, among other items, our ability to (i) fully develop our product candidates, (ii) scale up our business and operational structure, (iii) obtain regulatory approval of our product candidates from the FDA, (iv) market and sell our product candidates, (v) successfully gain market acceptance of our product candidates, and (vi) obtain sufficient and on-time supply of components from our third-party suppliers. If we fail to successfully commercialize any of our product candidates, we may never receive a return on our investments in product development, sales and marketing, regulatory compliance, manufacturing and quality assurance, which may cause us to fail to generate revenue and gain economies of scale from such investments.

 

In addition, potential customers may decide not to purchase our product candidates and, even if we succeed in increasing adoption of our product candidates by physicians, hospitals and other healthcare providers, creating and maintaining relationships with customers and developing and commercializing new features or indications for our products, we may not be able to generate sufficient revenue to achieve or maintain profitability.

 

We utilize a third-party, single-source supplier for some components and materials used in the ProCol Vascular Bioprosthesis and the loss of this supplier could have an adverse impact on our business.

 

We rely on a third-party, single source supplier to supply the cow tissue used in the ProCol Vascular Bioprosthesis to fulfill our sub-manufacturing requirement, pursuant to that certain Services and Material Supply Agreement, dated as of March 4, 2016, or the supply agreement, by and between us and ATSCO, Inc., or ATSCO. We intend to use ATSCO to supply pig and cow tissue for our three product candidates. Our ability to supply the ProCol Vascular Bioprosthesis to LMAT and our future product candidates, if approved, commercially depends, in part, on our ability to obtain this pig and cow tissue in accordance with our specifications and with regulatory requirements and in sufficient quantities to meet demand. Our ability to obtain pig and cow tissue may be affected by matters outside our control, including that ATSCO may cancel our arrangements on short notice, we may be relatively less important as a customer to ATSCO and ATSCO may have disruptions to its operations.

 

Pursuant to the supply agreement, ATSCO exclusively provides us with bovine veins, a key component for the manufacturing of ProCol Vascular Bioprosthesis. ATSCO trains its staff to collect materials from audited abattoirs under our specifications and procedures. In exchange, we agreed to purchase at least 700 units every month. The supply agreement terminates on March 3, 2019, but may be extended upon mutual agreement between us and ATSCO. The supply agreement may be terminated by either party with reasonable cause upon 90 days written notice if (i) we fail to pay without cure in limited situations, (ii) ATSCO willfully fails to follow procedures set forth therein, (iii) upon our mutual agreement with ATSCO without penalty, and (iv) if we cease manufacturing the ProCol Vascular Bioprosthesis for LMAT.

 

  13  
 

 

If we are required to establish additional or replacement suppliers for the pig and cow tissue, it may not be accomplished quickly and our operations could be disrupted. Even if we are able to find replacement suppliers, the replacement suppliers would need to be qualified and may require additional regulatory authority approval, which could result in further delay. In the event of a supply disruption, our product inventories may be insufficient to supply our customers. If ATSCO fails to deliver the required commercial quantities of pig tissue on a timely basis and at commercially reasonable prices, and we are unable to find one or more replacement suppliers capable of production at a substantially equivalent cost in substantially equivalent volumes and quality on a timely basis, the continued commercialization of the ProCol Vascular Bioprosthesis and any of our product candidates, if approved, the supply of ProCol Vascular Bioprosthesis to customers and the development of any future product candidates would be delayed, limited or prevented, which could have an adverse impact on our business.

 

We depend upon third-party suppliers for certain components of our product candidates, making us vulnerable to supply problems and price fluctuations, which could harm our business.

 

We rely on a number of third-party suppliers to provide certain components of our product candidates. We do not have long-term supply agreements with most of our suppliers, and, in many cases, we purchase finished goods on a purchase order basis. Our suppliers may encounter problems during manufacturing for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these third-party suppliers also subjects us to other risks that could harm our business, including:

 

  interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations;
     
  delays in product shipments resulting from defects, reliability issues or changes in components from suppliers;
     
  price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers;
     
  errors in manufacturing components, which could negatively impact the effectiveness or safety of our product candidates or cause delays in shipment of our product candidates;
     
  discontinued production of components, which could significantly delay our production and sales and impair operating margins;
     
  inability to obtain adequate supplies in a timely manner or on commercially reasonable terms;
     
  difficulty locating and qualifying alternative suppliers, especially with respect to our sole-source supplies;
     
  delays in production and sales caused by switching components, which may require product redesign and/or new regulatory submissions;
     
  delays due to evaluation and testing of devices from alternative suppliers and corresponding regulatory qualifications;
     
  non-timely delivery of components due to our suppliers manufacturing products for a range of customers;
     
  the failure of our suppliers to comply with strictly enforced regulatory requirements, which could result in disruption of supply or increased expenses; and
     
  inability of suppliers to fulfill orders and meet requirements due to financial hardships.

 

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In addition, there are a limited number of suppliers and third-party manufacturers that operate under the FDA’s Quality System Regulation, or QSR, requirements, maintain certifications from the International Organization for Standardization that are recognized as harmonized standards in the European Economic Area, or EEA, and that have the necessary expertise and capacity to manufacture components for our product candidates. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth may strain the ability of our current suppliers to deliver products, materials and components to us. If we are unable to arrange for third-party manufacturing of components for our product candidates, or to do so on commercially reasonable terms, we may not be able to complete development of, market and sell our current or new product candidates. Further, any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our product candidates would limit our ability to manufacture our product candidates. Failure to meet these commitments could result in legal action by our customers, loss of customers or harm to our ability to attract new customers, any of which could have a material and adverse effect on our business, financial condition, results of operations and growth.

 

We must demonstrate to surgeons and hospitals the merits of our product candidates to facilitate adoption of our product candidates.

 

Surgeons continue to play a significant role in determining the devices used in the operating room and in assisting in obtaining approval by the relevant value analysis committee, or VAC. Educating surgeons on the benefits of our product candidates will require a significant commitment by our marketing team and sales organization. Surgeons and hospitals may be slow to change their practices because of familiarity with existing devices and/or treatments, perceived risks arising from the use of new devices, lack of experience using new devices, lack of clinical data supporting the benefits of such devices or the cost of new devices. There may never be widespread adoption of our product candidates by surgeons and hospitals. If we are unable to educate surgeons and hospitals about the advantages of our product candidates incorporating our technology, as compared to surgical methods which do not incorporate such technology, we may face challenges in obtaining approval by the relevant VAC, and we will not achieve significantly greater market acceptance of our product candidates, gain momentum in our sales activities, significantly grow our market share or grow our revenue and our business and financial condition will be adversely affected.

 

We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our sales and operating results may be negatively affected.

 

The medical device industry is intensely competitive and subject to rapid and significant technological change, as well as the introduction of new products or other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop future product candidates that reach the market in a timely manner, are well adopted by customers and receive adequate coverage and reimbursement from third-party payors.

 

We have numerous competitors, many of whom have substantially greater name recognition, commercial infrastructure and financial, technical and personnel resources than us. Our competitors develop and patent competing products or processes earlier than we can or obtain regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar products or processes. Additionally, our competitors may, in the future, develop medical devices that render our product candidates obsolete or uneconomical.

 

Many of our current and potential competitors are publicly traded, or are divisions of publicly-traded, major medical device or technology companies that enjoy several competitive advantages. We face a challenge overcoming the long-standing preferences of some specialists for using the products of our larger, more established competitors. Specialists who have completed many successful procedures using the products made by these competitors may be reluctant to try new products from a source with which they are less familiar. If these specialists do not try and subsequently adopt our product candidates, we may be unable to generate sufficient revenue or growth. In addition, many of our competitors enjoy other advantages such as:

 

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  greater financial resources for marketing and aggressive discounting;
     
  large and established sales, marketing and distribution networks with greater reach in both domestic and international markets;
     
  significantly greater brand recognition;
     
  established business and financial relationships with specialists, referring physicians, hospitals and medical schools;
     
  greater existing market share in our markets;
     
  greater resources devoted to research and development of competing products and greater capacity to allocate additional resources;
     
  greater experience in obtaining and maintaining regulatory clearances and approvals for new products and product enhancements;
     
  products supported by long-term clinical data;
     
  more expansive patent portfolios and other intellectual property rights; and
     
  broader product portfolios affording them greater ability to cross-sell their products or to incentivize hospitals or surgeons to use their products.

 

As a result of this increased competition, we believe there will be increased pricing pressure in the future. The entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our product candidates and pricing in our markets generally. Additionally, because we expect that potential hospital and other healthcare provider customers will bill various third-party payors to cover all or a portion of the costs and fees associated with the procedures in which our product candidates will be used, including the cost of the purchase of our product candidates, changes in the amount such payors are willing to reimburse our customers for procedures using our product candidates could create pricing pressure for us. If competitive forces drive down the prices we are able to charge for our product candidates, our profit margins will shrink, which will adversely affect our ability to invest in and grow our business.

 

Our competitors may not seek to obtain agreements, exclusive or otherwise, with the same partners or licensees that we intend to approach in order to develop and market our product candidates. In addition, our competitors may be able to meet these requirements and develop products that are comparable or superior to our product candidates or that would render our product candidates obsolete or non-competitive.

 

Our long-term growth depends on our ability to develop and commercialize additional product candidates.

 

The medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our product candidate offerings and introduce new product candidates. Developing new product candidates is expensive and time-consuming. Even if we are successful in developing additional product candidates, the success of any new product candidates or enhancements to existing product candidates will depend on several factors, including our ability to:

 

  properly identify and anticipate surgeon and patient needs;
     
  develop and introduce new product candidates or enhancements in a timely manner;
     
  develop an effective and dedicated sales and marketing team;
     
  avoid infringing upon the intellectual property rights of third-parties;

 

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  demonstrate, if required, the safety and efficacy of new product candidates with data from preclinical studies and clinical trials;
     
  obtain the necessary regulatory clearances or approvals for new product candidates or enhancements;
     
  be fully FDA-compliant with marketing of new product candidates or modified product candidates;
     
  provide adequate training to potential users of our product candidates; and
     
  receive adequate coverage and reimbursement for procedures performed with our product candidates.

 

If we are unsuccessful in developing and commercializing additional devices in other areas, our ability to increase our revenue may be impaired.

 

New technologies, techniques or products could emerge that might offer better combinations of price and performance than the products and services that we plan to offer. Existing markets for surgical devices are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and physician, hospital and healthcare provider practices. It is also important that we successfully introduce new, enhanced and competitive product candidates to meet our prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage our introduction of new product candidates. If potential customers believe that such product candidates will offer enhanced features or be sold for a more attractive price, they may delay purchases until such product candidates are available. We may also continue to offer older obsolete products as we transition to new product candidates, and we may not have sufficient experience managing transitions. If we do not successfully innovate and introduce new technology into our anticipated product lines or successfully manage the transitions of our technology to new product offerings, our revenue, results of operations and business could be adversely impacted.

 

Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, industry standards, distribution reach or customer requirements. We anticipate that we will face strong competition in the future as current or future competitors develop new or improved product candidates and as new companies enter the market with novel technologies.

 

If we are unable to convince hospital facilities to approve the use of our product candidates, we may be unable to generate a substantial volume of sales of our products.

 

In the United States, in order for surgeons to use our product candidates, the hospital facilities where these surgeons treat patients will typically require us to receive approval from the facility’s VAC. VACs typically review the comparative effectiveness and cost of medical devices used in the facility. The makeup and evaluation processes for VACs vary considerably, and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant VAC. For example, even if we have an agreement with a hospital system for purchase of our products, in most cases, we must obtain VAC approval by each hospital within the system to sell at that particular hospital. Additionally, hospitals typically require separate VAC approval for each specialty in which our product is used, which may result in multiple VAC approval processes within the same hospital even if such product has already been approved for use by a different specialty group. We often need VAC approval for each different product to be used by the surgeons in that specialty. In addition, hospital facilities and group purchasing organizations, or GPOs, which manage purchasing for multiple facilities, may also require us to enter into a purchasing agreement and satisfy numerous elements of their administrative procurement process, which can also be a lengthy, costly and time-consuming effort. If we do not receive access to hospital facilities in a timely manner, or at all, via these VAC and purchasing contract processes, or otherwise, or if we are unable to secure contracts on commercially reasonable terms in a timely manner, or at all, our operating costs will increase, our sales may decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these costly and time-consuming processes and still may not obtain VAC approval or a purchase contract from such hospitals or GPOs.

 

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Our manufacturing resources are limited and if we are unable to produce an adequate supply of our product candidates for use in our current and planned clinical trials or for commercialization, our regulatory, development and commercialization efforts may be delayed.

 

Our manufacturing resources for our product candidates are limited. We currently manufacture our product candidates for our research and development purposes at our manufacturing facility in Irvine, California. If our existing manufacturing facility experiences a disruption, we would have no other means of manufacturing our product candidates until we are able to restore the manufacturing capability at our current facility or develop alternative manufacturing facilities. Additionally, any damage to or destruction of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability to produce our product candidates and prepare our product candidates for clinical trials.

 

Additionally, in order to produce our product candidates in the quantities that will be required for commercialization, we will have to increase or “scale up” our production process over the current level of production. We may encounter difficulties in scaling up our production, including issues involving yields, controlling and anticipating costs, quality control and assurance, supply and shortages of qualified personnel. If our scaled-up production process is not efficient or results in a product that does not meet quality or other standards, we may be unable to meet market demand and our revenues, business and financial prospects would be adversely affected. Further, third parties with whom we may develop relationships may not have the ability to produce the quantities of the materials we may require for clinical trials or commercial sales or may be unable to do so at prices that allow us to price our products competitively.

 

If our facilities are damaged or become inoperable, we will be unable to continue to research, develop and manufacture our product candidates and, as a result, there will be an adverse impact on our business until we are able to secure a new facility.

 

Our facility and equipment would be costly to replace and could require substantial lead time to repair or replace. The facility may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire, vandalism and power outages, which may render it difficult to operate our business for some period of time. While we have taken precautions to safeguard our facilities, any inability to operate our business during such periods could lead to the loss of customers or harm to our reputation. We also possess insurance for damage to our property and the disruption of our business, but this insurance may not be sufficient to cover all of our potential losses and this insurance may not continue to be available to us on acceptable terms, or at all.

 

Our future international operations could subject us to regulatory and legal risks and certain operating risks, which could adversely impact our business, results of operations and financial condition.

 

The sale and shipment of our product candidates, if approved, across international borders and the purchase of components from international sources subject us to U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and could expose us to penalties for non-compliance. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue to identify opportunities in international markets. Our future international business operations are subject to a variety of risks, including:

 

  fluctuations in foreign currency exchange rates;
     
  difficulties in staffing and managing foreign and geographically dispersed operations;
     
  third-party reimbursement policies that may require some of the patients who undergo procedures using our products or who use our services to directly absorb costs or that may necessitate the reduction of the selling prices of our products;
     
  an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action;

 

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  economic, political or social instability in certain countries and regions;
     
  the imposition of additional U.S. and foreign governmental controls or regulations;
     
  changes in duties and tariffs, license obligations and other non-tariff barriers to trade;
     
  the imposition of costly and lengthy new export licensing requirements;
     
  the imposition of restrictions on the activities of foreign agents, representatives and distributors;
     
  the occurrence of an FDA inspection that results in adverse findings at our facilities, or the facilities of our vendors or suppliers, and any resulting import detention that prevents products made in such facilities from entering the United States;
     
  scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us;
     
  availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us;
     
  imposition of differing labor laws and standards;
     
  the ability of a foreign government to exclude us from, or limit our ability to compete in, the markets under its jurisdiction through collective tender processes or otherwise;
     
  longer payment cycles for products sold to customers outside the United States;
     
  difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; and
     
  the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity.

 

We expect each international market we enter will pose particular regulatory and other hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.

 

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.

 

We expect to expand our business operations to meet anticipated growth in demand for our product candidates. This future growth could strain our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. Our ability to effectively manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.

 

As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increases in scale, expansion of personnel, purchase of equipment or process enhancements may not be successfully implemented.

 

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We must also successfully increase production output to meet expected customer demand. In the future, we may experience difficulties with production yields, quality control, component supply and shortages of qualified personnel, among other problems. These problems could result in delays in product availability and increases in expenses. Any such delay or increased expense could adversely affect our ability to generate revenues.

 

We currently have no sales and marketing infrastructure and if we are unable to successfully secure a sales and marketing partner or establish a sales and marketing infrastructure, we may be unable to commercialize our product candidates, if approved, and may never generate sufficient revenue to achieve or sustain profitability.

 

In order to commercialize products that are approved by regulatory agencies, we must either collaborate with third parties that have such commercial infrastructure, engage third party distributors, or develop our own sales and marketing infrastructure. At present, we have no sales or marketing personnel. We may not be able to enter into collaborations on acceptable terms or at all, which would leave us unable to progress our business plan. We will face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to maintain or reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of our product candidates, reduce or delay development programs, delay potential commercialization of our product candidates or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.

 

Moreover, even if we are able to maintain and/or enter into such collaborations, such collaborations may pose a number of risks, including the following:

 

  collaborators may not perform their obligations as expected;
     
  disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of our product candidates, might lead to additional responsibilities for us with respect to such devices, or might result in litigation or arbitration, any of which would be time-consuming and expensive;
     
  collaborators could independently develop or be associated with products that compete directly or indirectly with our product candidates;
     
  collaborators could have significant discretion in determining the efforts and resources that they will apply to our arrangements with them, and thus we may have limited or no control over the sales, marketing and distribution activities;
     
  should any of our product candidates achieve regulatory approval, a collaborator with marketing and distribution rights to our product candidates may not commit sufficient resources to the marketing and distribution of such product candidates;
     
  collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation;
     
  collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and
     
  collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to either find alternative collaborators (which we may be unable to do) or raise additional capital to pursue further development or commercialization of our product candidates on our own.

 

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Our business would be materially or perhaps significantly harmed if any of the foregoing or similar risks comes to pass with respect to our key collaborations.

 

If we elect to establish a sales and marketing infrastructure, we may not realize a positive return on this investment. We will have to compete with established and well-funded medical device companies to recruit, hire, train and retain sales and marketing personnel. Once hired, the training process is lengthy because it requires significant education of new sales representatives to achieve the level of clinical competency with our products expected by specialists. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. If we are unable to attract, motivate, develop and retain a sufficient number of qualified sales personnel, or if our sales representatives do not achieve the productivity levels in the time period we expect them to reach, our revenue will not grow at the rate we expect and our business, results of operations and financial condition will suffer. Also, to the extent we hire sales personnel from our competitors, we may be required to wait until applicable non-competition provisions have expired before deploying such personnel in restricted territories or incur costs to relocate personnel outside of such territories. In addition, we have been in the past, and may be in the future, subject to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Any of these risks may adversely affect our ability to increase sales of our product candidates. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize our product candidates, which would adversely affect our business, results of operations and financial condition.

 

Product liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing product candidates and limit commercialization of any products that we may develop.

 

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Manufacturing and marketing of our commercial devices and clinical testing of our product candidates under development, may expose us to product liability and other tort claims. Furthermore, surgeons may misuse our product candidates or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our product candidates are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Regardless of the merit or eventual outcome, product liability claims may result in:

 

  significant litigation costs;
   
  distraction of management’s attention from our primary business operations;
     
  decreased demand for our product candidates and any product candidates that we may develop;
     
  damage to our reputation;
     
  withdrawal of clinical trial participants;
     
  substantial monetary awards to trial participants, patients or other claimants;
     
  loss of revenue; and
     
  the inability to commercialize any product candidates that we may develop.

 

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Although we intend to maintain liability insurance, the coverage limits of our insurance policies may not be adequate, and one or more successful claims brought against us may have a material adverse effect on our business and results of operations. If we are unable to obtain insurance in the future at an acceptable cost or on acceptable terms with adequate coverage, we will be exposed to significant liabilities.

 

We bear the risk of warranty claims on our product candidates.

 

We provide limited product warranties against manufacturing defects of the ProCol Vascular Bioprosthesis, including component parts manufactured by third parties. Our product warranty requires us to repair defects arising from product design and production processes, and if necessary, replace defective components. Thus far, we have not accrued a significant liability contingency for potential warranty claims.

 

If we experience warranty claims in excess of our expectations, or if our repair and replacement costs associated with warranty claims increase significantly, we will incur liabilities for potential warranty claims that may be greater than we expect. An increase in the frequency of warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our business, results of operations and financial condition.

 

The loss of our executive officers or our inability to attract and retain qualified personnel may adversely affect our business, financial conditions and results of operations.

 

Our business and operations depend to a significant degree on the skills, efforts and continued services of our executive officers who have critical industry experience and relationships. Although we have entered into employment agreements with our executive officers, they may terminate their employment with us at any time. Accordingly, these executive officers may not remain associated with us. The efforts of these persons will be critical to us as we continue to develop our product candidates and business. We do not carry key person life insurance on any of our management, which would leave our company uncompensated for the loss of any of our executive officers.

 

Further, competition for highly-skilled and qualified personnel is intense. As such, our future viability and ability to achieve sales and profit will also depend on our ability to attract, train, retain and motivate highly qualified personnel in the diverse areas required for continuing our operations. If we were to lose the services one or more of our current executive officers or if we are unable to attract, hire and retain qualified personnel, we may experience difficulties in competing effectively, developing and commercializing our products and implementing our business strategies, which could have a material adverse effect on our business, operations and financial condition.

 

Our employees, consultants, independent sales agencies, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.

 

We are exposed to the risk that our employees, consultants, collaborators, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees, sales agencies, distributors and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.

 

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We may not be able to successfully complete any future acquisitions and any acquisitions, joint ventures or other investments may result in dilution of our stockholders’ ownership, increase our debt or cause us to incur significant expense.

 

We may seek to grow our business through the acquisition of additional products, technologies, services or businesses that we believe have significant commercial potential. Growth through acquisitions will depend upon the continued availability of suitable acquisition candidates at favorable prices and on commercially acceptable terms and conditions. Even if these opportunities are present, we may be unable to successfully identify suitable acquisition candidates. In addition, we may not be able to successfully integrate any acquired companies or achieve the commercial potential or synergies projected for any acquisition. Future acquisitions may also divert management’s attention from other business activities. Further, any such acquisitions may result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations.

 

Additionally, we may pursue strategic alliances and joint ventures that leverage our technology and industry experience. We may be unable to find suitable partners or, in the event we identify such a partner, we may be unable to realize the anticipated benefits of any such alliance or joint venture. To finance any such acquisitions, alliances or joint ventures, we may choose to issue shares of capital stock as consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, however, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.

 

If we experience significant disruptions in our information technology systems, our business may be adversely affected.

 

We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. We do not have redundant systems at this time. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades, which would impact our business operations, or experience difficulties in operating our business during the upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.

 

We are increasingly dependent on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a material and adverse effect on our business. For example, third parties may attempt to hack into systems and may obtain our proprietary information.

 

Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.

 

As of December 31, 2017 , we had available federal and state net operating loss carryforwards, or NOLs, of approximately $ 11.1 million, which begin to expire in the year ending December 31, 2026. As of December 31, 2017, we also had federal research and development tax credit carryforwards of approximately $0.2 million. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally defined as a cumulative change in equity ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period) may be subject to limitations on its ability to utilize its NOLs and certain credit carryforwards to offset future taxable income and taxes. We are currently analyzing the tax impacts of any potential ownership changes on our federal NOLs and credit carryforwards. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in ownership changes. Our NOLs and credit carryforwards may also be limited under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future tax benefits of such assets.

 

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Risks Related to Regulatory Approval and Other Governmental Regulations

 

Our business and product candidates are subject to extensive governmental regulation and oversight, and our failure to comply with applicable regulatory requirements could harm our business.

 

Our product candidates and operations are subject to extensive regulation in the United States by the FDA and by regulatory agencies in other countries where we anticipate conducting business activities. The FDA regulates the development, testing, manufacturing, labeling, storage, record-keeping, promotion, marketing, sales, distribution and post-market support and reporting of medical devices in the United States. The regulations to which we are subject are complex and may become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.

 

In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board, or IRB, approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an IDE application. Our system product is considered a significant risk device requiring IDE approval prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the United States for any new devices we intend to market in the United States in the future. If we obtain such approvals, we may not be able to conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition and results of operations. It is uncertain whether clinical trials will meet desired endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA will accept the validity of foreign clinical study data, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant financial costs and reduced revenue.

 

Our product candidates may be subject to extensive governmental regulation in foreign jurisdictions, such as the EU, and our failure to comply with applicable requirements could cause our business, results of operations and financial condition to suffer.

 

In the EEA, our product candidates will need to comply with the Essential Requirements set forth in Annex I to the EU Active Implantable Medical Devices Directive. Compliance with these requirements is a prerequisite to be able to affix the CE mark to a product, without which a product cannot be marketed or sold in the EEA. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE mark to our product candidates, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by a competent authority of an EEA country to conduct conformity assessments. Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the Technical File and the quality system for the manufacture, design and final inspection of our products. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical products after having prepared and signed a related EC Declaration of Conformity.

 

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As a general rule, demonstration of conformity of medical products and their manufacturers with the Essential Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific literature. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the competent authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can be expensive and time-consuming.

 

The FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.

 

In the United States, our product candidates are expected to be regulated as medical devices. Before our medical device product candidates can be marketed in the United States, we must submit, and the FDA must approve a PMA. For the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. In addition, modifications to products that are approved through a PMA application generally need FDA approval. The time required to obtain approval, clearance or license by the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including the substantial discretion of the FDA.

 

Our product candidates could fail to receive regulatory approval, clearance or license for many reasons, including the following:

 

  the FDA may disagree with the design or implementation of our clinical trials or study endpoints;
     
  we may be unable to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for their proposed indications or that our product candidates provide significant clinical benefits;
     
  the results of our clinical trials may not meet the level of statistical significance required by the FDA for approval, clearance or license or may not support approval of a label that could command a price sufficient for us to be profitable;
     
  the FDA may disagree with our interpretation of data from preclinical studies or clinical trials;
     
  the opportunity for bias in the clinical trials as a result of the open-label design may not be adequately handled and may cause our trial to fail;
     
  our product candidates may be subject to an FDA advisory committee review, which may be requested at the sole discretion of the FDA, and which may result in unexpected delays or hurdles to approval;
     
  the FDA may determine that the manufacturing processes at our facilities or facilities of third-party manufacturers with which we contract for clinical and commercial supplies are inadequate; and
     
  the approval, clearance or license policies or regulations of the FDA may significantly change in a manner rendering our clinical data insufficient for approval.

 

Even if we were to obtain approval, clearance or license, the FDA may grant approval, clearance or license contingent on the performance of costly post-marketing clinical trials, or may approve our product candidates with a label that does not include the labeling claims necessary or desirable for successful commercialization of our product candidates. Any of the above could materially harm our product candidates’ commercial prospects.

 

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Even if our product candidates are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our product candidates, our product candidates could be subject to restrictions or withdrawal from the market.

 

The manufacturing processes, post-approval clinical data and promotional activities of any product candidate for which we obtain marketing approval will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of our product candidates is granted in the United States, the approval may be subject to limitations on the indicated uses for which the product candidates may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown and unanticipated problems with our product candidates, including but not limited to unanticipated severity or frequency of adverse events, delays or problems with the manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such product candidates or manufacturing processes, withdrawal of the product candidates from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

 

Legislative or regulatory reforms in the United States or the EU may make it more difficult and costly for us to obtain regulatory clearances or approvals for our product candidates or to manufacture, market or distribute our product candidates after clearance or approval is obtained.

 

From time to time, legislation is drafted and introduced in the U.S. Congress that could significantly change the statutory provisions governing the regulation of medical devices or the reimbursement thereof. In addition, the FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our product candidates. For example, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance or approval. Any new statutes, regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of any future products or make it more difficult to manufacture, market or distribute our product candidates or future products. We cannot determine what effect changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

 

  additional testing prior to obtaining clearance or approval;
     
  changes to manufacturing methods;
     
  recall, replacement or discontinuance of our systems or future products; or
     
  additional record keeping.

 

Any of these changes could require substantial time and cost and could harm our business and our financial results.

 

In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the EU Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation (the Medical Devices Regulation). Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.

 

In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the Medical Devices Coordination Group, or MDCG (a new, yet to be created, body chaired by the European Commission, and representatives of EEA Member States), for an opinion. These new procedures may result in a longer or more burdensome assessment of our new products.

 

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Our product candidates may in the future be subject to recalls or market withdrawals that could harm our business, results of operation and financial condition.

 

Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance or other reasons. Additionally, the FDA and similar foreign governmental authorities have the authority to require the recall of commercialized devices in the event of material deficiencies or defects in the design, manufacture or labeling in the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, conduct a device notification to inform surgeons of changes to instructions for use or of a deficiency, or of a suspected deficiency, found in a device. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include certain notifications and corrections as well as removals, of any of our product candidates, could divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers and reduce our ability to achieve expected revenues.

 

Further, under the FDA’s Medical Device Reporting or MDR regulations, we are required to report to the FDA any incident in which our product candidates may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or regulatory authority actions, such as inspection, mandatory recall or other enforcement action. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our product candidates in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results.

 

Moreover, depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our product candidates, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, withdrawals or clearances or approvals or civil or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including our ability to market our product candidates in the future.

 

We are required to report certain malfunctions, deaths and serious injuries associated with our product candidates, which can result in voluntary corrective actions or agency enforcement actions.

 

Under MDR regulations, medical device manufacturers are required to submit information to FDA when they become aware of information that reasonably suggests a device may have caused or contributed to a death or serious injury or has malfunctioned, and, upon recurrence, the malfunction would likely cause or contribute to death or serious injury. If our product candidates are approved for commercial marketing and sale, we determine that an MDR report is not required to be submitted for an event, and FDA disagrees with that determination, it could take enforcement action against us for failing to report the event. All manufacturers marketing medical devices in the EEA are legally bound to report incidents involving devices they produce or sell to the regulatory agency, or competent authority, in whose jurisdiction the incident occurred. Under the EU Medical Devices Directive (Directive 93/42/EEC), an incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health.

 

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Malfunction or misuse of our product candidates could result in future voluntary corrective actions, such as recalls, including corrections (e.g., customer notifications), or agency action, such as inspection or enforcement actions. If malfunctions or misuse do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions or misuse, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products or the instructions for use for those products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, may distract management from operating our business, and may harm our business, results of operations and financial condition.

 

The potential misuse or off-label promotion of our product candidates may harm our reputation in the marketplace, result in injuries that lead to product liability litigation or result in costly investigations and sanctions by regulatory bodies.

 

If our product candidates are cleared by the FDA and CE marked in the EEA for specific indications, we may only promote or market our product candidates for their specifically cleared or approved indications. We will train our marketing and sales force against promoting our product candidates for uses outside of the cleared or approved indications for use, known as “off-label uses.”

 

If the FDA determines that our promotional materials or training constitute promotion of unsupported claims or an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business, results of operations and financial condition.

 

Further, the contemplated advertising and promotion of our product candidates will be subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. EEA Member State legislation may also restrict or impose limitations on our ability to advertise our product candidates directly to the general public. In addition, voluntary EU and national Codes of Conduct provide guidelines on the advertising and promotion of our product candidates to the general public and may impose limitations on our promotional activities with healthcare professionals harming our business, results of operations and financial condition.

 

We are subject to federal, state and foreign healthcare laws and regulations, and a finding of failure to comply with such laws and regulations could have a material and adverse effect on our business.

 

Our operations are, and will continue to be, directly and indirectly affected by various federal, state or foreign healthcare laws, including, but not limited to, those described below. These laws include:

 

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  the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-kickback Statute may result in substantial civil or criminal penalties, including criminal fines of up to $25,000, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law of up to $50,000 for each violation, plus three times the remuneration involved, civil penalties under the federal False Claims Act of up to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs;
     
  the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, the government may impose penalties of not less than $5,500 and not more than $11,000, plus three times the amount of the damages that the government sustains due to the submission of a false claim and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs;
     
  the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
     
  HIPAA, as amended by the HITECH Act, and their respective implementing regulations, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $50,000 per violation, not to exceed $1.5 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can bring a civil action to enjoin a HIPAA violation or to obtain statutory damages up to $25,000 per violation on behalf of residents of his or her state. HIPAA also imposes criminal penalties for fraud against any healthcare benefit program and for obtaining money or property from a healthcare benefit program through false pretenses and provides for broad prosecutorial subpoena authority and authorizes certain property forfeiture upon conviction of a federal healthcare offense. Significantly, the HIPAA provisions apply not only to federal programs, but also to private health benefit programs. HIPAA also broadened the authority of the U.S. Office of Inspector General of the U.S. Department of Health and Human Services to exclude participants from federal healthcare programs;
     
  the federal physician sunshine requirements under the PPACA, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, which is defined broadly to include other healthcare providers and teaching hospitals and ownership and investment interests held by physicians and their immediate family members. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year. Failure to submit the required information may result in civil monetary penalties up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”) for all payments, transfers of value or ownership or investment interests not reported in an annual submission, and may result in liability under other federal laws or regulations; and
     
  analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third- party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Any failure by us to ensure that our employees and agents comply with applicable state and foreign laws and regulations could result in substantial penalties or restrictions on our ability to conduct business in those jurisdictions, and our results of operations and financial condition could be materially and adversely affected.

 

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The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with surgeons and other healthcare providers, some of whom recommend, purchase and/or prescribe our product candidates, and our distributors, could be subject to challenge under one or more of such laws.

 

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion from governmental health care programs and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.

 

Regulatory healthcare reform measures and other legislative changes may have a material and adverse effect on business, results of operations and financial condition.

 

FDA regulations and guidance are often revised or reinterpreted by FDA and such actions may significantly affect our business and our product candidates. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times for our product candidates. Delays in receipt of, or failure to receive, regulatory approvals for our product candidates would have a material and adverse effect on our business, results of operations and financial condition.

 

In March 2010, the PPACA was signed into law, which includes a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, that began on January 1, 2013. Although a moratorium was placed on the medical device excise tax in 2016 and 2017 and its reinstatement thereafter is uncertain, if it is reinstated, it may adversely affect our results of operations and cash flows. Other elements of the PPACA, including comparative effectiveness research, an independent payment advisory board and payment system reforms, including shared savings pilots and other provisions, may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business, results of operations and financial condition.

 

In addition, other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, or the ATRA, was signed into law which further reduced Medicare payments to certain providers, including hospitals.

 

We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our product candidates, if approved, and services or additional pricing pressures.

 

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We could be negatively impacted by violations of global anti-bribery laws, including the U.S. Foreign Corrupt Practices Act, or FCPA.

 

Certain anti-bribery laws, including the FCPA or the UK Bribery Act of 2010, prohibit covered entities from offering, promising, authorizing or giving anything of value, directly or indirectly, to foreign officials or other commercial parties with the intent to influence the recipient’s act or decision, to induce action or inaction in violation of lawful duty or for the purpose of improperly obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates. As we expect to generate substantial revenue from countries outside the United States, we are subject to the risk that we, our employees, or any third parties such as sales agents and distributors acting our behalf in foreign countries may take action determined to be in violation of applicable anti-corruption laws, including the FCPA. Any violations of these laws, or even allegations of such violations, can lead to an investigation, which could disrupt our operations, involve significant management distraction, lead to significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition or operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other costly remedial measures.

 

Although we intend to implement a program designed to ensure our employees and distributors comply with the FCPA and other anti-bribery laws, this program may not prevent all potential violations of the FCPA and other anti-corruption laws. Similarly, our books and records and internal control policies and procedures do not guarantee that we will, in all instances, comply with the accounting provisions of the FCPA.

 

Our relationships with physician consultants, owners and investors could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions.

 

Federal and state laws and regulations impose restrictions on our relationships with physicians who are consultants, owners and investors. We may enter into consulting agreements, license agreements and other agreements with physicians in which we provide cash as compensation. We have or may have other written and oral arrangements with physicians, including for research and development grants and for other purposes as well.

 

We could be adversely affected if regulatory agencies were to interpret our financial relationships with these physicians, who may be in a position to influence the ordering of and use of our product candidates for which governmental reimbursement may be available, as being in violation of applicable laws. If our relationships with physicians are found to be in violation of the laws and regulations that apply to us, we may be required to restructure the arrangements and could be subject to administrative, civil and criminal penalties, including exclusion from participation in government healthcare programs, imprisonment, and the curtailment or restructuring of our operations, any of which could negatively impact our ability to operate our business and our results of operations.

 

Many of our customers and potential customers are required to comply with the federal Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act and implementing regulation affecting the transmission, security and privacy of health information, and failure to comply could result in significant penalties.

 

Numerous federal and state laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, and the Health Information Technology for Economic and Clinical Health Act, or the HITECH Act, govern the collection, dissemination, security, use and confidentiality of health information that identifies specific patients. HIPAA and the HITECH Act require our surgeon and hospital customers and potential customers to comply with certain standards for the use and disclosure of health information within their companies and with third parties. The Privacy Standards and Security Standards under HIPAA establish a set of standards for the protection of individually identifiable health information by health plans, health care clearinghouses and certain health care providers, referred to as Covered Entities, and the business associates with whom Covered Entities enter into service relationships pursuant to which individually identifiable health information may be exchanged. Notably, whereas HIPAA previously directly regulated only these Covered Entities, the HITECH Act makes certain of HIPAA’s privacy and security standards also directly applicable to Covered Entities’ business associates. As a result, both Covered Entities and business associates are now subject to significant civil and criminal penalties for failure to comply with Privacy Standards and Security Standards.

 

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HIPAA requires Covered Entities (like many of our customers and potential customers) and business associates to develop and maintain policies and procedures with respect to protected health information that is used or disclosed, including the adoption of administrative, physical and technical safeguards to protect such information. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides for civil monetary penalties for HIPAA violations. The HITECH Act also increased the civil and criminal penalties that may be imposed against Covered Entities and business associates and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney fees and costs associated with pursuing federal civil actions. Additionally, certain states have adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA.

 

Any new legislation or regulation in the area of privacy and security of personal information, including personal health information, could also adversely affect our business operations. If we do not comply with existing or new applicable federal or state laws and regulations related to patient health information, we could be subject to criminal or civil sanctions and any resulting liability could adversely affect our financial condition.

 

In addition, countries around the world have passed or are considering legislation that would impose data breach notification requirements and/or require that companies adopt specific data security requirements. If we experience a data breach that triggers one or more of these laws, we may be subject to breach notification obligations, civil liability and litigation, all of which could also generate negative publicity and have a negative impact on our business.

 

Our business involves the use of hazardous materials and we and our current or future third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.

 

Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.

 

New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, required the SEC to establish new disclosure and reporting requirements for those companies that use certain minerals and metals mined in the Democratic Republic of Congo and adjoining countries, known as conflict minerals, in their products whether or not these products or the components containing such conflict minerals are manufactured by third parties. The new rule may affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to verify the origins for these minerals used in our products sufficiently through the due diligence procedures that we implement, which may prevent us from certifying our products as conflict-free, harming our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

 

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Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers such as us from certain markets, which could have an adverse effect on our business, results of operations or financial condition.

 

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers, including us, from important market segments as GPOs, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for hospitals. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our product candidates and may adversely impact our business, results of operations or financial condition.

 

If coverage and reimbursement from third-party payors for procedures using our product candidates significantly decline, surgeons, hospitals and other healthcare providers may be reluctant to use our product candidates and our sales may decline.

 

In the United States, healthcare providers who may purchase our product candidates, if approved, will generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, to pay for all or a portion of the cost of our product candidates in the procedures in which they are employed. Because there is often no separate reimbursement for instruments and supplies used in surgical procedures, the additional cost associated with the use of our product candidates can impact the profit margin of the hospital or surgery center where the surgery is performed. Some of our target customers may be unwilling to adopt our product candidates in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for the procedures using our product candidates may make it difficult for existing customers to continue using, or adopt, our products and could create additional pricing pressure for us. We may be unable to sell our product candidates, if approved, on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement.

 

To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes. Surgeons, hospitals and other healthcare providers may not purchase our product candidates if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our product candidates.

 

In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. Because the cost of our product candidates generally will be recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. With respect to physician payments, in the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. In April 2015, however, the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, was signed into law, which repealed and replaced the statutory formula for Medicare payment adjustments to physicians. MACRA provides a permanent end to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Medicare Physician Fee Schedule. MACRA extended existing payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System, beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities and meaningful use of electronic health records. MACRA also requires Centers for Medicare & Medicaid Services, or CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations, that emphasize quality and value over the traditional volume-based fee-for-service model. It is unclear what impact, if any, MACRA will have on our business and operating results, but any resulting decrease in payment may result in reduced demand for our products.

 

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Moreover, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer surgical procedures or by requiring the use of the least expensive devices available. Additionally, as a result of reform of the U.S. healthcare system, changes in reimbursement policies or healthcare cost containment initiatives may limit or restrict coverage and reimbursement for our product candidates and cause our revenue to decline.

 

Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for laparoscopic procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our product candidates, if approved, may decline.

 

We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of our product candidates, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.

 

Our manufacturing processes and facility are required to comply with the FDA’s QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our product candidates. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies. We are required to register our manufacturing facility with the FDA and list all devices that are manufactured. We also operate an International Organization for Standards, or ISO, 13485 certified facility and annual audits are required to maintain that certification. The suppliers of our components are also required to comply with the QSR and are subject to inspections. We have limited ability to ensure that any such third-party manufacturers will take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:

 

  administrative or judicially imposed sanctions;
     
  injunctions or the imposition of civil penalties;
     
  recall or seizure of our product candidates;
     
  total or partial suspension of production or distribution;
     
  the FDA’s refusal to grant future clearance or pre-market approval for our product candidates;

 

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  withdrawal or suspension of marketing clearances or approvals;
     
  clinical holds;
     
  warning letters;
     
  refusal to permit the import or export of our product candidates; and
     
  criminal prosecution of us or our employees.

 

Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving any of our product candidates would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.

 

Risks Related to Our Intellectual Property

 

If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect our product candidates, others could compete against us more directly, which could harm our business, financial condition and results of operations.

 

Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.

 

We have filed and are actively pursuing patent applications for our product candidates and manufacturing processes. As of December 31, 2017, the critical design components and function relationships for our bioprosthetic heart valve are protected by U.S. patent 7,815,677 issued on October 19, 2010, and we owned 2 issued U.S. patents, no foreign patents, 2 pending U.S. patent applications and no pending foreign patent applications. Assuming all required fees are paid, individual patents or applications owned by us will expire between July 20, 2027 and November 20, 2029.

 

Our patents may not have, or our pending patent applications that mature into issued patents may not include, claims with a scope sufficient to protect our products, any additional features we develop for our current products or any new products. Other parties may have developed technologies that may be related or competitive to our products, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our implant systems.

 

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Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If any of these developments were to occur, they each could have a negative impact on our business and competitive position.

 

Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.

 

In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products are invalidated or found unenforceable, our financial position and results of operations could be negatively impacted. In addition, if a court found that valid, enforceable patents held by third parties covered one or more of our products, our financial position and results of operations could be harmed.

 

We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we will seek to protect, in part, by entering into confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

 

Obtaining and maintaining our patent protection depends on compliance with various procedures, document submission requirements, fee payments and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

The U.S. Patent and Trademark Office, or USPTO, and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payments such as maintenance and annuity fee payments and other provisions during the patent procurement process as well as over the life span of an issued patent. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, competitors might be able to enter the market earlier than would otherwise have been the case.

 

Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.

 

We may employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employees.

 

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We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.

 

Our success will depend in part on our ability to operate without infringing the intellectual property and proprietary rights of third parties. Our business, product candidates and methods could infringe the patents or other intellectual property rights of third parties.

 

The medical device industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many medical device companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties, either in the United States or internationally. We may also become a party to patent infringement claims and litigation or interference proceedings declared by the USPTO to determine the priority of inventions. Third parties may also challenge the validity of any of our issued patents and we may initiate proceedings to enforce our patent rights and prevent others from infringing on our intellectual property rights. Any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, diversion of our management’s attention and resources, or entrance into royalty or license agreements that are not advantageous to us. In any of these circumstances, we may need to spend significant amounts of money, time and effort defending our position. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.

 

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings, which could have a material and adverse effect on us. If we are unable to avoid infringing the intellectual property rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of intellectual property in court or redesign our product candidates.

 

Our collaborations with outside scientists and consultants may be subject to restriction and change.

 

We work with scientists at academic and other institutions, and consultants who assist us in our research, development, and regulatory efforts, including the members of our medical advisory board. These scientists and consultants have provided, and we expect that they will continue to provide, valuable advice on our programs. These scientists and consultants are not our employees, may have other commitments that would limit their future availability to us and typically will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated.

 

We have entered into or intend to enter into non-competition agreements with certain of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. However, under current law, we may be unable to enforce these agreements against certain of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former employees gained while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.

 

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Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.

 

Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The USPTO recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which only became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.

 

However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.

 

We may not be able to adequately protect our intellectual property rights throughout the world.

 

The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.

 

Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.

 

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

 

Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks or names. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential customers in our markets of interest. In addition, third parties may register trademarks similar and identical to our trademarks in foreign jurisdictions, and may in the future file for registration of such trademarks. If they succeed in registering or developing common law rights in such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products in those countries. In any case, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business, results of operations and financial condition may be adversely affected.

 

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Risks Related to this Offering and Ownership of Our Securities

 

The market price of our securities may be highly volatile, and you could lose all or part of your investment.

 

Prior to this offering, there was no public market for our securities . The offering price for our securities sold in this offering will be determined by negotiation between the underwriters and us. This price may not reflect the market price of our securities following this offering. As a result, the trading price of our securities is likely to be volatile, which may prevent you from being able to sell your securities at or above the initial public offering price of our securities . Our market price could be subject to wide fluctuations in response to a variety of factors, which include:

 

  whether we achieve our anticipated corporate objectives;
     
  actual or anticipated fluctuations in our financial condition and operating results;
     
  changes in financial or operational estimates or projections;
     
  the development status of our product candidates and when our product candidates receive regulatory approval if at all;
     
  our execution of our sales and marketing, manufacturing and other aspects of our business plan;
     
  performance of third parties on whom we rely to manufacture our product candidate components and product candidates, including their ability to comply with regulatory requirements;
     
  the results of our preclinical studies and clinical trials;
     
  results of operations that vary from those of our competitors and the expectations of securities analysts and investors;
     
  our announcement of significant contracts, acquisitions or capital commitments;
     
  announcements by our competitors of competing products or other initiatives;
     
  announcements by third parties of significant claims or proceedings against us;
     
 

regulatory and reimbursement developments in the United States and internationally;

     
  future sales of our common stock;
     
  product liability claims;
     
  healthcare reform measures in the United States;
     
  additions or departures of key personnel; and
     
  general economic or political conditions in the United States or elsewhere.

 

In addition, the stock market in general, and the stock of medical device companies like ours, in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the issuer. These market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.

 

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There is no existing market for our securities and we do not know if one will develop to provide you with adequate liquidity.

 

Prior to this offering, there has not been a public market for our securities. An active trading market for our securities may never develop or be sustained following this offering. You may not be able to sell your securities quickly or at the market price if trading in our securities is not active. The initial public offering price for our securities will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the trading market. You may not be able to sell your securities at or above the price you paid for our securities in the offering. As a result, you could lose all or part of your investment. Further, an inactive market may also impair our ability to raise capital by selling our securities and may impair our ability to enter into strategic partnerships or acquire companies or products by using our securities as consideration.

 

Due to the speculative nature of the warrants, there is no guarantee that it will ever be profitable for holders to exercise such warrants.

 

The warrants being offered as part of our securities do not confer any rights of common stock ownership on their holders, such as voting rights or the right to receive dividends, but rather, merely represent the right to acquire shares of our common stock at an exercise price per whole share of common stock equal to 120% of our initial public offering price for a period expiring on the fifth anniversary of the date of issuance. The market value of the warrants is uncertain and may not equal or exceed the price that you paid in this offering for the warrants. The market price of the common stock may never equal or exceed the exercise price of the warrants, and, consequently, it may never be profitable for holders to exercise such warrants.

 

We may be subject to securities litigation, which is expensive and could divert our management’s attention.

 

The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

 

We have broad discretion in the use of the net proceeds from this offering and may invest or spend the proceeds in ways with which you disagree or that may not yield a return.

 

While we set forth our anticipated use for the net proceeds from this offering in the section titled “Use of Proceeds”, our management will have broad discretion on how to use and spend any proceeds that we receive from this offering and may use the proceeds in ways that differ from the anticipated uses set forth in this prospectus. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds with only limited information concerning management’s specific intentions. It is possible that we may decide in the future not to use the proceeds of this offering in the manner described in this offering. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of our common stock may not desire or that may not yield a significant return or any return at all. Investors will receive no notice or vote regarding any such change and may not agree with our decision on how to use such proceeds. If we fail to utilize the proceeds we receive from this offering effectively, our business and financial condition could be harmed and we may need to seek additional financing sooner than expected. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

Holders of the warrants may not be able to exercise the warrants if we do not maintain a current prospectus and comply with applicable securities laws.

 

The warrants sold in this offering as part of our securities may not be exercisable unless at the time of exercise a prospectus relating to the common stock issuable upon exercise of the warrants is current and our common stock has been registered or qualified or is deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. Although we intend to register the warrants and the shares of common stock issuable upon exercise of such warrants in the registration statement of which this prospectus is a part, if we do not maintain a current prospectus related to the common stock issuable upon exercise of the warrants or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, holders may not be able to exercise their warrants.

 

Our principal stockholders and management own a significant percentage of our capital stock and will be able to exert a controlling influence over our business affairs and matters submitted to stockholders for approval.

 

After this offering, it is anticipated that our officers and directors, together with holders of 5% or more of our outstanding common stock before this offering and their respective affiliates, will beneficially own or control 6,774,245 shares of our common stock, which in the aggregate will represent approximately 59.2 % of the outstanding shares of our common stock, or 58.3 % if the underwriters’ option to purchase additional Units is exercised in full. As a result, if some of these persons or entities act together, they will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, the approval of any business combination and any other significant corporate transaction. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares. Some of these persons or entities who make up our principal stockholders may have interests different from yours.

 

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Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our common stock.

 

If, after listing, we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq Marketplace Rules, but our common stock may not be listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with the Nasdaq Marketplace Rules.

 

If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain a listing on Nasdaq and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.

 

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. After giving effect to this offering and based on 9,042,480 shares outstanding as of the date of this prospectus, we will have outstanding 10,185,337 shares of common stock, assuming no conversion of the remaining $10,000 of the aggregate principal amount outstanding under the 2017 Notes or exercise of outstanding options and warrants. Of these shares, 1,142,857 shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional Units , will be freely tradable, without restriction, in the public market. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.

 

After the lock-up agreements pertaining to this offering expire and based on shares outstanding after this offering, an additional 5,514,564 shares will be eligible for sale in the public market. In addition, upon issuance, the 1,422,000 shares subject to outstanding options under our stock option plans and the shares reserved for future issuance under our equity compensation plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

 

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Sales of our securities in this offering may take place concurrently with sales of our common stock by selling stockholders, which might affect the price and liquidity of, and demand for, our securities.

 

We are registering shares of common stock underlying the Underwriters’ Warrants, and the Notes and the Warrants that were issued together to certain Selling Stockholders, concurrently with this offering. The conversion price of the Notes is the lesser of (i) $12.00 or (ii) the per share price in this offering, multiplied by 70%. The exercise price per share of the related Warrants is the lesser of (i) $14.40 or (ii) 120% of the conversion price of the Notes. As a result, the shares of our common stock issued to the Selling Stockholders upon conversion of the 2017 Notes and the 2018 Notes or exercise of the related Warrants may be issued at a discount to the price of our securities sold in this offering, which would result in further dilution of your investment. Concurrent or future sales of our common stock by these Selling Stockholders may reduce the price of our securities and demand for our securities sold in the offering and, as a result, the liquidity of your investment.

 

If you purchase our securities in this offering, you will suffer immediate dilution of your investment.

 

The initial public offering price of our securities will be substantially higher than the net tangible book value per share of our common stock before giving effect to this offering. Therefore, if you purchase our securities in this offering, you will pay a price per Unit that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding stock options, you will incur further dilution. Based on an assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $6.32 per Unit , representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of our securities in this offering will have contributed approximately 18.9% of the aggregate price paid by all purchasers of our common stock but will own only approximately 11.2% of our common stock outstanding after this offering.

 

We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. We may remain an emerging growth company until as late as December 2023 (the fiscal year-end following the fifth anniversary of the completion of our initial public offering), though we may cease to be an emerging growth company earlier under certain circumstances, including (1) if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an emerging growth company as of the following December 31, or (2) if our gross revenue exceeds $1.07 billion in any fiscal year. Emerging growth companies may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors could find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

 

In addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An emerging growth company can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

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We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.

 

As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Act and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.

 

To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls when we become subject to this requirement could negatively impact the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.

 

Our management team has limited experience managing a public company.

 

Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition and operating results.

 

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If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.

 

The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the price for our common stock could be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.

 

Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.

 

Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the consummation of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include, but are not limited to:

 

  a classified board of directors so that not all directors are elected at one time;
     
  a prohibition on stockholder action through written consent;
     
  no cumulative voting in the election of directors;
     
  the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director;
     
  a requirement that special meetings of the stockholders may be called only by our chairman of the board, chief executive officer or president, or by a resolution adopted by a majority of our board of directors;
     
  an advance notice requirement for stockholder proposals and nominations;
     
  the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and
     
  a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our amended and restated certificate of incorporation.

 

In addition, the Delaware General Corporate Law, or DGCL, prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, the DGCL may discourage, delay or prevent a change in control of our company.

 

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Furthermore, our amended and restated certificate of incorporation will specify that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of the DGCL by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers.

 

We do not anticipate paying any cash dividends on our common stock in the foreseeable future and, as such, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, and any future loan arrangements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

 

We may be a “controlled company” within the meaning of the Nasdaq Marketplace Rules and may on certain corporate governance exemptions afforded to controlled companies in the future. If we utilize the exemptions afforded to us under the Nasdaq Marketplace Rules, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.

 

Prior to this offering, Biodyne Holding, S.A., or Biodyne, has controlled a majority of the voting power of our company on account of its ownership of our common stock. Upon completion of this offering, Biodyne may not continue to control a majority of the voting power of our company on account of its ownership of our common stock. Upon completion of this offering, and assuming the midpoint of the price range listed on the cover page of this Prospectus, Biodyne will hold 42.9% of our common stock. If its ownership increases by just 7.2% , we may be a “controlled company” within the meaning of the Nasdaq Marketplace Rules. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements:

 

  that a majority of the board of directors consists of independent directors;
     
  that we have a nominating and corporate governance committee that is composed entirely of independent directors; and
     
  that we have a compensation committee that is comprised entirely of independent directors.

 

Even if we are a controlled company, we do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or any of our board committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq Marketplace Rules. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and the Nasdaq Marketplace Rules within the applicable time frame.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY AND MARKET DATA

 

Special Note Regarding Forward-Looking Statements

 

This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements include, but are not limited to, statements about:

 

  failure to obtain FDA approval to commercially sell our product candidates in a timely manner or at all;
     
  whether surgeons and patients in our target markets accept our product candidates, if approved;
     
  the expected growth of our business and our operations, and the capital resources needed to progress our business plan;
     
  failure to scale up of the manufacturing process of our product candidates in a timely manner, or at all;
     
  failure to manufacture our product candidates at a competitive price;
     
  our ability to retain and recruit key personnel, including the development of a sales and marketing infrastructure;
     
  reliance on third party suppliers for certain components of our product candidates;
     
  reliance on third parties to commercialize and distribute our product candidates in the United States and internationally;
     
  changes in external competitive market factors;
     
  uncertainties in generating sustained revenue or achieving profitability;
     
  unanticipated working capital or other cash requirements;
     
  changes in FDA regulations, including testing procedures, of medical devices and related promotional and marketing activities;
     
  our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing;
     
  our ability to obtain and maintain intellectual property protection for our product candidates; and
     
  changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the medical device industry.

 

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You should read this prospectus, including the section titled “Risk Factors,” and the documents that we reference elsewhere in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

 

These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus regardless of the time of delivery of this prospectus or any sale of our common stock. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein.

 

Industry and Market Data

 

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market opportunity and market size, is based on information from various sources, including independent industry publications. In presenting this information, we have also made assumptions based on such data and other similar sources, and on our knowledge of, and our experience to date in, the markets for our products. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We believe that the information from these industry publications that is included in this prospectus is reliable. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

 

We estimate that the net proceeds to us from our issuance and sale of 1,142,857 Units in this offering will be approximately $6.7 million (or approximately $7.8 million if the underwriters exercise their option to purchase additional Units in full), based upon an assumed initial public offering price of $7.00 per Unit , which is the mid-point of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Each $1.00 increase or decrease in the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $1.0 million, assuming the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of Units we are offering. Each increase or decrease of 100,000 Units we are offering at the assumed initial public offering price of $7.00 per Unit , which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $630,000, assuming the assumed initial public offering price remains the same.

 

We intend to use the net proceeds from this offering as follows:

 

  approximately $1.5 million to fund our research and development activities;
     
  approximately $4.25 million to fund the regulatory review process for all three of our product candidates; and
     
  the remainder for working capital and other general corporate purposes, including the additional costs associated with being a public company.

 

In addition, on May 10, 2013, we issued a note payable with a principal balance amount of $1,070,000, or the Leman Note, in connection with the purchase of certain assets from Leman Cardiovascular S.A., or Leman. The Leman Note bears interest at a rate of 6% per annum and originally matured on May 10, 2014, which was later extended to May 10, 2018. During the years ended 2013, 2014, 2015, 2016 and 2017, we repaid principal of $302,000, $30,000, $248,000, $76,000 and 174,734, respectively. As of December 31, 2017 and 2016, the principal balance due on the Leman Note was $270,038 and $444,772, respectively, and the related accrued interest was $6,436 and $15,419, respectively. As of December 31, 2017, the principal balance due is $270,038. The highest principal balance owed under the Leman Note since January 1, 2015 was approximately $768,011. We intend to use a portion of the net proceeds from this offering to repay all of the principal and accrued interest on the Leman Note in full.

 

The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, our sales, marketing and manufacturing efforts, any collaboration that we may enter into with third parties for our product candidates and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.

 

We believe opportunities may exist from time to time to expand our current business through the acquisition or in-license of complementary product candidates. While we have no current agreements or commitments for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.

 

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DIVIDEND POLICY

 

We have never declared or paid any cash dividends on our capital stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects, the requirements of current or then-existing debt instruments and other factors our board of directors may deem relevant.

 

In addition, subject to limited exceptions, the terms of the Notes prohibit us from paying dividends on our equity securities so long as at least 33% of the principal amount of the Notes remains outstanding.

 

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CAPITALIZATION

 

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2017:

 

  on an actual basis;
     
  on a pro forma basis to reflect the (1) automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,630,058 shares of our common stock, which will occur immediately prior to the closing of this offering, (2) issuance of $2,897,500 of 2018 Notes subsequent to December 31, 2017 for net proceeds of $2,603,750, and the subsequent automatic conversion of the aggregate principal amount and the interest accrued through March 31, 2018 of the 2018 Notes into 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (3) conversion of certain 2017 Notes outstanding as of March 31, 2018 into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the $2,740,500 aggregate principal and $92,351 of interest accrued through March 31, 2018 of those converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (4) issuance of an estimated 90,717 shares of common stock in payment of accrued but unpaid dividends on shares of our preferred stock, based on dividends accruing through March 31, 2018, (5) repayment of $270,038 principal and $6,436 interest on the Leman Note, (6) the reclassification of $1,900,553 of warrant derivative liabilities to equity, which will occur immediately prior to the closing of this offering, and (7) the filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the closing of this offering; and
     
  on a pro forma as adjusted basis to give further effect to our issuance and sale of 1,142,857 Units in this offering at an assumed initial public offering price of $7.00 per Unit , which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our common stock and other terms of this offering determined at pricing. You should read the following table in conjunction with “Use of Proceeds,” “Selected Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and other financial information contained in this prospectus, including the financial statements and related notes appearing elsewhere in this prospectus.

 

    Actual     Pro Forma       Pro Forma As Adjusted(1)  
                   
Cash and cash equivalents   $ 77,688     $ 2,404,964     $ 9,119,022  
                         
Total debt   $ 3,794,538     $ 777,564     $ 777,564  
                         
Series A preferred stock, par value $0.00001 per share; 1,300,000 shares authorized, 1,005,700 shares issued and outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted   $ 3,935,638       -       -  
Series B convertible preferred stock, par value $0.00001 per share; 2,000,000 shares authorized, 253,792 shares issued and outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted   $ 1,235,117       -       -  
                         
Stockholders’ (deficit) equity:                        
Preferred stock, par value $0.00001 per share; no shares authorized, issued and outstanding, actual; 10,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted                        
Common stock, par value $0.00001 per share; 30,000,000 shares authorized, 6,133,678 shares issued and outstanding, actual; 50,000,000 shares authorized, 9,042,480 shares issued and outstanding, pro forma; 50,000,000 shares authorized, 10,185,337 shares issued and outstanding, pro forma as adjusted     61       90       101  
Additional paid-in capital     24,389,307       38,532,923       45,246,970  
Accumulated deficit     (35,519,819 )     (37,155,555 )     (37,155,555 )
                         
Total stockholders’ (deficit) equity   $ (11,130,451 )     1,377,458       8,091,516  
                         
Total capitalization   $ (2,165,158   $ 2,155,022     $ 8,869,080  

 

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(1) A $1.00 increase or decrease in the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $1.0 million, assuming the number of Units offered by us, as stated on the cover page of this prospectus, remains unchanged and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 100,000 Units we are offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $630,000, assuming the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

The outstanding share information in the table above excludes the following:

 

  1,438,247 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31, 2018, at a weighted average exercise price of $12.80 per share;
     
  57,143 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $8.75, which represents 5% of the Units being offered hereby and 125% of an assumed initial public offering price of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus;
     
  2,109 shares of our common stock issuable upon the conversion of certain unconverted 2017 Notes outstanding as of March 31 , 2018, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the outstanding 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  1,422,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Omnibus Incentive Plan, or the 2016 plan, as of March 31 , 2018; and
     
  1,078,000 shares of our common stock reserved for future issuance under the 2016 plan.

  

Unless otherwise indicated, all information contained in the information above assumes:

 

  no exercise of the warrants offered as part of the Units;
     
  no exercise by the underwriters of their option to purchase additional Units;
     
  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,720,775 shares of our common stock, which includes 90,717 shares of common stock in payment of accrued dividends as of March 31 , 2018, which will occur immediately prior to the closing of this offering;
     
  the automatic conversion of the 2018 Notes outstanding as of March 31, 2018, into an aggregate of 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the conversion of certain 2017 Notes outstanding as of March 31 , 2018 into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal and the estimated accrued interest amounts of those converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and
     
  a one-for-two reverse stock split of our common stock effected on December 14, 2017.

 

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DILUTION

 

If you invest in our Units in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

 

Our historical net tangible book value (deficit) is the amount of our total assets less our liabilities. Our historical net tangible book value (deficit) per share is our historical net tangible book value (deficit) divided by the number of shares of common stock outstanding as of December 31 , 2017. Our historical net tangible book value (deficit) as of December 31 , 2017, was approximately $( 7,949,785 ), or $(1.30) per share of common stock.

 

Our pro forma net tangible book value (deficit) as of December 31 , 2017 was $(704,982) or $(0.08) per share of common stock, after giving effect to the (i) issuance of $2,897,500 of 2018 Notes subsequent to December 31 , 2017 for net proceeds of $2,603,750, and the subsequent automatic conversion of the aggregate principal amount and the interest accrued through March 31 , 2018 of the 2018 Notes into 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (ii) the conversion of $2,740,500 of aggregate principal amount and $92,351 of interest accrued through March 31, 2018 on certain converting 2017 Notes into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , (iii) automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,630,058 shares of our common stock, which will occur immediately prior to the closing of this offering, (iv) issuance of an estimated 90,717 shares of common stock in payment of accrued but unpaid dividends on shares of our preferred stock based on dividends accruing through March 31, 2018, (v) repayment of $270,038 principal and $6,436 interest on the Leman Note, (vi) the reclassification of $1,900,553 of warrant derivative liabilities to equity, which will occur immediately prior to the closing of this offering, and (vii) the filing and effectiveness of our amended and restated certificate of incorporation, each of which will occur immediately prior to the closing of this offering.

 

Pro forma as adjusted net tangible book value (deficit) is our pro forma net tangible book value, after giving further effect to the sale of 1,142,857 Units in this offering at an assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. This amount represents an immediate increase in pro forma net tangible book value (deficit) of $0.76 per share to our existing stockholders, and an immediate dilution of $6.32 per share to new investors participating in this offering.

 

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share           $ 7.00  
Historical net tangible book value (deficit) per share as of December 31 , 2017   $ (1.30 )        
Increase in pro forma net tangible book value (deficit) attributable to conversion of the certain 2017 Notes     0.39          
Increase in pro forma net tangible book value (deficit) attributable to conversion of the 2018 Notes     0.33          

Increase in pro forma net tangible book value (deficit) attributable to reclassification of

warrant derivatives

    0.21          
Increase in pro forma net tangible book value (deficit) attributable to conversion of our convertible preferred stock     0.29          
Pro forma net tangible book value (deficit) per share as of December 31, 2017, before giving effect to this offering     (0.08)          
Increase in pro forma net tangible book value (deficit) per share attributable to new investors participating in this offering     0.76          
Pro forma as adjusted net tangible book value (deficit) per share after this offering             0.68  
Dilution in pro forma net tangible book value (deficit) per share to new investors participating in this offering           $ 6.32  

  

A $1.00 increase or decrease in the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $0.10 per share and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $0.10 per share, assuming that the number of Units offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Similarly, a 100,000 Units increase or decrease in the number of Units offered by us, as set forth on the cover page of this prospectus, would increase or decrease, as appropriate, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $0.05 and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $0.05 assuming the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of Units and other terms of this offering determined at pricing.

 

If the underwriters exercise in full their option to purchase 171,429 additional Units in this offering, the pro forma as adjusted net tangible book value will increase to $0.77 per share, representing an immediate increase in pro forma net tangible book value to existing stockholders of $0.09 per share and a decrease in immediate dilution of $0.09 per share to new investors participating in this offering.

 

The following table sets forth, as of the date of this prospectus, on the pro forma as adjusted basis described above, the differences between our existing stockholders and the purchasers of Units in this offering with respect to the number of Units purchased from us, the total consideration paid to us and the weighted average price paid per share paid to us, based on an assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

    Units Purchased     Total Consideration    

Weighted

Average Price

 
    Number     Percent     Amount     Percent     per Share  
Existing stockholders     9,042,480       88.8 %   $ 34,228,223       81.1 %   $ 3.79  
                                         
New investors     1,142,857       11.2 %   $ 8,000,000       18.9 %   $ 7.00  
                                         
Total     10,185,337       100.0 %   $ 42,228,223       100.0 %   $ 4.15  

 

If the underwriters exercise in full their option to purchase additional Units in this offering, the number of shares held by existing stockholders will be reduced to 87. 3 % of the total number of shares of common stock that will be outstanding upon completion of this offering, and the number of shares of common stock held by new investors participating in this offering will be further increased to 12. 7 % of the total number of shares of common stock that will be outstanding upon completion of the offering, before any sales by any Selling Stockholders of any of the shares of common stock registered concurrently with this offering.

 

If the Selling Stockholders sell, in a separate offering covered by the Selling Stockholder Prospectus, all 2,469,221 shares of our common stock registered concurrently with this offering (calculated using the midpoint of the price range listed on the cover page of this prospectus, assuming the conversion of all Notes, and the exercise of all Warrants, held by the Selling Stockholders, and after giving effect to the reverse stock split to be effected prior to the completion of this offering), the number of shares held by existing stockholders will be further reduced to 78.9% of the total number of shares of common stock that will be outstanding upon completion of both offerings, and the number of shares of common stock held by new investors will be further increased to 21.1% of the total number of shares of common stock that will be outstanding upon completion of both offerings.

 

A $1.00 increase or decrease in the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $1.0 million, assuming the number of Units offered by us, as stated on the cover page of this prospectus, remains unchanged and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 100,000 Units we are offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $630,000, assuming the assumed initial public offering price of $7.00 per Unit, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

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We may choose to raise additional capital through the sale of equity or equity-linked securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any options are issued under our equity incentive plan or we issue additional shares of common stock or equity-linked securities in the future, there will be further dilution to investors purchasing in this offering.

 

The number of shares of our common stock to be outstanding after this offering is based on 9,042,480 shares of common stock outstanding as of March 31, 2018, and excludes:

 

  1,438,247 shares of our common stock issuable upon the exercise of warrants outstanding as of March 31 , 2018, at a weighted average exercise price of $12.80 per share;
     
  57,143 shares of our common stock that may be issued upon exercise of the Underwriters’ Warrants at an exercise price of $8.75, which represents 5% of the Units being offered hereby and 125% of an assumed initial public offering price of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus;
     
  2,109 shares of our common stock issuable upon the conversion of certain unconverted 2017 Notes outstanding as of March 31 , 2018, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the outstanding 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  1,422,000 shares of our common stock issuable upon the exercise of outstanding stock options under our 2016 Omnibus Incentive Plan, or the 2016 plan, as of March 31 , 2018; and
     
  1,078,000 shares of our common stock reserved for future issuance under the 2016 plan.

 

Unless otherwise indicated, all information contained in the information above assumes:

 

  no exercise of the warrants offered as part of the Units;
     
  no exercise by the underwriters of their option to purchase additional Units;
     
  the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 1,720,775 shares of our common stock, which includes 90,717 shares of common stock in payment of accrued dividends as of March 31 , 2018, which will occur immediately prior to the closing of this offering;
     
  the automatic conversion of the 2018 Notes outstanding as of March 31, 2018, into an aggregate of 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the conversion of certain 2017 Notes outstanding as of March 31, 2018 into 578,118 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal and the estimated accrued interest amounts of those converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units;
     
  the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering; and
     
  a one-for-two reverse stock split of our common stock effected on December 14, 2017.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

 

You should read the following discussion of our financial condition and results of operations in conjunction with “Selected Financial Data” and our financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry and Market Data” in this prospectus.

 

Overview

 

We are a development stage medical device company developing biologic-based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three product candidates: the Bioprosthetic Heart Valve, which we refer to as BHV, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Recent Developments

 

Amendments to Certificate of Incorporation

 

On March 1, 2017, we filed a second amended and restated certificate of incorporation, to increase the number of our authorized shares of preferred stock to 6,000,000, designate 1,300,000 shares of our authorized preferred stock as Series A Preferred Stock, or Series A preferred stock, and set forth the rights, preferences and privileges of our Series A preferred stock. On June 8, 2017, we filed a third amended and restated certificate of incorporation to revise certain protective voting provisions afforded to the holders of our preferred stock. On the same date, we filed a certificate of designation, preferences, rights and limitations of Series B convertible preferred stock, to designate 2,000,000 shares of our authorized preferred stock as Convertible Series B Preferred Stock, or Series B preferred stock, and set forth the rights, preferences and privileges of our Series B preferred stock.

 

Series B Preferred Stock and Placement Agent Warrants

 

Through December 31, 2017, we issued 253,792 shares of Series B preferred stock, at a purchase price of $6.00 per share, to certain accredited investors. The gross proceeds from the Series B preferred stock were $1,522,752 and we incurred offering expenses of $230,350, including $153,075 of placement agent fees. In connection with the sale of shares of our Series B preferred stock, we issued the placement agent a warrant to purchase 17,303 shares of our common stock at an exercise price equal to the lesser of $12.00 per share or the price of the securities issued in a future round of financing.

 

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Convertible Notes and Warrants

 

During the period from June 15, 2017 through December 7, 2017, we received proceeds aggregating $2,750,500 pursuant to the issuance of convertible promissory notes, or the 2017 Notes, and five-year warrants for the purchase of 114,608 shares of our common stock, or the Warrants. The 2017 Notes bear interest at 15% per annum, payable quarterly, and were originally due on January 11, 2018. The 2017 Notes are convertible at a price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the price per share in our initial public offering, or the Conversion Price. The Warrants have a term of five years, and are exercisable for the number of common shares equal to 50% of the total shares issuable upon the conversion of the 2017 Notes, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the Conversion Price.

 

On December 29, 2017, we amended and restated the 2017 Notes to, among other things, (i) defer the December 2017 quarterly interest payment to January 2018, (ii) extend the maturity date to February 28, 2018, (iii) eliminate the remedy upon an event of default that the principal of each 2017 Note increases by 20%, and (iv) increase the Warrant coverage of the 2017 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2017 Notes.

 

On February 28, 2018, we further amended and restated the 2017 Notes to, among other things, (i) extend the maturity date to May 15, 2018 and (ii) increase the Warrant coverage of the 2017 Notes from 75% to 100% of the shares of common stock issued upon conversion of the 2017 Notes.

 

From January 5, 2018 through January 16, 2018, we issued convertible notes, or the 2018 Notes, in the aggregate principal amount of $2,897,500 for net cash proceeds of $2,603,750. The 2018 Notes bear interest at 15% per annum, payable quarterly, and are due on February 28, 2018, or the Maturity Date. The 2018 Notes are convertible at the option of the holder at any time prior to the Maturity Date at a price of $12.00 per share, and are automatically convertible upon the consummation of this offering at a price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the price per share in the initial public offering, or the 2018 Conversion Price. In connection with the issuance of the 2018 Notes, we also issued five-year warrants exercisable for the number of shares of common stock equal to 50% of the total shares issuable upon the conversion of the 2018 Notes, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the 2018 Conversion Price. We have agreed to issue a five-year warrant to the placement agent for the purchase of 60,002 shares of common stock.

 

On February 28, 2018, we amended and restated the 2018 Notes to, among other things, (i) extend the maturity date to May 15, 2018, (ii) eliminate the remedy that adjusts the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes, and (iii) increase the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes.

 

The offers, sales and issuances of these securities were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering. The recipients of such securities in each of these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof.

 

Debt Issuance

 

On December 13, 2017 we issued a promissory note in the principal amount of $200,000, and on December 22, 2017 we issued a promissory note in the principal amount of $75,000, which we refer to together as the December Notes. The December Notes bore interest at a rate of 10% per annum and were due on the earlier of sixty days from the date of issuance or upon the consummation of this offering. The December Notes were secured by all of our assets. The December Notes were repaid in full in January 2018. The proceeds from the December Notes were used for working capital purposes, including a portion of the expenses of this offering.

 

Reverse Stock Split

 

A one-for-two reverse stock split of our common stock, or the reverse stock split, was effected on December 14, 2017. With the exception of the securities that are not affected by the reverse stock split, all share and per share information has been retroactively adjusted to give effect to the reverse stock split for all periods presented, unless otherwise indicated.

 

Results of Operations

 

The following table represents selected items in our statements of operations for years ended December 31, 2017 and 2016:

 

    For the Years Ended  
    December 31,  
    2017     2016  
             
Revenues:                
Product sales   $ 184,800     $ 694,118  
Royalty income     137,711       91,794  
Contract research - related party     99,600       -  
      422,111       785,912  
Cost of goods sold     419,659       810,294  
Gross Profit (Loss)     2,452       (24,382 )
                 
Selling, general and administrative expenses     5,455,963       4,634,801  
Research and development expenses     649,736       -  
Loss from Operations     (6,103,247 )     (4,659,183 )
                 
Other Expense (Income):                
Impairment loss in investment     -       487,900  
Gain on extinguishment of convertible notes payable     (257,629 )     -  
Interest expense, net     209,506       57,890  
Amortization of debt discount     1,710,130       -  
Change in fair value of derivative liabilities     26,215       383,285  
Total Other Expense     1,688,222       929,075  
                 
Loss from Continuing Operations     (7,791,469 )     (5,588,258 )
Discontinued Operations:                
Loss from discontinued operations, net of tax     -       (298,286 )
Gain on sale of discontinued operations, net of tax     -       2,499,054  
Income from Discontinued Operations, net of tax     -       2,200,768  
                 
Net Loss     (7,791,469 )     (3,387,490 )
Deemed dividend to preferred stockholders     (459,917 )     (342,859 )
Net Loss Attributable to Common Stockholders   $ (8,251,386 )   $ (3,730,349 )

 

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Comparison of the years ended December 31, 2017 and 2016

 

Overview

 

We reported net losses of $7,791,469 and $3,387,490 for the years ended December 31, 2017 and 2016, respectively, representing an increase in net loss of $4,403,979, or 130%, resulting primarily from increases in operating expenses of $1,444,064, increases in amortization of debt discount of $1,710,130 and a decrease in income from discontinued operations of $2,200,768, partially offset by a $487,900 decrease in impairment loss and $357,070 decrease in the loss from change in fair value of derivatives liabilities, as discussed below.

 

Revenues

 

Revenues earned during the year ended December 31, 2017 were generated through product sales of the ProCol Vascular Bioprosthesis of $184,800, royalty income of $137,711 and contract research revenue of $99,600. Revenues earned during the year ended December 31, 2016 were generated through product sales of the ProCol Vascular Bioprosthesis of $694,118 and royalty income of $91,794. The decrease in product sales of the ProCol Vascular Bioprosthesis resulted from decreased orders from LMAT. The sales of the ProCol Vascular Bioprosthesis result from our contract manufacturing supply arrangement with LMAT, entered into in connection with the sale of the ProCol Vascular Bioprosthesis to LMAT in 2016. As a result, until any of our product candidates are approved, if at all, our revenue will be substantially dependent upon LMAT’s sales efforts of the ProCol Vascular Bioprosthesis. The contract research revenue is related to research and development services performed on behalf of HJLA, pursuant to a Development and Manufacturing Agreement dated April 1, 2016.

 

Royalty income is earned pursuant to the terms of our March 2016 asset sale agreement with LMAT. The increase in royalty income results from royalties earned for the year ended 2017, versus nine months in 2016, from the date of the asset sale agreement (March 18, 2016) through December 31, 2016.

 

Cost of Sales

 

Cost of sales were $419,659 and $810,294 for the years ended December 31, 2017 and 2016, respectively, and consisted primarily of labor costs and the costs of materials used for the sub-contract manufacture of the vascular bioprosthesis. The gross loss on product sales of the ProCol Vascular Bioprosthesis is primarily the result of (i) lower than expected product sales, and (ii) high fixed costs, since we have a fixed volume contract with the supplier of our raw materials. For periods in which LMAT’s demand for sub-contract manufacture of the vascular bioprosthesis is relatively low, we can expect to incur losses on the sale of product of the ProCol Vascular Bioprosthesis. We intend to renegotiate the contract with the supplier such that during periods of low demand, the supplier will provide materials that can be used for research and development purposes, however, we may not be successful in these negotiations.

 

Selling, General and Administrative Expenses

 

For the year ended December 31, 2017, selling, general and administrative expenses increased by $821,162 or 18%, to $5,455,963 from $4,634,801 for the year ended December 31, 2016. The increase is primarily due to increases of approximately (i) $1.2 million in compensation expense resulting from the hiring of our Chief Medical Officer, Chief Financial Officer and Business Development Manager during 2016, such that salaries were paid for a full year in 2017 and only a partial period during the year ended December 31, 2016; (2) $280,000 related to a fixed volume contract with the supplier of our raw materials, which materials were not used during the period and were discarded, partially offset by a decreases of approximately $709,000 in stock based compensation expense during the period.

 

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Research and Development Expenses

 

We incurred $649,736 of research and development expenses during the year ended December 31, 2017 related primarily to labor costs, benefits and supplies and materials associated with research and development activities incurred by us in developing techniques to manufacture the BHV and the pediatric bioprosthetic heart valves. We did not conduct any research and development activities during the year ended December 31, 2016. During 2016, our efforts were primarily focused on manufacturing the ProCol Vascular Bioprosthesis pursuant to our manufacturing supply arrangement with LMAT. We did not manufacture any heart values for LMAT during the second or third quarter of 2017, allowing us to increase our research and development activities.

 

Allowance on Advances to Related Party

 

During the year ended December 31, 2016, we reviewed the recoverability of our advances to HJLA and concluded that collectability was not reasonably assured. As a result, we recorded an allowance of $487,900 for the year ended December 31, 2016 related to our advances to HJLA.

 

Gain on extinguishment of convertible notes payable

 

For the year ended December 31, 2017, we recorded a gain on extinguishment of Convertible Notes of $257,629, On December 29, 2017, the Company amended the 2017 Notes to extend the maturity date and increase the Warrant coverage of the 2017 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2017 Notes. The amendment to the 2017 Notes was deemed to be a debt extinguishment and the Company recognized a $257,629 gain on extinguishment consisting of the extinguishment of $1,175,668 of derivative liabilities associated with the embedded conversion feature of the extinguished Convertible Notes, partially offset by (i) the write-off of $520,828 of debt discount associated with the extinguished Convertible Notes and (ii) the $397,211 grant date value of additional warrant coverage.

 

Interest Expense

 

For the year ended December 31, 2017, interest expense increased by $151,616, or 262%, as compared to the year ended December 31, 2016, due to an increase in the average balance of loans payable outstanding, principally from the issuance of the Notes during the period.

 

Amortization of Debt Discount

 

During the year ended December 31, 2017, we recognized $1,710,130 of amortization of debt discount related to the embedded conversion option in the Notes, as well as the Warrants issued with the Notes during the period. We recorded no such amortization during 2016.

 

Change in Fair Value of Derivative Liability

 

For the years ended December 31, 2017 and 2016, we recorded losses of $26,215 and $383,285, respectively, from the change in the fair value of the derivative liabilities. Our derivative liabilities are related to warrants issued in connection with our Series A preferred stock and Series B preferred stock financings, plus Warrants issued in connection with the Notes, as well as the embedded conversion option in the Notes.

 

 Loss from Continuing Operations

 

Our loss from continuing operations for the year ended December 31, 2017, increased by $2,203,211, or 39%, to $7,791,469 as compared to $5,588,258 for the year ended December 31, 2016. The increase was primarily attributable to increases in (i) selling, general and administrative expenses of $821,162, (ii) research and development expenses of $649,736, (iii) interest expense of $151,616, and (iv) amortization of debt discount of $1,710,130, partially offset by (i) a $487,900 decrease in expense for allowance on advances to HJLA (ii) $257,629 gain on extinguishment of convertible notes payable recognized in 2017 and $357,070 decrease in the loss from the change in fair value of derivative liabilities.

 

Income (Loss) From Discontinued Operations

 

During the year ended December 31, 2016, we recognized income from discontinued operations of $2,200,768, consisting of a $2,499,054 gain on the sale of discontinued operations, offset by a $298,286 loss from discontinued operations.

 

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Liquidity and Capital Resources

 

We have incurred losses since inception and negative cash flows from operating activities for the years ended December 31, 2017 and 2016. As of December 31, 2017, we had an accumulated deficit of $35,519,819. Since inception, we have funded our operations primarily through private placements of equity and convertible debt securities as well as from modest sales of the ProCol Vascular Bioprosthesis. As of December 31, 2017, we had cash of $77,688.

 

We measure our liquidity in a variety of ways, including the following:

 

    December 31,  
    2017     2016  
             
Cash   $ 77,688     $ 56,514  
Working capital deficiency   $ (8,004,171 )   $ (1,673,367 )

 

Based upon our working capital as of December 31, 2017, we require additional equity and or debt financing in order to meet our obligations as they become due within one year after the date of this filing and sustain operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern.

 

We will require significant amounts of additional capital to continue to fund our operations and commence and complete our research and development activities. We currently have limited resources to continue to fund our operations and if we are not able to obtain additional cash resources, we will not be able to continue operations. We will continue seeking additional financing sources to meet our working capital requirements, to make continued investment in research and development and to make capital expenditures needed for us to maintain and expand our business. We may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us when we require it, or if we expend capital on projects that are not successful, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, or we may have to cease our operations. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock, including our Units sold in this offering.

 

Under the 2017 Notes, so long as at least 33% of the principal amount of the Notes remains outstanding, we are subject to the following covenants, which we refer to as “the covenants”: we cannot amend our organizational documents in a manner that materially and adversely affects any rights of the holders, pay cash dividends or distributions upon any of our equity securities, enter into a transaction with an affiliate of our company, or enter into an agreement with respect to any of the foregoing. These covenants could limit the operation of our business.

 

In addition, under the 2017 Notes, an event of default occurs upon any of the following: (i) any default in the payment of the principal amount of any 2017 Note or of interest or other amounts owed to such holder when due and not cured within 15 trading days, (ii) our failure to perform a covenant or agreement, which failure is not cured in 15 trading days, (iii) a material representation or warranty made in the 2017 Notes or related transaction document is untrue in any material respect when made, that would cause a material adverse effect, (iv) we become subject to a bankruptcy event, or (v) the 2017 Note Shares become ineligible for listing on a trading market. Upon an event of default under the Notes, the outstanding principal amount of the 2017 Notes plus any other amounts owed to such holder will become immediately due and payable.

 

Under the 2018 Notes, within 15 trading days after an event of default, the aggregate principal amount of the 2018 Notes will increase by 20% and the Warrant Shares will increase from 50% to 75% coverage. If an event of default occurs and the holders accelerate the amounts due, we may not be able to make accelerated payments. Further, we may be unable to arrange for additional financing to make the accelerated payments. The occurrence of any one of these events could adversely impact our business, financial condition or results of operations.

 

During December 2017, we issued the December Notes in the aggregate principal amount of $275,000. The December Notes bore interest at a rate of 10% per annum and were due on the earlier of sixty days from the date of issuance or upon the consummation of this offering. The December Notes were secured by all of our assets. The December Notes were repaid in full in January 2018. The proceeds from the December Notes were used for working capital purposes, including a portion of the expenses of this offering.

 

From January 5, 2018 through January 16, 2018, we issued the 2018 Notes, in the aggregate principal amount of $2,897,500 for net cash proceeds of $2,603,750. See Recent Developments within Management’s Discussion and Analysis for additional details.

 

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For the Years Ended December 31, 2017 and 2016

 

During the years ended December 31, 2017 and 2016, we financed our activities primarily from net proceeds derived from sales of our Series A and Series B preferred stock of $1,292,400 and $2,233,131 and proceeds from the issuance of notes payable of $3,150,400 and $188,000, respectively.

 

For the years ended December 31, 2017 and 2016, we used cash of $4,202,240 and $3,417,157, respectively, in operations. Cash used during the year ended December 31, 2017 was primarily attributable to our net loss of $7,791,469, adjusted for net non-cash expenses in the aggregate amount of $2,496,333, and by $1,092,896 of net cash provided by changes in the levels of operating assets and liabilities. Cash used during the year ended December 31, 2016 was primarily attributable to our net loss of $3,387,490, adjusted for net non-cash expenses in the aggregate amount of $33,524 and by $63,191 of net cash used by changes in the levels of operating assets and liabilities.

 

During the year ended December 31, 2017, cash provided in investing activities was $165,312, of which $166,250 was received as the final cash installment from the March 2016 sale of the ProCol Vascular Bioprosthesis to LMAT, or the Asset Sale, $216,000 was received from repayment of related party advances, offset by a $206,000 advance to a related party and a $10,938 purchase of property and equipment. During the year ended December 31, 2016, cash used in investing activities was $372,766 of which $370,200 was paid for the purchase of an intangible asset, $497,900 was paid in connection with an investment in an unconsolidated affiliate and $3,416 was for the purchase of property and equipment, partially offset by $498,750 of cash installment proceeds received from the Asset Sale.

 

 During the year ended December 31, 2017, cash provided in financing activities was $4,058,102, of which $2,564,400 was provided in connection with proceeds from the issuance of convertible notes and warrants (net of issuance costs of $186,100), $1,292,400 in connection with proceeds from the issuance of Series B preferred stock and warrants (net of issuance costs of $230,349), $311,000 was provided by proceeds from the issuance of notes payable, $275,000 was provided from issuance of notes payable, partially offset by the repayments of notes payable of $174,734 and payment of initial public offering costs of $209,964. During the year ended December 31, 2016, cash used in financing activities was $2,261,232, of which $2,233,131 was provided in connection with proceeds from the issuance of Series A preferred stock and warrants (net of issuance costs of $615,369), $188,000 was provided by proceeds from the issuance of notes payable, $100,000 was provided by advances from distributors, partially offset by the repayments of notes payable of $186,624 and payment of initial public offering costs of $73,275.

 

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Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating ASU 2016-02 and its impact on our financial statements.

 

In March 2016, the FASB issued ASU 2016-07, “Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 simplifies the accounting for equity method investments by eliminating the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016 with early adoption permitted. The adoption of ASU 2016-07, did not have a material impact on our financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)”, or ASU 2016-12. This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption. We have elected to adopt Topic 606 using a modified retrospective approach. Accordingly, Topic 606 will be applied prospectively in our financial statements from January 1, 2018 forward. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated using a five-step model. We earn revenues from providing research and development services on a time and materials basis. Product revenues and royalty income are earned and recognized over time. Topic 606 requires enhanced disclosures, which we will include in the notes to the our financial statements beginning with the year ending December 31, 2018. We do not believe that the adoption of these ASUs will have a material impact on our financial statements, either at initial implementation or on an ongoing basis.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)”, or ASU 2016-09. ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of ASU 2016-09 did not have a material impact on our financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)”, or ASU 2016-15. ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. We will require adoption on a retrospective basis unless it is impracticable to apply, in which case we will be required to apply the amendments prospectively as of the earliest date practicable. We do not anticipate that the adoption of ASU 2016-15 will have a material impact on our cash flows and related disclosures.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We do not expect the adoption of ASU 2017-09 to have a material impact on our financial statements.

 

In September 2017, the FASB issued ASU No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments” that enhances the guidance surrounding sale leaseback transactions, accounting for taxes on leveraged leases and leases with third party value. The related amendments to the Topics described above become effective on the same schedule as Topics 605, 606, 840 and 842. We do not expect that the adoption of these amendments will have a material impact on our financial statements.

 

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Critical Accounting Policies and Estimates

 

Investments

 

Equity investments in which we exercise significant influence but do not control, and are not the primary beneficiary, are accounted for using the equity method, whereby investment accounts are increased (decreased) for our proportionate share of income (losses), but investment accounts are not reduced below zero.

 

Long-Lived Assets

 

We account for our long-lived assets in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets”, or ASC 360, which requires that long-lived assets be evaluated whenever events or changes in circumstances indicate that the carrying amount may not be recoverable or the useful life has changed. Some of the events or changes in circumstances that would trigger an impairment test include, but are not limited to:

 

  significant under-performance relative to expected and/or historical results (negative comparable sales growth or operating cash flows;
     
  significant negative industry or economic trends;
     
  knowledge of transactions involving the sale of similar property at amounts below our carrying value; or
     
  our expectation to dispose of long-lived assets before the end of their estimated useful lives, even though the assets do not meet the criteria to be classified as “held for sale.”

 

Long-lived assets are grouped for recognition and measurement of impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. The impairment test for long-lived assets requires us to assess the recoverability of our long-lived assets by comparing their net carrying value to the sum of undiscounted estimated future cash flows directly associated with and arising from our use and eventual disposition of the assets. If the net carrying value of a group of long-lived assets exceeds the sum of related undiscounted estimated future cash flows, we would be required to record an impairment charge equal to the excess, if any, of net carrying value over fair value.

 

When assessing the recoverability of our long-lived assets, which include property and equipment and finite-lived intangible assets, we make assumptions regarding estimated future cash flows and other factors. Some of these assumptions involve a high degree of judgment and also bear a significant impact on the assessment conclusions. Included among these assumptions are estimating undiscounted future cash flows, including the projection of comparable sales, operating expenses, capital requirements for maintaining property and equipment and the residual value of asset groups. We formulate estimates from historical experience and assumptions of future performance based on business plans and forecasts, recent economic and business trends, and competitive conditions. In the event that our estimates or related assumptions change in the future, we may be required to record an impairment charge. Based on our evaluation, we did not record a charge for impairment for the years ended December 31, 2017 or 2016.

 

Management believes that our intangible assets (patented heart valve bioprosthesis technology and a right to develop and manufacture dermal filler on behalf of HJLA) have significant long-term profit potential. Although our efforts may not be successful, we and HJLA intend to allocate financial and personnel resources when and as deemed possible and/or necessary. If we choose to abandon these efforts, or if we determine that such funding is not available, we may be unable to realize the potential of our efforts and the intangible assets may be subject to significant impairment.

 

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Preferred Stock

 

We apply the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A and Series B Preferred Stock, or the Preferred Stock. Preferred stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable preferred stock (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, preferred stock is classified as permanent equity. As of the issuance date, the carrying amount of the Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions such that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

Derivative Liabilities

 

The accounting treatment of derivative financial instruments requires that we record these instruments as a liability at fair value and mark-to-market the instruments at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the derivative financial instruments was determined using observable market data and required judgment and estimates. We reassess the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

Convertible Debt

 

The Company records a beneficial conversion feature, or “BCF”, related to the issuance of notes which are convertible at a price that is below the market value of the Company’s stock when the note is issued. The convertible notes payable discussed in Note 10 – Convertible Notes and Convertible Note – Related Party, have a conversion price that can be adjusted based on the Company’s stock price which results in the conversion feature being recorded as a derivative liability and a debt discount.  The debt discount is amortized to interest expense over the life of the respective note, using the effective interest method.

 

Revenue Recognition

 

We recognize revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale or rendering of services is recorded as deferred revenue on the accompanying balance sheets.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements as defined in the rules and regulations of the SEC. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for any other contractually narrow or limited purpose.

 

JOBS Act

 

Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

For as long as we remain an emerging growth company under the recently enacted JOBS Act, we will, among other things:

 

  be permitted to have only two years of audited financial statements and only two years of related selected financial data and management’s discussion and analysis of financial condition and results of operations disclosure;
     
be entitled to rely on an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
     
be entitled to reduced disclosure obligations about executive compensation arrangements in our periodic reports, registration statements and proxy statements; and
     
be exempt from the requirements to seek non-binding advisory votes on executive compensation or golden parachute arrangements.

 

Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.

 

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BUSINESS

 

Overview

 

We are a development stage medical device company developing biologic-based solutions that are designed to be life-enhancing for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, or ESRD. Each product candidate we are developing is designed to allow vascular and cardiothoracic surgeons to achieve effectiveness while improving current procedures and healthcare for a variety of patients. We are in the process of developing and obtaining U.S. Food and Drug Administration, or FDA, approval for the following three product candidates: the Bioprosthetic Heart Valve, which we refer to as BHV, the Bioprosthetic Coronary Artery Bypass Graft, which we refer to as CoreoGraft, and the Bioprosthetic Venous Valve, which we refer to as the VenoValve. We have previously manufactured, developed and obtained FDA pre-market approval for the ProCol Vascular Bioprosthesis, a product for hemodialysis vascular access in patients with ESRD, which we sold to LeMaitre Vascular, Inc., or LMAT, in March 2016.

 

Each of our product candidates will be required to successfully complete significant clinical trials to demonstrate the safety and efficacy of the product candidate before it will be able to be approved by the FDA. The completion of these clinical trials will require a significant amount of capital and the hiring of additional personnel.

 

Our Product Candidates

 

We are in the process of developing the following bioprosthetic implantable devices for cardiovascular disease:

 

  The Bioprosthetic Heart Valve: the BHV is a bioprosthetic, pig heart valve designed to function like a native heart valve, and designed to provide a patient greater functional performance than currently available devices. Early clinical testing has demonstrated improved function over existing surgically implanted devices and, due to these study results, we believe BHV may be suitable for the pediatric population, as it accommodates for the growth concomitant with the patient. Most of the data and studies have been performed to support our submission to the FDA for either a first-in-human study or for an investigational device exemption, or IDE, which we plan to submit in 2018. If we receive approval for an IDE, we plan to proceed with a clinical trial through the FDA standard ISO 5840, which is the international standard for bioprosthetic heart valve testing.
     
 

The CoreoGraft: the CoreoGraft is an “off the shelf” bioprosthetic, cow derived heart, coronary artery bypass graft with a 3 millimeter, or mm, diameter for use as a coronary vascular conduit in coronary artery bypass procedures. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and to facilitate a more complete revascularization of the injured heart muscle. The CoreoGraft is intended to allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures. We believe we will need to proceed with both pre-clinical and human studies in order to obtain FDA approval. Once we complete the pre-clinical studies, we plan to proceed with a human trial in the United States to evaluate this graft in patients in need of cardiac revascularization without any autologous tissue. The human study would likely be a one-year study to evaluate the graft being open by coronary angiography. We intend to start the pre-clinical studies in the United States in 2018.

     
 

The Venous Valve: the VenoValve is a bioprosthetic, porcine venous valve for patients with lower limb chronic venous insufficiency, or CVI, which occurs because of damage to the valves of the veins in the legs after patients develop blood clots in the deep venous system. An estimated 4.5 million people experience CVI in the United States and we believe the VenoValve, which is surgically implanted, will result in improvement in venous valve function in the legs of these patients. The VenoValve would replace dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. The VenoValve could allow for surgical insertion into the femoral vein or popliteal vein, thereby re-establishing competence and antegrade venous flow back to the heart and improvement in symptoms. Preclinical prototype testing, including in vivo animal studies by us, and in vitro hemodynamic studies have demonstrated that the VenoValve mimics the function of a normal functioning venous valve. In preclinical studies, the VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, the VenoValve has functioned normally in acute pre-clinical implementations as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. Ascending and descending venography of the VenoValve in pre-clinical study has demonstrated competency of the valve as well as being open in appropriate flow patterns. Results of eight pre-clinical tests were submitted to the FDA in the third quarter of 2017 in order to commence first-in-human trials in the United States. In the fourth quarter of 2017, we and the FDA discussed the pre-clinical tests submitted by us in the third quarter of 2017 and the FDA recommended we perform an additional 90-day pre-clinical study before commencing a first-in-human testing. We are preparing to commence the additional pre-clinical trial and once completed, we expect to begin first-in-human testing. Once we commence the first-in-human testing, we may seek to obtain reimbursement approval for this product candidate.

 

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In addition, we previously manufactured, developed and obtained FDA pre-market approval, or PMA, for the ProCol Vascular Bioprosthesis, a Class III product for hemodialysis vascular access in patients with ESRD. It is a biological graft derived from a cow’s mesenteric vein. The ProCol Vascular Bioprosthesis received a PMA for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft implant.

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for its dialysis access line of products for an upfront payment and a three-year royalty of up to $5 million. We continue to provide manufacturing transition services to LMAT from our facility in Irvine, California and are obligated to do so under a post-acquisition supply agreement with LMAT until 2019. Our ongoing revenue stream is derived from the sub-contract manufacturing services and royalties earned on LMAT sales pursuant to our agreement with LMAT.

 

Bioprosthetic Heart Valve

 

The BHV is a bio-prosthetic heart valve designed to mimic and function like a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability of BHV have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients.

 

Following an eight-year research and development effort, we completed the designing, prototyping and testing in accordance with the requisite International Organization for Standardization, or ISO, 5840 Part 1 (Cardiovascular Implants, Cardiac Valve Prostheses General Requirements) and Part 2 (Surgically Implanted Heart Valve Substitutes) of what we believe is an innovative heart valve bio-prosthesis for pediatric cardiac heart valve replacement. We believe that we have completed the necessary ISO 5840 pre-clinical data requirements and plan a submission to the FDA for either a first-in-human study or for an IDE which we plan to submit in 2018. To that end, we have obtained a patent for the BHV. We intend to produce 19 mm, 21 mm and 23 mm diameter bio-prosthetic heart valves to address the specific needs of the pediatric and adult patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease.

 

The BHV is designed to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease. Based upon our patented technology, the BHV is designed to eliminate the need for external support structures technically referred to as a “stent” to maintain valve geometry and function. This is accomplished through a use of titanium wires embedded within the wall of the bioprosthetic valve. This increases the size of the bioprosthesis that can be placed on the pediatric patient’s small annulus, the site of the inflow of the patient’s original valve. Thus, the BHV allows for effective functional results equal to a valve size at least two sizes larger than would be possible when implanting with an external stent. In addition, the internalized titanium supports are robust enough so as not to require additional suturing as is the case for weakly supported or stentless valves. This allows for the utilization of a single suture line for attachment of the valve to the recipient’s annulus and for an uninterrupted flow plane, which greatly increases the volume of blood with each heartbeat. Conversely, conventional valve design requires that the valve tissue be sewn or mounted inside the external stent diminishing the effective diameter and resulting in poor performance, stress on the leaflets and ultimately to a decreased longevity. When a conventional bioprosthetic heart valve is placed in a small annulus, not only will the valve react adversely to increasing cardiac output, but it will require a valve three sizes larger than the annulus to achieve a similar hemodynamic or functional result to the native valve; a feat not advisable or in any event accomplishable even with conventional root enlargement procedures. A patient prosthesis mismatch (the prosthesis is too small with regards to the patient’s size and weight) results in poor quality of life and in impairment of physical development and social integration.

 

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Similar flow advantages have been verified for our 23 mm BHV, the most common size implanted for mitral disease. We believe our 23 mm BHV provides an orifice area that mimics flow conditions of a younger active child.

 

Additionally, for a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. The protrusion of our 23 mm BHV is up to 2 mm less when compared to other bioprosthetic valves. Our flatter more planar geometry comes closer to mimicking the native anatomy allowing for physiological, more efficient left ventricular and aortic outflow tract flow patterns.

 

The CoreoGraft

 

The CoreoGraft is a device for use as an alternate or supplemental coronary vascular conduit in coronary bypass surgery. The CoreoGraft is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and facilitate a more complete revascularization of the injured heart muscle. The device will allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures and patients suffering from CVI. This device is fashioned from 3 mm diameter bovine mesenteric veins. The “feel” and suturing quality of the graft are mimetic of mammary arteries and requires no special suture considerations beyond those commonly used for autologous grafts. The CoreoGraft length is designed to be appropriate for all bypass requirements to allow exact trimming to the individually required length.

 

The CoreoGraft is functionally similar to a natural artery and has been demonstrated in preliminary studies to sustain effective “coronary” hemodynamics and cardiac function. Outcomes of the 24 procedures performed exemplify the utility as an alternate or supplemental coronary vascular conduit in off-pump CABG. This preliminary clinical study was limited to patients without sufficient available autologous grafts or patients who could not be weaned from bypass perfusion because of incomplete cardiac revascularization. Twenty-six grafts were implanted in 24 patients requiring a complete myocardial revascularization subsequent to hospital admission for coronary artery bypass grafting. In all cases, the CoreoGraft was used when it was determined that adequate or suitable autologous conduits were not available as a consequence of prior use, vascular pathology or contraindication associated with a comorbid condition.

 

We believe there are no presently approved “off the shelf” vascular grafts for coronary artery bypass procedures. We believe that the availability of a readily available “off the shelf” device will encourage multiple graft placement without the surgeon foregoing additional procedures that are not cost-effective. We anticipate that the FDA trial for this product candidate will begin in 2018. We expect the trial’s endpoints will be patient survival as well as graft survival at one year. We will also be assessing complications post operatively and comparing them to concurrent CABG patients.

 

The VenoValve

 

We have developed the VenoValve for use in treatment of lower limb CVI. The VenoValve is intended to be a replacement of dysfunctional valves in the deep venous system in individuals suffering from lower limb CVI. Restoration of valvular function in the deep system is the primary treatment for treatment of CVI. The VenoValve comprises a biologic leaflet mounted in a supporting frame that is designed to allow for surgical insertion of VenoValve into the femoral vein or popliteal vein, thereby re-establishing competence and anterograde venous flow back to the heart.

 

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Preclinical prototype testing, including in vivo animal studies and in vitro hemodynamic studies have demonstrated that the VenoValve is similar in function to a normal functioning venous valve. In preclinical studies, VenoValve has passed the following areas: hemolysis, complement activation, platelet/leukocyte, thrombogenicity, cytotoxicity, and corrosion resistance. Moreover, VenoValve has functioned normally in acute animal implant as shown by venograms, and has also functioned normally under various conditions in hydrodynamic testing. Ascending and descending venography of the VenoValve in sheep, demonstrated competency of the valve as well as patency in appropriate flow patterns.

 

In August 2017, we made a presubmission to the FDA to initiate feedback regarding an IDE to initiate an Early Feasibility study in the United States. As we believe there are no currently available medical or non-surgical treatments for lower limb CVI, we believe the VenoValve will provide for a paradigm shift in the treatment of both primary and secondary causes of CVI disease.

 

ProCol Vascular Bioprosthesis

 

In March 2016, LMAT, a provider of peripheral vascular devices and implants, acquired our ProCol Vascular Bioprosthesis for dialysis access line of products for $2,805,297 plus a three-year royalty up to a maximum of $5 million. We agreed to provide manufacturing transition services to LMAT from its facility for up to three years.

 

The ProCol Vascular Bioprosthesis is a Class III vascular bioprosthesis for hemodialysis vascular access concomitant with ESRD. The ProCol Vascular Bioprosthesis is a natural biological graft derived from a cow’s mesenteric vein. The tissue processing technology and sterilization process ensures a product that is flexible, easy to suture and one which exhibits physiologic pulsatile flow characteristics similar to a native fistula. The ProCol Vascular Bioprosthesis may be implanted in a straight or loop configuration, according to the specific surgical need and has demonstrated clinical efficacy in the upper arm, forearm, and thigh.

 

The ProCol Vascular Bioprosthesis has received PMA for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft or consequent to failure of a prosthetic graft in terms of intent to treat.

 

The outcomes of the FDA trials and subsequent studies demonstrate that the cumulative patency for the ProCol Vascular Bioprosthesis implanted as a first access or after multiple failed prosthetic grafts is fundamentally that usually reported for arteriovenous fistulas as the first access or employed consequent to failed ePTFE grafts. As compared with the present standard of care, the ePTFE graft, the ProCol Vascular Bioprosthesis has shown 3.7 times lower relative risk of infection, 1.4 times lower relative risk of interventions, and 1.7 times lower relative risk of thrombosis. We believe this is exemplified by the quantitative and qualitative similarities of the cumulative patency of the ProCol Vascular Bioprosthesis to that reported for native arteriovenous fistulae in the Dialysis Outcome and Practice Patterns Study. We believe the results of these and other studies consistently demonstrate that as a vascular access bridge graft, the ProCol Vascular Bioprosthesis provides dramatically better cumulative patency compared to ePTFE grafts and exhibits a lower complication rate. Most importantly is the continued patient satisfaction associated with the paucity of complications and uninterrupted dialysis therapy.

 

The ProCol Vascular Bioprosthesis is stored in sterile saline, so preparation in the operating room is easily accomplished via a simple, quick rinsing process. The ProCol Vascular Bioprosthesis is also highly biocompatible and elicits no antibody reactions in patients. Handling and suturing characteristics of the ProCol Vascular Bioprosthesis are similar to a patient’s native tissue making it easy to work with during the implant procedure. The natural tissue of the ProCol Vascular Bioprosthesis is easily punctured in the hemodialysis setting affording the ease of access associated with a native fistula and the highly elastic and compliant nature of the ProCol Vascular Bioprosthesis enables it to handle high flow rates. Hemostasis is also readily achieved with minimal pressure following the removal of the hemodialysis needles. The ProCol Vascular Bioprosthesis graft may be accessed for hemodialysis as soon as two weeks following implant, based upon the physician’s decision and patient tolerance.

 

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Our Industry and Market

 

Our three product candidates currently under development are designed to address three different industries. The BHV is designed to address diseases relating to the aortic and mitral valves. The CoreoGraft is designed to address coronary artery bypass graft surgery, or CABG, and the VenoValve is designed to address lower limb CVI.

 

Aortic and Mitral Valve Diseases

 

Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. There is a long history of durability and value of these devices. Aortic valve or mitral valve stenosis occurs when the heart’s valves narrow, preventing the valve from opening fully. This obstructs blood flow from the heart and to the rest of the body. When the valves are obstructed, the heart needs to work harder to pump blood to the body, eventually limiting the amount of blood it can pump and may weaken the heart muscle. Valve stenosis, if left untreated, can lead to serious heart problems.

 

Mitral valve stenosis and prolapse, leakage or regurgitation related to inadequate or faulty closing, concerns a defective mitral valve, which is located between the left chambers of the heart. This valve works to keep blood flowing properly and allows blood to pass from the left atrium to the left ventricle but prevents it from flowing backward. When the mitral valve does not work properly, a person can experience symptoms such as fatigue and shortness of breath because the defective valve is allowing blood to flow backwards into the left atrium. Consequently, the heart will not pump enough blood out of the left ventricular chamber to supply the body with oxygen-filled blood. In certain cases, mitral valve disease, may, if left untreated, lead to heart failure or irregular heartbeats (arrhythmias), which may be life threatening.

 

Historically, heart valve manufacturers have fabricated replacement heart valve types (mechanical, biological, pericardial, pig-origin) and sizes to accommodate a spectrum of patient age, body mass or special pathologic conditions. Typically, this consists of aortic valve sizes with outside diameters ranging from 19 mm to 27 mm in 2 mm increments and mitral valves sizes in 2 mm increments from 27 mm to 31 mm. Hospitals and surgeons generally used one biologic and/or one mechanical valve from a single manufacturer and until about the end of the last century hospitals tended to inventory a complete size range of valves typically from a single manufacturer. As the practice of heart valve replacement surgery developed, it became apparent that the recipient population demanded a more prospective view in terms of the various implant modalities, geometrical configuration and a patient’s comorbidities. Depending on age (patients under age 20 receive a mechanical valve due to their calcium metabolism) surgeons use either mechanical, pericardial or porcine biological valves.

 

Distinctive features of one particular valve may facilitate implantation or meet the particular demands of a patient’s unique pathology. This stimulated the development of various valve configurations, but in the end did not significantly improve hemodynamic performance or advance quality of life concerns. There is no disagreement and considerable evidence that for most cardiac valve related disorders presently available devices will improve graft recipients presenting conditions.

 

However, we believe there is one patient cohort for whom the present devices fall short: very young children and adolescents requiring the smallest valve sizes, typically 19 to 21 mm in diameter. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple successive surgeries to provide a larger valve replacement. Additionally, biological valves in younger patients will deteriorate as a consequence of what is known as dystrophic mineralization, a phenomenon most likely associated with skeletal growth. Children and adolescent receive historically mechanical valves, which show lower performance. The patient outgrows the valve size several times between ages 2 and 20, requiring three to five surgeries before adulthood (also referred to as patient prosthetic mismatch).

 

Pediatric patients suffering from mitral valve prolapse, stenosis or rheumatic fever typically face complex issues such as alterations of the morphology and geometrical shape of the left heart chambers, which may compromise the chords that tether the mitral valve and the surrounding annular tissues that maintain the leaflet in a proper position (juxtaposition) leading to leakage or regurgitation. The common course for mitral valve disease in children is repair rather than replacement of the valve due to the potential complexity of pediatric mitral valve disease. However, when the mitral valve is not amenable to repair either as a consequence of surgeon skill and/or experience or the complexity of the pathology, a valve replacement procedure is necessary. Mitral valve stenosis and prolapse, leakage or regurgitation also results in significant changes in the morphology of the wall of the left ventricle, typically manifested as considerable thinning, and/or ventricle enlargement or thickening. For a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. This leads to a restricted passage of the blood through the aortic valve (aortic insufficiency). A too large aortic valve replacement may restrict the function of the mitral valve. It is therefore very important to match the respective valve with the size of the patient’s heart.

 

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For developing children, the increasing body mass or body surface area as a child grows is frequently incongruent with the valve size that the patient’s heart can accommodate. Consequently, these recipients almost universally develop a condition designated as “patient prosthetic mismatch.” For valve replacement in both younger and older pediatric patients, patient prosthetic mismatch has been shown to be associated with longer recovery periods and diminished improvements in symptoms. This is reflected in decreased exercise capacity, decreased recovery of the thickened left ventricle, as a result of the ventricular adaptation to the flow resistance of the narrowed aortic valve outflow tract, and an increased number of adverse postoperative cardiac events. Older pediatric patients are especially susceptible to patient prosthetic mismatch with a marked persistence of symptoms. This is most likely related to the younger patient’s higher cardiac output requirements in association with a longer exposure to the consequences of patient prosthetic mismatch.

 

The American Heart Association reports that in each year, approximately 10 of every 1,000 children (approximately 1.3 million children) worldwide including 8 of every 1,000 in the United States are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30 to 40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 mm sized prostheses. The 2015 Global Data Report reported the global heart valve market inclusive of the pediatric market to be approximately $4 billion based on an average selling price, or ASP, for standard valve prostheses of $5,000 to $9,000.

 

Coronary Artery Bypass Graft Surgery

 

The present standard procedure for CABG employs the use of the patient’s saphenous vein and/or internal mammary artery as conduits to re-establish blood flow. While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. Balloon angioplasty also has not produced conclusive and consistent results and, in a large number of instances, may only provide short term relief necessitating subsequent and consequently more difficult surgical intervention. CABG remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. During the last decade, up to 500,000 CABG procedures requiring almost one million harvested autologous grafts were performed annually in the United States. Advances in surgical technologies, including the proliferation of angioplasty, and drug eluting stenting, has resulted in a decrease in the incidence of CABG surgeries . In 2016, 150,000 CABG procedures were performed in the United States, accounting for approximately 375,000 bypass grafts (2.5 bypasses per procedure). We anticipate that the CoreoGraft will provide another option for cardiac surgeons.

 

We believe that the recent trend toward off pump coronary graft surgery—the surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation—has had considerable bearing on both perioperative and procedural safety and efficacy and has had a significant impact on the future of the procedure and attendant utility of prosthetic bypass grafts. Bypass graft harvest remains the most invasive and complication prone aspect of minimally invasive bypass procedures as well as on-pump CABG. Present standard-of-care complications are described in recent published reports in major medical journals. The percentage of complications can be as high as 43%. Fortunately, less than 50% of these wounds require operative intervention, but the ones that do can be major.

 

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We believe saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the 3 mechanisms that lead to venous graft failure. Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure. We believe that the CoreoGraft bioprosthetic bypass graft may eliminate the complications associated with bypass graft harvests, and potentially reduce or eliminate the failure rate of conventional bypass grafts.

 

The increased incidence of chronic venous diseases of the lower limbs also reduce the possibility of harvesting good quality veins as well as the increased incidence of redo CABG bypasses. With an aging population the incidence of good quality veins for bypass is reduced and the need for an “off the shelf” conduit becomes imperative. An “off the shelf” bypass conduit (tube) would do away with the attendant complications and chronic postoperative discomfort frequently reported for autologous graft harvest and consistently afford sufficient material for more complete cardiac revascularization. The American Heart Association stated in 2015 that complete revascularization was key to ensure long term survival and quality of life in patients with coronary disease. An efficacious prosthetic bypass graft in concert with off pump and/or minimally invasive surgery would comprise an almost wholly “noninvasive procedure.” We believe the availability and appeal of such a modality would have considerable impact on the therapeutic balance between bypass revascularization and interventional cardiology regimens like stents and balloon catheterization, which only provide temporary relief.

 

Coronary artery bypass surgery departs from the usual one-procedure, one-device paradigm. When revascularization requires more than an internal mammary graft, a conservative average of 2.5 additional grafts is required. The economics and surgeon reimbursement amounts for bypass procedures presently discourage multiple graft procedures as the time to harvest additional grafts is not economically justified in terms of the reimbursement amounts. Reimbursement codes for a single bypass graft versus five grafts on the same patient only differ by a few hundred dollars but the multiple grafts require up to three times the amount of time and operating costs of a single procedure. We believe that this discourages taking the time and incurring the operating room costs in harvesting additional bypass grafts resulting in suboptimal cardiac revascularization. Moreover, patients requiring multiple bypasses for a complete revascularization often show comorbidities like chronic venous insufficiency of the lower limbs as well as redo patients.

 

If only 20% of the annually performed procedures required multiple graft revascularization and were high risk patients, the requisite number for the United States alone would be in excess of 100,000 grafts. On the basis that, consequent to an approved device, utilization was only 50% of the prospective market potential, market value for the United States alone would be approximately $300 million to $350 million for unit pricing of approximately $6,000 to $7,000. The European and Pacific Asia markets combined would have an estimated similar value for a worldwide market of approximately $1 billion to $2 billion. Pricing evaluation for this product candidate includes reduced operating room expense and time for vein harvest, including reduction in operating room personnel as well as reduction in the overall morbidity from the leg wounds created during vein harvest in the post-operative period. Pricing evaluation also includes the fact this is the first off the shelf device for CABG as there is no competitive product. Most importantly, we believe there is an immediate need for this device in the medical field. Studies to obtain FDA approval would be required in patients without any autologous tissue for bypass. We would be evaluating patients after one year for survival and graft functioning.

 

Lower Limb CVI

 

Lower limb CVI is a disease presently affecting tens of millions of patients worldwide with approximately 1.5 million new cases annually. In the United States, based upon data from the Vascular Disease Foundation, approximately 20 million Americans suffer from varicose veins and 5% of that population is expected to develop deep vein thrombosis, or DVT, and approximately 65% of the DVT population is expected to develop CVI. Data from the Vascular Disease Foundation reveals that in the United States, the present population of individuals suffering lower limb CVI is approximately 4.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in approximately 700,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. The highest incidence of CVI is in the age group of patients between 57-80 years of age. With an aging global population, the incidence of CVI is rising. In Western Europe, the incident rate of CVI is estimated at 1 million hospitalizations per year, the prevalent CVI population is estimated at 17.5 million, and the mean prevalence of CVI of the legs in the general population in Western Europe is 30%. Patients with CVI are plagued with marked disability, either from leg swelling or development of non-healing leg ulcers.

 

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The hallmark of the disease is the failure of damaged venous valves to allow for lower limb venous blood to return to the heart. It is a mechanical reflux problem. Presently, no known medical or nonsurgical treatment is available other than compression “garments” for early stage disease or leg elevation for more severe cases, which are, at best, only palliative. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected vein is an option. However, for the deep system, valve transplants have been used but with very poor results or creation of valves using fibrous tissue which is only performed in few centers worldwide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI.

 

Competition

 

We operate in the highly competitive medical device industry. While we believe our product candidates may face minimum direct competition, there are other products, treatments or devices that may indirectly now or in the future compete with our product candidates. We compete with various companies that operate in the medical device industry. Among these companies are St. Jude Medical, Inc., Johnson & Johnson and Medtronic Inc. Many of our competitors have substantially greater technological, financial, research and development, manufacturing, personnel and marketing resources than we do. We believe that we have competitive strengths that will position us favorably in our markets. However, our industry is evolving rapidly and is becoming increasingly competitive. Larger and more established companies may acquire or in-license devices and could directly compete with us. Additionally, certain of our competitors may be able to develop competing or superior technologies and processes and compete more aggressively and sustain that competition over a longer period of time than we could. Our technologies and devices may be rendered obsolete or uneconomical by technological advances or entirely different approaches developed by one or more of our competitors, which could result in limited demand for our product candidates.

 

We believe that each of our product candidates face limited direct competition for the following reasons:

 

BHV

 

Although the BHV market is mature with multiple established competing products, we believe that our approach (natural physiology with a proprietary tissue processing technology, design and geometry) will greatly facilitate market entry and acceptance. Our competitors in this market include St. Jude Medical, Inc., Johnson & Johnson and Medtronic Inc., all of which have previously acquired heart valves developed by some of our present and previous management.

 

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The CoreoGraft

 

To our knowledge, no company presently develops adjunct devices to be applied to a patient’s harvested grafts. Others have made attempts to “tissue engineer” small diameter grafts. We believe there will not be an approved competitive device for possibly a decade as a consequence of the complexities of present FDA regulations for tissue engineered devices and the historically poor outcomes of grafts fabricated from synthetics. As a result, we do not face significant competition to our CoreoGraft.

 

The VenoValve

 

The VenoValve may provide a new paradigm for the treatment of the disease for which it is intended. While the etiology of deep CVI may vary, the condition is wholly attributable to significant reflux in the deep system caused by dysfunctional venous valves. For some time, it has been recognized that the only durable treatment must include either reconstruction or replacement of the affected valve. There are no known FDA approved effective drugs, practical effective surgical or nonsurgical treatments, or a single treatment strategy for CVI. As a result, we believe there is no current direct competition for the VenoValve for the foreseeable future.

 

Our Strategy

 

Our business strategy is focused primarily on research, development and manufacturing of biomedical device technologies for use in surgical procedures. We are also focused on the relatively large device markets where our technological advances and achievements provide an opportunity to offer our product candidates in an environment conducive and advantageous to their utilization and clinical benefit. Developing pathways to obtain FDA approval in the most expedient fashion is our main strategy for our product candidates. Our present strategy for the VenoValve is to obtain approval from the FDA for a first-in-human study that will quickly evolve into a study coordinated to demonstrate improvement in the quality of life for patients with CVI. We believe that the VenoValve will provide significant improvement in the quality of life measures for patients living with the disability of CVI.

 

Our Competitive Strengths

 

We believe we will offer the cardiovascular device market a compelling value proposition with the launch of our three product candidates, if approved, for the following reasons:

 

  We have experience of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic tissue devices. We believe that our patents which cover certain aspects of our devices and the processing methods of biologic valvular tissue as a “bioprosthetic” device may provide an advantage over potential competitors.
     
  We operate a 14,507 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of Class III medical devices and is equipped for research and development, prototype fabrication, current good manufacturing practices, or cGMP, and manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.
     
  We have attracted senior executives who are experienced in research and development and who have the expertise to obtain FDA approval for product candidates like ours that are intended to satisfy patient needs. We also have the advantage of an experienced board of directors and scientific advisory board who will provide guidance as we move towards market launch.

 

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Marketing and Sales

 

We intend to develop an internal marketing and sales group to manage a combination of direct sales representatives and an independent distribution network.

 

BHV

 

The 2015 Global Data Report reported the global heart valve market to be approximately $4 billion, based on an ASP for standard adult valve prostheses of $5,000 to $9,000.

 

Cardiac surgeons and hospitals generally develop a preference for one particular company’s device, whether based on an impression of superior performance or on developed relationships with the providers, or costs. We believe that by focusing on the pediatric segment we are not subject to this issue as the prospective user can focus on the best ethical approach to the patient’s needs without “abandoning” prior affiliations. We believe that with the present “commodity” nature of the heart valve industry, the benefits of the BHV will position the device as a standard of care without a competitive “peer.”

 

Inclusive of the global market and according to the American Heart Association, each year, approximately 10 of every 1,000 children, worldwide (approximately 1.3 million children worldwide) including 8 of every 1,000 in the United States (approximately 35,000 children in the United States) are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30 to 40% (approximately 400,000 children worldwide) will undergo either aortic or mitral valve replacement surgery during the first two decades of life.

 

In the United States, this results in approximately 14,000 to 17,000 procedures with the vast majority requiring 19, 21 or 23 mm sized prostheses. Based on these statistics, we believe that at the proposed ASP of $17,500 per unit for all sizes, the estimated market of the pediatric BHV is approximately $250 million to $300 million in the United States and we estimate double that market size in Western Europe and Asia Pacific at $500 million to $600 million.

 

CoreoGraft CABG

 

The CABG market is a more complex market to estimate on a procedural basis. This is largely due to the evolving attitude toward more complete vascularization of the infarcted heart and the varying number of placed grafts accompanying the cardiopulmonary bypass and off pump or beating heart procedures. In lieu of a multifaceted trend analysis, it is reasonable to approach the potential market on a conservative basis by assigning an average of 2.5 grafts per procedure, which for the United States, would be an equivalent of approximately 375,000 units annually representing approximately 150,000 procedures per year and a market value of approximately $2.25 billion.

 

It appears that a cost for a device that substitutes for graft harvest alleviates the inevitable cost of treatment subsequent to incomplete revascularization with stents. In consideration of the above, the anticipated price to the hospital would be approximately $6,000 per unit.

 

The VenoValve

 

In the United States, based upon data from the Vascular Disease Foundation, approximately 5% of the population is expected to develop DVT and approximately 65% of the DVT population is expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the United States, the present prevalent population of individuals suffering varying degrees of CVI is approximately 4.5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 700,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. For Western Europe, the incident rate of CVI disease is estimated at one million hospitalizations per year, the prevalent CVI disease population is estimated at 17.5 million, and the mean prevalence of CVI disease of the legs in the general population in Western Europe is 30%.

 

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There is no known comparable device for purposes of price comparisons or reimbursement codes. Therefore, after consulting with industry analysts and examining the actual selling price sensitivity in terms of clinical benefit, and analyzing trends in reimbursement for similarly existing devices, we have developed a potential clinical value for the VenoValve. We have estimated a reimbursement of approximately $6,500 to $11,000 per valve.

 

A measure to estimate the cost effectiveness of an intervention is quality-of life-years, or QOLY. Presently for CVI, the cost per patient to maintain the status quo of CVI or no substantial improvement in QOLY is approximately $50,000 annually. We believe the VenoValve will improve the QOLY over a 5-year period by at least 2.5 QOLYs and would reduce the annual cost to maintain the improved longevity and life style by 60%. For device recipients, with a return to normal activity without pain, the QOLY improvement would be 4, equivalent to reducing annual costs by 75%. We believe the savings per year for treatment of venous ulcers in particular is approximately $40,000 per patient, as part of the QOLY assessment and includes loss of work days. Over a 5 year period of time, this averages to be approximately $220,000 per patient over 5 years. In consideration of the above anticipated price to the buyer, we expect these factors to be associated with the cost of the device.

 

Intellectual Property

 

We possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that extends device longevity, provides device functions and guarantees sterility. Our patents pertaining to the design advantages and processing methods of valvular tissue as a bioprosthetic device provides further intellectual advantage over potential competitors. In addition, there are various specific intellectual property items related to each of our product candidates as described below. The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010, and expiring on July 9, 2027. Patents are pending for the design of the frame for this device. We maintain proprietary methods for processing tissue for this valve. Two patents have been filed for the VenoValve with the U.S. Patent and Trademark Office.

 

Regulatory Pathway

 

BHV

 

We have developed a prototype specification for each of the BHV sizes, device history records and other required documentation including risk analyses to support the prototype specification. We have complete biocompatibility testing and tests specified in ISO 5840 Standards, including animal and tissue fatigue and hydrodynamic. Subsequent to the completion of all required studies and investigational protocol, we will submit an application to the FDA to begin human studies in the United States.

 

In October 2002, under the Medical Device User Fee and Modernization Act of 2002, or MDUFMA, the FDA developed guidelines, which were enacted into law in 2007, to stimulate and facilitate the development of devices for pediatric medicine. Among other things, the MDUFMA amended provisions of the Federal, Food, Drug, and Cosmetic Act, or FFDCA, to promote the development of safe and effective pediatric devices and promote protection of such patient population during the course of clinical trials involving such products. The 21st Century Cures Act, implemented in September 2016, adds significantly to our ability to perform trials in the least burdensome regulatory path. We believe that the adoption of these guidelines will greatly facilitate the regulatory tasks and FDA PMA for the BHV clinical trial protocol.

 

The CoreoGraft

 

There are no regulatory guidelines for the development and preclinical testing of conduits for CABG and we have taken the initiative in developing a proposal for preclinical testing and the clinical investigation protocol. Most of the production procedures and validation processes are similar if not identical to the FDA PMA of ProCol. The remaining preclinical work will include a short-term implantation in an approved animal model. The study will require approximately 6 months to complete and is intended to be combined with presently completed documentation including the “first-in-human” studies reviewed in the device information studies as part of the FDA IDE application.

 

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The VenoValve

 

A pivotal trial will be conducted under an approved IDE following a Human Feasibility study. Due to the low hazard analysis and high need for such a device, we anticipate that the time to receive a PMA for commercialization may be shortened to approximately eighteen months for this Class III device due to medical needs in the community.

 

Government Regulation

 

Our product candidates and our operations are subject to extensive regulation by the FDA, and other federal and state authorities in the United States, as well as comparable authorities in foreign jurisdictions. Our product candidates are subject to regulation as medical devices in the United States under the FFDCA, as implemented and enforced by the FDA. The FDA regulates the development, design, non-clinical and clinical research, manufacturing, safety, efficacy, labeling, packaging, storage, installation, servicing, recordkeeping, pre-market clearance or approval, import, export, adverse event reporting, advertising, promotion, marketing and distribution, and import and export of medical devices to ensure that medical devices distributed domestically are safe and effective for their intended uses and otherwise meet the requirements of the FFDCA.

 

FDA Pre-market Clearance and Approval Requirements

 

Unless an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) pre-market notification, or approval of a PMA application. Under the FFDCA, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These special controls can include performance standards, postmarket surveillance, patient registries and FDA guidance documents. While most Class I devices are exempt from the 510(k) pre-market notification requirement, manufacturers of most Class II devices are required to submit to the FDA a pre-market notification under Section 510(k) of the FFDCA requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) pre-market notification is generally known as 510(k) clearance. Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of a PMA. Some pre-amendment devices are unclassified, but are subject to FDA’s pre-market notification and clearance process in order to be commercially distributed.

 

510(k) Marketing Clearance Pathway

 

We do not intend to utilize the 510(k) clearance route. However, if we do, to obtain 510(k) clearance, we must submit to the FDA a premarket notification submission demonstrating that the proposed device is “substantially equivalent” to a predicate device already on the market. A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to six months, but may take longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence.

 

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If the FDA agrees that the device is substantially equivalent to a predicate device currently on the market, it will grant 510(k) clearance to commercially market the device. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the “de novo” process, which is a route to market for novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device. After a device receives 510(k) marketing clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) marketing clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, we may be subject to significant regulatory fines or penalties.

 

The FDA is currently considering proposals to reform its 510(k) marketing clearance process, and such proposals could include increased requirements for clinical data and a longer review period. Specifically, in response to industry and healthcare provider concerns regarding the predictability, consistency and rigor of the 510(k) regulatory pathway, the FDA initiated an evaluation of the 510(k) program, and in January 2011, announced several proposed actions intended to reform the review process governing the clearance of medical devices. The FDA intends these reform actions to improve the efficiency and transparency of the 510(k) clearance process, as well as bolster patient safety. In addition, as part of the Food and Drug Administration Safety and Innovation Act, or FDASIA, enacted in 2012, Congress reauthorized the Medical Device User Fee Amendments with various FDA performance goal commitments and enacted several “Medical Device Regulatory Improvements” and miscellaneous reforms, which are further intended to clarify and improve medical device regulation both pre- and post-clearance and approval.

 

PMA Approval Pathway

 

Class III devices require PMA approval before they can be marketed although some pre-amendment Class III devices for which FDA has not yet required a PMA are cleared through the 510(k) process. The PMA process is more demanding than the 510(k) premarket notification process. In a PMA the manufacturer must demonstrate that the device is safe and effective, and the PMA must be supported by extensive data, including data from preclinical studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities and controls used for manufacturing and proposed labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, the FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. In addition, the FDA will generally conduct a pre-approval inspection of the applicant or its third-party manufacturers’ or suppliers’ manufacturing facility or facilities to ensure compliance with the QSR.

 

The FDA will approve the new device for commercial distribution if it determines that the data and information in the PMA constitute valid scientific evidence and that there is reasonable assurance that the device is safe and effective for its intended use(s). The FDA may approve a PMA with post-approval conditions intended to ensure the safety and effectiveness of the device, including, among other things, restrictions on labeling, promotion, sale and distribution, and collection of long-term follow-up data from patients in the clinical study that supported PMA approval or requirements to conduct additional clinical studies post-approval. The FDA may condition PMA approval on some form of post-market surveillance when deemed necessary to protect the public health or to provide additional safety and efficacy data for the device in a larger population or for a longer period of use. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and to make periodic reports to the FDA on the clinical status of those patients. Failure to comply with the conditions of approval can result in material adverse enforcement action, including withdrawal of the approval.

 

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Certain changes to an approved device, such as changes in manufacturing facilities, methods or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness. None of our product candidates are currently approved under a PMA. However, we may in the future develop devices which will require the approval of a PMA.

 

De novo Classification Process

 

Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a new route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation, or the FDASIA, a medical device could only be eligible for de novo classification if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. Under FDASIA, FDA is required to classify the device within 120 days following receipt of the de novo application. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the reclassification petition if it identifies a legally marketed predicate device that would be appropriate for a 510(k) or determines that the device is not low to moderate risk or that general controls would be inadequate to control the risks and special controls cannot be developed. We may utilize the de novo classification process to obtain marketing authorization for our product candidates under development.

 

Clinical Trials

 

Clinical trials are almost always required to support a PMA and are sometimes required to support a 510(k) submission. All clinical investigations of devices to determine safety and effectiveness must be conducted in accordance with the FDA’s IDE regulations, which govern investigational device labeling, prohibit promotion of the investigational device and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. If the device presents a “significant risk,” to human health, as defined by the FDA, the FDA requires the device sponsor to submit an IDE application to the FDA, which must become effective prior to commencing human clinical trials. A significant risk device is one that presents a potential for serious risk to the health, safety or welfare of a patient and either is implanted, used in supporting or sustaining human life, substantially important in diagnosing, curing, mitigating or treating disease or otherwise preventing impairment of human health, or otherwise presents a potential for serious risk to a subject. An IDE application must be supported by appropriate data, such as animal and laboratory test results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. The IDE will automatically become effective 30 days after receipt by the FDA unless the FDA notifies the company that the investigation may not begin. If the FDA determines that there are deficiencies or other concerns with an IDE for which it requires modification, the FDA may permit a clinical trial to proceed under a conditional approval.

 

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In addition, the study must be approved by, and conducted under the oversight of, an Institutional Review Board, or IRB, for each clinical site. The IRB is responsible for the initial and continuing review of the IDE, and may pose additional requirements for the conduct of the study. If an IDE application is approved by the FDA and one or more IRBs, human clinical trials may begin at a specific number of investigational sites with a specific number of patients, as approved by the FDA. If the device presents a non-significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or more IRBs without separate approval from the FDA, but must still follow abbreviated IDE requirements, such as monitoring the investigation, ensuring that the investigators obtain informed consent and labeling and record-keeping requirements. Acceptance of an IDE application for review does not guarantee that the FDA will allow the IDE to become effective and, if it does become effective, the FDA may or may not determine that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of clinical trials. An IDE supplement must be submitted to, and approved by, the FDA before a sponsor or investigator may make a change to the investigational plan that may affect its scientific soundness, study plan or the rights, safety or welfare of human subjects.

 

During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the clinical study are also subject to FDA’s regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

 

Post-market Regulation

 

After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:

 

  establishment registration and device listing with the FDA;
     
  QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;
     
  labeling regulations and FDA prohibitions against the promotion of investigational products, or “off-label” uses of cleared or approved products;
     
  requirements related to promotional activities;
     
  clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of one of our cleared devices;
     
  medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
     
  correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;
     
  the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and
     
  post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.

 

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Our manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file and complaint files. As a manufacturer, we are subject to periodic scheduled or unscheduled inspections by the FDA. Our failure to maintain compliance with the QSR requirements could result in the shut-down of, or restrictions on, our manufacturing operations and the recall or seizure of our products, which would have a material adverse effect on our business. The discovery of previously unknown problems with any of our products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or off-label by a physician in the practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.

 

The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that we failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, which may result in any of the following sanctions:

 

  warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
     
  recalls, withdrawals or administrative detention or seizure of our products;
     
  operating restrictions or partial suspension or total shutdown of production;
     
  refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
     
  withdrawing 510(k) clearances or PMA approvals that have already been granted;
     
  refusal to grant export approvals for our products; or
     
  criminal prosecution.

 

Regulation of Medical Devices in the EEA

 

There is currently no pre-market government review of medical devices in the European Economic Area, or EEA (which is comprised of the 28 Member States of the European Union, or EU, plus Norway, Liechtenstein and Iceland). However, all medical devices placed on the market in the EEA must meet the relevant essential requirements laid down in the Medical Devices Directive. The most fundamental essential requirement is that a medical device must be designed and manufactured in such a way that it will not compromise the clinical condition or safety of patients, or the safety and health of users and others. In addition, the device must achieve the performances intended by the manufacturer and be designed, manufactured and packaged in a suitable manner. The European Commission has adopted various standards applicable to medical devices. These include standards governing common requirements, such as sterilization and safety of medical electrical equipment, and product standards for certain types of medical devices. There are also harmonized standards relating to design and manufacture. While not mandatory, compliance with these standards is viewed as the easiest way to satisfy the essential requirements as a practical matter. Compliance with a standard developed to implement an essential requirement also creates a rebuttable presumption that the device satisfies that essential requirement.

 

To demonstrate compliance with the essential requirements laid down in Annex I to the Medical Devices Directive, medical device manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Conformity assessment procedures require an assessment of available clinical evidence, literature data for the product and post-market experience in respect of similar products already marketed. Except for low-risk medical devices, where the manufacturer can self-declare the conformity of its products with the essential requirements, a conformity assessment procedure requires the intervention of a Notified Body. Notified bodies are often private entities and are authorized or licensed to perform such assessments by government authorities. The notified body would typically audit and examine a products’ technical dossiers and the manufacturers’ quality system. If satisfied that the relevant product conforms to the relevant essential requirements, the notified body issues a certificate of conformity, which the manufacturer uses as a basis for its own declaration of conformity. The manufacturer may then apply the CE mark to the device, which allows the device to be placed on the market throughout the EEA. Once the product has been placed on the market in the EEA, the manufacturer must comply with requirements for reporting incidents and field safety corrective actions associated with the medical device.

 

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In September 2012, the European Commission published proposals for the revision of the EU regulatory framework for medical devices. The proposal would replace the Medical Devices Directive and the Active Implantable Medical Devices Directive with a new regulation, or the Medical Devices Regulation. Unlike the Directives that must be implemented into national laws, the Regulation would be directly applicable in all EEA Member States and so is intended to eliminate current national differences in regulation of medical devices.

 

In October 2013, the European Parliament approved a package of reforms to the European Commission’s proposals. Under the revised proposals, only designated “special notified bodies” would be entitled to conduct conformity assessments of high-risk devices, such as active implantable devices. These special notified bodies will need to notify the European Commission when they receive an application for a conformity assessment for a new high-risk device. The European Commission will then forward the notification and the accompanying documents on the device to the MDCG, (a new, yet to be created, body chaired by the European Commission, and representatives of Member States) for an opinion. These new procedures may result in the re-assessment of our existing medical devices, or a longer or more burdensome assessment of our new products.

 

In April 2017, the Medical Devices Regulation was adopted and it entered into force in May 2017 and expected to become applicable through transitional periods ranging from six month to five years thereafter. The Medical Devices Regulation would, among other things, impose additional reporting requirements on manufacturers of high risk medical devices, impose an obligation on manufacturers to appoint a “qualified person” responsible for regulatory compliance and provide for more strict clinical evidence requirements.

 

Federal, State and Foreign Fraud and Abuse, Data Privacy and Security and Physician Payment Transparency Laws

 

In addition to FDA restrictions on marketing and promotion of drugs and devices, other federal and state laws restrict our business practices. These laws include, without limitation, foreign, federal and state anti-kickback and false claims laws, data privacy and security laws, as well as transparency laws regarding payments or other items of value provided to healthcare providers.

 

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any good, facility, item or service reimbursable, in whole or in part, under Medicare, Medicaid or other federal healthcare programs. The term “remuneration” has been broadly interpreted to include anything of value. Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (described below).

 

Recognizing that the Anti-Kickback Law is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry, the U.S. Department of Health and Human Services issued regulations in July 1991, which the Department has referred to as “safe harbors.” These safe harbor regulations set forth certain provisions which, if met in form and substance, will assure medical device manufacturers, healthcare providers and other parties that they will not be prosecuted under the federal Anti-Kickback law. Additional safe harbor provisions providing similar protections have been published intermittently since 1991.

 

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Although there are a number of statutory exceptions and regulatory safe harbors protecting some common activities from prosecution, the exceptions and safe harbors are drawn narrowly. Our arrangements with physicians, hospitals and other persons or entities who are in a position to refer may not fully meet the stringent criteria specified in the various safe harbors. Practices that involve remuneration that may be alleged to be intended to induce prescribing, purchases or recommendations may be subject to scrutiny if they do not qualify for an exception or safe harbor. Failure to meet all of the requirements of a particular applicable statutory exception or regulatory safe harbor does not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the arrangement will be evaluated on a case-by-case basis based on a cumulative review of all its facts and circumstances. Several courts have interpreted the statute’s intent requirement to mean that if any one purpose of an arrangement involving remuneration is to induce referrals of federal healthcare covered business, the Anti-Kickback Statute has been violated. In addition, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. Moreover, a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal civil False Claims Act (described below). Violations of the Anti-Kickback Statute can result in imprisonment, exclusion from Medicare, Medicaid or other governmental programs as well as civil and criminal penalties, including criminal fines of up to $5,000 and imprisonment of up to five years. Violations are subject to civil monetary penalties up to $50,000 for each violation, plus up to three times remuneration involved. Civil penalties for such conduct can further be assessed under the federal False Claims Act of up to $11,000 for each claim submitted, plus up to three times the amounts paid for such claims. Conduct and business arrangements that do not fully satisfy one of these safe harbor provisions may result in increased scrutiny by government enforcement authorities. The majority of states also have anti-kickback laws which establish similar prohibitions and in some cases, may apply more broadly to items or services covered by any third-party payor, including commercial insurers and self-pay patients.

 

The federal civil False Claims Act prohibits, among other things, any person or entity from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government. A claim includes “any request or demand” for money or property presented to the U.S. government. The civil False Claims Act also applies to false submissions that cause the government to be paid less than the amount to which it is entitled, such as a rebate. Intent to deceive is not required to establish liability under the civil False Claims Act. The government may further prosecute conduct constituting a false claim under the criminal False Claims Act. The criminal False Claims Act prohibits the making or presenting of a claim to the government knowing such claim to be false, fictitious or fraudulent and, unlike the civil False Claims Act, requires proof of intent to submit a false claim. In addition, private parties may initiate “qui tam” whistleblower lawsuits against any person or entity under the False Claims Act in the name of the government and share in the proceeds of the lawsuit. Penalties for False Claim Act violations include fines ranging from $5,500 to $11,000 for each false claim, plus up to three times the amount of damages sustained by the federal government and, most critically, may provide the basis for exclusion from the federally funded healthcare program.

 

The civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or is false or fraudulent.

 

Additionally, there has been a recent trend of increased federal and state regulation of payments and transfers of value provided to healthcare professionals or entities. The Physician Payment Sunshine Act, which imposes new annual reporting requirements on device manufacturers for payments and other transfers of value provided by them, directly or indirectly, to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their family members. A manufacturer’s failure to submit timely, accurately and completely the required information for all payments, transfers of value or ownership or investment interests may result in civil monetary penalties of up to an aggregate of $150,000 per year, and up to an aggregate of $1 million per year for “knowing failures.” Manufacturers must submit reports by the 90th day of each calendar year. Certain states also mandate implementation of commercial compliance programs, impose restrictions on device manufacturer marketing practices and require tracking and reporting of gifts, compensation and other remuneration to healthcare professionals and entities. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may fail to comply fully with one or more of these requirements.

 

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Many U.S. states have similar fraud and abuse statutes or regulations that may be broader in scope and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. We may also be subject to similar foreign laws, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. In addition, many foreign countries have similar laws relating to healthcare fraud and abuse. Foreign laws and regulations may vary greatly from country to country. These laws may limit or restrict the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals.

 

We are also subject to various federal, state and foreign laws that protect the confidentiality of certain patient health information, including patient medical records, and restrict the use and disclosure of patient health information by healthcare providers, such as HIPAA in the United States. HIPAA created new federal criminal statutes that prohibit among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program, including private third-party payors, knowingly and willfully embezzling or stealing from a healthcare benefit program, willfully obstructing a criminal investigation of a healthcare offense, and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

 

Under HIPAA, the Department of Health and Human Services, or HHS, has issued regulations to protect the privacy and security of protected health information used or disclosed by covered entities including health care providers and their business associates. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. HIPAA violations carry civil and criminal penalties, including civil monetary penalties up $50,000 per violation, not to exceed $1.5 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can also bring a civil action to enjoin a HIPAA violation or to obtain statutory damages up to $25,000 per violation on behalf of residents of his or her state.

 

We intend to develop and implement processes designed to comply with these regulations. The requirements under these regulations may change periodically and could have an effect on our business operations if compliance becomes substantially more costly than under current requirements. Additionally, a breach of unsecured protected health information, such as by employee error or an attack by an outsider, could have an adverse effect on our business in terms of potential penalties and corrective action required. In addition to federal privacy regulations, there are a number of state laws governing confidentiality and security of health information that are applicable to our business. New laws governing privacy may be adopted in the future as well. State privacy laws can also be more stringent and more broadly applicable than HIPAA. While HIPAA does not create a private right of action allowing individuals to sue us in civil court for violations of HIPAA, its standards have been used as the basis for duty of care in state civil suits such as those for negligence or recklessness in the misuse or breach of protected health information, or PHI.

 

In the EU, we are subject to laws relating to our collection, control, processing and other use of personal data (i.e. data relating to an identifiable living individual). We may process personal data in relation to our operations. We may process data of both our employees and our customers, including health and medical information. The data privacy regime in the EU includes the EU Data Protection Directive (95/46/EC) regarding the processing of personal data and the free movement of such data, the E-Privacy Directive 2002/58/EC and national laws implementing each of them. Each EU Member State has transposed the requirements laid down by this Privacy and Data Protection Directive into its own national data privacy regime and therefore the laws differ significantly by jurisdiction. We need to ensure compliance with the rules in each jurisdiction where we are established or are otherwise subject to local privacy laws.

 

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The requirements include that personal data may only be collected for specified, explicit and legitimate purposes based on legal grounds set out in the local laws, and may only be processed in a manner consistent with those purposes. Personal data must also be adequate, relevant, not excessive in relation to the purposes for which it is collected, be secure, not be transferred outside of the EEA unless certain steps are taken to ensure an adequate level of protection and must not be kept for longer than necessary for the purposes of collection. To the extent that we process, control or otherwise use sensitive data relating to living individuals (for example, patients’ health or medical information), more stringent rules apply, limiting the circumstances and the manner in which we are legally permitted to process that data and transfer that data outside of the EEA. In particular, in order to process such data, explicit consent to the processing (including any transfer) is usually required from the data subject (being the person to whom the personal data relates).

 

We are subject to the supervision of local data protection authorities in those jurisdictions where we are established or otherwise subject to applicable law. We depend on a number of third parties in relation to our provision of our services, a number of which process personal data on our behalf. With each such provider we enter into contractual arrangements to ensure that they only process personal data according to our instructions, and that they have sufficient technical and organizational security measures in place. Where we transfer personal data outside the EEA, we do so in compliance with the relevant data export requirements. We take our data protection obligations seriously, as any improper disclosure, particularly with regard to our customers’ sensitive personal data, could negatively impact our business and/or our reputation.

 

Local laws are amended from time to time, and guidance is issued frequently by regulators. Any changes in law and new guidance may impact, and require changes to, our current operations. Additionally, on January 25, 2012, the European Commission published its draft EU Data Protection Regulation. On March 12, 2014, the European Parliament formally passed a revised proposal of the Regulation, and the Council of the European Union published its general approach on June 15, 2015. Trilogue discussion between the European Commission, European Parliament and Council of the European Union are currently ongoing and are expected to be finalized by the end of 2015, taking into account the two-year implementation period, the earliest the terms would be in force would be the end of 2017. The current form of the Regulation proposes significant changes to the EU data protection regime. Unlike the Privacy and Data Protection Directive, the Regulation has direct effect in each EU Member State, without the need for further enactment. When implemented, the Regulation will likely strengthen individuals’ rights and impose stricter requirements on companies processing personal data. There are similar privacy laws in a number of other countries in which we operate and in the future new privacy laws may be enacted countries that do not have privacy laws today. Significant changes in the current draft of the Regulation include: (1) the need for consent to processing to always be explicit; (2) extended information duties; (3) tougher sanctions (as currently drafted, the applicable data protection authority may be able to impose a fine of up to EUR 100 million or five percent of annual worldwide turnover, whichever is greater); and (4) increased rights of the data subject and a requirement to notify the data protection authority of data breaches. As the Regulation has not yet made its full progression through the legislative process, it is not currently possible to assess its full impact on our business. As the Regulation has not yet made its full progression through the legislative process, it is not currently possible to assess its full impact on our business.

 

These existing and proposed laws, regulations and guidance can be costly to comply with and can delay or impede the development of new products and/or entry into new markets, increase our operating costs, require significant management time and attention, increase our risk of non-compliance and subject us to claims and other remedies, including fines, demands that we modify or cease our existing practices and/or negative publicity and reputational harm

 

Employees

 

As of March 31, 2018, we had 9 full-time and 3 subcontracted employees. None of our employees are represented by a collective bargaining agreement, and we have never experienced any work stoppage. We believe we have good relations with our employees.

 

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Properties and Facilities

 

We lease a 14,507 square foot manufacturing facility in Irvine, California, which is certified under the ISO 13485 medical device manufacturing standard for medical devices and operates under the FDA’s QSR. We renewed our lease on September 20, 2017, effective October 1, 2017, for five years with an option to extend the lease for an additional 60-month term at the end of lease term. Our facility is designed expressly for the manufacture of biologic vascular grafts and is equipped for research and development, prototype fabrication, cGMP manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices. We believe there is present capacity to manufacture up to 24,000 venous valves per year to meet potential market demands of $228 million based on an estimated selling price of $9,500 per valve.

 

Legal Proceedings

 

From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.

 

Changes in and Disagreements with Accountants

 

None.

 

Corporation Information

 

We were incorporated in the State of Delaware in December 1999. Our principal executive office is located at 70 Doppler, Irvine, California 92618 and our telephone number is (949) 261-2900. Our website is www.hancockjaffe.com. The information contained on or that can be accessed through our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase our common stock.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table provides information regarding our executive officers and directors as of March 31, 2018:

 

Name   Age   Position(s)
Executive Officers and Directors        
Robert A. Berman   55   Chief Executive Officer and Director
Benedict Broennimann, M.D.   60   Chief Medical Officer, OUS
William R. Abbott   61   Senior Vice President and Chief Financial Officer, Secretary and Treasurer
Marc H. Glickman, M.D.   68   Senior Vice President and Chief Medical Officer
Susan Montoya   66   Senior Vice President of Operations, Regulatory Affairs and Quality Assurance
Non-Employee Directors        
Yury Zhivilo   58   Chairman of the Board of Directors
Robert A. Anderson   77   Director
Robert W. Doyle   75   Director
Steven Girgenti   72   Director

 

Executive Officers and Directors

 

Robert A. Berman has served as our Chief Executive Officer and a member of our board of directors since April 2018. From September 2017 to March 2018, Mr. Berman worked as an independent strategic business consultant. From September 2012 to July 2017, he served as the President, Chief Executive Officer, and a member of the board of directors of ITUS Corporation, a Nasdaq listed company, that develops a liquid biopsy technology for early cancer detection. Prior to ITUS Corporation, Mr. Berman was the Chief Executive Officer of VIZ Technologies, a start-up company which developed and licensed a beverage dispensing cap, and he was the founder of IP Dispute Resolution Corporation, a company focused on intellectual property licensing. From 2000 to March 2007, Mr. Berman was the Chief Operating Officer and General Counsel of Acacia Research Corporation, which became a publicly traded company for licensing and enforcing patented technologies. Mr. Berman was a Director of Business Development at QVC where he developed and selected products for on-air sales and distribution. Mr. Berman started his career at the law firm of Blank Rome LLP. He has a Bachelor of Science in Entrepreneurial Management from the Wharton School of the University of Pennsylvania and holds a Juris Doctorate degree from the Northwestern University School of Law, where he serves as an adjunct faculty member. We believe Mr. Berman is qualified to serve as a member of our board of directors because of his experience in broad variety of areas including healthcare, finance, acquisitions, marketing, compliance, turnarounds, and the development and licensing of emerging technologies.

 

Benedict Broennimann, M.D. has served as our Chief Medical Officer, Outside of United States, or OUS, since April 2018. He has served as our Chief Executive Officer from September 2016 to August 2017, and our Co-Chief Executive Officer from August 2017 to April 2018. From 2006 to 2008, Dr. Broennimann served as our Chairman and Chief Executive Officer, and from 2009 to 2015 he was engaged by us as a consultant to facilitate our efforts to gain various regulatory approvals in Europe. From 2012 to 2016, he served as Chief Executive Officer and Chief Medical Officer of OstomyCure AS, where he was responsible for achieving CE marking of a Class IIb medical implant and leading strategic alliances and negotiations. From 2004 to 2008, he was also Chief Executive Officer of Leman Cardiovascular S.A., where he spearheaded fundraising and cardiovascular device developments. Dr. Broennimann served as Principal at Heidrick & Struggles from 2000 to 2002 and Highland Partners from 2003 to 2004. He also served as a Senior Partner at Rosewall Ventures, Ltd. from 2008 to 2011. Dr. Broennimann attended the University of Bern in Switzerland, where he received his Doctor of Medicine, and was Chief Resident in the Department of General Surgery and Transplantation at the Centre Hospitalier Universitaire Vaudois in Lausanne, Switzerland. Dr. Broennimann is also board certified in general surgery and pharmaceutical medicine.

 

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William R. Abbott has served as our Chief Financial Officer since March 2016. In July 2016 he was appointed as our Interim President, Chief Financial Officer and Secretary and in September 2017 he was named as Senior Vice President and Chief Financial Officer, Treasurer and Secretary. Mr. Abbott has more than thirty years of experience in multi-industry international companies. From December 2014 to March 2016, Mr. Abbott served as Vice President of Finance and Corporate Controller and later as Interim Chief Financial Officer of Apollo Medical Holdings, Inc. From 2011 to 2014, he was an independent consultant providing accounting and advisory services. From 2006 to 2011, Mr. Abbott served as Senior Vice President, Chief Financial Officer, Secretary and Treasurer for Cardiogenesis Corporation. From 1997 to 2005, Mr. Abbott served in financial management positions at Newport Corporation, including as Vice President of Finance and Treasurer from 2001 to 2005 and Vice President and Corporate Controller from 1997 to 2001. Prior to that, Mr. Abbott served as Vice President and Corporate Controller of Amcor Sunclipse North America, Director of Financial Planning at Coca-Cola Enterprises, Inc. and Controller of McKesson Water Products Company. Mr. Abbott also spent six years in management positions at PepsiCo, Inc. after beginning his career with PricewaterhouseCoopers, LLP. Mr. Abbott has a Bachelor of Science degree in accounting from Fairfield University and a Masters in Business Administration degree from Pepperdine University.

 

Marc H. Glickman, M.D. has served as our Senior Vice President and Chief Medical Officer since May 2016 and served as member of our board of directors from July 2016 to August 2017. In 1981, Dr. Glickman started a vascular practice in Norfolk, Virginia. He established the first Vein Center in Virginia and also created a dialysis access center. He was employed by Sentara Health Care as director of Vascular Services until he retired in 2014. Dr. Glickman is a board certified vascular surgeon. Dr. Glickman received his Doctor of Medicine from Case Western Reserve, in Cleveland, Ohio and completed his residency at the University of Washington, Seattle. He is board certified in Vascular Surgery and was the past president of the Vascular Society of the Americas. He has served on the advisory boards of Possis Medical, Cohesion Technologies, Thoratec, GraftCath, Inc., TVA medical, Austin, Texas.

 

Susan Montoya has served as our Vice President Operations, Quality Assurance/Regulatory Affairs since 1999. In this role, she is responsible for manufacturing operations, quality procedures and regulatory affairs. Ms. Montoya has overseen clinical trials and regulatory submissions. Ms. Montoya has over 30 years of leadership experience in medical device industry, and has been with our company since our inception. Ms. Montoya was employed by Xenotech Laboratories from 1980 to 1986, where she developed one of the first Quality System and Good Manufacturing Practices for Cardiovascular and Orthopedic bioprosthetic devices and at a precursor company of our company beginning in 1988. She has also held various management positions at several medical device companies, including Medtronic Inc., St. Jude Medical and Leman Cardiovascular S.A. Ms. Montoya holds both a Bachelor and a Masters degree in Biology from the California State University, Fullerton.

 

Non-Employee Directors

 

Yury Zhivilo has served as Chairman of our board of directors since September 2007. In 2004, he co-founded Leman Cardiovascular S.A., a private company that develops, manufactures and markets bioprosthetic products used in cardiovascular surgery, as well as nephrology indications. Since 2010, he has been serving as President of Leman Cardiovascular S.A., Chief Executive Officer and President of Dante-Lido Financial Limited, and as Managing Director of Biodyne, all of which are based in Morge, Switzerland. Biodyne’s principal line of business is to invest in medical device technology companies. Mr. Zhivilo is also currently serving as a director of Dante-Lido Financial Limited and Biodyne. From 2004 to present, Mr. Zhivilo served as Chairman of the board of director of Leman Cardiovascular S.A. Prior to that, he served as Chairman and Chief Executive Officer of Base Metal Trading Limited from 1992 to 2004. Mr. Zhivilo received a Senior Specialist degree in economics in 1985 from Moscow State Institute of International Affairs. We believe Mr. Zhivilo is qualified to serve as a member of our board of directors because of his extensive experience in the medical device industry as both an operating executive and as a board member.

 

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Robert A. Anderson has served as a member of our board of directors since August 2016. Since April of 2014, Mr. Anderson has been a member of the board of directors at BioAffinity Technologies, Inc. For the past five years, Mr. Anderson has been providing marketing, business, and strategic consulting services as a partner of Medi-Pharm Consulting LLC to small pharmaceutical and medical device companies. From 1983 to 1988, Mr. Anderson served as Group Product Director at Parke-Davis, where he was responsible for the cardiovascular products and pipeline. From 1988 to 1990, Mr. Anderson served as Vice-President of Marketing for the Key Pharmaceuticals division of Schering-Plough Corporation, and was responsible for the marketing of Schering-Plough Corporation’s cardiovascular portfolio. Following his tenure at Schering-Plough Corporation, Mr. Anderson was brought on board at Centocor, Inc. (now known as Janssen Biotech, Inc.) to build the business infrastructure, including developing marketing plans, budgets and the U.S. pre-launch product strategies. In 1992, Mr. Anderson joined Physicians World Communications Group (which was later acquired by Thomson Corp.) as Vice President, was later appointed to the Executive Committee and made a Partner and was appointed Chief Operating Officer in 1997. Mr. Anderson received a Bachelor of Arts degree in Political Science from Rutgers University. We believe Mr. Anderson is qualified to serve as a member of our board of directors because of his experience in providing infrastructure development, financial analysis, marketing leadership and successfully launching products in the cardiovascular, biotech and pharmaceutical industries.

 

Robert W. Doyle has served as a member of our board of directors since August 2016. Since December of 2011, Mr. Doyle has been a partner at Medi-Pharm Consulting LLC. From 1994 to 2000, Mr. Doyle headed Marketing Operations for Parke-Davis where he had overall responsibility for launch meetings. Mr. Doyle continued his operations responsibilities during the Pfizer acquisition in 2000. From 2001 to 2005, Mr. Doyle served at Novartis Pharmaceuticals, US as Vice-President of Marketing Operations and also chaired the Committees on Pharmaceutical Research & Manufacturers of America Code guidelines and Office of Inspector General – HHS guidelines, and was a permanent member of the senior management group overseeing the Core Team (Medical, Legal, Regulatory Compliance). From 1978 to 1984, Mr. Doyle served at E.R. Squibb & Sons as Hospital Advertising Manager, then Cardiovascular Product Manager. From 1984 to 1990 Mr. Doyle was a product manager, Director of New Products and then Director of Product Licensing at Warner-Lambert. From 1990 to 1992 he was Worldwide Director of Marketing for Imaging Products at Centocor. Mr. Doyle also served on the board of directors of the Healthcare Marketing & Communications Council. He is also a past member of the Editorial Advisory Board, of Pharmaceutical Executive magazine. Mr. Doyle also served as a member of the Hilton Advisory Board from 1997 to 2004. Mr. Doyle holds a Bachelor of Business Administration degree from Upsala College and a Master in Business Administration from Fairleigh Dickinson University. We believe Mr. Doyle is qualified to serve as a member of our board of directors because of his experience leading and successfully managing budgets and highly regulated and complex pharmaceutical businesses.

 

Steven Girgenti has served as a member of our board of directors since September 2017. Mr. Girgenti concurrently serves as the chairman of the board of directors at BioAffinity Technologies, Inc. Since 2013, Mr. Girgenti has been the managing partner of Medi-Pharm Consulting LLC. In 2005, Mr. Girgenti founded DermWorx Inc., a specialty pharmaceutical company, which he sold to a European dermatology company in 2013. Mr. Girgenti was also the founder, Chief Executive Officer and Worldwide Chairman of Healthworld Corporation until 2008, a leading global healthcare marketing services network. Mr. Girgenti serves as a director of Vycor Medical and BioAffinity Technologies, Inc. He is the Vice Chairman of the Board of Governors for the Mount Sinai Hospital Prostate Disease and Research Center in New York City and is a Director of the Jack Martin Fund, an affiliated Mount Sinai Hospital charity dedicated to pediatric oncology. He graduated from Columbia University and has worked in the pharmaceutical industry since 1968 for companies such as Bristol-Myers Squibb, Carter Wallace and DuPont, as well as advertising agencies that specialize in healthcare. During his career, Mr. Girgenti has held positions in marketing research, product management, new product planning and commercial development. We believe that Mr. Girgenti’s extensive knowledge of the medical industry qualifies him to serve on our board of directors.

 

Family Relationships

 

There are no family relationships between or among any of the current directors or executive officers. There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.

 

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Board Composition

 

Our business and affairs are organized under the direction of our board of directors, which currently consists of five members. Our directors hold office until the earlier of their death, resignation, removal or disqualification, or until their successors have been elected and qualified. Our board of directors does not have a formal policy on whether the roles of a Chief Executive Officer and Chairman of our board of directors should be separate. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis. Upon completion of this offering, our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors.

 

We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.

 

In connection with the closing of this offering, we will file our amended and restated certificate of incorporation. The amended and restated certificate of incorporation will divide our board of directors into three classes, with staggered three-year terms, as follows:

 

  Class I, which will consist of Robert Doyle and Robert Anderson whose terms will expire at our annual meeting of stockholders to be held in 2019 ;
     
  Class II, which will consist of Steven Girgenti and Robert A. Berman, and whose terms will expire at our annual meeting of stockholders to be held in 2020 ; and
     
  Class III, which will consist of Yury Zhivilo, and whose terms will expire at our annual meeting of stockholders to be held in 2021 .

 

At each annual meeting of stockholders to be held after the initial classification, the successors to directors whose terms then expire will serve until the third annual meeting following their election and until their successors are duly elected and qualified. The authorized size of our board of directors is currently five members. The authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed between the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in our control or management. Our directors may be removed for cause by the affirmative vote of the holders of at least 66 2/3% of our voting stock.

 

Director Independence

 

The Nasdaq Marketplace Rules require a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act.

 

Under Rule 5605(a)(2) of the Nasdaq Marketplace Rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.

 

Our board of directors has reviewed the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of Messrs. Anderson, Doyle, and Girgenti is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq Marketplace Rules. Our board of directors also determined that Messrs. Anderson, Doyle and Girgenti, who will each serve on our audit committee, our compensation committee, and our nominating and corporate governance committee following this offering, satisfy the independence standards for such committees established by the SEC and the Nasdaq Marketplace Rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.

 

Controlled Company

 

Upon completion of this offering, Biodyne may continue to control a majority of the voting power of our outstanding common stock. As a result, we may be a “controlled company” under the Nasdaq Marketplace Rules. As a controlled company, exemptions under the standards will free us from the obligation to comply with certain corporate governance requirements, including the requirements:

 

  that a majority of the board of directors consists of independent directors;
     
  that we have a nominating and corporate governance committee that is composed entirely of independent directors; and
     
  that we have a compensation committee that is comprised entirely of independent directors.

 

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Even if we are deemed to be a controlled company, we do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or on our audit, nominating and corporate governance, and compensation committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and the Nasdaq Marketplace Rules within the applicable time frame.

 

Board Committees

 

Our board of directors has established three standing committees—audit, compensation, and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors. Prior to the completion of this offering, copies of each committee’s charter will be posted on the Investor Relations section of our website, which is located at www.hancockjaffe.com. Each committee has the composition and responsibilities described below. Our board of directors may from time to time establish other committees.

 

Audit Committee

 

Our audit committee consists of Mr. Doyle, who is the chair of the committee, and Messrs. Anderson and Girgenti. Our board of directors has determined that each of the members of our audit committee satisfies the Nasdaq Marketplace Rules and SEC independence requirements. The functions of this committee include, among other things:

 

  evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors;
     
  reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services;
     
  reviewing our annual and quarterly financial statements and reports, including the disclosures contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management;
     
  reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy and effectiveness of our financial controls;
     
  reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented; and
     
  reviewing and evaluating on an annual basis the performance of the audit committee, including compliance of the audit committee with its charter.

 

Our board of directors has determined that Mr. Doyle qualifies as an “audit committee financial expert” within the meaning of applicable SEC regulations and meets the financial sophistication requirements of the Nasdaq Marketplace Rules. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.

 

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Compensation Committee

 

Our compensation committee consists of Mr. Girgenti, who is the chair of the committee, and Messrs. Anderson and Doyle. Our board of directors has determined that each of the members of our compensation committee is an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and satisfies the Nasdaq Marketplace Rules independence requirements. The functions of this committee include, among other things:

 

  reviewing, modifying and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) our overall compensation strategy and policies;
     
 

reviewing and approving the compensation, the performance goals and objectives relevant to the compensation, and other terms of employment of our Chief Executive Officers and our other executive officers;

     
  reviewing and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) the equity incentive plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs;
     
  reviewing and approving the terms of any employment agreements, severance arrangements, change in control protections and any other compensatory arrangements for our executive officers;
     
  reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” in our periodic reports or proxy statements to be filed with the SEC; and
     
  preparing the report that the SEC requires in our annual proxy statement.

 

Nominating and Corporate Governance Committee

 

Our nominating and corporate governance committee consists of Mr. Anderson, who is the chair of the committee, and Messrs. Doyle and Girgenti. Our board of directors has determined that each of the members of this committee satisfies the Nasdaq Marketplace Rules independence requirements. The functions of this committee include, among other things:

 

identifying, reviewing and evaluating candidates to serve on our board of directors consistent with criteria approved by our board of directors;
     
evaluating director performance on our board of directors and applicable committees of our board of directors and determining whether continued service on our board of directors is appropriate;
     
evaluating, nominating and recommending individuals for membership on our board of directors; and
     
evaluating nominations by stockholders of candidates for election to our board of directors.

 

Medical Advisory Board

 

Our executive team is supported by our Medical Advisory Board, the members of which include medical doctors experienced in the field of vascular medicine. The members of our Medical Advisory Board provide scientific, portfolio and project strategy advice to our company, including the evaluation of licensing arrangements and research and development strategies. We have agreed to compensate the members of our Medical Advisory Board with payment of a monthly fee of $4,500. The members of our Medical Advisory Board are set forth below.

 

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Steve Elias, M.D., FACS, FACPH , is Director at the Center for Vein Disease at Englewood Hospital and Medical Center. Dr. Elias has extensive expertise in vascular medicine, conducting important research and writing extensively about the treatment of vein disease, and serving as the principal investigator on several major clinical trials. His work has been recognized at national medical and scientific meetings and published in top peer reviewed journals, and he is frequently invited to lecture to both national and international audiences about minimally invasive vein care and surgical procedures. Dr. Elias has been named as one of the 25 most influential professionals in vein care worldwide by VEIN Magazine and has been recognized as Top Doctor in the New York Metropolitan Area for the past nine years by Castle Connolly. He is a member of several medical societies, including The Society for Clinical Vascular Surgery, American College of Surgeons, and the International Society of Cardiovascular Surgery.

 

Antonios Gasparis, M.D. , is Professor of Surgery, Director of the Center for Vein Care, Director of the Wound Center, Medical Director of the Non-Invasive Vascular Laboratory, and Director of Phlebology Fellowship at Stony Brook University Medical Center. His areas of clinical interest and expertise include minimally invasive endovascular surgery for the management of aortic aneurysms; surgery for stroke prevention, aortic aneurysms, lower extremity vascular reconstruction, and dialysis access; pelvic congestion syndrome and pelvic venous insufficiency; minimally invasive percutaneous closure for varicose veins; and treatment of spider veins. Dr. Gasparis is an internationally renowned expert on venous disease and is currently a director of the 2016 New York Venous Symposium, one of the premier international conferences on issues and treatment related to venous disease. Previously, he was Committee Chair of the 2014 American Venous Forum. Dr. Gasaparis is a Fellow of the American College of Surgeons and has authored more than 35 peer-reviewed publications. He was selected for inclusion in Guide to America’s Top Surgeons by the Consumers’ Research Council of America.

 

Wade Dimitri, M.D. , is a highly regarded cardiac surgeon in Europe and pioneer in off-pump coronary artery bypass grafting, a Council Member of the Fellowship of Postgraduate Medicine and a member of the Royal Society of Medicine. He is a reviewer for The European Journal of Cardiovascular and Thoracic Surgery. Since retiring from active clinical work, he has increased his involvement with overseas training, teaching cardiac surgeons as well as operating. At Warwick Medical School he is a member of the Panel of Examiners. He is a member of several Cardiac Surgical Societies including The Society for Cardiothoracic Surgery in Great Britain and Ireland, The Society of Thoracic Surgeons (USA), Scottish Cardiac Society, The Egyptian Society Of Cardiovascular and Thoracic Surgery and an Honorary fellow of The Indian Society Of Cardiovascular and Thoracic Surgeon. Dr. Dimitri performed several dozens of surgeries with the CoreoGraft CABG graft in Europe with excellent results. He will be instrumental in helping the company bring this product to the market in Europe.

 

Afksendyios Kalangos, M.D., Ph.D. , is a world-renowned pediatric cardiac surgeon. Dr. Kalangos was the 2015 President of the World Society of Cardiothoracic Surgeons, and he has written 300 articles in journals with editorial policy and 10 book chapters, delivered 450 lectures as guest speaker, and presented 700 abstracts in national and international congresses. He was Chairman of the Department of Cardiovascular Surgery at University of Geneva from 2011-2016 and presently Chairman of Cardiovascular Surgery at the Mitera Hospital in Athens, Greece. He has many distinguish honors and has been involved in many of the Cardiovascular Societies in Europe and the Mideast. His interests included development of third general tissue heart valve and in Congenital Heart Surgery.

 

Code of Business Conduct and Ethics

 

Our board of directors has adopted a written code of conduct that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted on our website a current copy of the code and all disclosures that are required by law or Nasdaq Marketplace Rules concerning any amendments to, or waivers from, any provision of the code.

 

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Board Leadership Structure

 

Our board of directors is free to select the Chairman of the board of directors and a Chief Executive Officer in a manner that it considers to be in the best interests of our company at the time of selection. Currently, Robert A. Berman serves as our Chief Executive Officer and Yury Zhivilo serves as Chairman of the board of directors. We currently believe that this leadership structure is in our best interests and strikes an appropriate balance between our Chief Executive Officer’s responsibility for the day-to-day management of our company and the Chairman of the board of directors’ responsibility to provide oversight, including setting the board of directors’ meeting agendas and presiding at executive sessions of the independent directors. Mr. Zhivilo provides a strong link between management and our board of directors, which we believe promotes clear communication and enhances strategic planning and implementation of corporate strategies. Additionally, in addition to having a Chairman of the board of directors that is not serving as an executive officer, three of our five members of our board of directors have been deemed to be “independent” by the board of directors, which we believe provides sufficient independent oversight of our management. Our board of directors has not designated a lead independent director.

 

Our board of directors, as a whole and also at the committee level, plays an active role overseeing the overall management of our risks. Our Audit Committee reviews risks related to financial and operational items with our management and our independent registered public accounting firm. Our board of directors is in regular contact with our Chief Executive Officer and Chief Financial Officer, who report directly to our board of directors and who supervise day-to-day risk management.

 

Role of Board in Risk Oversight Process

 

We face a number of risks, including those described under the caption “Risk Factors” contained elsewhere in this prospectus. Our board of directors believes that risk management is an important part of establishing, updating and executing on our business strategy. Our board of directors has oversight responsibility relating to risks that could affect the corporate strategy, business objectives, compliance, operations, and the financial condition and performance of our company. Our board of directors focuses its oversight on the most significant risks facing us and on our processes to identify, prioritize, assess, manage and mitigate those risks. Our board of directors receives regular reports from members of our senior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While our board of directors has an oversight role, management is principally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on us.

 

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EXECUTIVE COMPENSATION

 

The following table sets forth total compensation paid to our named executive officers for the years ended December 31, 2017 and 2016. Individuals we refer to as our “named executive officers” include both of our previous Co-Chief Executive Officers and our two other most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2017.

 

Name and Principal Position   Year     Salary
($)
    Bonus
($)
    Option
Awards
($)
    Non-
Equity
Incentive
Plan
Compensation
($)
    Nonqualified
Deferred
Compensation
Earnings
($)
    All Other
Compensation
($)
   

Total

($)

 
Benedict Broennimann, M.D.     2017       360,000 (1)     -       -       -       -       -       360,000  
Co-Chief Executive Officer     2016       140,000 (1)     -       155,290 (5)               -                 -       -       295,290  
Steven A. Cantor     2017       300,000 (2)     300,000 (3)     -       -       -       274,816 (6)     874,816  
Co-Chief Executive Officer     2016       42,046       215,000 (4)     -       -       -       -       257,046  
Marc H. Glickman, M.D.     2017       300,000       -       -       -       -       41,717 (7)     341,717  
Chief Medical Officer and Senior Vice President     2016       196,454       -       195,570 (5)     -       -       24,241 (8)     416,265  
Susan Montoya     2017       295,192       -       -       -       -       43,539 (9)     338,731  
Vice President Operations,     2016       301,187       -       867,610 (5)     -       -       43,000 (10)     1,211,797  
Quality Assurance/Regulatory Affairs                                                                

 

(1)

Beginning August 30, 2016 and through the date hereof, Dr. Broennimann’s annual base salary rate under his employment agreement has been $360,000. Dr. Broennimann received $90,000 in base salary in 2017 and did not receive any base salary in 2016.  He has orally agreed to defer certain amounts of base salary until such time as we and Dr. Broennimann agree. As a result, we owed Dr. Broennimann $410,000 in base salary as of December 31, 2017. Dr. Broennimann is not a U.S. taxpayer and is not, therefore, subject to U.S. tax laws governing deferred compensation.

   
(2)

Beginning December 1, 2016, Mr. Cantor’s annual base salary rate under his employment agreement was $300,000. Amounts in this column for Mr. Cantor reflect base salary earned for 2016 and 2017.

   
(3) Mr. Cantor received a $300,000 incentive payment in 2017 for achieving certain capital raising milestones in accordance with his employment agreement.
   
(4) Mr. Cantor received a $215,000 incentive payment in 2016 for achieving certain capital raising milestones in accordance with his employment agreement.
   
(5)

Represents the grant date fair value of stock options granted on October 1, 2016, computed in accordance with FASB ASC Topic 718. The options vested 20% on the grant date and the remaining 80% vest ratably on a monthly basis for the 24 months following the grant date.

   
(6)

Includes (i) federal and state income tax payments of $125,180 and $23,149, respectively, made by us on behalf of Mr. Cantor to gross up his $300,000 incentive payment received in 2017 in accordance with his employment agreement, (ii) $12,497 from company paid healthcare, and (iii) relocation and temporary living expenses of $38,408 and the associated federal and state tax payments made by us on Mr. Cantor's behalf of $19,186 and $4,980, respectively, and (iv) $51,415 paid to Mr. Cantor in 2017 under the terms of a retention award that we entered into with him in September 2013.

   
(7) Includes company paid healthcare of $27,831 and 401(k) match of $13,846.
   
(8) Includes company paid healthcare of $16,344 and 401(k) match of $8,077.
   
(9) Includes company paid healthcare of $28,779 and 401(k) match of $14,760.
   
(10) Includes company paid healthcare of $27,574 and 401(k) match of $12,254.

 

Employment Agreements

 

We have entered into various employment agreements with certain of our executive officers. Set forth below is a summary of many of the material provisions of such agreements, which summaries do not purport to contain all of the material terms and conditions of each such agreement. For purposes of the following employment agreements:

 

  “Cause” generally means the executive’s (i) willful misconduct or gross negligence in the performance of his or her duties to us; (ii) willful failure to perform his or her duties to us or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or disability); (iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude: (iv) repeated failure to cooperate in any audit or investigation of our business or financial practices; (v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of our property; or (vi) material breach of his or her employment agreement or any other material agreement with us or a material violation of our code of conduct or other written policy.

 

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  “Good reason” generally means, subject to certain notice requirements and cure rights, without the executive’s consent, (i) material diminution in his or her base salary or annual bonus opportunity; (ii) material diminution in his or her authority or duties (although a change in title will not constitute “good reason”), other than temporarily while physically or mentally incapacitated, as required by applicable law; (iii) relocation of his or her primary work location by more than 25 miles from its then current location; or (iv) a material breach by us of a material term of the employment agreement.
     
  “Change of control” generally means (i) the acquisition, other than from us, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than us or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act) or employee benefit plan of ours, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors; (ii) a reorganization, merger, consolidation or recapitalization of us, other than a transaction in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following such transaction is held by the persons who, immediately prior to the transaction, were the holders of our voting securities; or (iii ) a complete liquidation or dissolution of us, or a sale of all or substantially all of our assets.

 

Benedict Broennimann, M.D.

 

On August 30, 2016, we entered into an employment agreement with Benedict Broennimann, M.D., one of our previous Co-Chief Executive Officers. Pursuant to the terms of his employment agreement, Dr. Broennimann’s initial base salary is $360,000, subject to annual review and adjustment at the discretion of our board of directors. Dr. Broennimann has orally agreed to defer certain amounts of cash compensation until such time as we and Dr. Broennimann agree. As a result, we owe Dr. Broennimann $410,000 as of December 31, 2017. Dr. Broennimann is not a U.S. taxpayer and is not, therefore, subject to U.S. tax laws governing deferred compensation.

 

In connection with his employment, Dr. Broennimann received an initial equity grant of an option to purchase up to 146,500 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. Dr. Broennimann is an at-will employee and has a full-time commitment. Further, Dr. Broennimann’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

In April 2018, we entered into an amendment to Dr. Broennimann’s employment agreement to appoint him as our Chief Medical Officer, OUS. Other than Dr. Broennimann’s title and duties, the remaining terms of his employment agreement were unchanged.

 

Steven A. Cantor

 

On July 1, 2016, we entered into an employment agreement with Mr. Cantor, who prior to December 1, 2016, was our business development manager and commencing on December 1, 2016 became our Chief Business Development Officer. The employment agreement was amended on December 1, 2016, and again on June 12, 2017. Pursuant to the terms of his employment agreement, as amended to date, Mr. Cantor’s base salary was $300,000 and was subject ed to annual review and adjustment at the discretion of our board of directors, and in no event was Mr. Cantor’s annual salary reduced from the preceding year without his consent. Mr. Cantor was entitled to receive a bonus of $250,000 upon the earlier of (i) a commercial sale of one of our product candidates, or (ii) the entry into a definitive agreement for the distribution or license of one of our product candidates. We also agreed to pay Mr. Cantor’s relocation expenses in connection with Mr. Cantor’s move to Orange County, California, and, after June 12, 2018 or at such time he no longer spends a substantial portion of his daily working day working on matters that reasonably can be determined at Mr. Cantor’s sole discretion to be in Orange County, California, to move Mr. Cantor back to New York when requested by him. In addition, so long as Mr. Cantor was living in Orange County, California, we agreed to pay or reimburse Mr. Cantor for all payments relating to (i) a furnished residence in Orange County, California and (ii) an automobile selected by Mr. Cantor, provided, however, that the amount of payments or reimbursements pursuant to (i) and (ii) would not exceed $5,000 per month. We further agreed to pay Mr. Cantor an amount equal to the aggregate federal, state and local income and employment taxes imposed on Mr. Cantor as a direct result of such payments or reimbursements in advance.

 

We also agreed to a net of withholdings and deductions lump sum payment to Mr. Cantor in the amount of twelve months’ gross salary, which was subject ed to claw back if Mr. Cantor’s relocation was for less than twelve months. Such lump sum payment and withholdings and deductions were to be paid if we rais ed at least $3.0 million in one or more financings. We have raised at least $3.0 million since June 12, 2017 through the issuance of the 2017 Notes and the 2018 Notes. As a result, we paid Mr. Cantor $300,000 accordingly.

 

In connection with his employment, Mr. Cantor received 299,400 shares of our common stock, which we issued to replace shares of our common stock previously earned under Mr. Cantor’s prior employment agreement and we ratified the issuance to Mr. Cantor of a warrant to purchase 416,667 shares of our common stock at an exercise price of $12.00 per share. As of December 31, 2017, Mr. Cantor returned to us 250,000 of such warrants and transferred the balance of 166,667 warrants to others.

 

Mr. Cantor’s employment agreement prohibit ed him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

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Pursuant to the terms of his employment agreement, Mr. Cantor was entitled to severance in the event of certain terminations of employment. In the event Mr. Cantor’s employment was terminated by us without cause and other than by reason of disability or he resign ed for good reason, subject ed to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he was entitled to receive 12 months of continued base salary (or 24 months if such termination occurred within 24 months following a change of control).

 

On March 20, 2018, we terminated Mr. Cantor’s employment with our company.

 

Susan Montoya

 

On July 22, 2016, we entered into an employment agreement with Susan Montoya, our Senior Vice President of Operations and Quality Assurance/Regulatory Affairs. Pursuant to the terms of her employment agreement, Ms. Montoya’s base salary is $295,000, subject to annual review and adjustment at the discretion of our board of directors, and she will be eligible for an annual year-end discretionary bonus of up to 50% of her base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with her employment, Ms. Montoya received an initial equity grant of an option to purchase up to 818,500 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Ms. Montoya’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Ms. Montoya’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.

 

Ms. Montoya is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on her behalf. Ms. Montoya’s employment agreement prohibits her from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

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Pursuant to the terms of her employment agreement, Ms. Montoya is entitled to severance in the event of certain terminations of employment. In the event Ms. Montoya’s employment is terminated by us without cause and other than by reason of disability or she resigns for good reason, subject to her timely executing a release of claims in our favor and in addition to certain other accrued benefits, she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Marc H. Glickman, M.D.

 

On July 22, 2016, we entered into an employment agreement with Marc H. Glickman, M.D., our Senior Vice President and Chief Medical Officer. Pursuant to the terms of his employment agreement, Dr. Glickman’s base salary is $300,000, subject to annual review and adjustment at the discretion of our board of directors, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with his employment, Dr. Glickman received an initial equity grant of an option to purchase up to 184,500 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Dr. Glickman’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Dr. Glickman’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.

 

Dr. Glickman is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Dr. Glickman’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

Pursuant to the terms of his employment agreement, Dr. Glickman is entitled to severance in the event of certain terminations of employment. In the event Dr. Glickman’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

Robert A. Berman

 

On March 30, 2018, we entered into an employment agreement with Robert A. Berman, our current Chief Executive Officer and director. Pursuant to the terms of his employment agreement, Mr. Berman’s base salary is $400,000, subject to annual review and adjustment at the discretion of our compensation committee, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our compensation committee. The initial term of Mr. Berman’s employment agreement may be terminated at anytime with or without cause and with or without notice or for good reason thereunder.

 

In connection with his employment, Mr. Berman will receive an equity grant of an option to purchase up to 6.5% of our common stock outstanding on a fully diluted basis at the closing of this offering, or the CEO award, with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter.

 

Mr. Berman is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Mr. Berman’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.

 

Pursuant to the terms of his employment agreement, Mr. Berman is entitled to severance in the event of certain terminations of employment. In the event Mr. Berman’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 6 month of base salary if termination occurred prior to the second anniversary of his employment or 12 months of continued base salary on and after the second anniversary of his employment (or 24 months if such termination occurs within 24 months following a change of control).

 

Potential Payments Upon Termination or Change-in-Control

 

Pursuant to the terms of the employment agreements discussed above, we will pay severance in the event of certain terminations of employment. In the event employment is terminated by us without cause and other than by reason of disability or if the executive resigns for good reason, subject to his or her timely executing a release of claims in our favor and in addition to certain other accrued benefits, he or she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).

 

We will also pay Dr. Broennimann any unpaid base salary upon his termination for any reason or upon a change of control of our company.

 

Outstanding Equity Awards at Fiscal Year-End

 

The following table sets forth information regarding equity awards held by our named executive officers as of December 31, 2017.

 

Name      

Number of securities underlying unexercised options

(#) exercisable (1)

   

Number of securities

underlying

unexercised

options

(#) unexercisable (1)

 

 

 

Equity

incentive

plan awards: Number of

securities

underlying

unexercised

unearned

options

(#)

 

 

Option

exercise price

($)

    Option expiration date
Benedict Broennimann, M.D.   2017     97,669       48,831     N/A   $ 10.00     October 1, 2026
Co-Chief Executive Officer   2016     39,067       107,433     N/A   $ 10.00     October 1, 2026
Steven A. Cantor   2017     -       -     N/A     -     -
Co-Chief Executive Officer   2016     -       -     N/A     -     -
Marc H. Glickman, M.D.   2017     123,000       61,500     N/A   $ 10.00     October 1, 2026
Chief Medical Officer and Senior Vice President   2016     49,200       135,300     N/A   $ 10.00     October 1, 2026
Susan Montoya   2017     545,669       272,831     N/A   $ 10.00     October 1, 2026
Vice President Operations, Quality Assurance/Regulatory Affair   2016     218,267       600,233     N/A   $ 10.00     October 1, 2026

 

(1) All options set forth in the table above were granted on October 1, 2016, and 20% of the shares subject to these options vested immediately upon grant, with the remaining shares subject to these options vesting monthly over twenty-four months.

 

Employee Benefit Plans

 

2016 Omnibus Incentive Plan

 

On October 1, 2016, our board of directors adopted the Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan, or 2016 plan, and on October 1, 2016, our stockholders voted to approve of the 2016 plan. The principal features of the 2016 plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2016 plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.

 

Share Reserve

 

We have reserved 2,500,000 shares of our common stock for issuance under the 2016 plan, all of which may be granted as incentive stock options under Code Section 422. The shares of common stock issuable under the 2016 plan will consist of authorized and unissued shares, treasury shares or shares purchased on the open market or otherwise.

 

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If any award is canceled, terminates, expires or lapses for any reason prior to the issuance of shares or if shares are issued under the 2016 plan and thereafter are forfeited to us, the shares subject to such awards and the forfeited shares will not count against the aggregate number of shares of common stock available for grant under the 2016 plan. In addition, the following items will not count against the aggregate number of shares of common stock available for grant under the 2016 plan: (1) the payment in cash of dividends or dividend equivalents under any outstanding award, (2) any award that is settled in cash rather than by issuance of shares of common stock, (3) shares surrendered or tendered in payment of the option price or purchase price of an award or any taxes required to be withheld in respect of an award or (4) awards granted in assumption of or in substitution for awards previously granted by an acquired company.

 

Administration

 

The 2016 plan may be administered by our board of directors or our compensation committee. Our compensation committee, in its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted and the terms and conditions of such awards.

 

Eligibility

 

Awards may be granted under the 2016 plan to officers, employees, directors, consultants and advisors of us and our affiliates. Incentive stock options may be granted only to employees of us or our subsidiaries.

 

Awards

 

The 2016 plan permits the granting of any or all of the following types of awards:

 

  Stock Options . Stock options entitle the holder to purchase a specified number of shares of common stock at a specified price (the exercise price), subject to the terms and conditions of the stock option grant. Our compensation committee may grant either incentive stock options, which must comply with Code Section 422, or nonqualified stock options. Our compensation committee sets exercise prices and terms and conditions, except that stock options must be granted with an exercise price not less than 100% of the fair market value of our common stock on the date of grant (excluding stock options granted in connection with assuming or substituting stock options in acquisition transactions). Unless our compensation committee determines otherwise, fair market value means, as of a given date, the closing price of our common stock. At the time of grant, our compensation committee determines the terms and conditions of stock options, including the quantity, exercise price, vesting periods, term (which cannot exceed 10 years) and other conditions on exercise.
     
  Stock Appreciation Rights . Our compensation committee may grant SARs, as a right in tandem with the number of shares underlying stock options granted under the 2016 plan or as a freestanding award. Upon exercise, SARs entitle the holder to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the share’s fair market value on the date of exercise over the grant price of the SAR. The grant price of a tandem SAR is equal to the exercise price of the related stock option and the grant price for a freestanding SAR is determined by our compensation committee in accordance with the procedures described above for stock options. Exercise of a SAR issued in tandem with a stock option will reduce the number of shares underlying the related stock option to the extent of the SAR exercised. The term of a freestanding SAR cannot exceed 10 years, and the term of a tandem SAR cannot exceed the term of the related stock option.
     
  Restricted Stock, Restricted Stock Units and Other Stock-Based Awards . Our compensation committee may grant awards of restricted stock, which are shares of common stock subject to specified restrictions, and restricted stock units, or RSUs, which represent the right to receive shares of our common stock in the future. These awards may be made subject to repurchase, forfeiture or vesting restrictions at our compensation committee’s discretion. The restrictions may be based on continuous service with us or the attainment of specified performance goals, as determined by our compensation committee. Stock units may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Our compensation committee may also grant other types of equity or equity-based awards subject to the terms and conditions of the 2016 plan and any other terms and conditions determined by our compensation committee.

 

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  Performance Awards . Our compensation committee may grant performance awards, which entitle participants to receive a payment from us, the amount of which is based on the attainment of performance goals established by our compensation committee over a specified award period. Performance awards may be denominated in shares of common stock or in cash, and may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Cash-based performance awards include annual incentive awards.

 

Awards to Non-employee Directors

 

No more than $250,000 may be granted in equity-based awards during any one year to a non-employee member of our board of directors, based on the grant date fair value for accounting purposes in the case of stock options or SARs and based on the fair market value of our common stock underlying the award on the grant date for other equity-based awards. This limit does not apply to shares received by a non-employee director at his or her election in lieu of all or a portion of the director’s retainer for board service.

 

Clawback

 

All cash and equity awards granted under the 2016 plan will be subject to all applicable laws regarding the recovery of erroneously awarded compensation, any implementing rules and regulations under such laws, any policies we adopted to implement such requirements and any other compensation recovery policies as we may adopt from time to time.

 

Change in Control

 

Under the 2016 plan, in the event of a change in control (as defined in the 2016 plan), outstanding awards will be treated in accordance with the applicable transaction agreement. If no treatment is provided for in the transaction agreement, each award holder will be entitled to receive the same consideration that stockholders receive in the change in control for each share of stock subject to the award holder’s awards, upon the exercise, payment or transfer of the awards, but the awards will remain subject to the same terms, conditions and performance criteria applicable to the awards before the change in control, unless otherwise determined by our compensation committee. In connection with a change in control, outstanding stock options and SARs can be cancelled in exchange for the excess of the per share consideration paid to stockholders in the transaction, minus the option or SARs exercise price.

 

Subject to the terms and conditions of the applicable award agreements, awards granted to non-employee directors will fully vest on an accelerated basis, and any performance goals will be deemed to be satisfied at target. For awards granted to all other service providers, vesting of awards will depend on whether the awards are assumed, converted or replaced by the resulting entity.

 

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  For awards that are not assumed, converted or replaced, the awards will vest upon the change in control. For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the change in control.
     
  For awards that are assumed, converted or replaced by the resulting entity, no automatic vesting will occur upon the change in control. Instead, the awards, as adjusted in connection with the transaction, will continue to vest in accordance with their terms and conditions. In addition, the awards will vest if the award recipient has a separation from service within two years after a change in control by us other than for “cause” or by the award recipient for “good reason” (each as defined in the applicable award agreement). For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the separation from service.

 

Amendment and Termination of the 2016 plan

 

Unless earlier terminated by our board of directors, the 2016 plan will terminate, and no further awards may be granted, 10 years after the date on which it was approved by our stockholders. Our board of directors may amend, suspend or terminate the 2016 plan at any time, except that, if required by applicable law, regulation or stock exchange rule, stockholder approval will be required for any amendment. The amendment, suspension or termination of the 2016 plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights under an outstanding award.

 

Limitation of Liability and Indemnification Matters

 

Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, will limit the liability of our directors for monetary damages for breach of their fiduciary duties, except for liability that cannot be eliminated under the DGCL. Consequently, our directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:

 

  any breach of their duty of loyalty to us or our stockholders;
     
  acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;
     
  unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or
     
  any transaction from which the director derived an improper personal benefit.

 

Our amended and restated bylaws will also provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether our amended and restated bylaws would permit indemnification. We have obtained directors’ and officers’ liability insurance.

 

We intend to enter into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our amended and restated bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by this person in any action or proceeding arising out of this person’s services as a director or executive officer or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.

 

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The above description of the indemnification provisions of our amended and restated bylaws and our indemnification agreements is not complete and is qualified in its entirety by reference to these documents, each of which is incorporated by reference as an exhibit to the registration statement to which this prospectus forms a part.

 

The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and may be unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

 

Director Compensation

 

We do not currently have a formal policy with respect to compensation payable to our non-employee directors for service as directors. Subsequent to completion of this offering, our board of directors plans to adopt a nonemployee director compensation program. During 2017, except as set forth in the table below, our non-employee directors did not receive any cash compensation for their services as directors or as board committee members. None of our non-employee directors received any equity award grants in 2016. Steven Cantor, our named executive officer who also serve d as a member of our board of directors, did not receive any additional compensation for his service on our board of directors during 2016 or 2017. We did not provide any other compensation to our nonemployee directors for their service on our board of directors during 2016 or 2017.

 

The table below shows the compensation paid to our non-employee directors during 2017 and 2016.

 

Name         Fees earned or paid in cash     Stock awards ($)     Option awards ($)     Non-equity incentive plan compensation ($)     Nonqualified deferred compensation earnings ($)     All other compensation($)     Total ($)  
Yury Zhivilo     2017       -       -       -       -       -       -       -  
      2016       -       -       -       -       -       -       -  
Robert A. Anderson     2017       -       -     $ 86, 860 (1)     -       -     $ 1,000 (2)   $ 87, 860  
      2016       -       -       -       -       -       -       -  
Robert W. Doyle     2017       -       -     $ 86, 860 (1)     -       -     $ 1,000 (2)   $ 87, 860  
      2016       -       -       -       -       -       -       -  
Steven Girgenti     2017       -       -     $ 78,400 (1)     -       -       -     $ 78,400  
      2016       -       -       -       -       -       -       -  

 

(1)

During 2017, we issued options to purchase shares of our common stock to directors Robert Doyle, Robert Anderson, and Steven Girgenti each exercisable for of 40,000 shares of our common stock, at an exercise price of $12.00 per share. The options were valued at $1.96 per share as of the date of the grant. In addition, we issued to each Robert Doyle and Robert Anderson options exercisable to purchase 3,000 shares of our common stock, at an exercise price of $7.00 per share. The options were valued at $2. 82 per share as of the date of the grant. All of these options were vested in full as of the date of grant and valued in accordance with FASB ASC Topic 718. These amounts do not reflect actual compensation earned or to be earned by our non-employee directors.

   
(2) Robert Doyle and Robert Anderson each received $1,000 from us for attending a two day meeting at our headquarters.

 

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PRINCIPAL STOCKHOLDERS

 

The following table sets forth certain information concerning the ownership of our common stock as of March 31, 2018, with respect to: (i) each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common stock; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our current directors and executive officers as a group.

 

Applicable percentage ownership is based on 9,042,480 shares of common stock outstanding as of March 31 , 2018 and reflects the (i) issuance of 1,630,058 shares of common stock issuable upon the conversion of all shares of our outstanding preferred stock, (ii) the issuance of an estimated 90,717 shares of common stock in payment of accrued dividends, (iii) the automatic conversion of the aggregate principal amount and the interest accrued through March 31 , 2018 of the 2018 Notes into 609,908 shares of our common stock, which number of shares was determined by dividing the total of the aggregate principal amount and the estimated accrued interest of the 2018 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units , and (iv) the conversion of certain 2017 Notes outstanding as of March 31 , 2018 into 578,118 shares of our common stock, which number of shares was determined by dividing the $2,740,500 aggregate principal amount and the interest accrued through March 31 , 2018 of those converting 2017 Notes by 70% of $7.00, which is the midpoint of the initial public offering price range reflected on the cover of this prospectus assuming no value is attributed to the warrants offered as part of the Units . The percentage of beneficial ownership after this offering assumes the sale and issuance of 1,142,857 Units in this offering. 

 

We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to such securities. In addition, pursuant to such rules, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of March 31, 2018. We did not deem such shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the beneficial owners named in the table below have sole voting and investment power with respect to all shares of our common stock that they beneficially own, subject to applicable community property laws.

 

    Beneficial Ownership
Prior to Offering
  Beneficial Ownership
After the Offering
Name and Address of Beneficial Owner(1)   Number of
Shares
  Percentage   Number
of Shares
  Percentage
5% Stockholders                                
Biodyne Holding, S.A. (2)     4,374,164       48.4 %     4,374,164       42.9 %
Steven A. Cantor     750,400       8.3 %     750,400       7.4 %
Susan Montoya (3)     682,087       7.0 %     682,087       6.3 %
Named Executive Officers and Directors                                
Steven A. Cantor (6)     750,400       8.3 %     750,400       7.4 %
Yury Zhivilo (2)     4,374,164       48.4 %     4,374,164       42.9 %
Robert A. Berman (5)     175,758       1.9 %     175,758       1.7 %
Susan Montoya (3)     682,087       7.0 %     682,087       6.3 %
Marc Glickman, M.D. (3)     153,750       1.7 %     153,750       1.5 %
Benedict Broennimann, M.D. (3) (4)     512,087       5.6 %     512,087       5.0 %
Robert A. Anderson (3)     43,000       * %     43,000       * %
Robert W. Doyle (3)     43,000       * %     43,000       * %
Steven Girgenti (3)     40,000       * %     40,000       * %
All directors and executive officers as a group (8 persons) (6)     6,023,845       58.5 %     6,023,845       52.6

 

* Represents beneficial ownership of less than 1%.

 

(1) Except as otherwise noted below, the address for each person or entity listed in the table is c/o Hancock Jaffe Laboratories, Inc., 70 Doppler, Irvine, California 92618.
   
(2) Mr. Zhivilo is the controlling shareholder, President and director of Biodyne Holding, S.A., or Biodyne, and may be deemed to be the beneficial owner of the shares of common stock owned by Biodyne. He has voting and investment power over the shares held by Biodyne. The principal business address of Biodyne is 13 Rue de la Gare, 1100 Morges, Switzerland.
   
(3) Represents shares of common stock issuable upon exercise of options that are currently exercisable or exercisable within 60 days of March 23, 2018 .
   
(4) Dr. Broennimann may be deemed to be the beneficial owner of the shares of common stock owned by Rosewall Ventures Ltd. The principal business address of Rosewall Ventures Ltd. is Route de Lausanne 3, CH-1303 Penthaz, Switzerland.
   
(5) Includes options to purchase 175,758 shares of our common stock exercisable upon the consummation of our offering.
   
(6) Mr. Cantor was one of our named executive for the year ended December 31, 2017, but he does not serve as one of our executive officer or director as of March 31, 2018.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

The following is a description of transactions since January 1, 2016 to which we were a party in which (i) the amount involved exceeded or will exceed the lesser of (A) $120,000 or (B) one percent of our average total assets at year end for the last two completed fiscal years and (ii) any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, any of the foregoing persons, who had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other similar arrangements, which are described under “Executive Compensation.”

 

Biodyne

 

On June 30, 2015, we entered into a loan agreement with Biodyne. The loan agreement has a maximum borrowing capacity of $2,200,000, available in advances in several installments over a period of 8 months. All advances bore interest at a rate of 3% per annum. On April 1, 2016, the related note was amended such that it was convertible at the option of Biodyne into shares of our common stock at a conversion price of $10.00 per share. The interest was due and payable on an annual basis, the first payment of which was due November 1, 2016. The highest principal balance owed under the loan agreement was approximately $1,200,000 as of August 31, 2016. On August 31, 2016, the entire principal advanced and $36,789 of related interest was converted into 123,481 shares of our common stock. During the year ended on December 31 , 2017, we borrowed additional $499,000 in aggregate principal and incurred approximately $13,886 in interest. An additional 197 shares were issued in satisfaction of accrued interest payable. As of March 31 , 2018, Biodyne owns 4,374,164 shares of our common stock, representing an ownership interest of approximately 48.4 % prior to the completion of this offering. Yury Zhivilo, the chairman of our board of directors, is the majority shareholder of Biodyne.

 

Leman Cardiovascular S.A.

 

On May 10, 2013, we issued a note payable with a principal balance amount of $1,070,000, or the Leman Note, in connection with the purchase of certain assets from Leman Cardiovascular S.A., or Leman. The Leman Note bears interest at a rate of 6% per annum and originally matured on May 10, 2014, which was later extended to May 10, 2018. During the years ended 2013, 2014, 2015, 2016 and 2017 we repaid principal of $302,000, $30,000, $248,000, $76,000 and $174,734, respectively. As of December 31, 2017 and 2016, the principal balance due on the Leman Note was $270,038 and $444,772 , respectively, and the related accrued interest was $6,436 and $15,419 , respectively. As of December 31, 2017, the principal balance due is $270,038. The highest principal balance owed under the Leman Note since January 1, 2015 was approximately $768,011.

 

Yury Zhivilo, the chairman of our board of directors, is a shareholder of Leman, and Norman Jaffe, our former president, and Sue Montoya, our Senior Vice President of Operations, Regulatory Affairs and Quality Assurance, were officers of Leman.

 

Indemnification of Officers and Directors

 

Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective in connection with the completion of this offering, will provide that we will indemnify each of our directors and officers to the fullest extent permitted by the DGCL. Further, we intend to enter into indemnification agreements with each of our directors and officers, and we intend to purchase a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. For further information, see “Executive Compensation—Limitations of Liability and Indemnification Matters.”

 

To the best of our knowledge, during the past two fiscal years, other than as set forth above, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds the lesser of (A) $120,000 or (B) one percent of our average total assets at year end for the last two completed fiscal years, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest (other than compensation to our officers and directors in the ordinary course of business).

 

Policies and Procedures for Related Party Transactions

 

All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.

 

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DESCRIPTION OF CAPITAL STOCK

 

The following is a summary of the rights of our common stock and preferred stock, certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws as they will be in effect upon completion of this offering and applicable law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed as exhibits to the registration statement and are incorporated by reference to our registration statement, of which this prospectus forms a part.

 

Units

 

Each Unit consists of one share of common stock, par value $0.00001 per share, and a warrant to purchase one share of our common stock. The Units will not be issued or certificated. Purchasers will receive only shares of common stock and warrants. Each warrant will be exercisable beginning on the date of issuance and will expire five years from the date of issuance. The common stock and warrants are immediately separable, but will be purchased together in this offering.

 

Authorized Capital Stock

 

Immediately prior to the completion of this offering and upon the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 50,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.

 

Common Stock

 

As the date of this prospectus, and after giving effect to the automatic conversion of all of our outstanding preferred stock and the conversion of certain 2017 Notes and all of the 2018 Notes into common stock in connection with this offering, there are 9,042,480 shares of common stock issued and outstanding and there were 13 holders  of record of our common stock, 1,438,247 shares of common stock issuable upon exercise of outstanding warrants (including the subsequent conversion of preferred stock warrants), and 1,422,000 shares of common stock issuable upon exercise of outstanding stock options.

 

Under the terms of our amended and restated certificate of incorporation, holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, including the election of directors, and do not have cumulative voting rights. The holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and in such amounts as our board of directors from time to time may determine. Our common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of our company, the assets legally available for distribution to stockholders are distributable ratably among the holders of our common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.

 

Preferred Stock

 

As the date of this prospectus, there are 1,005,700 outstanding shares of Series A preferred stock, which will be converted into 1,3 63,613 shares of common stock immediately prior to the closing of this offering, and 253,792 outstanding shares of Series B preferred stock, which will be converted into 357,162 shares of common stock immediately prior to the closing of this offering.

 

Upon the closing of this offering, we will have no shares of our preferred stock outstanding, but our board of directors will be authorized, without further action by the stockholders, to create and issue one or more series of preferred stock and to fix the rights, preferences and privileges thereof. Among other rights, our board of directors may determine, without further vote or action by our stockholders:

 

  the number of shares constituting the series and the distinctive designation of the series;
     
  the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series;
     
  whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights;

 

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  whether the series will have conversion privileges and, if so, the terms and conditions of conversion;
     
  whether or not the shares of the series will be redeemable or exchangeable, and, if so, the dates, terms and conditions of redemption or exchange, as the case may be;
     
  whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and
     
  the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series.

 

Although we presently have no plans to issue any shares of preferred stock upon completion of the offering, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, could, among other things, decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.

 

Options

 

As of March 31 , 2018, we had outstanding options to purchase an aggregate 1,422,000  shares of our common stock, with a weighted-average exercise price of $10.17 per share.

 

Warrants Issued In This Offering

 

The following summary of certain terms and provisions of the warrants included in the Units offered hereby is not complete and is subject to, and qualified in its entirety by, the provisions of the warrant, the form of which has been filed as an exhibit to the registration statement of which this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of warrant for a complete description of the terms and conditions of the warrants.

 

The warrants will be issued as individual warrants to the investors, all of which will be governed by a warrant agreement.

 

The warrants will be exercisable beginning on the date of issuance. The warrants will be exercisable, at the option of each holder, in whole or in part by delivering to us a duly executed exercise notice and, at any time a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is effective and available for the issuance of such shares, or an exemption from registration under the Securities Act is available for the issuance of such shares, by payment in full in immediately available funds for the number of shares of common stock purchased upon such exercise. If a registration statement registering the issuance of the shares of common stock underlying the warrants under the Securities Act is not effective or available and an exemption from registration under the Securities Act is not available for the issuance of such shares, the holder may, in its sole discretion, elect to exercise the warrant through a cashless exercise, in which case the holder would receive upon such exercise the net number of shares of common stock determined according to the formula set forth in the warrant. No fractional shares of common stock will be issued in connection with the exercise of a warrant. In lieu of fractional shares, we will pay the holder an amount in cash equal to the fractional amount multiplied by the exercise price.

 

A holder will not have the right to exercise any portion of the warrant if the holder (together with its affiliates) would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage ownership is determined in accordance with the terms of the warrants. However, any holder may increase or decrease such percentage to any other percentage not in excess of 9.99% upon at least 61 days’ prior notice from the holder to us.

 

The warrants will have an exercise price equal to 120% of the initial public offering price per Unit set forth on the cover page of this prospectus. The exercise price is subject to appropriate adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock and also upon any distributions of assets, including cash, stock or other property to our stockholders.

 

Subject to applicable laws, the warrants may be offered for sale, sold, transferred or assigned without our consent. In the event of a fundamental transaction, as described in the warrants and generally including any reorganization, recapitalization or reclassification of our common stock, the sale, transfer or other disposition of all or substantially all of our properties or assets, our consolidation or merger with or into another person, the acquisition of more than 50% of our outstanding common stock, or any person or group becoming the beneficial owner of 50% of the voting power represented by our outstanding common stock, the holders of the warrants will be entitled to receive upon exercise of the warrants the kind and amount of securities, cash or other property that the holders would have received had they exercised the warrants immediately prior to such fundamental transaction.

 

Except as otherwise provided in the warrants or by virtue of such holder’s ownership of shares of our common stock, the holder of a warrant does not have the rights or privileges of a holder of our common stock, including any voting rights, until the holder exercises the warrant.

 

Subject to certain exceptions, any term of the warrants may be amended or waived with our written consent and the written consent of the holders of at least two-thirds of the then-outstanding warrants. The exercise price and number of shares of common stock issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of our recapitalization, reorganization, merger or consolidation. We may, in our sole discretion, upon due notice to holders of the then outstanding warrants, lower the exercise price at any time prior to the expiration date of the warrants. We may also extend the duration of the warrants by delaying the expiration date.

 

We will attempt to maintain the effectiveness of a current prospectus covering the common stock issuable upon exercise of the warrants until the expiration of such warrants. However, we cannot assure you that we will be able to do so and we may not be able to maintain our eligibility to use such current prospectus. If the prospectus relating to the common stock issuable upon the exercise of the warrants is not current or if we are not eligible to use such current prospectus or if the common stock is not qualified or exempt from qualification in the jurisdictions in which the holders of the warrants reside, the warrants may have no value, except to the extent they may be cashlessly exercised.

 

Warrants

 

Legend Securities, Inc., or Legend, acted as our placement agent for the offering of Series A preferred stock and in connection therewith, we agreed to issue Legend warrants to purchase an aggregate of 89,320 shares of Series A preferred stock with an exercise price of $5.00 per share on a pre-reverse split basis. The shares of Series A preferred stock issuable upon exercise of such warrants will have the same rights as shares sold to investors in the Series A preferred stock financing.

 

On May 5, 2016, pursuant to his employment agreement, we issued a warrant to Steven A. Cantor, our former Co-Chief Executive Officer and director, to purchase 416,667 shares of our common stock at an initial exercise price of $12.00 per share. As of June 30, 2017, Mr. Cantor forfeited 250,000 of such warrants and transferred the balance of 166,667 warrants to others. The warrant is immediately vested and exercisable until May 5, 2023.

 

Leone G.I.S. LLC, or Leone, acted as our placement agent for the offering of Series A preferred stock and Series B preferred stock and in connection therewith, we agreed to issue Leone warrants to purchase an aggregate of 11,250 shares of Series A preferred stock with an exercise price of $5.00 per share on a pre-reverse split basis and an aggregate of 11,071 shares of our common stock with an exercise price of $12.00 per share.

 

Newbridge Securities Corp., or Newbridge, acted as our placement agent for the offering of Series B preferred stock and in connection therewith, we agreed to issue Newbridge warrants to purchase an aggregate of 6,226 shares of our common stock with an exercise price of $12.00 per share.

 

From June 6, 2017 to January 16 , 2018, in connection with our convertible debt financings, we agreed to issue warrants to purchase an aggregate amount of 1,037,609 shares of our common stock to debt holders. We also agreed to issue warrants to purchase an aggregate amount of 99,764 shares of our common stock to Alexander Capital, LP, our placement agent and financial advisor in connection with the convertible debt financings.

 

Underwriters’ Warrants

 

We are registering the offer and sale of Underwriters’ Warrants (and the underlying shares of common stock) to purchase up to a total of 57,143 shares of our common stock. See “Underwriting” beginning on page 11 4 for a description of the Underwriters’ Warrants.

 

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Convertible Notes

 

Through December 11, 2017, in connection with our convertible debt financing, we issued 2017 Notes for an aggregate principal amount of $2,750,500. The 2017 Notes were originally due and payable on January 11, 2018 and bear interest at a rate of 15% to be paid quarterly. The 2017 Notes are convertible at a price equal to the lesser of (i) $12.00, or (ii) 70% of the price per share in our initial public offering. On December 29, 2017, we amended and restated the 2017 Notes to, among other things, (i) defer the December 2017 quarterly interest payment to January 2018, (ii) extend the maturity date to February 28, 2018, (iii) eliminate the remedy upon an event of default that the principal of each 2017 Note increases by 20%, and (iv) increase the Warrant coverage of the 2017 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2017 Notes.

 

On February 28, 2018, we further amended and restated the 2017 Notes to, among other things, (i) extend the maturity date to May 15, 2018 and (ii) increase the Warrant coverage of the 2017 Notes from 75% to 100% of the shares of common stock issued upon conversion of the 2017 Notes. 

 

From January 5, 2018 through January 16, 2018, we issued the 2018 Notes, in the aggregate principal amount of $2,897,500 for net cash proceeds of $2,603,750. The 2018 Notes bear interest at 15% per annum, payable quarterly, and are due on the Maturity Date. The 2018 Notes are convertible at the option of the holder at any time prior to the Maturity Date at a price of $12.00 per share, and are automatically convertible upon the consummation of this offering at a price equal to the 2018 Conversion Price. In connection with the issuance of the 2018 Notes, we also issued five-year warrants exercisable for the number of shares of common stock equal to 50% of the total shares issuable upon the conversion of the 2018 Notes, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the 2018 Conversion Price. We have agreed to issue a five-year warrant to the placement agent for the purchase of 60,002 shares of common stock.

 

On February 28, 2018, we amended and restated the 2018 Notes to, among other things, (i) extend the maturity date to May 15, 2018, (ii) eliminate the remedy that adjusts the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes, and (iii) increase the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes.

 

Registration Rights

 

Demand Registration Rights

 

Pursuant to our Amended and Restated Securities Purchase Agreement relating to the issuance of the 2017 Notes, and the Securities Purchase Agreement relating to the 2018 Notes, or the Purchase Agreements, at any time we propose to register any of our common stock under the Securities Act, and subject to certain terms of limitation, we agreed to register (i) shares of our common stock issued or issuable upon conversion of the Notes purchased by the parties to such agreement, and (ii) shares of our common stock issued or issuable upon exercise of the Warrants issued to the parties to such agreement, including the placement agents of the Notes issued. We are required to pay all expenses relating to the registration of (i) and (ii), subject to certain limitations. We are registering the shares of common stock issuable upon conversion of the Notes and issuable upon exercise of the Warrants on the Selling Stockholder Prospectus.

 

Pursuant to the Underwriters’ Warrants, the underwriters can request that we file up to two registration statements registering all or a portion of the common stock issued or issuable upon exercise of such Underwriters’ Warrant. Under specified circumstances, we have the right to defer filing of a requested registration statement for a period of not more than 60 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including that the underwriters are required to pay all of the expenses for the second demand registration.

 

Form S-3 Demand Registration Rights

 

Pursuant to our Investors’ Rights Agreements, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the following held by the holders of our Series A preferred stock, and the holders of at least 30% of the following held by the holders of our Series B preferred stock, (i) shares of our common stock issued or issuable upon conversion, exercise of any of our securities by the parties to such agreement, (ii) shares of our common stock issued or issuable upon conversion, exercise of any other securities of the company, acquired by the parties to such agreement subsequent to entering such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), have the right to demand that we file additional registration statements, including a shelf registration statement, for such holders on Form S-3. Under specified circumstances, we also have the right to defer filing of a requested registration statement for a period of not more than 120 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.

 

Piggyback Registration Rights

 

Pursuant to our Investors’ Rights Agreements and Underwriters’ Warrants, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit or similar plans, or corporate reorganizations or other transactions under Rule 145 under the Securities Act, the holders of (i) shares of our common stock issued or issuable upon conversion, exercise of any of our securities by the parties to such agreement, (ii) shares of our common stock issued or issuable upon conversion, exercise of any other securities of our company, acquired by the parties to such agreement subsequent to entering such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), are entitled to notice of the registration and have the right to include their registrable securities in such registration. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, including the right to exclude all such stockholder shares from this offering.

 

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Expenses of Registration

 

We are required to pay all expenses except for all underwriting discounts, selling commissions, and stock transfer taxes relating to any Form S-3 or piggyback registration by the holders of registerable securities under the Investors’ Rights Agreement, subject to certain limitations.

 

Expiration of Registration Rights

 

The registration rights described under our Investors’ Rights Agreement will expire for each holder at such time (i) the company liquidates, (ii) Rule 144 or another similar exemption under the Securities Act is available for the sale of such investors’ shares without limitation during a three-month period without registration, and (iii) the fourth anniversary of this offering. The registration rights described under our Purchase Agreements will expire for each holder at such time (i) the company liquidates, (ii) Rule 144 or another similar exemption under the Securities Act is available for the sale of such investors’ shares without limitation during a three-month period without registration, and (iii) the first anniversary of this offering.

 

Delaware Anti-Takeover Law and Provisions of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

 

Some provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise; or the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions which provide for payment of a premium over the market price for our shares.

 

These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.

 

Delaware Anti-Takeover Law

 

We are subject to Section 203 of the DGCL. Section 203 generally prohibits a publicly traded corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

 

  prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
     
  upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or
     
  at or subsequent to the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder.

 

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Section 203 defines a “business combination” to include:

 

  any merger or consolidation involving the corporation and the interested stockholder;
     
  any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder;
     
  subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
     
  subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or
     
  the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
     
  In general, Section 203 defines an “interested stockholder” as any person that is:
     
  the owner of 15% or more of the outstanding voting stock of the corporation;
     
  an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or
     
  the affiliates and associates of the above.

 

Under specific circumstances, Section 203 makes it more difficult for an “interested stockholder” to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation’s certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.

 

Our amended and restated certificate of incorporation and amended and restated bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our board of directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.

 

Undesignated Preferred Stock

 

The ability of our board of directors, without action by the stockholders, to issue up to 10,000,000 shares of undesignated preferred stock with voting or other rights or preferences as designated by our board of directors could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.

 

Stockholder Meetings

 

Our amended and restated certificate of incorporation and amended and restated bylaws provide that a special meeting of stockholders may be called only by our chairman of the board, chief executive officer or president, or by a resolution adopted by a majority of our board of directors.

 

Requirements for Ad v ance Notification of Stockholder Nominations and Proposals

 

Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals to be brought before a stockholder meeting and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.

 

Elimination of Stockholder Action by Written Consent

 

Our amended and restated certificate of incorporation and amended and restated bylaws eliminate the right of stockholders to act by written consent without a meeting.

 

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Removal of Directors

 

Our amended and restated certificate of incorporation provides that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of the total voting power of all of our outstanding voting stock then entitled to vote in the election of directors.

 

Stockholders Not Entitled to Cumulative Voting

 

Our amended and restated certificate of incorporation does not permit stockholders to cumulate their votes in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock may be entitled to elect.

 

Choice of Forum

 

Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws; any action to interpret, apply, enforce, or determine the validity of our amended and restated certificate of incorporation or amended and bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable.

 

Amendment Provisions

 

The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred stock, would require approval by holders of at least two thirds of the total voting power of all of our outstanding voting stock.

 

The provisions of the DGCL, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.

 

Elimination of Monetary Liability for Officers and Directors

 

Our amended and restated certificate of incorporation incorporates certain provisions permitted under the DGCL relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty. Our amended and restated certificate of incorporation also contains provisions to indemnify the directors and officers to the fullest extent permitted by the DGCL. We believe that these provisions will assist us in attracting and retaining qualified individual to serve as directors.

 

Exchange Listing

 

We anticipate that our common stock and warrants underlying the Units, will be listed on the Nasdaq under the symbols “HJLI” and “HJLIW”, respectively.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our Units, common stock , and warrants is Vstock Transfer, LLC. The transfer agent and registrar’s address is 18 Lafayette Pl, Woodmere, New York 11598.

 

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SHARES ELIGIBLE FOR FUTURE SALE

 

Prior to this offering, there has been no public market for our securities . Future sales of substantial amounts of our common stock in the public market following this offering, or the possibility of such sales occurring, could cause the prevailing market price of our common stock to fall and impede our ability to raise capital through an offering of equity securities.

 

Upon the completion of this offering, we will have a total of 10,185,337 shares of common stock outstanding based upon 9,042,480 shares outstanding as of the date of this prospectus, assuming an initial public offering price of $7.00 per Unit and assuming no exercise by the underwriters’ option to purchase additional Units, and no exercise or conversion of outstanding options, Warrants, or Notes to purchase shares of common stock prior to completion of this offering. All of the Units sold in this offering , and eventually the underlying common stock and warrants, as well as shares of common stock issued upon exercise of the warrants, will be freely tradable unless held by our “affiliates”, as defined in Rule 144 under the Securities Act. Shares purchased by affiliates may generally only be sold pursuant to an effective registration statement under the Securities Act or in compliance with Rule 144.

 

Lock-Up Agreements

 

We and all of our executive officers, directors and other certain holders of our outstanding common stock have entered into a “lock-up” agreement. As a result of these contractual restrictions and the provisions of Rules 144 and 701 promulgated under the Securities Act, 5,514,564 common stock shares will be eligible for sale in the public market upon expiration of lock-up agreements 180 days after the date of this prospectus, subject, in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701. The representatives may, in their discretion, release any of the securities subject to these lock-up agreements at any time.

 

Rule 144

 

In general, under Rule 144, as amended, a person (or persons whose shares are required to be aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned our common stock for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell those shares, subject only to the availability of current public information about us and provided that we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. If such person has held our shares for at least one year, such person can resell such shares under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company and current public information requirements.

 

A person (or persons whose shares are aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

 

 

1% of the number of shares of common stock then outstanding, which will equal approximately 101,853 shares immediately after this offering (assuming no exercise of the underwriters’ option to purchase additional Units and no exercise or conversion of outstanding options or Warrants); or

     
  the average weekly trading volume of our common stock on the Nasdaq during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.

 

Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us.

 

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Rule 701

 

Under Rule 701 under the Securities Act, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, by:

 

  persons, other than affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject only to the manner-of-sale provisions of Rule 144; and
     
  our affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject to the manner-of-sale and volume limitations, current public information and filing requirements of Rule 144, in each case, without compliance with the six-month holding period requirement of Rule 144.

 

Notwithstanding the foregoing, our Rule 701 shares held by our executive officers and directors are subject to lock-up agreements as described above and in the section titled “Underwriting” and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

 

Form S-8 Registration Statement

 

We intend to file a registration statement on Form S-8 under the Securities Act after the closing of this offering to register the shares of our common stock that are issuable pursuant to our 2016 plan. The registration statement is expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to Rule 144 volume limitations applicable to affiliates and the lock-up arrangement described above, if applicable.

 

Registration Rights

 

After the closing of this offering, the holders of the Notes, the Warrants, and Underwriters’ Warrants may convert and exercise their security instrument for 2,518,859 shares of our common stock. These holders will be entitled to certain rights with respect to the registration of such shares under the Securities Act. If we register any securities for public sale other than for our initial public offering, these holders will have the right to include their shares in the registration statement. In an underwritten offering, we have agreed to use our best efforts to cause the shares to be included in the underwriting on the same terms and conditions as the securities being sold through any such underwriters. We have agreed to indemnify the holders of this registration right against liabilities under the Securities Act, the Exchange Act, or other federal or state securities laws.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS

 

The following discussion describes the material U.S. federal income tax considerations for Non-U.S. Holders (as defined below) with respect to the acquisition, ownership and disposition of Units acquired in this offering. This discussion does not address all aspects of U.S. federal income tax law that may be relevant to Non-U.S. Holders in light of their particular circumstances, nor does it address any U.S. federal estate or gift tax, or any state, local or non-U.S. tax consequences or U.S. federal tax consequences other than income taxes. Non-U.S. Holders should consult their tax advisors as to these matters. Rules different from those described below may apply to certain Non-U.S. Holders that are subject to special treatment under the Code such as:

 

  banks, financial institutions, or insurance companies;
     
  tax-exempt organizations;
     
  tax-qualified retirement plans;
     
  broker-dealers and traders in securities, commodities or currencies;
     
 

certain former citizens or long-term residents of the United States;

     
  persons that own, or are deemed to own, more than five percent of our common stock (except to the extent specifically set forth below);
     
  regulated investment companies or real estate investment trusts;
     
  “controlled foreign corporations,” “passive foreign investment companies,” or corporations that accumulate
     
  earnings to avoid U.S. federal income tax;
     
  persons that hold our common stock as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic
     
  security” or other integrated investment or risk reduction strategy;
     
  holders deemed to sell our common stock under the constructive sale provisions of the Code;
     
  holders who hold or receive our common stock pursuant to the exercise of employee stock options or otherwise as compensation;
     
  holders who are subject to the alternative minimum tax or Medicare contribution tax; or
     
  partnerships and other pass-through entities, and investors in such pass-through entities or entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their places of organization or formation).

 

Such Non-U.S. Holders are urged to consult their own tax advisors to determine the U.S. federal, state, local and other tax consequences that may be relevant to them. Furthermore, the discussion below is based upon the provisions of the Code, and Treasury regulations, published administrative pronouncements, rulings and judicial decisions thereunder as of the date hereof. Such authorities may be repealed, revoked or modified, perhaps retroactively, so as to result in U.S. federal income tax consequences different from those discussed below. We have not requested a ruling from the IRS with respect to the statements made and the conclusions reached in the following summary. In addition, the IRS could challenge one or more of the tax consequences described herein. This discussion assumes that the Non-U.S. Holder holds our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment).

 

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The following discussion is for general information only and is not tax advice for any Non-U.S. Holders under their particular circumstances. Persons considering the purchase of our common stock pursuant to this offering should consult their own tax advisors concerning the U.S. federal income tax consequences of acquiring, owning and disposing of our common stock in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction or under any applicable tax treaty, including any state, local and non-U.S. tax consequences and any U.S. federal non-income tax consequences. For the purposes of this discussion, a “Non-U.S. Holder” is, for U.S. federal income tax purposes, a beneficial owner of our common stock that is not a U.S. Holder. A “U.S. Holder” means a beneficial owner of our common stock that is, for U.S. federal income tax purposes, (a) an individual who is a citizen or resident of the United States, (b) a corporation or other entity treated as a corporation for U.S. federal income tax purposes created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is subject to U.S. federal income taxation regardless of its source, or (d) a trust if it (1) is subject to the primary supervision of a court within the United States and one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person. Also, partnerships, or other entities that are treated as partnerships for U.S. federal income tax purposes (regardless of their place of organization or formation) and entities that are treated as disregarded entities for U.S. federal income tax purposes (regardless of their place of organization or formation), are not addressed by this discussion and are, therefore, not considered to be Non-U.S. Holders for the purposes of this discussion. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

 

Distributions on Our Common Stock

 

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying dividends to holders of our common stock in the foreseeable future. However, distributions of cash or property, if any, made on our common stock to a Non-U.S. Holder of our common stock generally will constitute dividends for U.S. federal income tax purposes to the extent made out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles) and will be subject to withholding tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. To obtain a reduced rate of withholding under a treaty, a Non-U.S. Holder generally will be required to provide us with a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E, or other appropriate form, certifying the Non-U.S. Holder’s entitlement to benefits under that treaty. In the case of a Non-U.S. Holder that is an entity, Treasury regulations and the relevant tax treaty provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends will be treated as paid to the entity or to those holding an interest in that entity. If a Non-U.S. Holder holds stock through a financial institution or other agent acting on the holder’s behalf, the holder will be required to provide appropriate documentation to such agent. The holder’s agent will then be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you should consult with your tax advisor to determine if you are able to obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.

 

We generally are not required to withhold tax on dividends paid to a Non-U.S. Holder that are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment that such holder maintains in the United States) if a properly executed IRS Form W-8ECI, stating that the dividends are so connected, is furnished to us (or, if stock is held through a financial institution or other agent, to such agent). In general, such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular graduated U.S. federal income tax rates, unless a specific treaty exemption applies. A corporate Non-U.S. Holder receiving effectively connected dividends may also be subject to an additional “branch profits tax,” which is imposed, under certain circumstances, at a rate of 30% (or such lower rate as may be specified by an applicable treaty) on the corporate Non-U.S. Holder’s effectively connected earnings and profits, subject to certain adjustments. To the extent distributions on our common stock, if any, exceed our current and accumulated earnings and profits, they will first reduce your adjusted basis in our common stock as a non-taxable return of capital, but not below zero, and then any excess will be treated as gain and taxed in the same manner as gain realized from a sale or other disposition of common stock as described in the next section.

 

Gain on Disposition of Our Common Stock

 

Subject to the discussion below regarding backup withholding and foreign accounts, a Non-U.S. Holder generally will not be subject to U.S. federal income tax with respect to gain realized on a sale or other disposition of our common stock unless (a) the gain is effectively connected with a trade or business of such holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment that such holder maintains in the United States), (b) the Non-U.S. Holder is a nonresident alien individual and is present in the United States for 183 or more days in the taxable year of the disposition and certain other conditions are met, or (c) we are or have been a United States real property holding corporation, or a USRPHC, within the meaning of Code Section 897(c)(2) at any time within the shorter of the five-year period preceding such disposition or such holder’s holding period for the relevant shares of our common stock.

 

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In the case of gain described in (a) above, a Non-U.S. Holder generally will be required to pay tax on the net gain derived from the sale at regular graduated U.S. federal income tax rates, unless a specific treaty exemption applies, and a corporate Non-U.S. Holder may be subject to the additional branch profits tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty. An individual Non-U.S. Holder described in (b) above generally will be subject to U.S. federal income tax at a rate of 30% on the gain derived from the sale (or such lower rate as may be specified by an applicable income tax treaty), which gain may be offset by certain of the Non-U.S. Holder’s U.S. source capital losses (even though the Non-U.S. Holder is not considered a resident of the United States), provided the Non-U.S. Holder timely files U.S. federal income tax returns with respect to such losses. With respect to (c) above, in general, we would be a USRPHC if our interests in U.S. real property interests constituted (by fair market value) at least half of our assets. We believe that we are not, and do not anticipate becoming, a USRPHC; however, there can be no assurance that we will not become a USRPHC in the future. Even if we are treated as a USRPHC, gain realized by a Non-U.S. Holder on a disposition of our common stock will not be subject to U.S. federal income tax so long as (1) the Non-U.S. Holder owned, directly, indirectly and constructively, no more than 5% of our common stock at all times within the shorter of (a) the five-year period preceding the disposition or (b) the holder’s holding period for the relevant shares of our common stock and (2) our common stock is “regularly traded,” as defined by applicable Treasury regulations, on an established securities market. There can be no assurance that our common stock will qualify as regularly traded on an established securities market.

 

Information Reporting Requirements and Backup Withholding

 

Generally, we or certain financial middlemen must report information to the IRS with respect to any dividends we pay on our common stock, including the amount of any such dividends, the name and address of the recipient, and the amount, if any, of tax withheld. A similar report is sent to the holder to whom any such dividends are paid. Pursuant to tax treaties or certain other agreements, the IRS may make its reports available to tax authorities in the recipient’s country of residence.

 

Dividends paid by us (or our paying agents) to a Non-U.S. Holder may also be subject to U.S. backup withholding. U.S. backup withholding generally will not apply to a Non-U.S. Holder that provides a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, or other appropriate form, or otherwise establishes an exemption. Under current U.S. federal income tax law, U.S. information reporting and backup withholding requirements generally will apply to the proceeds of a disposition of our common stock effected by or through a U.S. office of any broker, U.S. or non-U.S., unless the holder provides a properly executed IRS Form W-8BEN, IRS Form W-8BEN-E, IRS Form W-8ECI or other appropriate form, or otherwise establishes an exemption. Generally, U.S. information reporting and backup withholding requirements will not apply to a payment of disposition proceeds to a Non-U.S. Holder where the transaction is effected outside the United States through a non-U.S. office of a non-U.S. broker. For information reporting purposes, certain brokers with substantial U.S. ownership or operations will generally be treated in a manner similar to U.S. brokers.

 

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. Non-U.S. Holders you should consult with their tax advisors to determine if they are eligible to obtain a tax refund or credit with respect to amounts withheld under the backup withholding rules.

 

Foreign Accounts

 

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a U.S. federal withholding tax of 30% may apply to dividends on, and the gross proceeds of, a disposition of our common stock paid to a foreign financial institution (as specifically defined by applicable rules), including when the foreign financial institution holds our common stock on behalf of a Non-U.S. Holder, unless such institution enters into an agreement with the U.S. government to withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which may include certain equity holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing these withholding and reporting requirements may be subject to different rules. FATCA withholding tax will also apply to dividends on, and the gross proceeds of, a disposition of our common stock paid to a non-financial foreign entity (as specifically defined by applicable rules) unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding direct and indirect U.S. owners of the entity. Withholding under FATCA will not apply if the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from the rules. Under certain circumstances, a Non-U.S. Holder might be eligible for refunds or credits of such taxes. Holders are encouraged to consult with their own tax advisors regarding the possible implications of FATCA on their investment in our common stock.

 

The withholding provisions described in the preceding paragraph will generally apply to payments of dividends and will begin to apply to payments of gross proceeds from a sale or other disposition of our common stock on or after January 1, 2019.

 

THIS SUMMARY IS NOT INTENDED TO BE TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR REGARDING THE TAX CONSEQUENCES OF PURCHASING, HOLDING AND DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAW, AS WELL AS TAX CONSEQUENCES ARISING UNDER ANY STATE, LOCAL, NON-U.S. OR U.S. FEDERAL NON- INCOME TAX LAWS

 

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UNDERWRITING

 

Network 1 Financial Securities, Inc. is acting as representatives of the several underwriters of the offering, and we have entered into an underwriting agreement on the date of this prospectus, with them as underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters and the underwriters have agreed to purchase from us, at the public offering price per share less the underwriting discounts set forth on the cover page of this prospectus.

 

Name   Number of Units  
Network 1 Financial Securities, Inc.        
Total     1,142,857  

 

The underwriting agreement provides that the underwriters are obligated to purchase all the Units in the offering if any are purchased, other than those Units covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.

 

We have granted to the underwriters a 45-day option to purchase on a pro rata basis up to 171,429 additional Units at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of our Units .

 

The underwriters are offering the Units, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel including the validity of the Units, and subject to other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The offering of the Units by the underwriters is also subject to the underwriters’ right to reject any order in whole or in part.

 

The underwriters propose to offer the Units initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $         per share. The underwriters and selling group members may allow a discount of $         per share on sales to other broker/dealers. After the initial public offering, the representatives may change the public offering price and concession and discount to broker/dealers.

 

The following table shows the public offering price, underwriting discount and proceeds, before expenses, to us. The information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

 

    Per Share     Total Without
Over-Allotment
Option
    Total With
Over-Allotment
Option
 
Public offering price   $       $       $    
Underwriting discount   $       $       $    
Proceeds, before expenses, to us   $       $       $    

 

In addition to the discount set forth in the above table, we have agreed to issue to the underwriters or their designees, Underwriters’ Warrants to purchase 57,143 shares of common stock. The terms of the Underwriters’ Warrants are more fully described below.

 

We estimate that our out of pocket expenses for this offering (not including any underwriting discounts and commissions) will be approximately $830,000. The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the Units being offered. The underwriters will not confirm sales to any accounts over which they exercise discretionary authority without first receiving a written consent from those accounts.

 

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We will bear all of our fees, disbursements and expenses in connection with this offering. The underwriting agreement, however, provides that in the event the offering is terminated, any advance expense deposits paid to the underwriters will be returned to the extent that offering expenses are not actually incurred in accordance with FINRA Rule 5110(f)(2)(C).

 

Upon the closing of this offering, we will grant to Network 1 Financial Securities, Inc. the right of first negotiation to co-manage any public underwriting or private placement of debt or equity securities (excluding (i) shares issued under any compensation or stock option plan approved by the stockholders of our company, (ii) shares issued in payment of the consideration for an acquisition or as part of strategic partnerships and transactions and (iii) conventional banking arrangements and commercial debt financing) of our company or any subsidiary or successor of our company, with the underwriters receiving the right to underwrite or place a number of the securities to be sold therein having an aggregate purchase price therein equal to a minimum of the aggregate purchase price of the Units offered by us in this offering (excluding any Units that we may sell to the underwriters to cover over-allotments), until twelve months after completion of this offering.

 

We have agreed to pay the underwriters’ non-accountable expenses allowance equal to 1% of the gross proceeds of the public offering of the Units (including Units that we may sell to the underwriters to cover over-allotments). We have also agreed to pay for a certain amount of the underwriters’ accountable expenses including actual accountable road show expenses for the offering, the cost associated with the underwriters’ use of book-building and compliance software for the offering, reasonable and documented fees and disbursements of the underwriters’ counsel up to an amount of $75,000 (which maximum shall apply solely to such fees and disbursements of counsel and not to other accountable fees and expenses), background checks of our officers and directors, and other offering related expenses up to $130,000, including the fees and disbursements of the underwriters’ counsel.

 

We have agreed to issue to the underwriters the Underwriters’ Warrants exercisable for 57,143 shares of common stock to be allocated in full to the underwriters or their designated affiliates. The Underwriters’ Warrants are not included in the securities being sold in this offering. The shares issuable upon exercise of the Underwriters’ Warrants are identical to those offered by this prospectus.

 

The Underwriters’ Warrants will be exercisable at a per share price of $      , which equals 125% of the initial public offering price, beginning one year after the effective date of the registration statement of which this prospectus is a part, which we refer to as the effective date, and for a period of five years from the effective date. As is customary, the number of shares to be issued under the Underwriters’ Warrants and the exercise price will be subject to adjustments in certain events, including stock splits, stock dividends, and recapitalizations. The Underwriters’ Warrants may not be transferred, assigned, sold or hypothecated nor will the underwriters be able to engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the underwriters’ warrants or the common stock underlying the Underwriters’ Warrants for a period of six months after the effective date except to officers, partners or registered representatives of the underwriter as permitted by FINRA or to dealers participating in the offering, all in accordance with Rule 5110(g)(1) of FINRA. The Underwriters’ Warrants and shares of common stock underlying the Underwriters’ Warrants are deemed compensation by FINRA. The terms and number of shares underlying the Underwriters’ Warrants shall be modified if necessary to comply with FINRA rules or regulations. We are registering the offer and sale of the Underwriters’ Warrants (and underlying shares of common stock) under the registration statement of which this prospectus is a part.

 

We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock, or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the representatives for a period of 180 days after the date of this prospectus, except (a) issuances pursuant to the conversion or exchange of convertible or exchangeable securities (including cashless or “net” exercises, other than broker-assisted cashless exercises) or the exercise of warrants or options, in each case outstanding on the date of this prospectus and described in this prospectus, (b) grants of employee stock options pursuant to the terms of a plan described in this prospectus, (c) issuances pursuant to the exercise of such options, or (d) satisfaction of certain existing contractual obligations.

 

All of our executive officers, directors and certain other holders of our capital stock and securities convertible into or exchangeable for our capital stock have agreed that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, they will not, without the prior written consent of the representatives, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise dispose of or hedge any of our shares of common stock, any options or warrants to purchase our shares of common stock, or any securities convertible into, or exchangeable for or that represent the right to receive our shares of common stock. The representatives may, in their discretion, release any of the securities subject to these lock-up agreements at any time. Upon the expiration of the lock-up period, all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.

 

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Prior to this offering, there has been no public market for our securities. The initial public offering price will be negotiated between us and the representatives. In determining the initial public offering price of our Units, the representatives will consider:

 

  the prospects for the industry in which we compete;
     
  our financial information;
     
  the ability of our management and our business potential and earning prospects;
     
  the prevailing securities markets at the time of this offering; and
     
  the recent market prices of, and the demand for, publicly traded shares of generally comparable companies.

 

We intend to apply to list the securities we are offering in this prospectus on the Nasdaq Capital Market as follows:

 

Security   Symbol
Common Stock   HJLI
Warrants   HJLIW

 

We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and to contribute to payments that the underwriters may be required to make for these liabilities.

 

In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

 

  Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.
     
  Over-allotment involves sales by the underwriters of Units in excess of the number of Units the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of Units over-allotted by the underwriters is not greater than the number of Units that they may purchase in the over-allotment option. In a naked short position, the number of Units involved is greater than the number of Units in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing Units in the open market.
     
  Syndicate covering transactions involve purchases of the Units in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of Units to close out the short position, the underwriters will consider, among other things, the price of Units available for purchase in the open market as compared to the price at which they may purchase Units through the over-allotment option. If the underwriters sell more Units than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying Units in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the Units in the open market after pricing that could adversely affect investors who purchase in the offering.
     
  Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

 

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq or otherwise and, if commenced, may be discontinued at any time.

 

A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of Units to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.

 

  116  
 

 

LEGAL MATTERS

 

Certain legal matters with respect to the Units offered hereby will be passed upon by K&L Gates LLP, Irvine, California. Certain other legal matters will be passed upon for the underwriters by Carmel, Milazzo & DiChiara LLP, New York, New York.

 

EXPERTS

 

The financial statements of Hancock Jaffe Laboratories, Inc. as of December 31, 2017 and 2016 and for each of the years then ended have been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements are included in this prospectus and registration statement in reliance upon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of Marcum LLP, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect and copy the registration statement and its exhibits and schedules at the Public Reference Room the SEC maintains at 100 F Street, N.E., Washington, D.C. 20549. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect the registration statement and its exhibits and schedules and other information without charge at the website maintained by the SEC. The address of this site is http://www.sec.gov.

 

We also maintain a website at www.hancockjaffe.com, at which, following the completion of this offering, you may access our SEC filings free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference in, and is not part of, this prospectus. You may also request a copy of these filings, at no cost, by writing us at 70 Doppler, Irvine, California 92618, or telephoning us at (949) 261-2900

 

  117  
 

 

HANCOCK JAFFE LABORATORIES, INC.

INDEX TO FINANCIAL STATEMENTS

 

 

Report of Independent Registered Public Accounting Firm F-2
   
Balance Sheets as of December 31, 2017 and 2016 F-3
   
Statements of Operations for the Years Ended December 31, 2017 and 2016 F-4
   
Statements of Changes in Temporary Equity and Stockholders’ Deficiency for the Years Ended December 31, 2017 and 2016 F-5
   
Statements of Cash Flows for the Years Ended December 31, 2017 and 2016 F-6
   
Notes to Financial Statements F-8

 

  F- 1  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Hancock Jaffe Laboratories, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Hancock Jaffe Laboratories, Inc. (the “Company”) as of December 31, 2017 and 2016, the related statements of operations, changes in temporary equity and stockholders’ deficiency and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Marcum LLP

  Marcum llp

 

We have served as the Company’s auditor since 2015 .

 

New York, NY

April 13, 2018

 

  F- 2  
 

 

HANCOCK JAFFE LABORATORIES, INC.

BALANCE SHEETS

 

    December 31,  
    2017     2016  
Assets            
Current Assets:                
Cash   $ 77,688     $ 56,514  
Accounts receivable, net     35,181       23,500  
Receivables from sale of assets     -       166,250  
Inventory     -       90,908  
Advances to related party     -       10,000  
Prepaid expenses and other current assets     57,544       46,049  
Total Current Assets     170,413       393,221  
Property and equipment, net     23,843       28,810  
Intangible assets, net     1,109,410       1,232,718  
Deferred offering costs     880,679       98,275  
Security deposits and other assets     30,543       29,843  
Total Assets   $ 2,214,888     $ 1,782,867  
                 
Liabilities, Temporary Equity and Stockholders’ Deficiency                
Current Liabilities:                
Accounts payable   $ 1,451,244     $ 541,957  
Accrued expenses     903,594       324,856  
Accrued interest - related parties     20,558       15,652  
Convertible notes payable, net of debt discount of $1,175,668  at December 31, 2017     1,574,832       -  
Convertible note payable - related party     499,000       188,000  
Notes payable     275,000       -  
Notes payable - related party     270,038       444,772  
Deferred revenue     103,400       -  
Derivative liabilities     3,076,918       551,351  
Total Liabilities     8,174,584       2,066,588
                 
Redeemable Convertible Series A Preferred Stock, par value $0.00001, 1,300,000 shares authorized, 1,005,700 shares issued and outstanding; liquidation preference of $10,801,863 and $10,399,859 at December 31, 2017 and December 31, 2016, respectively     3,935,638       3,935,638  
Redeemable Convertible Series B Preferred Stock, par value $0.00001, 2,000,000 shares authorized, 253,792 and 0 shares issued and outstanding as of  December 31, 2017 and December 31, 2016, respectively; liquidation preference of $3,103,416 and $0 at December 31, 2017 and  December 31, 2016, respectively     1,235,117       -  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficiency:                
Preferred stock, par value $0.00001, 6,000,000 shares authorized; 2,700,000 shares available for designation as of December 31, 2017 and December 31, 2016     -       -  
Common stock, par value $0.00001, 30,000,000 shares authorized, 6,133,678 and 6,123,481 shares issued and outstanding as of December 31, 2017 and 2016, respectively     61       61  
Additional paid-in capital     24,389,307       23,508,930  
Accumulated deficit     (35,519,819 )     (27,728,350 )
Total Stockholders’ Deficiency     (11,130,451 )     (4,219,359 )
Total Liabilities, Temporary Equity and Stockholders’ Deficiency   $ 2,214,888     $ 1,782,867  

 

See Notes to these Financial Statements

 

  F- 3  
 

 

HANCOCK JAFFE LABORATORIES, INC.

STATEMENTS OF OPERATIONS

 

    For the Years Ended  
    December 31,  
    2017     2016  
             
Revenues:                
Product sales   $ 184,800     $ 694,118  
Royalty income     137,711       91,794  
Contract research - related party     99,600       -  
      422,111       785,912  
Cost of goods sold     419,659       810,294  
Gross Profit (Loss)     2,452       (24,382 )
                 
Selling, general and administrative expenses     5,455,963       4,634,801  
Research and development expenses     649,736       -  
Loss from Operations     (6,103,247 )     (4,659,183 )
                 
Other Expense (Income):                
Impairment loss in investment     -       487,900  
Gain on extinguishment of convertible notes payable     (257,629 )     -  
Interest expense, net     209,506       57,890  
Amortization of debt discount     1,710,130       -  
Change in fair value of derivative liabilities     26,215       383,285  
Total Other Expense     1,688,222       929,075  
                 
Loss from Continuing Operations     (7,791,469 )     (5,588,258 )
Discontinued Operations:                
Loss from discontinued operations, net of tax     -       (298,286 )
Gain on sale of discontinued operations, net of tax     -       2,499,054  
Income from Discontinued Operations, net of tax     -       2,200,768  
                 
Net Loss     (7,791,469 )     (3,387,490 )
Deemed dividend to preferred stockholders     (459,917 )     (342,859 )
Net Loss Attributable to Common Stockholders   $ (8,251,386 )   $ (3,730,349 )
                 
Net Loss Per Basic and Diluted Common Share:                
Loss from continuing operations   $ (1.35 )   $ (0.98 )
Income from discontinued operations     -       0.36  
Net Loss Per Basic and Diluted Common Share:   $ (1.35 )   $ (0.62 )
                 
Weighted Average Number of Common Shares Outstanding:                
Basic and Diluted     6,126,824       6,041,161  

 

See Notes to these Financial Statements

 

  F- 4  
 

 

HANCOCK JAFFE LABORATORIES, INC.

STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY

   

    Series A Redeemable     Series B Redeemable                          
    Convertible     Convertible           Additional           Total  
    Preferred Stock     Preferred Stock     Common Stock     Paid-in     Accumulated     Stockholders’  
    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     Deficiency  
                                                       
Balance at January 1, 2016     436,000     $ 1,796,484       -     $ -       6,000,000     $ 60     $ 20,763,896     $ (24,340,860 )   $ (3,576,904 )
Series A redeemable convertible
preferred stock issued, net of
offering costs
    569,700       2,139,154       -       -       -       -       -       -       -  
Exchange of note payable and
accrued interest into common stock
    -       -       -       -       123,481       1       1,234,815       -       1,234,816  
Stock-based compensation     -       -       -       -       -       -       1,510,219       -       1,510,219  
Net loss     -       -       -       -       -       -               (3,387,490 )     (3,387,490 )
Balance at December 31, 2016     1,005,700       3,935,638       -       -       6,123,481       61       23,508,930       (27,728,350 )     (4,219,359 )
Series B redeemable convertible
preferred stock issued, net of
offering costs
    -       -       253,792       1,235,117       -       -       -       -       -  
Exchange of accrued interest
for common stock
    -       -       -       -       197       -       1,973       -       1,973  
Stock-based compensation:                                                                     -  
-options     -       -       -       -       -       -       801,624       -       801,624  
-common stock     -       -       -       -       10,000       -       76,780       -       76,780  
Net loss     -       -       -       -       -       -       -       (7,791,469 )     (7,791,469 )
Balance at December 31, 2017     1,005,700     $ 3,935,638       253,792     $ 1,235,117       6,133,678     $ 61     $ 24,389,307     $ (35,519,819 )   $ (11,130,451 )

 

See Notes to these Financial Statements

 

  F- 5  
 

 

HANCOCK JAFFE LABORATORIES, INC.

STATEMENTS OF CASH FLOWS

 

    For the Years Ended  
    December 31,  
    2017     2016  
Cash Flows from Operating Activities                
Net Loss   $ (7,791,469 )   $ (3,387,490 )
Adjustments to reconcile net loss to cash used in operating activities:                
Stock-based compensation     878,404       1,510,219  
Amortization of debt discount     1,710,130       -  
Depreciation and amortization     139,213       151,174  
Gain on sale of discontinued operations     -       (2,499,054 )
Loss on extinguishment of convertible notes payable     (257,629 )     -  
Impairment loss on investment     -       487,900  
Change in fair value of derivatives     26,215       383,285  
Changes in operating assets and liabilities:                
Accounts receivable, net     (11,681 )     (23,500 )
Inventory     90,908       (213,178 )
Prepaid expenses and other current assets     (11,495 )     (30,618 )
Security deposit and other assets     (700 )     (3,730 )
Accounts payable     545,385       (76,322 )
Accrued expenses     377,079       237,356  
Deferred revenues     103,400       46,801  
Total adjustments     3,589,229       (29,667 )
Net Cash Used in Operating Activities     (4,202,240 )     (3,417,157 )
                 
Cash Flows from Investing Activities                
Proceeds from asset sale     166,250       498,750  
Issuance of note receivable to related party     (160,000 )     -  
Receipts from collections of note receivable to related party     160,000       -  
Advances to related party     (206,000 )     (497,900 )
Receipts from repayment of related party advances     216,000       -  
Purchase of property and equipment     (10,938 )     (3,416 )
Purchase of intangible assets     -       (370,200 )
Net Cash Provided by (Used in) Investing Activities     165,312       (372,766 )
                 
Cash Flows from Financing Activities                
Proceeds from issuance of notes payable     275,000       -  
Repayments of notes payable     -       (111,000 )
Repayments of notes payable - related party     (174,734 )     (75,624 )
Proceeds from issuance of convertible note payable - related party     311,000       188,000  
Proceeds from issuance of convertible notes, net of cash  offering costs of $186,100     2,564,400       -  
Initial public offering costs paid in cash     (209,964 )     (73,275 )
Preferred stock offering costs paid in cash     (175,196 )     (615,369 )
Proceeds from issuance of redeemable Series B preferred stock and warrant     1,467,596       -  
Proceeds from issuance of redeemable Series A preferred stock and warrant     -       2,848,500  
Advances from distributor     -       100,000  
Net Cash Provided by Financing Activities     4,058,102       2,261,232  
                 
Net Increase (Decrease) in Cash     21,174       (1,528,691 )
Cash - Beginning of year     56,514       1,585,205  
Cash - End of year   $ 77,688     $ 56,514  

 

See Notes to these Financial Statements

 

  F- 6  
 

 

    For the Years Ended  
    December 31,  
    2017     2016  
Supplemental Disclosures of Cash Flow Information:            
Cash Paid During the Years For:                
Interest   $ 105,938     $ 37,667  
                 
Non-Cash Financing Activities                
Exchange of note payable and accrued interest into common stock   $ 1,973     $ 1,234,816  
Fair value of placement agent warrants issued in connection with  preferred stock offering included in derivative liabilities   $ 57,283     $ 93,977  
Fair value of warrants issued in connection with convertible debt included in derivative liabilities   $ 870,966     $ -  
Embedded conversion option in convertible debt   included in derivative liabilities   $ 2,349,560     $ -  
Forgiveness of debt in connection with the sale of discontinued operations   $ -     $ 2,805,297  

 

 See Notes to these Financial Statements

 

  F- 7  
 

 

HANCOCK JAFFE LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016 

 

Note 1 – Business Organization, Nature of Operations and Basis of Operations

 

Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe” or the “Company”) develops and sells biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.

 

The Company develops and manufactures implantable cardiovascular bioprosthetic devices for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease, and has manufactured and developed the following medical devices that have, or are in the process of, getting Class III U.S. Food and Drug Administration (“FDA”) approval:

 

 

ProCol® Vascular Bioprosthesis;

     
 

Bioprosthetic Heart Valve;

     
 

Coronary Artery Bypass Graft, “off the shelf” device, Coreograft™; and

     
 

Bioprosthetic Venous Valve, the VenoValve™.

 

The Company also realizes sub-contract manufacturing and royalty revenue from sales of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has been approved by the FDA.

 

On September 1, 2015, our Board of Directors approved a 2.1144 for 1.00 forward stock split of the Company’s common stock, which became effective on July 22, 2016. On October 31, 2017, our Board of Directors approved a 1 for 2 reverse stock split of the Company’s common stock, which was effected on December 14, 2017 . Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the aforementioned stock splits. See Note 14 – Temporary Equity and Stockholders’ Deficiency for additional details regarding the Company’s authorized capital.

 

On March 1, 2017, the Company filed a second amended and restated certificate of incorporation, to increase the number of the Company’s authorized shares of preferred stock to 6,000,000, to designate 1,300,000 shares of the Company’s authorized preferred stock as Series A preferred Stock, or Series A preferred stock, and set forth the rights, preferences and privileges of the Company’s Series A preferred stock. On June 8, 2017, the Company filed a third amended and restated certificate of incorporation to revise certain protective voting provisions afforded to the holders of the Company’s preferred stock. On the same date, the Company filed a certificate of designation, preferences, rights and limitations of Series B convertible preferred stock, to designate 2,000,000 shares of the Company’s authorized preferred stock as Convertible Series B Preferred Stock, or Series B preferred stock, and set forth the rights, preferences and privileges of the Company’s Series B preferred stock.

 

Note 2 – Going Concern and Management’s Liquidity Plan

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company incurred net losses of $7,791,469 and $3,387,490 during the years ended December 31, 2017 and 2016, respectively, and has an accumulated deficit of $35,519,819 at December 31, 2017. Cash used in operating activities was $4,202,240 for the year ended December 31, 2017. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the issuance date of the financial statements.

 

  F- 8  
 

 

As of December 31, 2017, Hancock Jaffe had a cash balance of $77,688 and working capital deficiency of $8,004,171.

 

From January 5 , 2018 through January 16, 2018, we issued senior secured convertible notes, in the aggregate principal amount of $2,897,500 for net cash proceeds of $2,603,750 (See Note 16 – Subsequent Events).

 

The Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Further, upon the Company’s sale or license of U.S. Patent No. 7,815,677 or certain product candidates (as defined in the Company’s third amended and restated certificate of incorporation) 50% of such proceeds is payable to the Company’s stockholders (see Note 13 – Commitments and Contingencies).

 

The Company presently has enough cash on hand to sustain its operations for three months. Historically, the Company has been successful in raising funds to support its capital needs. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms. Such a plan could have a material adverse effect on the Company’s business, financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations, liquidate and/or seek reorganization in bankruptcy. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Note 3 – Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“ U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance related to the Company’s deferred tax assets, and the valuation of warrants and derivative liabilities.

 

Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2017 and 2016, the Company had no cash equivalents.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Upon completion, finished goods are shipped directly to a distributor. There is no right of return after the products are delivered and accepted. There is no inventory at December 31, 2017. Inventory balances at December 31, 2016 consist primarily of finished goods. There is no inventory reserve at December 31, 2017 or 2016.

 

Deferred Offering Costs

 

Deferred offering costs, which primarily consist of direct, incremental professional fees relating to pending equity offerings are capitalized within non-current assets. The deferred offering costs will be offset against the proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. For the years ended December 31, 2017 and 2016, the Company has capitalized deferred offering costs, consisting primarily of legal costs, related to a potential initial public offering totaling $880,679 and $98,275, respectively.

 

Investments

 

Equity investments over which the Company exercises significant influence, but does not control, are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.

 

  F- 9  
 

 

The Company holds a 28.5% ownership investment, consisting of founders’ shares acquired at nominal cost, in Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA). To date, HJLA has recorded cumulative losses. Since the Company’s investment is recorded at $0, the Company has not recorded its proportionate share of HJLA’s losses. If HJLA reports net income in future years, the Company will apply the equity only after its share of HJLA’s net income equals its share of net losses previously incurred.

 

Property and Equipment, Net

 

Property and equipment are stated at cost, net of accumulated depreciation using the straight-line method over their estimated useful lives, which range from 5 to 7 years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred, and expenditures, which extend the economic life are capitalized. When assets are retired, or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized.

 

Intangible Assets

 

The Company’s recorded intangible assets consist of a purchased patent related to heart valve bioprosthesis technology and an exclusive worldwide right to provide development and manufacturing services to HJLA. The patent is stated at cost and is amortized on a straight-line basis over its estimated useful life of approximately 14 years. The right is stated at cost and is amortized on a straight-line basis over its estimated useful life of approximately 10 years (see Note 7 – Intangible Assets).

 

Impairment of Long-lived Assets

 

The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The Company has not identified any impairment losses at December 31, 2017 and 2016.

 

Fair Value of Financial Instruments

 

The Company measures the fair value of financial assets and liabilities based on the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

FASB ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

  Level 1 Quoted prices available in active markets for identical assets or liabilities trading in active markets.
         
  Level 2 Observable inputs other than quoted prices included in Level 1, such as quotable prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
         
  Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs.

 

Financial instruments, including accounts receivable, accounts payable and short-term advances are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company’s other financial instruments include notes payable, the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations with similar terms and maturities. Derivative liabilities are accounted for at fair value on a recurring basis.

 

The fair value of derivative liabilities as of December 31, 2017 and 2016, by level within the fair value hierarchy appears below:

 

Description:   Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 
Derivative liabilities - Preferred Stock Series A Warrants                                
December 31, 2017   $ -     $ -     $ 541,990  
December 31, 2016   $ -     $ -     $ 551,351  
Derivative liabilities - Common Stock Series B Warrants                        
December 31, 2017   $ -     $ -     $ 60,551  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Warrants                        
December 31, 2017   $ -     $ -     $ 1,298,012  
December 31, 2016   $ -     $ -     $ -  
Derivative liabilities - Convertible Debt Conversion Feature                        
December 31, 2017   $ -     $ -     $ 1,176,365  
December 31, 2016   $ -     $ -     $ -  

 

  F- 10  
 

 

The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis:

 

    Derivative  
    Liabilities  
Balance January 1, 2016   $ 74,089  
Issuance of derivative liabilities - preferred stock warrants     93,977  
Change in fair value of derivative liabilities     383,285  
Balance - December 31, 2016     551,351  
Issuance of derivative liabilities - common stock Series B warrants     57,283  
Issuance of derivative liabilities - convertible debt warrants     1,268,177  
Issuance of derivative liabilities - convertible debt conversion feature     2,349,560  
Extinguishment of derivative liabilities - convertible debt conversion feature     (1,175,668 )
Change in fair value of derivative liabilities     26,215  
Balance - December 31, 2017   $ 3,076,918  

   

Preferred Stock

 

The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A and Series B Preferred Stock (together, the “Preferred Stock”). Preferred stock subject to mandatory redemption is classified as a liability instrument and is measured at fair value. Conditionally redeemable preferred stock (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity. At all other times, preferred stock is classified as permanent equity. As of the issuance date, the carrying amount of the Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions such that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

Derivative Liabilities

 

Derivative financial instruments are recorded as a liability at fair value and are marked-to-market as of each subsequent balance sheet date. The change in fair value at each balance sheet date is recorded as a change in the fair value of derivative liabilities on the statement of operations for each reporting period. The fair value of the derivative liabilities was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification of the financial instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is marked to market and reclassified as of the date of the event that caused the reclassification.

 

Convertible Debt

 

The Company records a beneficial conversion feature (“BCF”) related to the issuance of notes which are convertible at a price that is below the market value of the Company’s stock when the note is issued. The convertible notes payable discussed in Note 10 – Convertible Notes and Convertible Note – Related Party, have a conversion price that can be adjusted based on the Company’s stock price which results in the conversion feature being recorded as a derivative liability and a debt discount. The debt discount is amortized to interest expense over the life of the respective note, using the effective interest method.

 

Revenue Recognition

 

The Company recognizes revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. During the years ended December 31, 2017 and 2016, the Company recognized revenues from the sub-contract manufacture of product and royalties earned from the sale of product pursuant to a supply agreement, as well as revenues related to contract research and development services provided pursuant to a development and manufacturing agreement (see “Major Customers” below). During the year ended December 31, 2017, the Company also recognized $99,600, representing 24% of the Company’s revenues, related to research and development services performed on behalf of HJLA, pursuant to a Development and Manufacturing Agreement dated April 1, 2016.

 

Net Loss per Share

 

The Company computes basic and diluted loss per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share are the same since the inclusion of common shares issuable pursuant to the exercise of warrants and options, plus the conversion of preferred stock or convertible notes, in the calculation of diluted net loss per common shares would have been anti-dilutive.

 

  F- 11  
 

 

The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:

   

    For the Years Ended  
    December 31,  
    2017     2016  
Loss from continuing operations   $ (7,791,469 )   $ (5,588,258 )
Less: Deemed dividend to preferred stockholders     (459,917 )     (342,859 )
Net loss from continuing operations attributable to common stockholders   $ (8,251,386 )   $ (5,931,117 )

 

The following table summarizes the number of potentially dilutive common share equivalents excluded from the calculation of diluted net loss per common share for the years ended December 31, 2017 and 2016.

   

    For the Years Ended  
    December 31,  
    2017     2016  
Shares of common stock issuable upon conversion of preferred stock     629,746       502,850  
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith     50,285       50,285  
Shares of common stock issuable upon conversion of senior secured convertible debt     229,208       -  
Shares of common stock issuable upon exercise of common stock warrants     371,216       416,666  
Shares of common stock issuable upon exercise of common stock options     1,422,000       1,296,000  
Potentially dilutive common share equivalents excluded from diluted net loss per share     2,702,455       2,265,801  

 

Major Customers

 

During the years ended December 31, 2017 and 2016, 76% and 100% of the Company’s revenues from continuing operations were from the sub-contract manufacture of product to for LeMaitre Vascular, Inc. (“LeMaitre”) and royalties earned from the sale of product by LeMaitre, respectively, with whom the Company entered a Post-Acquisition Supply Agreement effective March 18, 2016. During the year ended December 31, 2017, the Company also recognized $99,600, representing 24% of the Company’s revenues, related to research and development services performed on behalf of HJLA, pursuant to a Development and Manufacturing Agreement dated April 1, 2016.

 

Major Supplier

 

During the years ended December 31, 2017 and 2016, 100% of the raw material used for the manufacture of vascular bioprostheses was purchased from a single vendor. (See Note 13 – Commitment and Contingencies).

 

Credit Risk

 

The Company maintains cash with major financial institutions. Cash held in US bank institutions is currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each institution. There were no cash balances in excess of federally insured amounts at December 31, 2017 and 2016.

 

Stock-Based Compensation

 

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally recorded on the measurement date and re-measured on financial reporting dates and vesting dates until the service period is complete. The fair value amount of the award is then recognized over the period services are required to be provided in exchange for the award, usually the vesting period. Forfeitures are recorded when they occur.

 

Income Taxes

 

The Company accounts for income taxes under FASB ASC 740 - Income Taxes. Under FASB ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

 

  F- 12  
 

 

FASB ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s financial condition, results of operations or cash flows.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations”, in April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing” and in May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers which is not yet effective. These new standards provide for a single, principles-based model for revenue recognition that replaces the existing revenue recognition guidance. In July 2015, the FASB deferred the effective date of ASU 2014-09 until annual and interim periods beginning on or after December 15, 2017. It will replace most existing revenue recognition guidance under U.S. GAAP when it becomes effective. The ASU may be applied retrospectively to historical periods presented or as a cumulative-effect adjustment as of the date of adoption.

 

The Company will adopt Topic 606 effective January 1, 2018 and has elected to use the modified retrospective approach. Accordingly, Topic 606 will be applied prospectively in the Company’s financial statements from January 1, 2018 forward, with a cumulative effect adjustment to opening retained earnings. Revenues under Topic 606 will require revenues to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated using a five-step model. The Company earns revenues from providing research and development services on a time and materials basis. Product revenues and royalty income are earned and recognized over time. Topic 606 requires enhanced disclosures, which the Company will include in the notes to the Company’s financial statements beginning with the year ending December 31, 2018. The adoption of these ASUs is not expected have a material impact on the Company’s financial statements, either at initial implementation or on an ongoing basis.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company does not anticipate that the adoption of ASU 2016-15 will have a material impact on its financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718); Scope of Modification Accounting. The amendments in this ASU provide guidance that clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. If the value, vesting conditions or classification of the award changes, modification accounting will apply. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its financial statements.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)”: (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company is currently evaluating the effect that adopting this new accounting guidance will have on its consolidated cash flows and related disclosures.

 

Reclassifications

 

Certain prior year balances have been reclassified in order to conform to the current year presentation. These reclassifications have no effect on previously reported results of operations or loss per share.

 

Subsequent Events

 

The Company evaluated events that have occurred after the balance sheet date through the date the financial statements were issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 16 - Subsequent Events.

 

  F- 13  
 

 

Note 4 – Discontinued Operations

 

Asset Sale

 

On March 18, 2016, Hancock Jaffe, LeMaitre Vascular, Inc. (“LeMaitre”) and CryoLife, Inc. (“CryoLife”) entered into a tripartite agreement whereby: (i) pursuant to the Exclusive Supply and Distribution Agreement, as amended, (the “Current Supply Agreement”), CryoLife transferred to LeMaitre its exclusive, freely assignable right and option to acquire certain assets of Hancock Jaffe in exchange for $2,035,000; (ii) CryoLife released Hancock Jaffe from all remaining indebtedness and released its security interest in the acquired assets pursuant to the security agreement dated March 26, 2014 between Hancock Jaffe and CryoLife (the “Security Agreement”); and (iii) the Current Supply Agreement and the Security Agreement were terminated without recourse.

 

On March 18, 2016, Hancock Jaffe entered into an asset purchase agreement with LeMaitre (the “Asset Purchase Agreement”) whereby Hancock Jaffe sold all of its assets (including intellectual property) related to the manufacture, sale and distribution of vascular bioprostheses to LeMaitre for consideration of $665,000 in cash and the forgiveness of certain liabilities, totaling, in the aggregate, $2,140,297 (the “Asset Sale”). Of the total cash proceeds, $332,500 was paid on March 18, 2016, $166,250 was paid on September 19, 2016 and $166,250 was paid on March 31 , 2017. In addition, Hancock Jaffe is entitled to a royalty equal to 10% of LeMaitre’s net sales, as defined, of vascular bioprostheses during the three-year period ending March 18, 2019. The royalty is to be paid quarterly in arrears and cannot exceed $2 million in any 12-month period or $5 million in the aggregate during the three-year period. During the year ended December 31, 2016, the Company recorded a gain of $2,499,054 (net of tax of $0) related to the Asset Sale, as follows:

 

Cash proceeds from sale (consisting of cash received and receivables)   $ 665,000  
Liabilities forgiven:        
Short term advances     1,180,000  
Accrued interest     21,997  
Accrued penalty payable     938,300  
Total consideration from sale     2,805,297  
         
Less - net book value of assets sold to buyer:        
Inventory     (306,243 )
Gain on sale of discontinued operations   $ 2,499,054  

 

Results of Discontinued Operations

 

Summarized operating results of discontinued operations for the period January 1, 2016 to March 18, 2016 are presented in the following table:

 

Revenues   $ 385,219  
Gross profit (loss)   $ 133,734  
General and administrative expenses   $ (432,020 )
Gain on sale of discontinued operations, net of tax   $ 2,499,054  
Loss from discontinued operations   $ 2,200,768  

 

Note 5 – Inventory

 

As of December 31, 2016, inventory consists of the following vascular bioprostheses:

 

Work-in-process   $ 12,884  
Finished goods     78,024  
Total Inventory   $ 90,908  

 

There was no inventory balance at December 31, 2017.

 

Note 6 – Property and Equipment

 

As of December 31, 2017 and 2016, property and equipment consist of the following:

 

    December 31,  
    2017     2016  
Lab equipment   $ 120,861     $ 146,817  
Furniture and fixtures     93,417       84,744  
Computer software and equipment     14,409       12,144  
Leasehold improvements     158,092       158,092  
      386,779       401,797  
Less: accumulated depreciation     (362,936 )     (372,987 )
Property and equipment, net   $ 23,843     $ 28,810  

 

  F- 14  
 

 

During the year ended December 31, 2017, the Company wrote off $25,956 of fully depreciated lab equipment that was no longer in use. Depreciation and amortization expense amounted to $15,905 and $39,281 for the years ended December 31, 2017 and 2016, respectively. Depreciation and amortization expense is reflected in general and administrative expenses in the accompanying statements of operations.

 

Note 7 – Intangible Assets

 

On May 10, 2013, the Company purchased a patent related to heart valve bioprosthesis technology. The patent expires on July 9, 2027.

 

On April 1, 2016, the Company acquired the exclusive rights to develop and manufacture a derma filler product for which HJLA holds a patent, for aggregate consideration of $445,200. (see Note 13 – Commitments and Contingencies - Development and Manufacturing Agreement). The right to provide development and manufacturing services to HJLA expires on December 31, 2025. As of December 31, 2017 and 2016, the Company’s intangible assets consisted of the following:

 

    December 31,  
    2017     2016  
Patent   $ 1,100,000     $ 1,100,000  
Right to develop and manufacture     445,200       445,200  
      1,545,200       1,545,200  
Less: accumulated amortization     (435,790 )     (312,482 )
Total   $ 1,109,410     $ 1,232,718  

 

Amortization expense charged to operations for the years ended December 31, 2017 and 2016 was $123,308 and $111,893, respectively, and is reflected in general and administrative expense in the accompanying statements of operations.

 

The estimated future amortization of intangible assets is as follows:

 

For the Years Ended
December 31,
 

Rights to Develop

and Manufacture

    Patents     Total  
2018   $ 45,662     $ 77,647     $ 123,309  
2019     45,662       77,647       123,309  
2020     45,662       77,647       123,309  
2021     45,662       77,647       123,309  
2022     45,662       77,647       123,309  
Thereafter     136,984       355,881       492,865  
    $ 365,294     $ 744,116     $ 1,109,410  

 

The remaining amortization period of the right to develop and manufacture and the patent is 8 years and 9.5 years, respectively, as of December 31, 2017 and both have no residual value.

 

  F- 15  
 

 

Note 8 – Advances to Related Party, net

 

From April 4, 2016 through December 31, 2016, the Company paid $497,900 (net of repayments of $119,500) to HJLA, which was recorded as an advance to related party (see Note 15 – Related Party Transactions ) .

 

In connection with the Company’s ownership interest in and advances to HJLA, the Company determined that it had a variable interest in HJLA. However, the Company determined that it was not the primary beneficiary of HJLA because the Company does not have the power to direct the activities of HJLA and does not have an obligation to absorb any losses, or the right to receive benefits from HJLA.

 

Note 9 – Accrued Expenses and Accrued Interest – Related Party

 

As of December 31, 2017 and 2016, accrued expenses consist of the following:

 

    December 31,  
    2017     2016  
Accrued compensation costs   $ 556,118     $ 294,110  
Accrued professional fees     235,654       15,864  
Deferred rent     4,978       11,951  
Accrued interest     101,050       -  
Other accrued expenses     5,794       2,931  
Accrued expenses   $ 903,594     $ 324,856  

 

Accrued interest - related parties consisted of accrued interest on notes payable to the majority stockholder and to Leman (see Note 11 - Notes Payable and Note Payable – Related Party ) totaling, in the aggregate, $20,558 and $15,652 at December 31, 2017 and 2016, respectively.

 

Note 10 - Convertible Notes and Convertible Note – Related Party

 

Convertible Notes

 

During the period from June 15, 2017 through December 7, 2017, the Company received proceeds aggregating $2,750,500 pursuant to the issuance of senior secured convertible promissory notes (the “Convertible Notes”) and five-year warrants for the purchase of 114,608 shares of the Company’s common stock. The Convertible Notes bear interest at 15% per annum and were due on January 11, 2018. The principal due on the Convertible Notes was convertible at a price equal to the lesser of (i) $12.00 per share, or (ii) 70% of the highest price per common share sold in an initial public offering (the “Conversion Price”). The warrants were exercisable for the number of shares of common stock equal to 50% of the total shares issuable upon the conversion of the related Convertible Note, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the Conversion Price (see Note 14 – Temporary Equity and Stockholders’ Deficiency - Warrants). In connection with the sale of the Convertible Notes, the Company issued five-year warrants to the placement agent for the purchase of 15,339 shares of common stock at an exercise price of $14.40 per share.

 

On December 29, 2017, the terms of the Convertible Notes were amended, such that the maturity date was extended to February 28, 2018, the Convertible Notes became convertible in the amount of principal and accrued interest due on the note at the date of conversion, and the warrant coverage increased such that the warrants became exercisable for the number of shares of common stock equal to 75% of the total shares issuable upon the conversion of the Convertible Note. The amendment of the Convertible Notes was deemed to be a debt extinguishment and, as a result, during the year ended December 31, 2017, the Company recognized a $257,629 gain on extinguishment of convertible notes payable within accompanying statement of operations consisting of the extinguishment of $1,175,668 of derivative liabilities associated with the embedded conversion feature of the extinguished Convertible Notes, partially offset by (i) the write-off of $520,828 of unamortized debt discount associated with the extinguished Convertible Notes and (ii) the grant date value of additional warrants issued (deemed to be a derivative liability) in the amount of $397,211. Additionally, the embedded conversion feature within the re-issued Convertible Notes was deemed to be a derivative liability and discount in the amount of $1,175,668. The resulting derivative liability and debt discount will be marked to market at each reporting date and amortized over the extended term of the Convertible Notes, respectively.

 

On February 28, 2018, the Convertible Notes were further amended such that the maturity date was extended to May 15, 2018 and the warrants became exercisable for the number of shares of common stock equal to 100% of the total shares issuable upon the conversion of the Convertible Note.

 

The conversion option and the warrants, as originally issued, had a grant date value of $1,173,892 and $870,966, respectively, and the aggregate of $2,044,858 was recorded as a debt discount and a derivative liability. The conversion option and the additional warrants issued pursuant to the amendment had a grant date value of $1,175,668 and $397,211, respectively. The conversion option and the warrants were valued using a Monte Carlo model, with the following assumptions used:

 

     

For the Year Ended

December 31, 2017

 
Volatility     42.1% - 42.9%  
Risk free interest rate     1.57% - 1.92%  

 

The debt discount on the Convertible Notes is amortized over the term of the notes using the effective interest method. During the year ended December 31, 2017, the company recorded $172,800 of interest expense, and $1,710,130 of amortization on debt discount, respectively. The balance of interest accrued on the Convertible Notes was $99,861 as of December 31, 2017, which is included in accrued expenses on the accompany balance sheet. The accrued interest on the Convertible Notes was paid on January 8, 2018.

 

  F- 16  
 

 

The fair value of the derivative liability is marked to market at each reporting date. During the year ended December 31, 2017, the Company recorded a loss on the change in fair value of the conversion option and the warrant of $2,473 and $29,835, respectively.

 

Convertible Note – Related Party

 

On June 30, 2015, the Company entered into a loan agreement with the then majority (78%) common stock shareholder, (the “2015 Note”). The 2015 Note has a maximum borrowing capacity of $2,200,000 and bears interest at 3% per annum. On April 1, 2016, the 2015 Note was amended such that the 2015 Note became convertible at the option of the lender at a conversion price of $10.00 per share. On August 31, 2016, principal and interest of $1,200,000 and $34,816 owed on the 2015 Note, respectively, were exchanged for 123,481 shares of the Company’s common stock at a price of $10.00 per share (see Note 14 – Temporary Equity and Stockholders’ Deficiency).

 

During the years ended December 31, 2017 and 2016, the Company borrowed $311,000 and $188,000, respectively under the 2015 Note. As of December 31, 2017 and 2016, the principal balance due on the 2015 Note was $499,000 and $188,000, respectively, and the related accrued interest was $14,121 and $233, respectively, which is included in accrued interest – related party on the accompanying balance sheets. During the years ended December 31, 2017 and 2016, the Company incurred interest expense of $13,886 and $24,625, respectively, in connection with the 2015 Note. On January 11, 2018, the Company amended the loan agreement to extend the due date of the 2015 Note’s principal and accrued interest to March 31, 2018, and on March 30, 2018 the loan agreement was further amended to extend the due date of the 2015 Note’s principal and accrued interest to June 30, 2018.

 

Note 11 - Notes Payable and Note Payable – Related Party

 

Notes Payable

 

During October 2015, the Company borrowed $111,000 which was formalized under a promissory note dated March 15, 2016. The note bears interest at 3% per annum and matured on April 30, 2016. The note was repaid in full during 2016, prior to the maturity date. The Company recognized interest expense of $509 during the year ended December 31, 2016 in connection with this promissory note.

 

During December 2017, the Company borrowed $200,000 which was formalized under a promissory note dated December 13, 2017. The note bears interest at 10% per annum and matured on February 11, 2018. The Company recognized interest expense of $1,000 during the year ended December 31, 2017 in connection with this note. The note was repaid in full on January 8, 2018.

 

During December 2017, the Company borrowed $75,000 which was formalized under a promissory note dated December 22, 2017. The note bears interest at 10% per annum and matured on February 20, 2018. The Company recognized interest expense of $188 during the year ended December 31, 2017 in connection with this note. The note was repaid in full on January 22, 2018.

 

Note Payable – Related Party

 

During 2013, the Company issued a note payable (“the Asset Purchase Note”) to Leman Cardiovascular SA with a principal balance amount of $1,070,000 in connection with the purchase of certain assets from a related entity, of which the Company’s Former President and the Company’s Vice President Operations, Quality Assurance/Regulatory Affairs, were officers, and of which a member of the Company’s Board of Directors is a shareholder. The Asset Purchase Note bore interest at 6% per annum and matured on May 10, 2014. During the years ended December 31, 2017 and 2016, the Company repaid an aggregate principal balance of $174,734 and $75,624, respectively, related to the Asset Purchase Note.

 

During the years ended December 31, 2017 and 2016, the Company incurred $21,283 and $28,841 of interest expense, respectively, related to the Asset Purchase Note. As of December 31, 2017 and 2016, the principal balance due on the Asset Purchase Note was $270,038 and $444,772, respectively, and the related accrued interest was $6,436 and $15,419, respectively, which is included in accrued interest - related party on the accompanying balance sheets (Note 9 – Accrued Expenses and Accrued Interest – Related Parties). The balance owed on the Asset Purchase Note is currently past due.

 

Note 12 – Income Taxes

 

New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”, was enacted on December 22, 2017, which, among things, reduced the United States corporate income tax rate from 35% to 21%. Pursuant to ASC 740, Accounting for Income Taxes, the Company is required to recognize the effect of tax law changes in the period of enactment even though the effective date for most provisions of the Tax Act is for tax years beginning after December 31, 2017. The change in tax law required the Company to remeasure existing net deferred tax assets using the lower rate in the period of enactment , resulting in a reduction of the deferred tax asset balance as of December 31, 2017 by $1.7 million. Due to the Company's full valuation allowance position, there was no net impact on the Company's income tax provision at December 31, 2017 as the reduction in the deferred tax asset balance was fully offset by a corresponding decrease in the valuation allowance.

 

  F- 17  
 

 

The following summarizes the Company’s income tax provision (benefit):

 

   

For the Years Ended

December 31,

 
    2017     2016  
Federal:                
Current   $ -     $ -  
Deferred     (138,931 )     (898,378 )
                 
State and local:                
Current                
Deferred     (479,833 )     (158,537 )
      (618,764 )     (1,056,915 )
Change in valuation allowance     618,764       1,056,915  
Income tax provision (benefit)   $ -     $ -  

 

The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective tax rate for the year’s ended December 31, 2017 and 2016 is as follows:

 

   

For the Years Ended

December 31,

 
    2017     2016  
Tax benefit at federal statutory rate     (34.0 )%     (34.0 )%
State taxes, net of federal benefit     (6.0 )%     (6.0 )%
Permanent differences     9.4 %     4.9 %

True up adjustments

    1.3 %     0.0 %
Effect of change in tax rate     21.3 %     0.0 %
Change in valuation allowance     7.9 %     35.1 %
Effective income tax rate     (0.0 )%     (0.0 )%

 

  F- 18  
 

 

Significant components of the Company’s deferred tax assets at December 31, 2017 and 2016 are as follows:

 

    December 31,  
    2017     2016  
Deferred tax assets:                
Net operating loss carryforwards   $ 3,122,308     $ 2,299,235  
Research and development credit carryforwards     185,680       185,680  
Intangible assets     48,629       138,614  
Property and equipment     34,974       47,804  
Accrued salaries     106,400       91,710  
Stock-based compensation     419,868       474,118  
Deferred rent     1,394       4,780  
Impairment loss     136,612       195,160  
Total gross deferred tax assets     4,055,865       3,437,101  
                 
Less: valuation allowance     ( 4,055,865 )     (3,437,101 )
Total   $ -     $ -  

 

Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an "ownership change" (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation's ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes to offset its post-change income taxes may be limited. As a result of the Section 382 limitation, deferred tax assets related to approximately $5.0 million of the Company’s NOLs were written off in connection with a change in ownership of the Company during 2006.

 

At December 31, 2017 and 2016, the Company had post-ownership change net operating loss carryforwards for federal and state income tax purposes of approximately $ 11.1 million and $5.7 million, respectively. The federal and state net operating loss (“NOL”) carryovers may be carried forward for twenty years and begin to expire in 2026. However, to the extent the Company utilizes its NOL carryforwards in the future, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state tax authorities of the future period tax return in which the attribute is utilized. The Company also has federal research and development tax credit carryforwards of approximately $0.2 million which begin to expire in 2027.

 

The Company files income tax returns in the U.S. federal jurisdiction as well as California and local jurisdictions and is subject to examination by those taxing authorities. The Company’s federal, state and local income taxes for the years beginning in 2014 remain subject to examination. No tax audits were initiated during 2017 or 2016.

 

Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2017 and 2016. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations.

 

Note 13 – Commitments and Contingencies

 

Litigations, Claims and Assessments

 

In the normal course of business, the Company may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. The Company is not currently a party to any legal proceedings nor is it aware of any threatened legal proceedings which are expected to have a material adverse effect on the Company’s financial statements.

 

  F- 19  
 

  

The Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.

 

Distribution upon Sale of Patent or Certain Products

 

Pursuant to the Company’s second amended and restated certificate of incorporation filed on March 1, 2017, the Company has agreed to use its best efforts to sell and/or license its U.S. Patent No. 7,815,677, as well as certain product candidates along with all regulatory and other pertinent records. Upon the sale or license of any of the foregoing 50% of the proceeds, up to $65,000,000, will be distributed to first to the Series A stockholders on a pro rata basis, calculated based on the number of shares outstanding multiplied by the Series A preferred stock purchase price ($5.00 per share) plus all accrued but unpaid dividends thereon,(the “Series A Distribution”), second, after the Series A Distribution is paid in full, then to the holders of the Series B preferred stock on a pro rata basis, calculated based on the number of shares outstanding multiplied by the Series B preferred stock purchase price ($6.00 per share) plus all accrued but unpaid dividends thereon (the “Series B Distribution”), and third, after the Series B Distribution is paid in full, to the holders of any equity ranking junior to the Series A preferred stock and Series B preferred stock, but senior to the common stock, (the “Junior Distribution”), and fourth, after the Junior Distribution is paid in full, to certain holders of the Company’s common stock (the Series A Distribution, Series B Distribution and Junior Distribution, along with the distributions to certain holders of the Company’s common stock, are together the “Principal Cash Distribution”). The Company’s obligation to pay the above cash distributions shall survive and cannot be reduced as a result of any general distributions, dividend payments, conversion of preferred stock, sale, transfer, or disposition of any shares of our preferred stock by any holder, changes in the capital structure of our company, whether by merger, amalgamation, reorganization, consolidation, funding, this offering, or any transaction involving any class of stock of the Company. Pursuant to the Certificate of Amendment of Third Amended and Restated Certificate of Incorporation and the Certificate of Amendment to the First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock, filed with the Delaware Secretary of State on December 14, 2017, respectively, the Principal Cash Distribution will be terminated upon the consummation of an initial public offering.

 

Property Lease Obligation

 

On or about July 1, 2010, the Company’s seven-year lease for 14,507 square foot industrial building located in Orange County, California became effective. The lease required a $26,113 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $21,761 and payments increase by 5% every 24 months. Payments under the lease also include real estate taxes not to exceed $7,254 per month. The lease expired on June 30, 2017. The Company rented the building on a month-to-month basis from July 1, 2017 through September 30, 2017. On September 20, 2017, the Company entered into an agreement to renew the lease effective October 1, 2017. The lease renewal has a five-year term. Rent expense pursuant to the lease is $26,838 per month for the first year and increases by 3% on each anniversary of the lease inception date. As of December 31, 2017, remaining future minimum lease payments under the lease are $1,629,318.

 

On May 1, 2016, the Company’s entered into a one-year lease of an apartment located in Irvine, California for the chairman of the Company’s board of directors. The lease required a $3,720 security deposit and the monthly rent payments under the lease were $1,860. The lease expired on April 30, 2017, the Company is currently renting the apartment on a month-to-month basis.

 

On June 21, 2017, the Company’s entered into a one-year lease of an apartment located in Irvine, California for the Co-Chief Executive Officer (see Employment Agreements – Business Development Manager, below). The lease required a $700 security deposit and the monthly rent payments under the lease were $3,099.

 

Future minimum lease payments under the Company’s operating leases are as follows:

 

For The Years Ending
December 31,
  Amount  
       
2018   $ 340,896  
2019     334,203  
2020     344,229  
2021     354,561  
2022     271,854  
Total   $ 1,645,743  

 

  F- 20  
 

 

The Company recognizes rent expense on a straight-line basis over the term of the respective lease. Differences between the straight-line rent expenses and rent payments are included in accrued expenses on the accompanying balance sheets. Rent expense for the years ended December 31, 2017 and 2016 was $418,358 and $373,986, respectively.

 

Development and Manufacturing Agreement

 

On April 1, 2016, the Company entered into a development and manufacturing agreement with HJLA, pursuant to which: (1) the Company paid $445,200 for the exclusive right to provide development and manufacturing services to HJLA for a period of ten years (see Note 7 – Intangible Assets), and (2) the Company has the right to purchase up to 484,358 shares of common stock of HJLA at $8.66 per share for an aggregate purchase price of $4,194,540 through April 1, 2021. Through the date these financial statements were available to be issued, no shares were purchased pursuant to this agreement.

 

Consulting Agreement

 

On September 15, 2017, the Company entered into an agreement (the “Consulting Agreement”) with a consultant (the “Consultant”) for the provision of financial and business advice to the Company, including, but not limited to, advice and services related to the Company’s initial public offering (“IPO”). Services contracted in connection with the Consulting agreement are deemed to be completed upon the closing of the IPO. Pursuant to the terms of the Consulting Agreement, as amended on December 22, 2017 and on February 27, 2018, and assuming the successful completion of the Company’s IPO, the Company agrees to pay to the Consultant (i) $200,000 and 550,000 restricted shares of the Company’s common stock by May 15, 2018, and (ii) $100,000 no later than October 15, 2018. If the Company does not successfully complete an IPO, there is no payment obligation to the Consultant.

 

Death of President and Appointment of Interim President

 

On June 19, 2016, the Company’s President and Chief Executive Officer (the “Former President”) passed away. On July 22, 2016, the Company’s Chief Financial Officer (the “CFO”) was appointed the Company’s Secretary and Interim President.

 

Board of Directors

 

The death of the Former President on June 19, 2016 and the resignation of a member of the board of directors on July 22, 2016 resulted in two vacancies on the board of directors (the “Board”). On July 22, 2016, the Chief Medical Officer (“CMO”) was appointed to the Board and the number of authorized members of the Board was decreased from three to two.

 

Amendment to Certificate of Incorporation

 

The Company filed a Certificate of Amendment of Third Amended and Restated Certificate of Incorporation and a Certificate of Amendment to the First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock, with the Delaware Secretary of State on December 14, 2017 (the “Certificate of Amendments”). Pursuant to the Certificate of Amendments, the Company (a) effected a one-for-two reverse stock split, (b) amended the conversion price of the Preferred Stock such that the Series A conversion price will be $4.30 and the Series B conversion price will be $4.50, and (c) terminated the Principal Cash Distribution (see Note 14 – Temporary Equity and Stockholders’ Deficiency) upon the consummation of an initial public offering.

 

Employment Agreements

 

Business Development Manager

 

On July 1, 2016, the Company entered into an employment agreement with the Company’s Business Development Manager (the “BDM Agreement”). The BDM Agreement ends on December 31, 2016, after which it is automatically extended for additional one-year renewal terms, unless either party gives written notice to the other to terminate the BDM Agreement at least thirty days prior to the end of each calendar year. The BDM Agreement provides for a base salary of $24,000 per year, subject to annual review and adjustments by the board of directors, and automatically increases to $180,000 per year, starting from the date of an initial public offering. Further, the BDM Agreement provides for the payment of a bonus of $250,000 upon the completion of a strategic transaction, of which $175,000 was paid and $2,500 was accrued through December 31, 2016, in connection with the issuances of Series A Preferred stock, to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The BDM Agreement may be terminated by the Business Development Manager with 30 days written notice, or immediately upon written notice by the Company for cause. On December 2, 2016, the Company entered into an amendment of the BDM Agreement whereby the BDM (See Note 13 – Commitments and Contingencies – Employment Agreements) became the Company’s Chief Business Development Officer (the ‘CBDO Agreement”). The CBDO Agreement ends on December 31, 2018, after which is it automatically extended for additional three-year renewal terms, unless either party gives written notice to the other to terminate the amended BDM Agreement at least thirty days prior to the end of each calendar year. The CBDO Agreement provides for a base salary of $300,000 per year. Further, the CBDO Agreement amended the performance requirements in order to receive the remaining payment of the bonus which is payable upon the earlier of (a) a commercial sale of one of the Company’s devices, or (b) upon the entry into a definitive agreement for the distribution or license of one of the Company’s devices.

 

  F- 21  
 

 

On June 12, 2017, the Company entered into an amendment to the CBDO Agreement whereby the Company agreed to provide relocation services and reimburse relocation expenses for the CBDO , which were paid during August 2017. Furthermore, pursuant to the amended CBDO agreement, the Company shall pay the CBDO for costs incurred by the CBDO as a result of relocation such as a furnished primary residence in the designated area outlined in the agreement and a vehicle for the sole use of the CBDO . The total amount of these outgoing payments is not to exceed $5,000 dollars per month. Lastly, the amended agreement states that upon employee relocation, the CBDO shall receive a lump sum payment in an amount that is the total of the gross salary that would have been due to the CBDO under the CBDO Agreement. On September 1 , 2017, the board of directors appointed the CBDO to the position of co-chief executive officer of the Company (the “Co-CEO”). The appointment solely represented a change of position and title for the Business Development Manager; all other terms of his employment agreement remained unchanged. On March 22, 2018, the Co-CEO's employment with the Company was terminated without cause.

 

Chief Financial Officer

 

The Company hired its CFO on March 21, 2016. On July 22, 2016, the Company entered into an employment agreement with the CFO which provides for annual base salary of $225,000, as well as standard employee insurance and other benefits (the “CFO Agreement”). Pursuant to the CFO Agreement the CFO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CFO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company.

 

In addition, in connection with the CFO Agreement, the CFO received a ten-year option for the purchase of 146,500 shares of the Company’s common stock at an exercise price of $10.00 per share with a grant date fair value of $155,290 (see Note 14 –Temporary Equity and Stockholder’s Deficiency). The CFO Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CFO Agreement. The CFO Agreement may be terminated by the CFO with 30 days written notice, or immediately upon written notice by the Company for cause.

 

Senior Vice President of Operations

 

On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President of Operations, Regulatory Affairs and Quality Assurance (the “SVP”) which provides for an annual base salary of $295,000, as well as standard employee insurance and other benefits (the “SVP Agreement”). Pursuant to this agreement the SVP is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The SVP Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occurs within 24 months of a change in control of the Company. In addition, in connection with the SVP Agreement, the SVP received a ten-year option for the purchase of 818,500 shares of the Company’s common stock at an exercise price of $10.00 per share with a grant date fair value of $867,610 (see Note 14 – Temporary Equity and Stockholder’s Deficiency). The SVP is entitled to severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company.

 

The SVP Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the SVP Agreement. The SVP Agreement may be terminated by the SVP with 30 days written notice, or immediately upon written notice by the Company for cause.

 

Chief Medical Officer

 

The Company hired its Senior Vice President and CMO on May 1, 2016. On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President and CMO which provides for an annual base salary of $300,000, as well as standard employee insurance and other benefits (the “CMO Agreement”). Pursuant to this agreement the CMO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CMO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CMO Agreement, the CMO received a ten-year option for the purchase of 184,500 shares of the Company’s common stock with a grant date fair value of $195,570 (see Note 14 –Temporary Equity and Stockholder’s Deficiency). The CMO Agreement ends on December 31, 2018, after which it is automatically extended for additional three-year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CMO Agreement. The CMO Agreement may be terminated by the CMO with 30 days written notice, or immediately upon written notice by the Company for cause.

 

  F- 22  
 

 

Chief Executive Officer

 

On August 30, 2016, the Company entered into an employment agreement with the Company’s Chief Executive Officer (the “CEO”) which provides for an annual base salary of $360,000, as well as standard employee insurance and other benefits (the “CEO Agreement”). Pursuant to the CEO Agreement, the CEO is eligible for annual salary increases at the discretion of the board of directors. In addition, in connection with the CEO Agreement, the CEO received a ten-year option for the purchase of 146,500 shares of the Company’s common stock at an exercise price of $10.00 per share with a grant date fair value of $155,290 (see Note 14 –Temporary Equity and Stockholder’s Deficiency). The CEO Agreement may be terminated by the CEO or the Company with 30 days written notice. See Note 16 – Subsequent Events.

 

Note 14 – Temporary Equity and Stockholders’ Deficiency

 

Common Stock

 

The Company is authorized to issue up to 30,000,000 shares of common stock with a par value of $0.00001 per share. The holders of common stock are entitled to dividends after the preferred stock holders, when funds are legally available and when declared by the Board of Directors.

 

During the year ended December 31, 2017, the Company issued 197 shares of common stock, valued in the aggregate at $1,973, in satisfaction of accrued interest payable

 

During the year ended December 31, 2017, the Company issued 10,000 shares of our common stock to a service provider in accordance with a marketing and consulting agreement dated August 18, 2016, in exchange for consulting services.

 

Exchange of Debt for Equity

 

On August 31, 2016 principal and interest of $1,200,000 and $34,816, respectively, owed to a majority (78%) common stock holder in connection with a note payable were exchanged for 123,481 shares of the Company’s common stock at a price of $10.00 per share.

 

Preferred Stock

 

Pursuant to the Amended and Restated Articles of Incorporation filed on December 2, 2015, the Company is authorized to issue shares of preferred stock with such designations, rights and preferences as may be determined from time to time by its Board. Accordingly, the Board is authorized, without stockholder approval, to issue preferred stock with dividend, liquidation conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. The Company is authorized to issue a total of 6,000,000 shares of preferred stock of which 1,300,000 and 2,000,000 preferred shares have been designated as the Company’s Series A Preferred Stock and Series B Preferred Stock (See Note – 1 Business Organization, Nature of Operations and Basis of Operations), respectively, and 2,700,000 preferred shares remain undesignated. The Company’s preferred shares feature certain redemption rights that are considered by the Company to be outside of the Company’s control. Accordingly, the Series A Preferred Stock and Series B Preferred Stock is presented as temporary equity on the Company’s balance sheets.

 

Series A and Series B Preferred stockholders are entitled to a Principal Cash Distribution upon the sale and/or license the Company’s U.S. Patent No. 7,815,677, as described in Note 13 – Commitment and Contingencies - Distribution upon Sale of Patent or Certain Products. The Principal Cash Distribution will be terminated upon the consummation of an initial public offering.

 

Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”)

 

The holders of the Company’s Series A Preferred Stock have voting rights equal to common stockholders on an as-converted basis and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series A Preferred Stock ranks senior to the Series B Preferred Stock and common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series A Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined.

 

Each share of Series A Preferred Stock is convertible at the option of the holder at any time into one share of the Company’s common stock, subject to certain typical anti-dilution provisions, such as stock dividend or stock splits. Each share of Series A Preferred Stock is mandatorily converted into the Company’s common stock (a) at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock; (b) the consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, or (c) FDA approval for either the Company’s venous valve, pediatric heart valve or coronary artery bypass graft product candidates. Because the conversion option associated with the Series A Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability.

 

At any time after the third anniversary of the original issuance of the Series A Preferred Stock, the Series A Preferred Stock may be redeemed as a result of the written request of the holder of the Series A Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series A Preferred Stock is classified as temporary equity.

 

As of the issuance date, the carrying amount of the Series A Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

During the year ended December 31, 2016, the Company issued 569,700 shares of Series A Preferred Stock at a purchase price of $5.00 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the additional shares were $2,848,500 and the Company incurred cash offering costs of $615,369 (including $366,211 of placement agent fees) and non-cash offering costs valued at $93,977 (see Placement Agent Warrants, below) resulting in an original carrying value of the additional Series A Preferred Stock of $2,139,154.

 

  F- 23  
 

 

Cumulative dividends in arrears on the Series A preferred stock were $744,863 and $342,859 at December 31, 2017 and 2016, respectively.

 

As of December 31, 2017 and 2016, the holders of Series A Preferred Stock are entitled to receive a liquidation preference payment of $10.00 per share, plus accrued and unpaid dividends totaling, in the aggregate of $10,801,863 and $10,399,859, respectively. The liquidation preference of The Series A Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

 

Redeemable Convertible Series B Preferred Stock (“Series B Preferred Stock”)

 

The holders of the Company’s Series B Preferred Stock have voting rights equal to common stockholders on an as-converted basis and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series B Preferred Stock ranks junior to the Series A Preferred Stock and senior to common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series B Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series B Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series B Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined.

 

As of December 31, 2017, the holders of Series B Preferred Stock are entitled to receive a liquidation preference payment of $12.00 per share plus accrued and unpaid dividends totaling, in the aggregate, $3,103,416. The liquidation preference of The Series B Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.

 

Each share of Series B Preferred Stock is convertible at the option of the holder at any time into a half share of the Company’s common stock, subject to certain anti-dilution provisions. In addition, each share of Series B Preferred Stock is mandatorily converted into the Company’s common stock at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock. Because the conversion option associated with the Series B Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability.

 

At any time after the third anniversary of the original issuance of the Series B Preferred Stock, the Series B Preferred Stock may be redeemed as a result of the written request of the holder of the Series B Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series B Preferred Stock is classified as temporary equity.

 

As of the issuance date, the carrying amount of the Series B Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.

 

During the year ended December 31, 2017, the Company issued 253,792 shares of Series B Preferred Stock at a purchase price of $6.00 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the shares were $1,522,752 and the Company incurred cash offering costs of $230,350 (including $191,250 of placement agent fees) and non-cash offering costs, consisting of warrants for the purchase of 17,303 shares of the Company’s common stock, valued at $57,285 (see Placement Agent Warrants, below) resulting in an original carrying value of the additional Series B Preferred Stock of $1,235,117 .

 

  F- 24  
 

 

Cumulative undeclared dividends in arrears on Series B Preferred Stock were $57,912 as of December 31, 2017.

 

Placement Agent Warrants

 

During the year ended December 31, 2016, the Series A Preferred Stock placement agent received a cash fee in the aggregate of $366,211, and five-year warrants to purchase an additional 56,970 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing. The warrants had a grant date fair value of $93,977 which was charged against the proceeds received from the sale of the shares.

 

During the year ended December 31, 2017, the Series B Preferred Stock placement agent received a cash fee in the aggregate of $153,075 and five-year warrants to purchase an additional 17,303 shares of the Company’s common stock at an exercise price equal to the lesser of $12.00 per share or the price of securities issued in a future round of financing. The warrants had an aggregate fair value of $57,285 on the date of grant, which was charged against the proceeds received from the sale of the shares.

 

In addition, upon the consummation of a Recap Event, as defined, upon payment of the exercise price in effect immediately prior to the Recap Event, holders of the Series A and Series B Preferred Stock placement agent warrants described above (the “Preferred Stock Placement Agent Warrants”) have the option to (a) receive such securities, cash and property to which they would have been entitled if they had exercised their warrant immediately prior to the consummation of the Recap Event , or (b), receive the number of shares of common stock of the surviving entity equal to the Black Scholes value of their Preferred Stock Placement Agent Warrant divided by 65% of the volume weighted-average price of the common stock for the twenty days immediately preceding the Recap Event.

 

Due to the variable exercise price relating to the down-round feature of the Preferred Stock Placement Agent Warrants, as well as the fact that upon a Recap Event the Preferred Stock Placement Agent Warrants are convertible into and indeterminate number of common shares, the warrants were determined to be a derivative liability and the value of the warrants is recorded as such on the accompanying balance sheet.

 

The Preferred Stock Placement Agent Warrants are recorded at fair value using a Monte Carlo simulation model. The fair value of the warrants is re-measured at each reporting period until the warrants are reclassified, exercised or they expire, with the changes in fair value recorded in other income (expense) on the statements of operations. The value of the warrant liability as of December 31, 2017 and 2016 was $602,541 and $551,351 , respectively. During the years ended December 31, 2017 and 2016, the Company recorded a gain (loss) of $6,093 and ($383,285), respectively, on the change in the fair value of the derivative liabilities.

 

The significant assumptions used in the valuation model were as follows:

 

    For the Years Ended  
    December 31,  
    2017     2016  
Risk free interest rate   1.57% - 1.65 %     1.01 - 1.93 %
Expected term (years)   5.00     3.93 - 5.00  
Expected volatility   42.8% - 42.9 %     32.4% - 33.7  
Expected dividends   0.00%     0.00%

 

Employee Warrant

 

On May 5, 2016, the Company granted a warrant for the purchase of 416,666 shares of common stock to its Business Development Manager. The warrant is immediately vested and is exercisable for 7 years at an exercise price of $12.00 per share (subject to adjustment in the event of certain stock dividends and distributions, stock splits, reclassifications or similar events affecting the Company’s common stock). The warrants had an aggregate fair value of $1,143,883 on the date of grant, which was charged to stock-based compensation expense in the statement of operations. Further, upon certain subsequent issuances of common stock or common stock equivalents at a price per share less than the exercise price in effect at the time of issuance, the exercise price of the warrant is to be reduced to a price equal to the consideration per share received by the Company with respect to those issuances. In accordance with FASB ASC 815, equity instruments issued to employees for compensation are not subject to derivative accounting. On June 30, 2017, the warrant for the purchase of 250,000 shares of common stock, which had been granted to the Business Development Manager, was returned to the Company by the Business Development Manager and was subsequently canceled by the Company.

 

  F- 25  
 

 

The Company determined the grant date value of the warrant using a Monte Carlo simulation model.

 

The significant assumptions used in the valuation model were as follows:

 

Risk free interest rate     1.2 %
Expected term (years)     7.0  
Expected volatility     32.4 %
Expected dividends     0.0 %

 

 A summary of warrants activity during the years ended December 31, 2017 and 2016 is presented below:

 

    Series A Preferred Stock     Common Stock  
    Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value     Number of Warrants     Weighted Average Exercise Price     Weighted Average Remaining Life in Years     Intrinsic Value  
Outstanding, January 1, 2016     43,600     $ 5.00                             -     $ -                                    
Issued     56,970       5.00                       416,666       12.00                  
Exercised     -       -                       -       -                  
Cancelled     -       -                       -       -                  
Outstanding, December 31, 2016     100,570       5.00                       416,666       12.00                  
Issued [1]     -       -                       204,550       12.00                  
Exercised     -       -                       -       -                  
Cancelled     -       -                       (250,000 )     12.00                  
Outstanding, December 31, 2017     100,570     $ 5.00       3.1     $ 267,516       371,216     $ 12.00       5.0     $    -  
                                                                 
Exercisable, December 31, 2017     100,570     $ 5.00       3.1     $ 267,516       371,216     $ 12.00       5.0     $ -  

   

[1] Warrants granted in 2017 consist of Series B placement agent warrants for purchase of 17,303 shares, convertible note debt holder warrants for purchase of 171,908 shares and convertible note placement agent warrants for purchase of 15,339 shares of common stock.

 

A summary of outstanding and exercisable warrants as of December 31, 2017 is presented below:

 

Warrants Outstanding     Warrants Exercisable  
Exercise Price     Exercisable Into   Outstanding
Number of
Warrants
    Weighted Average
Remaining Life
In Years
    Exercisable
Number of
Warrants
 
$ 12.00     Common Stock     371,216     5.0       371,216  
$ 5.00     Series A Preferred Stock     100,570     3.1       100,570  
        Total     471,786             471,786  

 

Omnibus Incentive Plan

 

On November 21, 2016, the board of directors approved the Company’s 2016 Omnibus Incentive Plan (the “2016 Plan”), which enables the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share based awards and cash awards to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company. Stock options granted under the 2016 Plan may be non-qualified stock options or incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an affiliate shall in all cases be non-qualified stock options. The option price must be at least 100% of the fair market value on the date of grant and if issued to a 10% or greater shareholder must be 110% of the fair market value on the date of the grant.

 

The 2016 Plan is to be administered by the Board, which shall have discretion over the awards and grants thereunder. No awards may be issued after November 21, 2026. On December 11, 2017 the board of directors approved an amendment to the 2016 Omnibus Incentive Plan, whereby the number of common shares reserved for issuance under the plan was increased from 1,650,000 to 2,500,000.

 

Stock Options

 

On October 1, 2016, the Company issued non-qualified stock options to purchase an aggregate of 1,296,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $10.00 per share, pursuant to the CFO Agreement, SVP agreement, CMO agreement, and the CEO agreement, of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The options expire ten years from the date of issuance. The options have an aggregate grant date fair value of $1,373,760 and will be amortized ratably over the vesting period of the options.

 

  F- 26  
 

 

On August 31, 2017, the Company granted non-qualified stock options for the purchase of 40,000 shares of the Company’s common stock to each of three members of the board of directors. The options vested immediately, have a ten-year contractual life, and are exercisable at $12.00 per share. The options had an aggregate grant date value of $235,200.

 

On December 4, 2017, the Company granted non-qualified stock options for the purchase of 6,000 shares of the Company’s common stock to two members of the board of directors. The options vested immediately, have a ten-year contractual life, and are exercisable at $7.00 per share. The options had an aggregate grant date value of $16,920.

 

In applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:

 

    For the Years Ended  
    December 31,  
    2017     2016  
Risk free interest rate   1.92 - 2.95 %     1.14%  
Expected term (years)   5.00     5.21  
Expected volatility   42.1% - 42.9 %     32.4%  
Expected Dividends   0.00%     0.00%  

 

The weighted average estimated fair value of the stock options granted during the years ended December 31, 2017 and 2016 was approximately $2.00 and $1.06 per share, respectively.

 

A summary of the option activity during the years ended December 31, 2017 and 2016 is presented below:

  

                Weighted        
          Weighted     Average        
          Average     Remaining     Aggregate  
    Number of     Exercise     Life     Intrinsic  
    Options     Price     In Years     Value  
Outstanding, January 1, 2016     -       -                  
Granted     1,296,000     $ 10.00                  
Forfeited     -       -                  
Outstanding, December 31, 2016     1,296,000     $ 10.00                  
Granted     126,000     $ 11.76                  
Forfeited     -       -                  
Outstanding, December 31, 2017     1,422,000     $ 10.16       8.8     $ 3,960  
                                 
Exercisable, December 31, 2017     990,010     $ 10.22       8.9     $ 3,960  

 

A summary of outstanding and exercisable options as of December 31, 2017 is presented below:

  

Options Outstanding     Options Exercisable  
Exercise Price     Exercisable Into   Outstanding
Number of
Options
    Weighted Average
Remaining Life
In Years
    Exercisable
Number of
Options
 
$ 10.00     Common Stock     1,296,000     8.8       864,010  
$ 12.00     Series A Preferred Stock     120,000     9.7       120,000  
$ 7.00     Common Stock     6,000     9.9       6,000  
        Total     1,422,000             990,010  

 

During the years ended December 31, 2017 and 2016, the Company recognized stock-based compensation expense related to stock options of $801,624 and $366,336, respectively, which is recorded in selling, general and administrative expenses on the accompanying statements of operations. As of December 31, 2017, there was $457,920 of unrecognized stock-based compensation expense that will be recognized over the weighted average remaining vesting period of 0.8 years.

 

  F- 27  
 

 

Note 15 – Related Party Transactions

 

Consulting Expense

 

During 2015, the Company engaged a consulting company (the “Consultant”), of which the Company’s Former President was the sole owner, to provide consulting services related to device design, clinical trials and patents, at a cost or $13,500 per month, pursuant to a Consulting Agreement dated March 1, 2006 as amended on January 1, 2013. The Company recognized consulting expense of $0 and $152,700 related to the Consulting Agreement during the years ended December 31, 2017 and 2016, respectively.

 

Advances to Related Party

 

During the year ended December 31, 2016 the Company paid $497,900 (net of repayments of $119,500) to HJLA. Of this amount, $487,900 was recorded as an investment in HJLA, and $10,000 was recorded as an advance to HJLA. The Company reviewed the recoverability of its investment In HJLA and concluded that the investment was fully impaired. As a result, the Company recorded an impairment loss of $487,900 for the year ended December 31, 2016.

 

During the year ended to December 31, 2017, the Company paid $206,000 as short-term advances to HJLA, and received repayments from HJLA of $216,000. The balance of advances outstanding as of December 31, 2017 was $0 (Note 8 – Advances to Related Party, net).

 

Loan Receivable - Related Party

 

On June 15, 2017, the Company entered into a promissory note agreement (the “Note Receivable”) with HJLA, pursuant to which the Company loaned $160,000 to HJLA. The Note Receivable bears interest at 15% per annum, and all unpaid principal and interest was due on September 15, 2017. During the year ended December 31, 2017, the note principal, along with $6,685 of accrued interest was repaid in full.

 

Contract & Research Revenue – Related Party

 

During the year ended December 31, 2017, the Company recognized $99,600 of revenue for contract research services provided pursuant to a Development and Manufacturing Agreement with HJLA dated April 1, 2016.

 

Note 16 – Subsequent Events

 

Convertible Notes

 

From January 5, 2018 through January 16, 2018, the Company issued senior secured convertible notes (the “2018 Convertible Notes”) in the aggregate amount of $2,897,500 and the Company incurred cash offering costs of $293,750 (including $289,750 of placement agent fees) for net cash proceeds of $2,603,750. The 2018 Convertible Notes bear interest at 15% per annum and are due on February 28, 2018 (the “Maturity Date”). The 2018 Convertible Notes are convertible at a price equal to the lesser of (i) $14.40 per share, or (ii) 70% of the highest price per common share sold in an initial public offering (the “Conversion Price”). The 2018 Convertible Notes include five-year warrants exercisable for the number of common shares equal to 50% of the total shares issuable upon the conversion of the 2018 Convertible Note, at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the Conversion price. The 2018 Convertible Notes (and accrued interest) are convertible at any time at the option of the holder; however, if the Company consummates an IPO on or prior to the Maturity Date, the principal and interest due under the then-outstanding 2018 Convertible Notes will be automatically converted into shares of the Company’s common stock.

 

In connection with the sale of the 2018 Convertible Notes, the Company agreed to issue a five-year warrant to the placement agent for the purchase of 60,002 shares of common stock, exercisable at a price equal to the lesser of (i) $14.40 per share or (ii) 120% of the Conversion price.

 

On February 28, 2018, the 2018 Notes were amended to extend the maturity date to May 15, 2018 and increase the Warrant coverage of the 2018 Notes from 50% to 75% of the shares of common stock issued upon conversion of the 2018 Notes.

 

  F- 28  
 

 

Chief Executive Officer

 

On March 20, 2018, the Company entered into an Amendment to Employment Agreement (the “Employment Amendment”) with the CEO, pursuant to which the CEO was removed from the position of CEO and was appointed to serve as the Company’s Chief Medical Officer Outside of the United States (CMO OUS). The Employment Amendment represented a change in position only; all other terms and conditions of the CEO Agreement remain in effect. Further on March 20, 2018, the employment of the Company’s Co-CEO was terminated without cause, and the Company entered into an agreement with a new Chief Executive Officer (the “New CEO”), which provides for an annual base salary of $400,000 as well as standard employee insurance and other benefits (the “New CEO Agreement”). Pursuant to this agreement, the New CEO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, as determined by the Compensation Committee of the Board of Directors. The New CEO Agreement provides for six-months of severance payments equal to base salary in the event of termination without cause, one year of severance payments if such termination occurs on or after the two-year anniversary of the effective date of the New CEO Agreement and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the New CEO Agreement, upon the Company’s IPO, the New CEO will receive an option for the purchase of up to 6.5% of the Company’s common stock on a fully-diluted basis. The New CEO’s employment with the Company is “at-will”, and may be terminated at any time, with or without cause and with or without notice by either the New CEO or the Company.

 

Certificate of Validation

 

On February 19, 2018, the Company filed a certificate of validation with the Delaware Secretary of State in respect of such ratifications, such that, the Series B Preferred Stock is duly authorized, validly issued, fully paid and nonassessable.

 

  F- 29  
 

 

1,142,857 Units

 

Each Unit Consisting of One Share of Common Stock and

a Warrant to Purchase One Share of Common Stock

 

 

PROSPECTUS

 

                     , 2018

 

  Sole Book-Running Manager  
 

 

Network 1 Financial Securities

 

 

 

 
 

 

ALTERNATE PAGES FOR SELLING STOCKHOLDER PROSPECTUS

 

The information in this preliminary prospectus is not complete and may be changed. The selling security holders named in this preliminary prospectus may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 16 , 2018

 

PRELIMINARY PROSPECTUS

 

 

 

Up to 2,469,221 Shares

Common Stock

 

This prospectus relates to the offer and sale from time to time by the selling stockholders identified in this prospectus, or the Selling Stockholders, of up to 2,469,221 shares of our common stock. These shares consist of (i) 580,232 shares, or the 2017 Note Shares, of our common stock issuable upon conversion of our outstanding amended and restated convertible notes, or the 2017 Notes, (ii) 609,908 shares of our common stock, which we refer to as the 2018 Note Shares, together with the 2017 Note Shares refer as the Note Shares, issuable upon conversion of our outstanding convertible notes, which we refer to as the 2018 Notes, together with the 2017 Notes refer as the Notes, (iii) 1,271,581 shares, or the Warrant Shares, of our common stock issuable upon exercise of outstanding warrants, or the Warrants, and (iv) 7,500 shares of our common stock held by COVA Capital LLC, or COVA Shares.

 

The aggregate amount of Note Shares, Warrant Shares, and COVA Shares was calculated using the midpoint of the price range listed on the cover page of the IPO Prospectus, assumes the conversion of all Notes and the exercise of all Warrants held by the Selling Stockholders, and gives effect to the one-for-two reverse stock split of our common stock effected on December 14, 2017.

 

The shares of our common stock registered hereby may be offered and sold by the Selling Stockholders from time to time in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. See “Plan of Distribution.”

 

We are not selling any shares of common stock under this prospectus, and we will not receive any of the proceeds from the offer and sale of shares of our common stock by the Selling Stockholders. See “Use of Proceeds.”

 

By separate prospectus, or the Prospectus, we have registered an aggregate of 1,142,857 Units and the 1,142,857 shares of our common stock issuable from time to time upon exercise of the warrants included in the Units (excluding 171,429 Units issuable upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any) which we are offering for sale to the public through an underwritten offering, which we refer to herein as the initial public offering. Each Unit consists of one share of our common stock and a warrant to purchase one share of our common stock. Each warrant will have an exercise price equal to 120% of our initial public offering price, will be exercisable beginning on the date of issuance and will expire five years from the date of issuance. We currently expect the initial public offering price of the Units to be between $6.00 and $8.00 per share.

 

This prospectus describes the general manner in which shares of common stock may be offered and sold by any Selling Stockholders. When the Selling Stockholders sell shares of common stock under this prospectus, we may, if necessary and required by law, provide a prospectus supplement that will contain specific information about the terms of that offering. Any prospectus supplement may also add to, update, modify or replace information contained in this prospectus. We urge you to read carefully this prospectus, any accompanying prospectus supplement and any documents we incorporate by reference into this prospectus and any accompanying prospectus supplement before you make your investment decision.

 

Our common stock has been approved for listing on the Nasdaq Capital Market, or Nasdaq, under the symbol “HJLI.”

 

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.

 

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 10 of the Prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is                    , 2018

 

1
 

 

EXPLANATORY NOTE

 

 

Concurrently with the registration of shares of common stock pursuant to this prospectus, which we refer to as the Selling Stockholder Prospectus, we are registering shares of our securities in connection with our initial public offering of 1,142,857 Units and the 1,142,857 shares of our common stock issuable from time to time upon exercise of the warrants included in the Units through the underwriters (excluding 171,429 Units which may be sold upon exercise of the underwriters’ over-allotment option). Each Unit consists of one share of our common stock and a warrant to purchase one share of our common stock. Each warrant will have an exercise price equal to 120% of our initial public offering price, will be exercisable beginning on the date of issuance and will expire five years from the date of issuance. Sales of our common stock by stockholders that purchase shares in our initial public offering may reduce the price of our common stock, demand for our shares and, as a result, the liquidity of shares of our common stock purchased from the Selling Stockholders.

 

2
 

 

SELLING STOCKHOLDERS

 

The shares of common stock being registered hereby are those issuable to the Selling Stockholders upon conversion of the Notes and the exercise of the Warrants, except in the case for the COVA Shares. For additional information regarding the Notes, the Warrants, the COVA Shares and certain rights of the Selling Stockholders with respect thereto, see “Recent Sales of Unregistered Securities” and “Description of Capital Stock” below. We are registering the shares of common stock in order to permit the Selling Stockholders to offer the shares for resale from time to time. Except as set forth in this Selling Stockholder Prospectus and except for certain ownership of our securities, the Selling Stockholders have not had any material relationship with us within the past three years.

 

The table below lists the Selling Stockholders and other information regarding the beneficial ownership of the shares of common stock by the Selling Stockholders. The second column lists the number of shares of common stock beneficially owned by the Selling Stockholders prior to this offering. The third column lists the shares of common stock being offered by this Selling Stockholder Prospectus by the Selling Stockholders, which is comprised of our common stockholder COVA Capital Partners, LLC, and, the Note Shares and the Warrant Shares beneficially owned by the applicable Selling Stockholder. The amounts in the second and third columns were calculated using the midpoint of the price range listed on the cover page of the Prospectus and assume the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders, and give effect to the one-for-two reverse stock split of our common stock effected on December 14, 2017. The conversion price of the Notes is the lesser of (i) $12.00 per share, or (ii) 70% of the price per share in our initial public offering, or the Conversion Price. The exercise price per share of the Warrants issued with the Note is the lesser of $14.40 per share or (ii) 120% of the Conversion price. The original exercise prices per share of the Warrants issued with the shares of our Series A preferred stock and Series B preferred stock are $5.00 and $6.00, respectively, and are subjected to certain adjustments. The fourth and fifth columns list the number and percentage, respectively, of shares of common stock beneficially owned by the Selling Stockholders after the closing of the offering, based on their ownership as of the date of this Selling Stockholder Prospectus, based on 9,042,480 shares of common stock outstanding as of the date of this Selling Stockholder Prospectus, and assuming the sale of all of the shares offered by the Selling Stockholders pursuant to this Selling Stockholder Prospectus.

 

Name of Selling Stockholder    Number of
Shares
Beneficially
Owned Prior
to Offering(1)
      Maximum
Number of
Shares to be
Sold
Pursuant to
this
Prospectus(1)(3)
      Number of
Shares
Beneficially
Owned
After
Offering(2)
      Percentage of
Shares
Beneficially
Owned After
Offering(2)
  
Sergey Gogin (4)       379,726          379,726          -       * %
William J. Peck (5)       126,574          126,574          -       * %
Catalytic Capital, LLC (6)       63,286          63,286          -       * %
NYFF Investors, LLC (7)       84,382          84,382          -       * %
Viktoriia Malyshkina (8)       4,218          4,218          -       * %
Nata Solutions Inc. (9)       42,190          42,190          -       * %
Michael Semidubersky (10)       12,656          12,656          -       * %
Roman Shteynshlyuger (11)       16,876          16,876          -       * %
Daniel Tulbovich (12)       17,086          17,086          -       * %
Chen Lu Yi (13)       8,438          8,438          -       * %
Jose D. Rios (14)       4,218          4,218          -       * %
Matthew D. Lowery (15)       42,190          42,190          -       * %
Wallace Johnson (16)       105,478          105,478          -       * %
Brian FitzPatrick (17)       147,670          147,670          -       * %
Thomas Hackl (18)       63,286          63,286          -       * %
Secured and Collateralized Lending LLC (19)       42,190          42,190          -       * %
COVA Capital Partners, LLC (20)       7,500          7,500          -       * %
Jonathan Gazdak (21)       13,700          13,700          -       * %
Rocco Guidicipietro (22)       4,388          4,388          -       * %
Joseph Amato (23)       4,388          4,388          -       * %
Stephen Walsh (24)       1,224          1,224          -       * %
Chris Carlin (25)       15,082          15,082          -       * %
Legend Securities, Inc. (26)       41,202          41,202          -       * %
Arthur Coffey (27)       37,675          37,675          -       * %
Jody Eisenman (28)       27,782          27,782          -       * %
Leone G.I.S. LLC (29)       24,155          24,155          -       * %
Jesse Krapf (30)       200          200          -       * %
Val Rayevsky (31)       200          200          -       * %
Mike Nessim (32)       825          825          -       * %
Kevin Jones (33)       200          200          -       * %
Newbridge Securities Corporation (34)       2,005          2,005          -       * %
Juan R Rivero (35)       5,528          5,528          -       * %
Alan Augenstein (36)       7,371          7,371          -       * %
Frank Ingriselli (37)       9,213          9,213          -       * %
Paul E Linthorst (38)       5,528          5,528          -       * %
Michael P Quackenbush Jr (39)       9,213          9,213          -       * %
James Somers (40)       18,429          18,429          -       * %
John Klinge (41)       7,371          7,371          -       * %
Charles Christensen (42)       11,056          11,056          -       * %
Ronald J Ciasulli (43)       18,429          18,429          -       * %
Wendell Young (44)       7,371          7,371          -       * %
Keith A Belote (45)       5,528          5,528          -       * %
Kevin MacKenzie (46)       9,213          9,213          -       * %
Amaresh Tripathy (47)       5,528          5,528          -       * %
James C Leslie (48)       9,213          9,213          -       * %
Euclid P Zurbaran & Cristina Elgarresta JTWROS (49)       5,528          5,528          -       * %
Joseph A McLauchlan (50)       9,213          9,213          -       * %
Kim E Tobler (51)       7,371          7,371          -       * %
Frederick M Kelso (52)       9,213          9,213          -       * %
Joseph C Atkinson (53)       9,213          9,213          -       * %
Michael Fahey (54)       14,742          14,742          -       * %
Miles E Everson (55)       27,643          27,643          -       * %
Emilio DiMatteo & Jessica DiMatteo JTWROS (56)       9,213          9,213          -       * %
James Eric Nicely & Karen B Nicely JTWROS (57)       9,213          9,213          -       * %
Justin C Lefevre (58)       9,213          9,213          -       * %
Dennis T Whalen & Linda P Whalen JTWROS (59)       18,429          18,429          -       * %
Todd J Anderson (60)       9,213          9,213          -       * %
Saurabh Mundhra (61)       5,528          5,528          -       * %
Michael Snow (62)       9,213          9,213          -       * %
Michael J Muldoon & Pamela J Muldoon JTWROS (63)       18,429          18,429          -       * %
Mark A Herndon & Sarah Herndon JTWROS (64)       9,213          9,213          -       * %
Russell Moore (65)       11,056          11,056          -       * %
David B Oneill (66)       11,056          11,056          -       * %
Andrew Nolan (67)       11,056          11,056          -       * %
Jonathan Gralnick (68)       9,213          9,213          -       * %
Neil T Brigham (69)       5,528          5,528          -       * %
Rayford Baines High III (70)       9,213          9,213          -       * %
Adan Martinez (71)       9,213          9,213          -       * %
Raymond C Fossett (72)       9,213          9,213          -       * %
Yogesh Gupta (73)       9,213          9,213          -       * %
Xavier Aguirre (74)       9,213          9,213          -       * %
Joseph M Diangelo (75)       9,213          9,213          -       * %
Kevin A Healy (76)       11,056          11,056          -       * %
Jeffrey M Kammerer (77)       9,213          9,213          -       * %
Jeffrey E Kuhlin (78)       7,371          7,371          -       * %
Dennis D Howarter & Pamela J Howarter JTWROS (79)       18,429          18,429          -       * %
Keith Jackson (80)       18,429          18,429          -       * %
Matthew W Cambi (81)       5,528          5,528          -       * %
Samir Mammadov (82)       9,213          9,213          -       * %
Dennis Lam (83)       9,213          9,213          -       * %
Peter D Raymond (84)       9,213          9,213          -       * %
Bryan J Gersack (85)       5,528          5,528          -       * %
Donald P Farve (86)       7,371          7,371          -       * %
James R Aldridge (87)       12,899          12,899          -       * %
Gregory G Galdi (88)       18,429          18,429          -       * %
Paul P Frank III & Colleen B Frank JTWROS (89)       9,213          9,213          -       * %
TTEE Patrick John Gregory Revocable Trust DTD 6-26-90 (90)       18,429          18,429          -       * %
Jorge Morazzani (91)       5,528          5,528          -       * %
Steven L Krueger (92)       9,213          9,213          -       * %
Scott Wiehle (93)       9,213          9,213          -       * %
Rich Shappard (94)       13,821          13,821          -       * %
Charles P Arnold (95)       9,213          9,213          -       * %
Kevin J Schwartz (96)       9,213          9,213          -       * %
John M Brady (97)       9,213          9,213          -       * %
Kurtis Krentz (98)       11,056          11,056          -       * %
Paul G Elie (99)       9,213          9,213          -       * %
John J Hancock (100)       9,213          9,213          -       * %
Stephen E Lawson (101)       9,213          9,213          -       * %
Anthony J Berni (102)       5,528          5,528          -       * %
John E Conway (103)       9,213          9,213          -       * %
Donald L Hulet (104)       9,213          9,213          -       * %
Richard J Poccia (105)       14,742          14,742          -       * %
Donald P Sesterhenn (106)       14,742          14,742          -       * %
Philip A Garland (107)       12,899          12,899          -       * %
The Roberts Fund (108)       9,213          9,213          -       * %
Dennis M Scullin (109)       5,528          5,528          -       * %
Daniel M Valerio (110)       11,056          11,056          -       * %
James Douglas Summa (111)       9,213          9,213          -       * %
Carlo Alberci (112)       9,213          9,213          -       * %
Edmond Allen Morrison (113)       11,035          11,035          -       * %
Anthony D Johnston (114)       7,357          7,357          -       * %
Michael Burwell (115)       18,392          18,392          -       * %
Peter A Casey (116)       5,517          5,517          -       * %
Laurence M Pfeffer (117)       9,196          9,196          -       * %
Ballington Living Trust DTD 8-5-14 (118)       9,196          9,196          -       * %
Stephen V Zawoyski (119)       7,357          7,357          -       * %
Marios Karayannis (120)       7,357          7,357          -       * %
Jeffrey J Kiley (121)       9,196          9,196          -       * %
John W Stadtler (122)       9,196          9,196          -       * %
Alexandre N Palma (123)       7,357          7,357          -       * %
Robert J Calabro (124)       7,357          7,357          -       * %
Alok Mahajan (125)       5,517          5,517          -       * %
David A Fitz (126)       5,517          5,517          -       * %
James M Koch (127)       12,874          12,874          -       * %
Paul Quattrocchi (128)       3,678          3,678          -       * %
Gary Sterbinsky (129)       5,517          5,517          -       * %
Donald Cameron (130)       18,392          18,392          -       * %
Sameer Shirsekar (131)       7,357          7,357          -       * %
Joseph Michalczyk (132)       11,035          11,035          -       * %
Mario Dellaera (133)       18,392          18,392          -       * %
David Petterson (134)       18,392          18,392          -       * %
Jose M Ramirez Roman (135)       9,196          9,196          -       * %
Mark W Boyer (136)       18,392          18,392          -       * %
Joseph Quattrocchi (137)       3,678          3,678          -       * %
Scott J Gehsmann (138)       9,196          9,196          -       * %
Stephen E Gray (139)       5,503          5,503          -       * %
Alan W Page (140)       9,173          9,173          -       * %
Alexander Capital, L.P. (141)       60,941          60,941          -       * %

  

3
 

 

*Less than 1%.
     
(1) The number of shares of common stock owned are those “beneficially owned” as determined under the rules of the SEC, including any shares of common stock as to which the Selling Stockholders has sole or shared voting or investment power and any shares of common stock that the Selling Stockholders has the right to acquire within 60 days of March 31, 2018 through the exercise of any option, warrant, or right, without giving effect to any prohibitions on such conversion or exercise subject to the receipt of stockholder approval or any beneficial ownership limitations. These amounts were calculated using the midpoint of the price range listed on the cover page of the Prospectus and assume the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders.
     
(2) The “Number of Shares Beneficially Owned After Offering” assumes the sale of all of the shares offered by the Selling Stockholders pursuant to this Selling Stockholder Prospectus. The “Percentage of Shares Beneficially Owned After Offering” are based on 10,185,337 shares of our common stock outstanding assuming all shares registered herein are issued to the Selling Stockholders and sold and assuming the conversion of all Notes, and exercise of all Warrants, held by the applicable Selling Stockholders.
     
(3) We issued to certain of the Selling Stockholders the Notes and Warrants, collectively. The Notes are convertible into shares of our common stock the lesser of (i) $12.00 per share, or (ii) 70% of the price per share in our initial public offering, or the Conversion Price. The exercise price per share of the Warrants issued with the Note is the lesser of $14.40 per share or (ii) 120% of the Conversion Price.
     
(4) Includes 189,863 shares of common stock issuable upon conversion of the 2017 Notes and 189,863 shares of common stock issuable upon exercise of the Warrants. Mr. Gogin purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(5) Includes 63,287 shares of common stock issuable upon conversion of the 2017 Notes and 63,287 shares of common stock issuable upon exercise of the Warrants. Mr. Peck purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(6) Includes 31,643  shares of common stock issuable upon conversion of the 2017 Notes and 31,643 shares of common stock issuable upon exercise of the Warrants. Catalytic Capital, LLC purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities. Catalytic Capital, LLC is located at 135 Oceana Drive East, Apartment 4E, Brooklyn, New York 11235, Care of Dmitriy Shapiro.
     
(7) Includes 42,191 shares of common stock issuable upon conversion of the 2017 Notes and 42,191 shares of common stock issuable upon exercise of the Warrants. NYFF Investors, LLC is located at 585 Stewart Avenue, Suite 302, Garden City, New York 11530, Care of Adam B. Kaufman, Esq.
     
(8) Includes 2,109 shares of common stock issuable upon conversion of the 2017 Notes and 2,109 shares of common stock issuable upon exercise of the Warrants.
     
(9) Includes 21,095 shares of common stock issuable upon conversion of the 2017 Notes and 21,095 shares of common stock issuable upon exercise of the Warrants. Nata Solutions, Inc. purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities. Natalia Shapiro is the President of Nata Solutions Inc. Nata Solutions Inc. is located at 170 Coleridge Street, Brooklyn, New York 11235.
     
(10) Includes 6,328 shares of common stock issuable upon conversion of the 2017 Notes and 6,328 shares of common stock issuable upon exercise of the Warrants. Mr. Semidubersky purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(11) Includes 8,438 shares of common stock issuable upon conversion of the 2017 Notes and 8,438 shares of common stock issuable upon exercise of the Warrants.
     
(12) Includes 8,543 shares of common stock issuable upon conversion of the 2017 Notes and 8,543 shares of common stock issuable upon exercise of the Warrants. Mr. Tulbovich purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(13) Includes 4,219 shares of common stock issuable upon conversion of the 2017 Notes and 4,219 shares of common stock issuable upon exercise of the Warrants.
     
(14) Includes 2,109 shares of common stock issuable upon conversion of the 2017 Notes and 2,109 shares of common stock issuable upon exercise of the Warrants. Mr. Rios purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(15) Includes 21,095 shares of common stock issuable upon conversion of the 2017 Notes and 21,095 shares of common stock issuable upon exercise of the Warrants.
     
(16) Includes 52,739 shares of common stock issuable upon conversion of the 2017 Notes and 52,739 shares of common stock issuable upon exercise of the Warrants.
     
(17) Includes 73,835 shares of common stock issuable upon conversion of the 2017 Notes and 73,835 shares of common stock issuable upon exercise of the Warrants.
     
(18) Includes 31,643 shares of common stock issuable upon conversion of the 2017 Notes and 31,643 shares of common stock issuable upon exercise of the Warrants.
     
(19) Includes 21,095 shares of common stock issuable upon conversion of the 2017 Notes and 21,095 shares of common stock issuable upon exercise of the Warrants. Sean FitzPatrick is the sole member of Secured and Collateralized Lending LLC. Secured and Collateralized Lending LLC is located at 100 Golf House Road, Haverford, Pennsylvania 19041.
     
(20) COVA Capital Partners, LLC is a broker-dealer and is also an affiliate of a broker-dealer. COVA Capital Partners, LLC purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities. Edward T. Gibstein is the Chief Executive Officer of COVA Capital Partners, LLC and has voting and dispositive power over the securities held by it. COVA Capital Partners, LLC is located at 6851 Jericho Turnpike Suite 120A, Syosset, New York 11791.
     
(21) Includes 13,700 shares of common stock issuable upon exercise of the Warrants. Jonathan Gazdak is the Managing Director of Alexander Capital, L.P. which acted as a placement agent for our Note financing. Jonathan Gazdak is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(22) Includes 4,388 shares of common stock issuable upon exercise of the Warrants. Rocco Guidicipietro is affiliated with Alexander Capital, L.P. which acted as a placement agent for our Note financing. Rocco Guidicipietro is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(23) Includes 4,388 shares of common stock issuable upon exercise of the Warrants. Joseph Amato is affiliated with Alexander Capital, L.P. which acted as a placement agent for our Note financing. Joseph Amato is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(24) Includes 1,224 shares of common stock issuable upon exercise of the Warrants. Stephen Walsh is affiliated with Alexander Capital, L.P. which acted as a placement agent for our Note financing. Stephen Walsh is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(25) Includes 15,082 shares of common stock issuable upon exercise of the Warrants. Chris Carlin is affiliated with Alexander Capital, L.P. which acted as a placement agent for our Note financing. Chris Carlin is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.
     
(26) Includes 41,202 shares of common stock issuable upon exercise of the Warrants. Legend Securities, Inc. acted as a placement agent for our Series A preferred stock financing. Legend Securities, Inc. is a broker-dealer. Legend Securities, Inc. is located at 45 Broadway 32nd Floor, New York, NY 10006.
     
(27) Includes 37,675 shares of common stock issuable upon exercise of the Warrants. Mr. Coffey acted as a placement agent for our Series A preferred stock financing. Mr. Coffey is an affiliate of a broker-dealer.
     
(28)

Includes 27,782 shares of common stock issuable upon exercise of the Warrants. Mr. Eisenman is affiliated with Newbridge Securities Corporation which was a placement agent for our Series A and Series B preferred stock financings. Mr. Eisenman is an affiliate of a broker-dealer. He purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.

 

(29) Includes 24,155 shares of common stock issuable upon exercise of the Warrants. Leone G.I.S. LLC acted as a placement agent for our Series A and B preferred stock financings. Leone G.I.S. LLC is a broker-dealer. Eugene Bilotti controls Leone G.I.S. LLC which is located at 34 Marina Dr. Bayonne, NJ 07002.
     
(30) Includes 200 shares of common stock issuable upon exercise of the Warrants. Jesse Krapf is affiliated with Newbridge Securities Corporation which acted as a placement agent for our Series B preferred stock financing. Jesse Krapf is an affiliate of a broker-dealer.
     
(31) Includes 200 shares of common stock issuable upon exercise of the Warrants. Val Rayevsky is affiliated with Newbridge Securities Corporation which acted as a placement agent for our Series B preferred stock financing. Val Rayevsky is an affiliate of a broker-dealer.
     
(32) Includes 825 shares of common stock issuable upon exercise of the Warrants. Mike Nessim is affiliated with Newbridge Securities Corporation which acted as a placement agent for our Series B preferred stock financing. Mike Nessim is an affiliate of a broker-dealer.
     
(33) Includes 200 shares of common stock issuable upon exercise of the Warrants. Kevin Jones is affiliated with Newbridge Securities Corporation which acted as a placement agent for our Series B preferred stock financing. Kevin Jones is an affiliate of a broker-dealer.
     
(34) Includes 2,005 shares of common stock issuable upon exercise of the Warrants. Newbridge Securities Corporation acted as a placement agent for our Series B preferred stock financing. Bruce Jordan is the Managing Director of Newbridge Securities Corporation and has voting and dispositive power over the securities held by it. Newbridge Securities Corporation is a broker-dealer. Newbridge Securities Corporation is located at 5200 Town Center Circle Tower 1, Suite 306, Boca Raton, FL 33486.
     
(35) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(36) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(37) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(38) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(39) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(40) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(41) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(42) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(43) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(44) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(45) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(46) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(47) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(48) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(49) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(50) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(51) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(52) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(53) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(54) Includes 8,424 shares of common stock issuable upon conversion of the 2018 Notes and 6,318 shares of common stock issuable upon exercise of the Warrants.
     
(55) Includes 15,796 shares of common stock issuable upon conversion of the 2018 Notes and 11,847 shares of common stock issuable upon exercise of the Warrants.
     
(56) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(57) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(58) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(59) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(60) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(61) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(62) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(63) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(64) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(65) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(66) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(67) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(68) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(69) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(70) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(71) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(72) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(73) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(74) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(75) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(76) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(77) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(78) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(79) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(80) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(81) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(82) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(83) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(84) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(85) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(86) Includes 4,212 shares of common stock issuable upon conversion of the 2018 Notes and 3,159 shares of common stock issuable upon exercise of the Warrants.
     
(87) Includes 7,371 shares of common stock issuable upon conversion of the 2018 Notes and 5,528 shares of common stock issuable upon exercise of the Warrants.
     
(88) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(89) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(90) Includes 10,531 shares of common stock issuable upon conversion of the 2018 Notes and 7,898 shares of common stock issuable upon exercise of the Warrants.
     
(91) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(92) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(93) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(94) Includes 7,898 shares of common stock issuable upon conversion of the 2018 Notes and 5,923 shares of common stock issuable upon exercise of the Warrants.
     
(95) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(96) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(97) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(98) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(99) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(100) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(101) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(102) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(103) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(104) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(105) Includes 8,424 shares of common stock issuable upon conversion of the 2018 Notes and 6,318 shares of common stock issuable upon exercise of the Warrants.
     
(106) Includes 8,424 shares of common stock issuable upon conversion of the 2018 Notes and 6,318 shares of common stock issuable upon exercise of the Warrants.
     
(107) Includes 7,371 shares of common stock issuable upon conversion of the 2018 Notes and 5,528 shares of common stock issuable upon exercise of the Warrants.
     
(108) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(109) Includes 3,159 shares of common stock issuable upon conversion of the 2018 Notes and 2,369 shares of common stock issuable upon exercise of the Warrants.
     
(110) Includes 6,318 shares of common stock issuable upon conversion of the 2018 Notes and 4,738 shares of common stock issuable upon exercise of the Warrants.
     
(111) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(112) Includes 5,265 shares of common stock issuable upon conversion of the 2018 Notes and 3,948 shares of common stock issuable upon exercise of the Warrants.
     
(113) Includes 6,306 shares of common stock issuable upon conversion of the 2018 Notes and 4,729 shares of common stock issuable upon exercise of the Warrants.
     
(114) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(115) Includes 10,510 shares of common stock issuable upon conversion of the 2018 Notes and 7,882 shares of common stock issuable upon exercise of the Warrants.
     
(116) Includes 3,153 shares of common stock issuable upon conversion of the 2018 Notes and 2,364 shares of common stock issuable upon exercise of the Warrants.
     
(117) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(118) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(119) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(120) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(121) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(122) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(123) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(124) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(125) Includes 3,153 shares of common stock issuable upon conversion of the 2018 Notes and 2,364 shares of common stock issuable upon exercise of the Warrants.
     
(126) Includes 3,153 shares of common stock issuable upon conversion of the 2018 Notes and 2,364 shares of common stock issuable upon exercise of the Warrants.
     
(127) Includes 7,357 shares of common stock issuable upon conversion of the 2018 Notes and 5,517 shares of common stock issuable upon exercise of the Warrants.
     
(128) Includes 2,102 shares of common stock issuable upon conversion of the 2018 Notes and 1,576 shares of common stock issuable upon exercise of the Warrants.
     
(129) Includes 3,153 shares of common stock issuable upon conversion of the 2018 Notes and 2,364 shares of common stock issuable upon exercise of the Warrants.
     
(130) Includes 10,510 shares of common stock issuable upon conversion of the 2018 Notes and 7,882 shares of common stock issuable upon exercise of the Warrants.
     
(131) Includes 4,204 shares of common stock issuable upon conversion of the 2018 Notes and 3,153 shares of common stock issuable upon exercise of the Warrants.
     
(132) Includes 6,306 shares of common stock issuable upon conversion of the 2018 Notes and 4,729 shares of common stock issuable upon exercise of the Warrants.
     
(133) Includes 10,510 shares of common stock issuable upon conversion of the 2018 Notes and 7,882 shares of common stock issuable upon exercise of the Warrants.
     
(134) Includes 10,510 shares of common stock issuable upon conversion of the 2018 Notes and 7,882 shares of common stock issuable upon exercise of the Warrants.
     
(135) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(136) Includes 10,510 shares of common stock issuable upon conversion of the 2018 Notes and 7,882 shares of common stock issuable upon exercise of the Warrants.
     
(137) Includes 2,102 shares of common stock issuable upon conversion of the 2018 Notes and 1,576 shares of common stock issuable upon exercise of the Warrants.
     
(138) Includes 5,255 shares of common stock issuable upon conversion of the 2018 Notes and 3,941 shares of common stock issuable upon exercise of the Warrants.
     
(139) Includes 3,145 shares of common stock issuable upon conversion of the 2018 Notes and 2,358 shares of common stock issuable upon exercise of the Warrants.
     
(140) Includes 5,242 shares of common stock issuable upon conversion of the 2018 Notes and 3,931 shares of common stock issuable upon exercise of the Warrants.
     
(141) Includes 60,941 shares of common stock issuable upon exercise of the Warrants. Alexander Capital, L.P. was the placement agent for the 2018 Notes. Jonathan Gazdak is the Managing Director of Alexander Capital, L.P. which is a broker-dealer. It purchased the securities in the ordinary course of business, and at the time of the purchase of the securities, did not have any agreements or understandings, directly or indirectly, with any purchase to distribute the securities.

 

4
 

 

PLAN OF DISTRIBUTION

 

We are registering for resale by the Selling Stockholders from time to time after the date of this Selling Stockholder Prospectus a total of 2,469,221 shares of common stock underlying the Notes and the Warrants. We will not receive any of the proceeds from the sale by the Selling Stockholders of the shares of common stock. See “Use of Proceeds” beginning on page 7 of this Selling Stockholder Prospectus. We will bear all fees and expenses incident to our obligation to register the shares of common stock.

 

The Selling Stockholders and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock registered hereby in the over-the-counter market or other national securities exchange or automated interdealer quotation system on which our common stock is then listed or quoted, or through one or more underwriters, broker-dealers or agents. If the shares of common stock are sold through underwriters or broker-dealers, the Selling Stockholders will be responsible for underwriting discounts or commissions or agent’s commissions. The shares of common stock may be sold in one or more transactions at fixed prices, at prevailing market prices at the time of the sale, at varying prices determined at the time of sale, or at negotiated prices. The Selling Stockholders may use any one or more of the following methods when selling their shares of common stock:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
     
  block trades in which the broker-dealer will attempt to sell the shares of common stock as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  settlement of short sales;
     
  in transactions through broker-dealers that agree with the Selling Stockholders to sell a specified number of such shares of common stock at a stipulated price per share;
     
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell the shares of common stock under Rule 144 under the Securities Act, if available, rather than under this Selling Stockholder Prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of the shares of common stock, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with FINRA IM-2440.

 

5
 

 

In connection with the sale of the shares of common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the shares of common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell the shares of common stock short and deliver these shares of common stock to close out its short positions, or loan or pledge the shares of common stock to broker-dealers that in turn may sell these shares of common stock. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of the shares of common stock offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares of common stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. The Selling Stockholders have informed us that they do not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the shares of common stock.

 

We are required to pay certain fees and expenses incurred by us incident to the registration of the shares of common stock. We have agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed the Selling Stockholders of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).

 

6
 

 

USE OF PROCEEDS

 

The proceeds from the sale of the shares offered pursuant to this Selling Stockholder Prospectus are solely for the accounts of the Selling Stockholders. Accordingly, we will not receive any of the proceeds from the sale of shares offered by this Selling Stockholder Prospectus. See “Selling Stockholders” and “Plan of Distribution.”

 

We will however, receive proceeds upon the exercise of the Warrants, with respect to which the underlying shares of common stock are being registered in the registration statement of which this Selling Stockholder Prospectus forms a part, provided that the Warrants are exercised for cash. If exercised, we plan to use the proceeds from the exercise of such Warrants for working capital and general corporate purposes. If all of the Warrants are exercised, and assuming they are not exercised using a cashless exercise procedure, this would result in an aggregate of approximately $7,612,608 of possible funding, calculated using the midpoint of the price range listed on the cover page of the Prospectus. However, the timing and manner of use of the net proceeds may vary, depending on the number of Warrants exercised and the time of exercise, the applicable exercise price at the time of exercise, the amount of actual proceeds actually received, if any, the timing of the receipt of such proceeds, our rate of growth and other factors. The foregoing represents our best estimate of our use of the net proceeds of the offering based on current planning and business conditions. We reserve the right to change our use of proceeds when and if market conditions or unexpected changes in operating conditions or results occur, or in our management’s discretion. Pending the use of the net proceeds from the cash exercise of the Warrants as described above, we intend to invest the proceeds in investment grade, interest-bearing instruments. Additionally, we can provide no assurances that any of the Warrants will be exercised in the future, or that such exercise will be in cash.

 

The Selling Stockholders will pay any underwriting discounts and commissions and expenses incurred by the Selling Stockholders for brokerage, accounting, tax or legal services or any other expenses incurred by the Selling Stockholders in disposing of the shares. We will bear all other costs, fees, and expenses incurred in effecting the registration of the shares covered by this Selling Stockholder Prospectus, including, without limitation, all registration and filing fees, exchange listing fees (if any), and fees and expenses of our counsel and our accountants.

 

7
 

 

DETERMINATION OF OFFERING PRICE

 

There currently is no public market for our common stock. The Selling Stockholders will determine at what price they may sell the offered shares, and such sales may be made at prevailing market prices or at privately negotiated prices. See “Plan of Distribution.”

 

8
 

 

LEGAL MATTERS

 

Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by K&L Gates LLP, Irvine, California.

 

9
 

 

2,469,221 Shares of

 

Common Stock

 

 

 

PROSPECTUS

 

    , 2018

 

 
 

 

PART II

 

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution.

 

The following table indicates the expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the Securities and Exchange Commission registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the Nasdaq Capital Market listing fee.

 

      Amount
to be Paid
  
SEC registration fee    $ 5,824   
FINRA filing fee    $ 2,750   
The Nasdaq Capital Market initial listing fee    $ 75,000   
Printing and engraving expenses    $ 10,000   
Accounting fees and expenses    $ 50,000   
Legal fees and expenses    $ 250,000   
Transfer agent and registrar fees    $ 20,000   
Miscellaneous fees and expenses    $ 75,000   
Total    $ 488,574   

 

Item 14. Indemnification of Directors and Officers.

 

Section 102 of the General Corporation Law of the State of Delaware permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for breaches of the director’s duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of a law, authorizations of the payments of a dividend or approval of a stock repurchase or redemption in violation of Delaware corporate law or for any transactions from which the director derived an improper personal benefit. Our certificate of incorporation will provide that no director will be liable to us or our stockholders for monetary damages for breach of fiduciary duties as a director, subject to the same exceptions as described above. We intend to enter into indemnification agreements with each of our directors which may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. We also expect to maintain standard insurance policies that provide coverage (1) to our directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments we may make to such officers and directors.

 

II- 1
 

 

Section 145 of the General Corporation Law of the State of Delaware provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with a threatened, pending, or completed action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, indemnification is limited to expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with defense or settlement of such action or suit and no indemnification shall be made with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. In addition, to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding described above (or claim, issue, or matter therein), such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be advanced by the corporation upon receipt of an undertaking by such person to repay such amount if it is ultimately determined that such person is not entitled to indemnification by the corporation under Section 145 of the General Corporation Law of the State of Delaware. Our amended and restated certificate of incorporation will provide that we will, to the fullest extent permitted by law, indemnify any person made or threatened to be made a party to an action or proceeding by reason of the fact that he or she (or his or her testators or intestate) is or was our director or officer or serves or served at any other corporation, partnership, joint venture, trust or other enterprise in a similar capacity or as an employee or agent at our request, including service with respect to employee benefit plans maintained or sponsored by us, against expenses (including attorneys’), judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend, or defense of such action, suit, proceeding, or claim. However, we are not required to indemnify or advance expenses in connection with any action, suit, proceeding, claim, or counterclaim initiated by us or on behalf of us. Our amended and restated bylaws will provide that we will indemnify and hold harmless each person who was or is a party or threatened to be made a party to any action, suit, or proceeding by reason of the fact that he or she is or was our director or officer, or is or was serving at our request in a similar capacity of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (whether the basis of such action, suit, or proceeding is an action in an official capacity as a director or officer or in any other capacity while serving as a director of officer) to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability and loss (including attorney’s fees, judgments, fines, ERISA excise taxes, or penalties and amounts paid in settlement) reasonably incurred or suffered by such person in connection with such action, suit or proceeding, and this indemnification continues after such person has ceased to be an officer or director and inures to the benefit of such person’s heirs, executors and administrators. The indemnification rights also include the right generally to be advanced expenses, subject to any undertaking required under Delaware General Corporation Law, and the right generally to recover expenses to enforce an indemnification claim or to defend specified suits with respect to advances of indemnification expenses.

 

Item 15. Recent Sales of Unregistered Securities.

 

Set forth below is information regarding securities sold and issued by us since January 1, 2014 that were not registered under the Securities Act, as well as the consideration received by us for such securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

 

(1) On July 25, 2016, we issued 299,400 shares of common stock to Steven A. Cantor, our previous Co-Chief Executive Officer and a previous member of our board of directors, pursuant to his Employment Agreement, dated September 4, 2013.
     
(2) On July 25, 2016, we issued 299,400 shares of common stock to Corbiz, LLC pursuant to a unanimous written consent of the board of directors, dated September 4, 2013.
     
(3) On May 5, 2016 and pursuant to his employment agreement, we issued a five-year warrant to purchase 416,667 shares of our common stock to Mr. Cantor, at a per share exercise price of $6.00. As of June 30, 2017, Mr. Cantor returned to us 250,000 of such warrants and transferred the balance of 166,667 warrants to others.
     
(4) On November 28, 2016, we completed a private placement of our Series A preferred stock, or the Series A Offering. We issued an aggregate of 1,005,700 shares of Series A preferred stock at a purchase price of $5.00 per share. We received aggregate gross proceeds of $5.
     
(5) From December 4, 2015 to December 1, 2016, we issued five-year warrants to 3 placement agents in the Series A Offering, to purchase an aggregate of 52,850 shares of our Series A preferred stock at an initial exercise price of $10.00 per share.

 

II- 2
 

 

(6) On August 31, 2016, we issued 123,481 shares of our common stock to Biodyne Holding, S.A., pursuant to an amendment to the Loan Agreement, dated as of June 30, 2015.
     
(7) From September 2016 to date, we granted stock options under our 2016 Omnibus Incentive Plan to purchase an aggregate of 1,422,000 shares of common stock at an exercise price of $10.00 per share to certain directors, officers, employees and service providers.
     
(8) On October 1, 2016, we agreed to issue 10,000 shares of our common stock to CorProminence LLC in accordance with a marketing and consulting agreement dated August 18, 2016, in exchange for consulting services to be rendered by CorProminence LLC.
     
(9) From February 14, 2017 to date, we issued 253,792 shares of our Series B Preferred Stock in foreign and private offerings to a total of 34 investors for a price of $12.00 per share. We received aggregate gross proceeds of $1,522,752.
     
(10) From June 6, 2017 to January 16 , 2018, we completed a private placement of approximately $2,750,500 in our convertible notes, or the 2017 Notes. We subsequently amended and restated the 2017 Notes on December 29, 207. The initial conversion price was $12.00 and each purchaser was issued a warrant to purchase 100% additional shares of common stock with an initial exercise price of $14.40. We paid approximately $129,030 to our placement agent Alexander Capital LP and issued it warrants to purchase shares of our common stock.
     
(11) During January 2018, we completed a private placement of $2,897,500 in our convertible notes. The initial conversion price is $12.00 and each purchaser was issued a warrant to purchase 75% additional shares of common stock with an initial exercise price of $14.40. We paid approximately $289,750 to our placement agent Alexander Capital LP and issued it warrants to purchase shares of our common stock.

 

The offers, sales and issuances of securities listed in items (1) through (6) and (8) through (10) and (11) above, were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering. The recipients of such securities in each of these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The offers, sales and issuances of securities listed in item (7) above, were deemed exempt from registration in reliance on Section 4(a)(2) of the Securities Act or Rule 701 promulgated thereunder as transactions pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our stock option plans. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act and appropriate legends were affixed to the securities issued in such transactions.

 

Item 16. Exhibits and Financial Statement Schedules.

 

(a) Exhibits.

 

The exhibits to the registration statement are listed in the Exhibit Index attached hereto and are incorporated by reference herein.

 

(b) Financial Statement Schedules .

 

All other schedules are omitted because they are not required, are not applicable, or the information is included in the financial statements or the related notes to financial statements thereto.

 

Item 17. Undertakings.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

 

II- 3
 

 

The undersigned registrant hereby undertakes:

 

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

 

(i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

 

(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;

 

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

(4) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser:

 

(i) Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and

 

(ii) Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date.

 

(5) That, for the purpose of determining liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities: the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

  (i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
     
  (ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

II- 4
 

 

  (iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
     
  (iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

(6) Provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

(7) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

 

(8) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

II- 5
 

 

EXHIBIT INDEX

 

Exhibit
Number
  Description of Exhibits
     
1.1 *   Form of Underwriting Agreement
3.1#   Third Amended and Restated Certificate of Incorporation, as currently in effect
3.2#   Bylaws, as currently in effect
3.3#   First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock
3.4#   Certificate of Amendment to Third Amended and Restated Certificate of Incorporation
3.5#   Certificate of Amendment to First Amended and Restated of Designation, Preferences, Rights and Limitations of Series B Convertible Preferred Stock
3.6 #   Form of Amended and Restated Certificate of Incorporation, to be in effect upon the completion of this offering
3.7#   Form of Amended and Restated Bylaws, to be in effect upon the completion of this offering
4.1#   Specimen common stock certificate
4.2#   Form of Investors’ Rights Agreement, by and among the Registrant and investors of Series A Preferred Stock
4.3#   Form of Investors’ Rights Agreement, by and among the Registrant and investors of Series B Preferred Stock
4.4#   Form of Series A Preferred Stock Placement Agents’ Warrant
4.5#   Form of Series B Preferred Stock Placement Agents’ Warrant
4.6#  

Form of Common Stock Purchase Warrant (issued in connection with the 2017 Notes)

4.7 #   Form of Underwriters’ Warrant
4.8#  

Form of Warrant to Purchase Shares of Common Stock (issued to Mr. Cantor)

4.9 #   Form of Amended and Restated Common Stock Purchase Warrant (issued in connection with the 2017 Notes)
4.10 #   Form of Common Stock Purchase Warrant (issued in connection with the 2018 Notes)
4.11   Form of Second Amended and Restated Common Stock Purchase Warrant (issued in connection with the 2017 Notes)
4.12   Form of Amended and Restated Common Stock Purchase Warrant (issued in connection with the 2018 Notes)

4.13*

  From of Warrant Agreement
4.14   Amendment to Warrant to Purchase Shares
5.1 *  

Opinion of Counsel to Registrant

10.1+#   2016 Omnibus Incentive Plan
10.2+#   Employment Agreement, dated as of August 30, 2016, by and between the Registrant and Benedict Broennimann, M.D.
10.3+#   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and William R. Abbott
10.4+#   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Marc Glickman, M.D.
10.5+#   Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Susan Montoya
10.6+#   Employment Agreement, dated as of July 1, 2016, by and between the Registrant and Steven Cantor
10.7#   Asset Purchase Agreement, dated as of March 18, 2016, by and between LeMaitre Vascular, Inc. and the Registrant
10.8#   Post-Acquisition Supply Agreement, dated as of March 18, 2016, by and between the Registrant and LeMaitre Vascular, Inc.
10.9#   Development and Manufacturing Agreement, dated as of February 1, 2013, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc.
10.10#   Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Steve Elias, M.D.
10.11#   Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Antonios Gasparis, M.D.
10.12#   Medical Advisory Board Agreement, dated as of September 1, 2016, by and between the Registrant and Wade Dimitri, M.D.
10.13#   Medical Advisory Board Agreement, dated as of October 1, 2016, by and between the Registrant and Afksendyios Kalangos, M.D.
10.14#   Standard Industrial/Commercial Single-Tenant Lease, dated as of September 20, 2017, by and between the Registrant and Corbiz, LLC
10.15#   Loan Agreement, dated as of June 30, 2015, by and between Biodyne Holding S.A. and the Registrant
10.16#   First Amendment to Loan Agreement, dated as of April 1, 2016, by and between Biodyne Holding S.A. and the Registrant
10.17#   Second Amendment to Loan Agreement, dated as of October 18, 2016, by and between Biodyne Holding S.A. and the Registrant
10.18#   Third Amendment to Loan Agreement, dated as of December 9, 2016, by and between Biodyne Holding S.A. and the Registrant
10.19#   Fourth Amendment to Loan Agreement, dated as of March 27, 2017, by and between Biodyne Holding S.A. and the Registrant
10.20#   Fifth Amendment to Loan Agreement, dated as of June 26, 2017, by and between Biodyne Holding S.A. and the Registrant
10.21#   Common Stock Purchase Agreement, dated as of April 1, 2016, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc.
10.22#   Services and Material Supply Agreement, dated as of March 4, 2016, by and between the Registrant and ATSCO, Inc.
10.23+#   First Amendment to Employment Agreement, dated as of June 1, 2017, by and between the Registrant and William Abbott
10.24+#   First Amendment to Employment Agreement, dated as of December 1, 2016, by and between the Registrant and Steven Cantor
10.25+#   Second Amendment to Employment Agreement, dated as of June 12, 2017, by and between the Registrant and Steven Cantor
10.26#   Securities Purchase Agreement dated as of June 15, 2017, by and among the Registrant and each purchaser identified on the signature pages thereto (2017 Note)
10.27#   Promissory Note, dated June 15, 2017, by and between the Registrant and Hancock Jaffe Laboratories Aesthetic, Inc.
10.28#   Promissory Note, dated August 22, 2017, by and between the Registrant and Hancock Jaffe Laboratories Aesthetic, Inc.
10.29+# Form of Amendment to 2016 Omnibus Incentive Plan
10.30#   Form of Indemnification Agreement
10.31+#   Form of Notice of Grant of Stock Option under the 2016 Plan
10.32#   Form of Convertible Note (2017 Note)
10.33#   Form of Subscription Agreement
10.34#   Agreement for Purchase of Corporate Assets, dated May 10, 2013, by and between the Registrant and Leman Cardiovascular S.A.
10.35#   Promissory Note, dated May 10, 2013, by and between the Registrant and Leman Cardiovascular S.A. as amended
10.36#   Convertible Promissory Note, dated June 26, 2015, by and between the Registrant and Biodyne Holding S.A.
10.37 #  

Amendment to Securities Purchase Agreement, dated December 29, 2017, by and among the Registrant and the holders signatory thereto (2017 Note)

10.38 #  

Form of Amended and Restated Convertible Note (2017 Note)

10.39 #  

Form of Securities Purchase Agreement, by and between the Registrant and the holders signatory thereto (2018 Note)

10.40 #   Form of Convertible Note (2018 Note)
10.41 #   Form of Promissory Note (December Note)
10.42   Second Amendment to Securities Purchase Agreement, dated February 28, 2018, by and among the Registrant and holders signatory thereto (2017 Note)
10.43   Form of Second Amended and Restated Convertible Note (2017 Note)
10.44   Amendment to Securities Purchase Agreement, dated February 28, 2018, by and among the Registrant and the holders signatory thereto (2018 Note)
10.45   Form of Amended and Restated Convertible Note (2018 Note)
10.46   First Amendment to Employment Agreement, dated as of April 2, 2018, by and between the Registrant and Benedict Broennimann, M.D.
10.47   Employment Agreement, dated as of March 30, 2018, by and between the Registrant and Robert A. Berman.
10.48   Sixth Amendment to Loan Agreement, dated as of January 11, 2018, by and between Biodyne Holding S.A. and the Registrant
10.49   Seventh Amendment to Loan Agreement, dated as of March 30, 2018, by and between Biodyne Holding S.A. and the Registrant
21.1#   Subsidiaries of the Registrant
23.1   Consent of Marcum LLP, independent registered public accounting firm
23.2 *   Consent of Counsel to the Registrant (included in Exhibit 5.1)
24.1#   Power of Attorney (included on signature page to this registration statement)

 

*   To be filed by amendment.
+   Indicates a management contract or compensatory plan.
#   Previously filed.

 

 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Amendment No. 5 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on this 16th day of April , 2018.

 

   HANCOCK JAFFE LABORATORIES, INC.
        
   By: /s/ Robert A. Berman
   Robert A. Berman
   Chief Executive Officer

 

Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 5 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

 

Signature    Title    Date
              
/s/ Robert A. Berman    Chief Executive Officer and Director    April 16 , 2018
Robert A. Berman    (Principal Executive Officer)        
              
/s/ William R. Abbott    Senior Vice President, Chief Financial Officer    April 16 , 2018
William R. Abbott    (Principal Financial Officer and Principal Accounting Officer)   
*            
   Chief Medical Officer, OUS    April 16 , 2018
Benedict Broennimann, M.D.           
         
/s/ Yury Zhivilo    Chairman and Director    April 16 , 2018
Yury Zhivilo            
              
*            
      Director    April 16 , 2018
Robert A. Anderson            
              
*            
      Director    April 16 , 2018
Robert W. Doyle            
              
*            
      Director    April 16 , 2018
Steven Girgenti            

 

*By: /s/ Yury Zhivilo   
   Yury Zhivilo   
   Attorney-in-Fact   

 

 
 

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF CORPORATE COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

SECOND AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT

HANCOCK JAFFE LABORATORIES, INC

 

Original Issue Date: June 15, 2017

Amended and Restated: December 29, 2017

Amended and Restated: February __, 2018

 

THIS SECOND AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT (the “ Warrant ”) certifies that, for value received [  ] or its assigns (the “ Holder ”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth and in the Securities Purchase Agreement, dated June 15, 2017, by and among Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”) and the investors party thereto (as it may be amended, amended and restated or otherwise modified from time to time, the “ Purchase Agreement ”), at any time on or after the Original Issue Date and on or prior to the close of business on the fifth anniversary of the Original Issue Date (the “ Termination Date ”) but not thereafter, to subscribe for and purchase from the Company, up to a number of shares of the Company’s common stock, par value $0.00001 per share, (the “ Common Stock ”) equal to one hundred percent (100%) of the number of shares of Common Stock issued upon conversion of the Holder’s Note at the applicable Conversion Price under the Note (as subject to adjustment hereunder, the “ Warrant Shares ”).

 

Section 1. Definitions . Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Second Amended and Restated Convertible Notes, dated February __, 2018, issued by the Company to the Holder pursuant to the Purchase Agreement (as they may be amended, amended and restated or otherwise modified from time to time, the “ Notes ”).

 

  1  

 

 

Section 2. Exercise .

 

a) Exercise of Warrant . Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as the Company may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed copy of the Notice of Exercise form annexed hereto and within three (3) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the Common Stock thereby purchased by wire transfer to an account designated by the Company or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 2(c) below. If the amount of payment received by the Company is less than the aggregate Exercise Price of the Warrant Shares being purchased, the Holder shall make payment of the deficiency within three (3) Trading Days following notice thereof. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall automatically reduce the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two (2) Business Days of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

b) Exercise Price . The exercise price per Warrant Share under this Warrant shall be the lesser of (a) $14.40 or (b) 120% of the Conversion Price (the “ Exercise Price ”).

 

c) Cashless Exercise . In connection with a Cashless Exercise, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exercise (the “ Total Number ”) less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the applicable existing Exercise Price by (B) the Fair Market Value. “ Fair Market Value ” shall mean: (1) if the Warrant Shares are listed on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the Pink OTC Markets (or any successors to any of the foregoing), the last reported sale price of the Warrant Shares on such exchange on the date for which the determination is being made; or (2) if the Warrant Shares are not so listed, “ Fair Market Value ” shall be determined in good faith by the Board of Directors of the Company.

 

  2  

 

 

d) Mechanics of Exercise .

 

i. Delivery of Warrant Shares Upon Exercise . The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the transfer agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“ DWAC ”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) the earlier of (A) three (3) Trading Days after the delivery to the Company of the Notice of Exercise and (B) one (1) Trading Day after delivery of the aggregate Exercise Price and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “ Warrant Share Delivery Date ”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised in accordance with the requirements of the preceding sentence and with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, prior to the issuance of such shares of Common Stock, having been paid. As used herein, “ Standard Settlement Period ” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.

 

ii. Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

iii. Rescission Rights . If the Company fails to cause the transfer agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

iv. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise . In addition to any other rights available to the Holder, if the Company fails to cause the transfer agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder subject to payment of the Exercise Price therefor. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of Warrant Shares with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

  3  

 

 

v. No Fractional Shares . No fractional shares of Common Stock shall be issued upon the exercise of this Warrant. As to any fraction of a share of Common Stock which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round to the nearest whole share of Common Stock.

 

Section 3. Certain Adjustments .

 

a) Issuance of Additional Shares of Common Stock .

 

i. Until the Company consummates its IPO, in the event the Company shall issue any Additional Common Shares (as defined below), at a price per share less than the Exercise Price then in effect or without consideration, then the Exercise Price upon each such issuance shall be adjusted to that price determined by multiplying the Exercise Price then in effect by a fraction:

 

(A) the numerator of which shall be equal to the sum of (x) the number of outstanding shares of Common Stock (assuming full exercise, conversion or exchange of all warrants and other securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, Common Stock) immediately prior to the issuance of such Additional Common Shares plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Common Shares so issued would purchase at a price per share equal to the Exercise Price then in effect, and

 

(B) the denominator of which shall be equal to the number of outstanding shares of Common Stock (assuming full exercise, conversion or exchange of all warrants and other securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, Common Stock) immediately after the issuance of such Additional Common Shares.

 

  4  

 

 

ii. “ Additional Common Shares ” means all Common Stock issued by the Company after the date hereof, except: (i) securities issued (other than for cash) in connection with a merger, acquisition, or consolidation, (ii) securities issued pursuant to the conversion or exercise of convertible or exercisable securities issued or outstanding on or prior to the date of the Purchase Agreement or issued pursuant to the Purchase Agreement (so long as the conversion or exercise price in such securities are not amended to lower such price and/or adversely affect the Holders), (iii) the Warrant Shares, (iv) securities issued in connection with bona fide strategic license agreements or other partnering arrangements so long as such issuances are not for the purpose of raising capital, (v) Common Stock issued to the Company’s employees, directors or advisors, (vi) any warrants issued to any placement agent and its designees for the transactions contemplated by the Purchase Agreement and (vii) Common Stock issued in the IPO.

 

b) Stock Dividends, Splits, Etc . If the Company subdivides the outstanding shares of the Common Stock by reclassification or otherwise into a greater number of shares, the number of Warrant Shares purchasable hereunder shall be proportionately increased and the Exercise Price shall be proportionately decreased. If the outstanding shares of the Common Stock are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Exercise Price shall be proportionately increased and the number of Warrant Shares shall be proportionately decreased. The Exercise Price set forth above reflects any stock splits effected by the Company after June 15, 2017 and prior to December 31, 2017.

 

c) Calculations . All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock issued and outstanding.

 

d) Notice to Holder .

 

i. Adjustment to Exercise Price . Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

ii. Notice to Allow Exercise by Holder . If (A) the Company shall declare a dividend on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any Common Stock of any class or of any rights, (D) the approval of any members of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock are converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously publicly disclose such notice. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

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e) Voluntary Adjustment By Company . The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

 

Section 4. Transfer of Warrant .

 

a) Transferability . Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer, but only after such transferee agrees to be bound by the provisions of this Agreement. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

b) New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

  6  

 

 

c) Warrant Register . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

d) Transfer Restrictions . The Warrant may only be disposed of in compliance with state and federal securities laws and shall not transferred unless the Warrant is (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144 under the Securities Act.

 

e) Representation by the Holder . The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

 

Section 5. Miscellaneous .

 

a) No Rights as Stockholder Until Exercise . This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i), except as expressly set forth in Section 3.

 

b) Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

c) Saturdays, Sundays, Holidays, etc . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

 

d) Authorized Common Stock .

 

The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

 

  7  

 

 

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (ii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body having jurisdiction thereof.

 

e) Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.

 

f) Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

g) Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder or Company shall operate as a waiver of such right or otherwise prejudice the Holder’s or Company’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If either party willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the other, the first party shall pay to the other party such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the affected party in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

h) Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via email or facsimile at the email address or facsimile number set forth on the signature pages attached to the Purchase Agreement at or prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of email or facsimile transmission, if such notice or communication is delivered via email or facsimile at the email address or facsimile number set forth on the signature pages attached to the Purchase Agreement on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature page attached to the Purchase Agreement.

 

  8  

 

 

i) Limitation of Liability . No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

j) Remedies . The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

k) Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

l) Amendment . This Warrant may be modified or amended or the provisions hereof waived in accordance with the Purchase Agreement. This Warrant amends and restates in its entirety the Amended and Restated Common Stock Purchase Warrant issued to Holder on December 29, 2017 which is hereby superseded in its entirety by the terms hereof.

 

m) Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

n) Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

  9  

 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
  Name: William Abbott
  Title: Chief Financial Officer

 

     

 

 

NOTICE OF EXERCISE

 

TO: HANCOCK JAFFE LABORATORIES, INC.

 

(1) The undersigned hereby elects to purchase Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box): [ ] lawful money of the United States; or [ ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3) If in connection with any IPO conducted by the Company, please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

________________________________________________

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

 

________________________________________________

 

________________________________________________

 

________________________________________________

 

(4) Accredited Investor . The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended, and that the aforesaid Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such Common Stock.

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: _____________________

 

Signature of Authorized Signatory of Investing Entity: __________________________

 

Name of Authorized Signatory: __________________________

 

Title of Authorized Signatory: ______________________

 

Date: ___________________________

 

     

 

 

ASSIGNMENT FORM

 

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

 

FOR VALUE RECEIVED, [______] all of or [_____] Common Stock of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

__________________________________________________________________________________whose address is

________________________________________________________________________________________.

 

Dated: __________________, ____________

 

  Holder’s Signature:    
  Holder’s Address:    
       

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of limited liability companies and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

     

 

 

 

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF CORPORATE COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT

Hancock Jaffe Laboratories, Inc.

 

Original Issue Date: January __, 2018

Amended and Restated: February __, 2018

 

THIS AMENDED AND RESTATED COMMON STOCK PURCHASE WARRANT (the “ Warrant ”) certifies that, for value received [*] or its assigns (the “ Holder ”) is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth and in the Securities Purchase Agreement, dated as of January 5, 2018, by and among Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”) and the Holders signatory thereto, as amended, modified or supplemented from time to time in accordance with its terms (as it may be amended, amended and restated or otherwise modified from time to time, the “ Purchase Agreement ”), at any time on or after the Original Issue Date and on or prior to the close of business on the fifth (5th) anniversary of the Original Issue Date (the “ Termination Date ”) but not thereafter, to subscribe for and purchase from the Company, subject to adjustment as set forth in Section 2.2(a)(iii) of the Purchase Agreement, up to a number of shares of the Company’s common stock, par value $0.00001 per share (the “ Common Stock ”) equal to seventy-five percent (75%) of the number of shares of Common Stock issued upon conversion of the Holder’s Note at the applicable Conversion Price under the Note (as subject to adjustment hereunder, the “ Warrant Shares ”).

 

Section 1. Definitions . Capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Amended and Restated Convertible Notes, dated February __, 2018, issued by the Company to the purchasers pursuant to the Purchase Agreement (as they may be amended, amended and restated or otherwise modified from time to time, the “ Notes ”).

 

B- 1
 

 

Section 2. Exercise .

 

a) Exercise of Warrant . The exercise of this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as the Company may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed copy of the Notice of Exercise form annexed hereto (the “ Notice of Exercise ”) and within three (3) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price (as defined below) of the Warrant Shares thereby purchased by wire transfer to an account designated by the Company or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 2(c) below. If the amount of payment received by the Company is less than the aggregate Exercise Price of the Common Stock being purchased, the Holder shall make payment of the deficiency within three (3) Trading Days following notice thereof. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within three (3) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall automatically reduce the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise Form within two (2) Business Days of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.

 

b) Exercise Price . The exercise price per share of Common Stock under this Warrant shall be the lesser of (i) $14.40 or (ii) 120% of the applicable Conversion Price (the “ Exercise Price ”).

 

c) Cashless Exercise . In connection with a cashless exercise, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exercise (the “ Total Number ”) less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the applicable existing Exercise Price by (B) the Fair Market Value. “ Fair Market Value ” shall mean: (1) if the Warrant Shares are listed on the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the Pink OTC Markets (or any successors to any of the foregoing), the last reported sale price of the Warrant Shares on such exchange on the date for which the determination is being made; or (2) if the Warrant Shares are not so listed, “ Fair Market Value ” shall be determined in good faith by the Board of Directors of the Company.

 

B- 2
 

 

d) Mechanics of Exercise .

 

i. Delivery of Warrant Shares Upon Exercise . The Company shall cause the Warrant Shares purchased hereunder to be transmitted by the transfer agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“ DWAC ”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by Holder or (B) this Warrant is being exercised via cashless exercise, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is the earlier of (i) the earlier of (A) three (3) Trading Days after the delivery to the Company of the Notice of Exercise and (B) one (1) Trading Day after delivery of the aggregate Exercise Price and (ii) the number of Trading Days comprising the Standard Settlement Period after the delivery to the Company of the Notice of Exercise (such date, the “ Warrant Share Delivery Date ”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised in accordance with the requirements of the preceding sentence and with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, prior to the issuance of such shares of Common Stock, having been paid. As used herein, “ Standard Settlement Period ” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of the Notice of Exercise.

 

ii. Delivery of New Warrants Upon Exercise . If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

 

iii. Rescission Rights . If the Company fails to cause the transfer agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to Section 2(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.

 

iv. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Exercise . In addition to any other rights available to the Holder, if the Company fails to cause the transfer agent to transmit to the Holder a certificate or the certificates representing the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder subject to payment of the Exercise Price therefor. For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

 

B- 3
 

 

v. No Fractional Shares . No fractional shares of Common Stock shall be issued upon the exercise of this Warrant. As to any fraction of a share of Common Stock which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round to the nearest whole share of Common Stock.

 

Section 3. Certain Adjustments .

 

a) Issuance of Additional Shares of Common Stock .

 

i. Until the Company consummates its IPO, in the event the Company shall issue any Additional Shares of Common Stock (as defined below), at a price per share less than the Exercise Price then in effect or without consideration, then the Exercise Price upon each such issuance shall be adjusted to that price determined by multiplying the Exercise Price then in effect by a fraction:

 

(A) the numerator of which shall be equal to the sum of (x) the number of outstanding shares of Common Stock (assuming full exercise, conversion or exchange of all warrants and other securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock) immediately prior to the issuance of such Additional Shares of Common Stock plus (y) the number of shares of Common Stock (rounded to the nearest whole share) which the aggregate consideration for the total number of such Additional Shares of Common Stock so issued would purchase at a price per share equal to the Exercise Price then in effect, and

 

(B) the denominator of which shall be equal to the number of outstanding shares of Common Stock (assuming full exercise, conversion or exchange of all warrants and other securities which are convertible into or exercisable or exchangeable for, and any right to subscribe for, shares of Common Stock) immediately after the issuance of such Additional Shares of Common Stock.

 

B- 4
 

 

ii. “ Additional Shares of Common Stock ” means all shares of Common Stock issued by the Company after the date hereof, except: (i) securities issued (other than for cash) in connection with a merger, acquisition, or consolidation, (ii) securities issued pursuant to the conversion or exercise of convertible or exercisable securities issued or outstanding on or prior to the date of the Purchase Agreement or issued pursuant to the Purchase Agreement (so long as the conversion or exercise price in such securities are not amended to lower such price and/or adversely affect the Holders), (iii) the Warrant Shares, (iv) securities issued in connection with bona fide strategic license agreements or other partnering arrangements so long as such issuances are not for the purpose of raising capital, (v) shares of Common Stock issued to the Company’s employees, directors or advisors, (vi) any warrants issued to any placement agent and its designees for the transactions contemplated by the Purchase Agreement, and (vii) shares of Common Stock issued in the IPO.

 

c) Calculations . All calculations under this Section 3 shall be made to the nearest cent or the nearest 1/100th of a share of Common Stock, as the case may be. For purposes of this Section 3 , the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock issued and outstanding.

 

d) Notice to Holder .

 

i. Adjustment to Exercise Price . Whenever the Exercise Price is adjusted pursuant to any provision of this Section 3 , the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.

 

ii. Notice to Allow Exercise by Holder . If (A) the Company shall declare a dividend on the shares of Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of Common Stock rights or warrants to subscribe for or purchase any shares of Common Stock of any class or of any rights, (D) the approval of any members of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the shares of Common Stock are converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously publicly disclose such notice. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.

 

B- 5
 

 

e) Voluntary Adjustment By Company . The Company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

 

Section 4. Transfer of Warrant .

 

a) Transferability . Subject to compliance with any applicable securities laws and the conditions set forth in Section 4(d) hereof, this Warrant and all rights hereunder (including, without limitation, any registration rights) are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer, but only after such transferee agrees to be bound by the provisions of this Agreement. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.

 

b) New Warrants . This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 4(a) , as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the Original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.

 

c) Warrant Register . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

B- 6
 

 

d) Transfer Restrictions . The Warrant may only be disposed of in compliance with state and federal securities laws and shall not transferred unless the Warrant is (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144 under the Securities Act.

 

e) Representation by the Holder . The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.

 

Section 5. Miscellaneous .

 

a) No Rights as Stockholder Until Exercise . This Warrant does not entitle the Holder to any voting rights or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 2(d)(i) , except as expressly set forth in Section 3 .

 

b) Loss, Theft, Destruction or Mutilation of Warrant . The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

 

c) Saturdays, Sundays, Holidays . If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.

 

d) Authorized Common Stock . The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue). Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its organizational documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (ii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

 

B- 7
 

 

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body having jurisdiction thereof.

 

e) Jurisdiction . All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof.

 

f) Restrictions . The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.

 

g) Nonwaiver and Expenses . No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder or Company shall operate as a waiver of such right or otherwise prejudice the Holder’s or Company’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If either party willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the other, the first party shall pay to the other party such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the affected party in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.

 

h) Notices . Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via email or facsimile at the email address or facsimile number set forth on the signature pages attached to the Purchase Agreement at or prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of email or facsimile transmission, if such notice or communication is delivered via email or facsimile at the email address or facsimile number set forth on the signature pages attached to the Purchase Agreement on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature page attached to the Purchase Agreement.

 

B- 8
 

 

i) Limitation of Liability . No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any share of Common Stock or as a member of the Company, whether such liability is asserted by the Company or by creditors of the Company.

 

j) Remedies . The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

 

k) Successors and Assigns . Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.

 

l) Amendment . This Warrant may be modified or amended or the provisions hereof waived in accordance with the Purchase Agreement. This Warrant amends and restates in its entirety the original Common Stock Purchase Warrant issued to Holder on January __, 2018, which is hereby superseded in its entirety by the terms hereof.

 

m) Severability . Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

 

n) Headings . The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

 

B- 9
 

 

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

 

  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
  Name:

William Abbott

  Title:

Chief Financial Officer

 

 
 

 

NOTICE OF EXERCISE

 

TO: HANCOCK JAFFE LABORATORIES, INC.

 

(1) The undersigned hereby elects to purchase Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

(2) Payment shall take the form of (check applicable box): [  ] lawful money of the United States; or [  ] if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in subsection 2(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in subsection 2(c).

 

(3) If in connection with the IPO, please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

 

___________________________________________________

 

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

 

___________________________________________________

 

___________________________________________________

 

___________________________________________________

 

(4) Accredited Investor . The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended, and that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale, in connection with the distribution thereof, and that the undersigned has no present intention of distributing or reselling such shares of Common Stock.

 

[SIGNATURE OF HOLDER]

 

Name of Investing Entity: _____________________

 

Signature of Authorized Signatory of Investing Entity: __________________________

 

Name of Authorized Signatory: __________________________

 

Title of Authorized Signatory: ______________________

 

Date: ___________________________

 

 
 

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute

this form and supply required information.

Do not use this form to exercise the Warrant.)

 

FOR VALUE RECEIVED, [______] all of or [_____] shares of Common Stock of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

______________________________ ___________________________________________________whose address is ____________________________________________________________________________________________.

 

_______________________________________________________________

 

Dated: __________________, ____________

 

  Holder’s Signature:    
  Holder’s Address:    
       

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company. Officers of limited liability companies and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 
 

 

 

AMENDMENT TO WARRANT TO PURCHASE SHARES

 

This Amendment to Warrant to Purchase Shares (this “ Amendment ”), dated as of April 6, 2018, is by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), and [___________] (the “ Holder ”), and amends that certain Warrant to Purchase Shares, issued as of [__________], by the Company to the Holder (the “ Warrant ”). Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Warrant.

 

RECITALS

 

WHEREAS, the Warrant may be modified or amended with the written consent of the Company and the Holder; and

 

WHEREAS, the Company and the Holder desire to amend the Warrant to remove certain repricing provisions and the ratchet dilution adjustment provisions that would otherwise create derivative liability for the Company and negatively impact the Company’s shareholder’s equity, as hereinafter set forth and as subject to the terms and conditions of this Amendment.

 

AGREEMENT

 

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged and agreed, the parties hereby agree as follows:

 

1. Amendment to Section 3.4(d) . The following provision from Section 3.4(d) of the Warrant is hereby deleted:

 

provided , however , the Holder at its option may elect to receive an amount in unregistered shares of the common stock of the surviving entity equal to the value of this Warrant calculated in accordance with the Black-Scholes formula; provided , further , such shares of common stock shall be valued at a [thirty-five (35%) percent] discount to the VWAP of the common stock for the twenty (20) Business Days immediately prior to the Recap Event”.

 

New Section 3.4(d) of the Warrant shall now read as follows:

 

“(d) effect a capital reorganization or reclassification of its Common Stock, then, and in the case of each such Recap Event, proper provision shall be made to the ExercisePrice and the number of shares of Common Stock that may be purchased upon conversion of this Warrant so that, upon the basis and the terms and in the manner provided in this Warrant, the Holder shall be entitled upon the conversion hereof at any time after the consummation of such Recap Event, to the extent this Warrant is not converted prior to such Recap Event, to receive at the ExercisePrice in effect at the time immediately prior to the consummation of such Recap Event, in lieu of the Common Stock issuable upon such conversion of this Warrant prior to such Recap Event, the securities, cash and property to which such Holder would have been entitled upon the consummation of such Recap Event if such Holder had exercised the rights represented by this Warrant immediately prior thereto (including the right of a shareholder to elect the type of consideration it will receive upon a Recap Event), subject to adjustments (subsequent to such corporate action) as nearly equivalent as possible to the adjustments provided for elsewhere in this Section 3 .

 

2. Section 3.5 of the Warrant entitled “Adjustment for Sale of Shares Below Exercise Price” is deleted in its entirety.

 

3. Remainder of Warrant Unchanged . Except as herein amended, all remaining provisions of the Warrant shall remain in full force and effect.

 

4. Counterparts . This Amendment may be executed in one or more counterparts, each of which shall have the same force and effect of the original.

 

[Signature Page Follows]

 

 

 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment To Warrant To Purchase Shares to be executed as of the date first above written.

 

  COMPANY:
     
  HANCOCK JAFFE LABORATORIES, INC.
   
  By: /s/ William Abbott
  Name: William Abbott
  Title: Chief Financial Officer

 

  HOLDER:
   
  [_________________________]

 

  By:  
  Name:  
  Title:  

 

[ Signature Page to Amendment to Warrant]

 

 

 

 

 

SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT

 

This SECOND AMENDMENT TO SECURITIES PURCHASE AGREEMENT (this “ Amendment ”), dated as of February __, 2018, is by and among Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), and the undersigned signatories hereto (collectively, the “ Lenders ”), and further amends that certain Securities Purchase Agreement, dated as of June 15, 2017, as amended on December 29, 2017, by and among the Company and the signatories thereto (the “ Purchasers ” and altogether, the “ Purchase Agreement ”), the Amended and Restated Convertible Notes issued pursuant to the Purchase Agreement (the “ 2017 Notes ”), and the Amended and Restated Common Stock Purchase Warrants issued pursuant to the Purchase Agreement (the “ 2017 Warrants ” and, together with the Purchase Agreement and the 2017 Notes, the “ Transaction Documents ”). Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Transaction Documents.

 

RECITALS

 

WHEREAS, the Company and the Lenders desire to amend the Transaction Documents to (i) extend the maturity date of the 2017 Notes to May 15, 2018, and (ii) provide that the number of Warrant Shares exercisable under the 2017 Warrants shall equal 100% of the number of shares of Common Stock issuable upon conversion of the 2017 Notes;

 

WHEREAS, pursuant to Section 5.5 of the Purchase Agreement, the Transaction Documents may be amended or the respective terms waived with the written consent of the Company and the Purchasers holding a majority of the aggregate principal amount of all 2017 Notes issued under the Purchase Agreement (the “ Requisite Holders ”); and

 

WHEREAS, the Company and the undersigned Lenders, constituting the Requisite Holders, desire to amend the Transaction Documents as hereinafter set forth.

 

AGREEMENT

 

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged and agreed, the parties hereby agree as follows:

 

1. Amendment to Purchase Agreement Section 2.2(a)(iii) . Section 2.2(a)(iii) of the Purchase Agreement is hereby amended and restated in its entirety as follows:

 

“(iii) a Warrant registered in the name of such Purchaser with an exercise price per share equal to the lesser of (a) $14.40 or (b) 120% of the Conversion Price, and to purchase up to a number of Common Shares equal to 100% of the number of Common Shares issuable upon conversion of such Purchaser’s Note.”

 

2. Amended and Restated Note . In connection and to facilitate the stated intent of the Company and the Lenders in the recitals, among other things, the parties consent and agree that the 2017 Notes issued to all Purchasers are hereby further amended and restated, substantially in the form attached hereto as Exhibit A (the “ Second Amended and Restated Note ”). The Company shall execute and deliver the Second Amended and Restated Note to each Purchaser.

 

     
 

 

3. Amended and Restated Warrant . In connection and to facilitate the stated intent of the Company and the Lenders in the recitals, among other things, the parties consent and agree that the 2017 Warrants issued to all Purchasers are further hereby amended and restated substantially in the form attached hereto as Exhibit B (the “ Second Amended and Restated Warrant ”). The Company shall execute and deliver the Second Amended and Restated Warrant to each Purchaser.

 

4. No Other Amendments . Except as herein amended, all provisions of the Transaction Documents shall remain in full force and effect.

 

5. Governing Law . This Amendment shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Delaware.

 

6. Enforceability . If any provision of this Amendment is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Amendment will remain in full force and effect. Any provision of this Amendment held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

 

7. Counterparts . This Amendment may be executed in one or more counterparts, each of which shall have the same force and effect of the original.

 

[Signature Page Follows]

 

     
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

 

  COMPANY:
     
  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
  Name: William R. Abbott            
  Title: Chief Financial Officer

 

Signature Page to Second Amendment to Securities Purchase Agreement

 

     
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

 

  LENDER:
     
  By:  
  Name:            
  Title:  

 

Signature Page to Second Amendment to Securities Purchase Agreement

 

     
 

 

EXHIBIT A

 

Second Amended and Restated Note

 

     
 

 

EXHIBIT B

 

Second Amended and Restated Warrant

 

     
 

 

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF CORPORATE COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

Original Issue Date: June 15, 2017

Amended and Restated: December 29, 2017

Amended and Restated: February __, 2018

 

$[*]

 

SECOND AMENDED AND RESTATED CONVERTIBLE NOTE

 

THIS SECOND AMENDED AND RESTATED CONVERTIBLE NOTE is one of a series of duly authorized and validly issued Convertible Notes of Hancock Jaffe Laboratories, Inc, a Delaware corporation company (the “ Company ”), having its principal place of business at 70 Doppler Irvine, CA, 92618, (the “ Note ” and, collectively with the other Notes of such series, the “ Notes ”).

 

FOR VALUE RECEIVED, the Company promises to pay to [*] or its registered assigns (the “ Holder ”), or shall have paid pursuant to the terms hereunder, the principal sum of $[*] together with interest thereon on May 15, 2018 (the “ Maturity Date ”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder. This Note shall bear interest in accordance with Section 2. This Note is subject to the following additional provisions:

 

Section 1. Definitions . For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:

 

Bankruptcy Event ” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any limited liability company or other action for the purpose of effecting any of the foregoing.

 

  1  
 

 

Business Day ” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

Buy-In ” shall have the meaning set forth in Section 4(d)(v).

 

Common Stock ” means shares of the Company’s common stock, par value $0.00001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

 

Conversion ” shall have the meaning ascribed to such term in Section 4.

 

Conversion Date ” shall have the meaning set forth in Section 4(a).

 

Conversion Price ” shall have the meaning set forth in Section 4(c).

 

Conversion Shares ” means the Common Stock issuable upon conversion of this Note in accordance with the terms hereof.

 

Event of Default ” shall have the meaning set forth in Section 5(a).

 

New York Courts ” shall have the meaning set forth in Section 6(d).

 

Note Register ” shall have the meaning set forth in Section 2(c).

 

Notice of Conversion ” shall have the meaning set forth in Section 4(a).

 

Original Issue Date ” means the date of the first issuance of the Notes, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence such Notes.

 

Purchase Agreement ” means the Securities Purchase Agreement, dated as of June 15, 2017 among the Company and the investors party thereto, as amended, modified or supplemented from time to time in accordance with its terms.

 

Securities Act ” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

  2  
 

 

Share Delivery Date ” means, subject to Section 4(d)(ii), five (5) Business Days after the Conversion Date.

 

Trading Day ” means a day on which the principal Trading Market is open for trading.

 

Trading Market ” means any of the following markets or exchanges on which the Company’s Common Stock (or an equivalent thereof) is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the Pink OTC Markets (or any successors to any of the foregoing).

 

Section 2. Interest; Prepayment. The Company acknowledges and agrees that this Note shall bear interest at a rate of 15% per annum to be paid quarterly in cash on each of March 31, June 30, September 30 and December 31; provided, that interest payable on December 31, 2017 shall be due and payable on January 11, 2018. Regularly scheduled interest payments shall be made on this Note. All payments hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “ Note Register ”). At the discretion of the Company, the Principal Amount and unpaid accrued interest of the Convertible Notes may be prepaid at anytime, provided that written notice is provided to the Holder at least 15 days in advance of the prepayment.

 

Section 3. Registration of Transfers and Exchanges .

 

a) Different Denominations . This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same; provided, that the minimum principal amount of any replacement Note shall be $50,000. No service charge will be payable for such registration of transfer or exchange.

 

b) Investment Representations . This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations to successor Holders who provide the same investment representations to the Company.

 

c) Reliance on Note Register . Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

Section 4. Conversion .

 

a) Voluntary Conversion . At any time after the Original Issue Date until this Note is no longer outstanding, the outstanding principal amount and accrued but unpaid interest on this Note shall be convertible, in whole or in part, into Common Stock at the option of the Holder, at any time and from time to time. The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “ Notice of Conversion ”), specifying therein the date on which such conversion shall be effected (such date, the “ Conversion Date ”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall be required to physically surrender this Note to the Company. The Company may deliver an objection to any Notice of Conversion within two (2) Business Days of delivery of such Notice of Conversion.

 

  3  
 

 

b) Conversion Price . The Conversion Price in effect on a Conversion Date shall be equal to the lesser of (A) (i) $12.00 or (B) the product equal to (i) the price per share of Common Stock sold in the Company’s initial public offering (the “ IPO ”), multiplied by (ii) 70%. In the event the Company (i) makes a distribution or distributions on Common Stock payable in Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes), (ii) subdivides outstanding shares of Common Stock into a larger number of shares of Common Stock, (iii) combines (including by way of a reverse split) outstanding shares of Common Stock into a smaller number of shares of Common Stock or (iv) issues, in the event of a reclassification of Common Stock, any Common Stock of the Company, then the Conversion Price shall be adjusted by multiplying the Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of members entitled to receive such distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

c) Adjustments for Reorganization, Merger, Consolidation or Sales of Assets . If at any time or from time to time after the issuance date of this Note there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions, or a reclassification, exchange or substitution of shares), or a merger or consolidation of the Company with or into another corporation where the holders of the Company’s outstanding voting securities prior to such merger or consolidation do not own over 50% of the outstanding voting securities of the merged or consolidated entity, immediately after such merger or consolidation, or the sale of all or substantially all of the Company’s properties or assets to any other person (an “Organic Change”), then as a part of such Organic Change an appropriate revision to the conversion price shall be made if necessary and provision shall be made if necessary (by adjustments of the conversion price or otherwise) so that, upon any subsequent conversion of this Note, the Holder shall have the right to receive, in lieu of Conversion Shares, the kind and amount of shares of stock and other securities or property of the Company or any successor corporation resulting from the Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of Section 4(a) with respect to the rights of the Holder after the Organic Change to the end that the provisions of Section 4(a) (including any adjustment in the conversion price then in effect and the number of shares of stock or other securities deliverable upon conversion of this Note) shall be applied after that event in as nearly an equivalent manner as may be practicable.

 

  4  
 

 

d) Mechanics of Conversion .

 

i. Conversion Shares Issuable Upon Conversion of Note . The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted plus any accrued but unpaid interest by (y) the Conversion Price.

 

ii. Delivery of Certificate Upon Conversion . The Company shall promptly deliver, or cause to be delivered, to the Holder a certificate or certificates representing the Conversion Shares representing the number of Conversion Shares being acquired upon the conversion of this Note, provided , however , provided if the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer Program, the Company may credit such aggregate number of shares of Common Stock to which the Holder shall be entitled pursuant to such conversion to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at custodian system.

 

iii. Failure to Deliver Certificates . If, in the case of a conversion of this Note after the IPO, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Notice of Conversion.

 

iv. Obligation Absolute; Partial Liquidated Damages . The Company’s obligations to issue the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided , however , that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 5 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

  5  
 

 

v. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion after IPO . In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant to Section 4(d)(ii), and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Section 4(d)(ii). For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing Common Stock upon conversion of this Note as required pursuant to the terms hereof.

 

vi. Fractional Common Stock . No fractional shares of Common Stock shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share of Common Stock.

 

Section 5. Negative Covenants .

 

Except as set forth in the Disclosure Schedules and exhibits thereto attached to the Securities Purchase Agreement, as long as at least 33% of the aggregate Principal Amount of the Notes issued pursuant to the Purchase Agreement remains outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:

 

a) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder;

 

b) pay cash dividends or distributions on any equity securities of the Company;

 

  6  
 

 

c) enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Securities and Exchange Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or

 

d) enter into any agreement with respect to any of the foregoing.

 

Section 6. Events of Default .

 

a) “ Event of Default ” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within fifteen (15) Trading Days;

 

ii. the Company shall fail to observe or perform any other material covenant or agreement contained in the Notes which failure is not cured, if possible to cure, within the earlier to occur of (A) fifteen (15) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and thirty (30) Trading Days after receipt of written notice thereof;

 

iii. any material representation or warranty made in this Note or any other Transaction Documents shall be untrue or incorrect in any material respect as of the date when made or deemed made that would cause a Material Adverse Effect;

 

iv. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a bankruptcy event; or

 

v. following the date the Company initially becomes a reporting company pursuant to the Securities Exchange Act of 1934 and its shares of Common Stock are listed on a Trading Market, the Common Stock shall subsequently not be eligible for listing or quotation for trading on a Trading Market and shall not be eligible to resume listing or quotation for trading thereon within ten (10) Trading Days.

 

b) Remedies Upon Event of Default . If any Event of Default occurs and is continuing before the Maturity Date, (a) the outstanding principal amount of this Note, plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash. Upon the payment in full, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 5(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. If this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note the Company shall be obligated and pay reasonable attorneys’ fees in connection with such collection, enforcement or action.

 

  7  
 

 

Section 7. Miscellaneous .

 

a) Notices . Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by e-mail, facsimile, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other e-mail address, facsimile number or address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section 6(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail or facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address, facsimile number or address of the Holder appearing on the signature pages attached to the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via e-mail or facsimile at the email address or facsimile number set forth on the signature pages attached to the Purchase Agreement prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail or facsimile at the e-mail address or facsimile number set forth on the signature pages attached to the Purchase Agreement on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.

 

b) Absolute Obligation . Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.

 

c) Lost or Mutilated Note . If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

 

  8  
 

 

d) Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “ New York Courts ”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

e) Waiver . Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.

 

  9  
 

 

f) Severability . If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

g) Next Business Day . Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

h) Headings . The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

 

i) Amendment. This Note may be modified or amended or the provisions hereof waived in accordance with the Purchase Agreement. This Note amends and restates in its entirety the Amended and Restated Convertible Note issued to the Holder on December 29, 2017 which is hereby superseded in its entirety by the terms hereof.

 

  10  
 

 

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

 

  Hancock Jaffe Laboratories, Inc.
     
  By:  
  Name: William Abbott
  Title: Chief Financial Officer

 

  11  
 

 

ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert the Convertible Note of Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), into Common Stock (the “ Common Stock ”), of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.

 

Conversion calculations: ____________________________________________

 

Date to Effect Conversion: ___________________________________________

 

Principal Amount of Note to be Converted: _______________________________

 

Number of Common Stock to be issued: _________________________________

 

Cash to be paid to Holder: ___________________________________________

 

Signature: _______________________________________________________

 

Name: __________________________________________________________

 

Address for Delivery of Common Stock Certificates: _______________________

 

Or

 

DWAC Instructions: ______________________________________________

 

Broker No: ______________________________________________________

 

Account No: ____________________________________________________

 

     
 

 

 

AMENDMENT TO SECURITIES PURCHASE AGREEMENT

 

This AMENDMENT TO SECURITIES PURCHASE AGREEMENT (this “ Amendment ”), dated as of February __, 2018, is by and among Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), and the undersigned signatories hereto (collectively, the “ Lenders ”), and amends that certain Securities Purchase Agreement, dated as of January 5, 2018, by and among the Company and the signatories thereto (the “ Purchasers ” and altogether, the “ Purchase Agreement ”), the Convertible Notes issued pursuant to the Purchase Agreement (the “ 2018 Notes ”), and the Common Stock Purchase Warrants issued pursuant to the Purchase Agreement (the “ 2018 Warrants ” and, together with the Purchase Agreement and the 2018 Notes, the “ Transaction Documents ”). Capitalized terms used but not defined herein shall have the meaning ascribed to such terms in the Transaction Documents.

 

RECITALS

 

WHEREAS, the Company and the Lenders desire to amend the Transaction Documents to (i) extend the maturity date of the 2018 Notes to May 15, 2018, and (ii) provide that the number of Warrant Shares exercisable under the 2018 Warrants shall equal 75% of the number of shares of Common Stock issuable upon conversion of the 2018 Notes;

 

WHEREAS, pursuant to Section 5.4 of the Purchase Agreement, the Transaction Documents may be amended or the respective terms waived with the written consent of the Company and the Purchasers holding a majority of the aggregate principal amount of all 2018 Notes issued under the Purchase Agreement (the “ Requisite Holders ”); and

 

WHEREAS, the Company and the undersigned Lenders, constituting the Requisite Holders, desire to amend the Transaction Documents as hereinafter set forth.

 

AGREEMENT

 

NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged and agreed, the parties hereby agree as follows:

 

1. Amendment to Purchase Agreement Section 2.2(a)(iii) . Section 2.2(a)(iii) of the Purchase Agreement is hereby amended and restated in its entirety as follows:

 

“(iii) a Warrant registered in the name of such Purchaser with an exercise price per share equal to the lesser of (a) $14.40 or (b) 120% of the Conversion Price, and to purchase up to a number of shares of Common Stock equal to 75% of the number of shares of Common Stock issuable upon conversion of such Purchaser’s Note.”

 

2. Amended and Restated Note . In connection and to facilitate the stated intent of the Company and the Lenders in the recitals, among other things, the parties consent and agree that the 2018 Notes issued to all Purchasers are hereby amended and restated, substantially in the form attached hereto as Exhibit A (the “ Amended and Restated Note ”). The Company shall execute and deliver the Amended and Restated Note to each Purchaser.

 

 
 

 

3. Amended and Restated Warrant . In connection and to facilitate the stated intent of the Company and the Lenders in the recitals, among other things, the parties consent and agree that the 2018 Warrants issued to all Purchasers are hereby amended and restated substantially in the form attached hereto as Exhibit B (the “ Amended and Restated Warrant ”). The Company shall execute and deliver the Amended and Restated Warrant to each Purchaser.

 

4. No Other Amendments . Except as herein amended, all provisions of the Transaction Documents shall remain in full force and effect.

 

5. Governing Law . This Amendment shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdiction other than those of the State of Delaware.

 

6. Enforceability . If any provision of this Amendment is held invalid or unenforceable by any court of competent jurisdiction, the other provisions of this Amendment will remain in full force and effect. Any provision of this Amendment held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable.

 

7. Counterparts . This Amendment may be executed in one or more counterparts, each of which shall have the same force and effect of the original.

 

[Signature Page Follows]

 

 
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

 

  COMPANY:
   
  HANCOCK JAFFE LABORATORIES, INC.
     
  By:  
  Name: William R. Abbott
  Title: Chief Financial Officer

 

Signature Page to Amendment to Securities Purchase Agreement

 

 
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written.

 

  LENDER:
     
  By:  
  Name:  
  Title:  

 

Signature Page to Amendment to Securities Purchase Agreement

 

 
 

 

EXHIBIT A

 

Amended and Restated Note

 

 
 

 

EXHIBIT B

 

Amended and Restated Warrant

 

 
 

 

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF CORPORATE COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY.

 

Original Issue Date: January __, 2018

Amended and Restated: February __, 2018

 

$[*]

 

AMENDED AND RESTATED CONVERTIBLE NOTE

 

THIS AMENDED AND RESTATED CONVERTIBLE NOTE is one of a series of duly authorized and validly issued Convertible Notes of Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), having its principal place of business at 70 Doppler Irvine, California, 92618 (this Note, the “ Note ” and, collectively with the other Notes of such series, the “ Notes ”).

 

FOR VALUE RECEIVED, the Company promises to pay to [*] or its registered assigns (the “ Holder ”), or shall have paid pursuant to the terms hereunder, the principal sum of $[*] together with interest thereon on May 15, 2018 (the “ Maturity Date ”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder. This Note shall bear interest in accordance with Section 2 . This Note is subject to the following additional provisions:

 

Section 1. Definitions . For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:

 

Bankruptcy Event ” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any limited liability company or other action for the purpose of effecting any of the foregoing.

 

1
 

 

Business Day ” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

Buy-In ” shall have the meaning set forth in Section 4(d)(vi) .

 

Common Stock ” means shares of the Company’s common stock, par value $0.00001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

 

Conversion ” shall have the meaning ascribed to such term in Section 4 .

 

Conversion Date ” shall have the meaning set forth in Section 4(a) .

 

Conversion Price ” shall have the meaning set forth in Section 4(b) .

 

Conversion Shares ” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.

 

Event of Default ” shall have the meaning set forth in Section 6(a) .

 

New York Courts ” shall have the meaning set forth in Section 7(d) .

 

Note Register ” shall have the meaning set forth in Section 2 .

 

Notice of Conversion ” shall have the meaning set forth in Section 4(a) .

 

Original Issue Date ” means the date of the first issuance of the Notes, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence such Notes.

 

Purchase Agreement ” means the Securities Purchase Agreement, dated as of January 5, 2018, by and among the Company and the Holders signatory thereto, as amended, modified or supplemented from time to time in accordance with its terms.

 

Securities Act ” shall have the meaning set forth in the preamble legend to this Note.

 

Share Delivery Date ” means, subject to Sections 4(d)(i) and (ii) , five (5) Business Days after the applicable Conversion Date.

 

Trading Day ” means a day on which the principal Trading Market is open for trading.

 

2
 

 

Trading Market ” means any of the following markets or exchanges on which the Common Stock (or an equivalent thereof) is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTC Bulletin Board or the Pink OTC Markets (or any successors to any of the foregoing).

 

Section 2. Interest; Prepayment . The Company acknowledges and agrees that this Note shall bear interest at a rate of fifteen percent (15%) per annum, to be paid quarterly in cash on the last Trading Day of each fiscal quarter. Regularly scheduled interest payments shall be made on this Note. All payments hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “ Note Register ”). At the discretion of the Company, the Principal Amount and unpaid accrued interest of this Note may be prepaid at anytime, provided that written notice is provided to the Holder at least fifteen (15) days in advance of the prepayment.

 

Section 3. Registration of Transfers and Exchanges .

 

a) Different Denominations . This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same; provided , that the minimum principal amount of any replacement Note shall be $50,000.00. No service charge will be payable for such registration of transfer or exchange.

 

b) Investment Representations . This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations to successor Holders who provide the same investment representations to the Company.

 

c) Reliance on Note Register . Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

 

Section 4. Conversion .

 

a) Voluntary and Mandatory Conversion .

 

i. At any time after the Original Issue Date until the Maturity Date, the outstanding principal amount of this Note, plus all accrued but unpaid interest (the “ Accreted Value ”) shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time, at the Conversion Price specified in Section 3(b)(i) below and in the manner specified in Section 3(d)(ii) below. The Holder shall effect any conversion pursuant to this Section 4(a)(i) by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “ Notice of Conversion ”), specifying therein, among other things, the date on which such conversion shall be effected (such date, the “ Voluntary Conversion Date ”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. To effect conversions hereunder, the Holder shall be required to physically surrender this Note to the Company. The Company may deliver an objection to any Notice of Conversion within two (2) Business Days of delivery of such Notice of Conversion.

 

3
 

 

ii. If on or prior to the Maturity Date, the Company consummates its initial public offering of its Common Stock pursuant to the Securities Act (the “ IPO ”), the entire Accreted Value of this Note shall be converted into shares of Common Stock at the Conversion Price specified in Section 3(b)(ii) below and in the manner specified in Section 3(d)(iii) below.

 

b) Conversion Price .

 

i. The Conversion Price in effect on a Voluntary Conversion Date in connection with a voluntary conversion pursuant to Section 4(a)(i) shall be $12.00.

 

ii. The Conversion Price in effect on an IPO Conversion Date (as defined below) in connection with a mandatory conversion pursuant to Section 4(a)(ii) shall be the lesser of (A) $12.00 or (B) the product equal to the price per share of Common Stock sold in the Company’s IPO, multiplied by 70%.

 

c) Adjustments to Conversion Price .

 

i. In the event the Company (i) makes a distribution or distributions on shares of Common Stock payable in Common Stock (which, for avoidance of doubt, shall not include any Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes), (ii) subdivides outstanding Common Stock into a larger number of Common Stock, (iii) combines (including by way of a reverse split) outstanding Common Stock into a smaller number of Common Stock or (iv) issues, in the event of a reclassification of Common Stock, any Common Stock of the Company, then the Conversion Price shall be adjusted by multiplying the Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of members entitled to receive such distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.

 

ii. If at any time or from time to time after the issuance date of this Note there shall be a capital reorganization of the Company (other than by way of a stock split or combination of shares or stock dividends or distributions, or a reclassification, exchange or substitution of shares), or a merger or consolidation of the Company with or into another corporation where the holders of the Company’s outstanding voting securities prior to such merger or consolidation do not own over fifty percent (50%) of the outstanding voting securities of the merged or consolidated entity, immediately after such merger or consolidation, or the sale of all or substantially all of the Company’s properties or assets to any other person (an “ Organic Change ”), then as a part of such Organic Change an appropriate revision to the conversion price shall be made if necessary and provision shall be made if necessary (by adjustments of the conversion price or otherwise) so that, upon any subsequent conversion of this Note, the Holder shall have the right to receive, in lieu of Conversion Shares, the kind and amount of shares of stock and other securities or property of the Company or any successor corporation resulting from the Organic Change. In any such case, appropriate adjustment shall be made in the application of the provisions of Section 4(a) with respect to the rights of the Holder after the Organic Change to the end that the provisions of Section 4(a) (including any adjustment in the conversion price then in effect and the number of shares of stock or other securities deliverable upon conversion of this Note) shall be applied after that event in as nearly an equivalent manner as may be practicable.

 

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d) Mechanics of Conversion .

 

i. Conversion Shares Issuable Upon Conversion of Principal Amount . The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the Accreted Value by (y) the Conversion Price.

 

ii. Mechanics of Voluntary Conversion . In connection with a conversion by the Company pursuant to Section 4(a)(i) , the Company shall provide Holder the Notice of Conversion in accordance with Section 4(a)(i) . Upon receipt of the notice from the Company, this Note shall automatically, and without any further action on the part of the Holder and whether or not the Note is surrendered to the Company, be converted into shares of Common Stock at the Conversion Price specified in Section 4(b)(i) above. The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless this Note is either delivered to the Company or the Holder notifies the Company that this Note been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such loss, theft or destruction. Upon receipt by the Company of this Note or an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such loss, theft or destruction, the Company at its expense shall, as soon as practicable thereafter, issue and deliver at such office to such Holder, or to the nominee or nominees of such Holder, a certificate or certificates for the shares of Common Stock to which such Holder shall be entitled as aforesaid. Such conversion shall be deemed to have been upon the date specified in the Notice of Conversion, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Common Stock as of such date. Notwithstanding the foregoing, if the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer Program, the Company may credit such aggregate number of shares of Common Stock to which the Holder shall be entitled pursuant to such conversion to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at custodian system.

 

ii. Mechanics of Mandatory Conversion . Upon a mandatory conversion pursuant to Section 4(a)(ii) , the Accreted Value shall automatically, and without any further action on the part of the Holder and whether or not the Note is surrendered to the Company, be converted into shares of Common Stock at the Conversion Price specified in Section 4(b)(ii) above on the consummation of the IPO (the “ IPO Conversion Date ” and together with the Voluntary Conversion Date, the “ Conversion Date ”). The Company shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such mandatory conversion unless this Note is either delivered to the Company or the Holder notifies the Company that this Note been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such loss, theft or destruction. Upon receipt by the Company of this Note or an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it in connection with such loss, theft or destruction, the Company at its expense shall, as soon as practicable thereafter, issue and deliver at such office to such Holder, or to the nominee or nominees of such Holder, a certificate or certificates for the shares of Common Stock to which such Holder shall be entitled as aforesaid. Such conversion shall be deemed to have been upon the completion of the IPO, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. Notwithstanding the foregoing, if the Company’s transfer agent is participating in the DTC Fast Automated Securities Transfer Program, the Company may credit such aggregate number of shares of Common Stock to which the Holder shall be entitled pursuant to such conversion to the Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at custodian system.

 

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iv. Failure to Deliver Certificates . Except in the case of a mandatory conversion in connection with Section 4(a)(ii) , in the case a Notice of Conversion is issued by the Holder to the Company, and such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Notice of Conversion.

 

v. Obligation Absolute; Partial Liquidated Damages . The Company’s obligations to issue the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided , however , that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default (as defined below) pursuant to Section 6 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

 

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vi. Compensation for Buy-In on Failure to Timely Deliver Certificates Upon Conversion at IPO . Subject to Sections 4(d)(i) and (ii) , in addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates by the Share Delivery Date pursuant to Sections 4(d)(i) and (ii) , and if after such Share Delivery Date the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock, to deliver in satisfaction of a sale by the Holder of the Conversion Shares which the Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “ Buy-In ”), then the Company shall (A) pay in cash to the Holder (in addition to any other remedies available to or elected by the Holder) the amount, if any, by which (x) the Holder’s total purchase price (including any brokerage commissions) for the shares of Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that the Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of the Holder, either reissue (if surrendered) this Note in a principal amount equal to the principal amount of the attempted conversion (in which case such conversion shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued if the Company had timely complied with its delivery requirements under Sections 4(d)(i) and (ii) . For example, if the Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of this Note with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause of the immediately preceding sentence, the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon conversion of this Note as required pursuant to the terms hereof.

 

vii. Fractional Common Shares . No fractional shares of Common Stock shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share of Common Stock.

 

Section 5. Negative Covenants .

 

Except as set forth in the Disclosure Schedules and exhibits thereto attached to the Purchase Agreement, as long as at least thirty-three percent (33%) of the aggregate Principal Amount of the Notes issued pursuant to the Purchase Agreement remains outstanding, the Company shall not, and shall not permit any of its Subsidiaries to, directly or indirectly:

 

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a) amend its charter documents, including, without limitation, its certificate of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder;

 

b) pay cash dividends or distributions on any equity securities of the Company;

 

c) enter into any transaction with any Affiliate of the Company which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or

 

d) enter into any agreement with respect to any of the foregoing.

 

Section 6. Events of Default .

 

a) “ Event of Default ” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

 

i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within fifteen (15) Trading Days;

 

ii. the Company shall fail to observe or perform any other material covenant or agreement contained in the Notes which failure is not cured, if possible to cure, within the earlier to occur of (A) fifteen (15) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and thirty (30) Trading Days after receipt of written notice thereof;

 

iii. any material representation or warranty made in this Note or any other Transaction Documents shall be untrue or incorrect in any material respect as of the date when made that would cause a Material Adverse Effect;

 

iv. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a bankruptcy event; or

 

v. following the date the Company initially becomes a reporting company pursuant to the Exchange Act and its shares of Common Stock are listed on a Trading Market, the Common Stock shall subsequently not be eligible for listing or quotation for trading on a Trading Market and shall not be eligible to resume listing or quotation for trading thereon within ten (10) Trading Days.

 

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b) Remedies Upon Event of Default . If any Event of Default occurs and is continuing before the Maturity Date, the outstanding principal amount of this Note, plus liquidated damages, interest and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash. Commencing fifteen (15) Trading Days after the occurrence of any Event of Default that results in the eventual acceleration of this Note, the Principal Amount on this Note shall increase twenty percent (20%). Upon the payment in full, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 6(b) . No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon. If this Note is placed in the hands of an attorney for collection or enforcement or is collected or enforced through any legal proceeding or the Holder otherwise takes action to collect amounts due under this Note or to enforce the provisions of this Note the Company shall be obligated and pay reasonable attorneys’ fees in connection with such collection, enforcement or action.

 

Section 7. Miscellaneous .

 

a) Notices . Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other e-mail address, or address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section 7(a) . Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by e-mail, or sent by a nationally recognized overnight courier service addressed to each Holder at the e-mail address, or address of the Holder appearing on the signature pages attached to the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via e-mail at the email address set forth on the signature pages attached to the Purchase Agreement prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via e-mail at the e-mail address set forth on the signature pages attached to the Purchase Agreement on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.

 

b) Absolute Obligation . Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.

 

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c) Lost or Mutilated Note . If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.

 

d) Governing Law . All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in the City of New York, Borough of Manhattan (the “ New York Courts ”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.

 

e) Waiver . Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.

 

f) Severability . If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

 

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g) Next Business Day . Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

 

h) Headings . The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

 

i) Amendment. This Note may be modified or amended or the provisions hereof waived in accordance with the Purchase Agreement. This Note amends and restates in its entirety the Convertible Note issued to Holder on January __, 2018 which is hereby superseded in its entirety by the terms hereof.

 

IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

 

  Hancock Jaffe Laboratories, Inc.
     
  By:  
  Name: William Abbott
  Title: Chief Financial Officer

 

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ANNEX A

 

NOTICE OF CONVERSION

 

The undersigned hereby elects to convert the principal under the Convertible Note (the “ Note ”) of Hancock Jaffe Laboratories, Inc., a Delaware corporation (the “ Company ”), into shares of Common Stock of the Company according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any. Capitalized terms used but not defined herein shall have the meaning ascribed to such term in the Note.

 

Conversion Price: ________________________________________________________________

 

Date to Effect Conversion: __________________________________________________________

 

Accreted Value to be Converted: _____________________________________________________

 

Number of shares of Common Stock to be issued: ________________________________________

 

Cash to be paid to Holder: __________________________________________________________

 

Signature: ______________________________________________________________________

 

Name: _________________________________________________________________________

 

Address for Delivery of Common Share Certificates: ____________________________________ __

 

Or

 

DWAC Instructions: ______________________________________________________________

 

Broker No: ______________________________________________________________________

 

Account No: ____________________________________________________________________

 

 
 

 

 

FIRST AMENDMENT TO EMPLOYMENT AGREEMENT

 

This First Amendment to Employment Agreement (this “ Amendment ”), dated as of April 2, 2018 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“ Hancock Jaffe ”) and Benedict Broennimann, M.D.(“ Executive ,” and together with Hancock Jaffe, the “ Parties ”), and amends that certain Employment Agreement, dated as of August 30, 2016, by and between Hancock Jaffe and Executive (the “ Employment Agreement ”).

 

RECITALS

 

WHEREAS, Hancock Jaffe and Executive previously entered into the Employment Agreement, pursuant to which Executive serves as Hancock Jaffe’s Co-Chief Executive Officer;

 

WHEREAS, pursuant to Section 14 of the Employment Agreement, no provision of the Employment Agreement may be modified unless such modification is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe; and

 

WHEREAS, the Parties desire to amend the Employment Agreement to change Executive’s title to Chief Medical Officer (OUS).

 

AGREEMENT

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. Amendment to Section 1 . Section 1 of the Employment Agreement is hereby amended and restated in its entirety as set forth below:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Chief Medical Officer (OUS). Executive shall be responsible for advancing the science and development of new products and acting as chief liaison with the medical community outside the United States of America. Executive shall perform the duties set forth in this Section 1 , in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.

 

(b) Executive shall report directly to the Chief Executive Officer.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.”

 

     
 

 

2. Effect on the Employment Agreement; Reaffirmation . The Employment Agreement is not modified or amended other than as expressly indicated herein, and all other terms and conditions of the Employment Agreement shall remain in full force and effect. Hancock Jaffe and Executive hereby reaffirm every term, condition, covenant, representation and warranty set forth in the Employment Agreement not amended herein as originally made and given.
   
3. Governing Law . This Amendment, for all purposes, shall be construed in accordance with the laws of the State of California without regard to conflicts of law principles.
   
4. Counterparts . This Amendment may be executed (a) in one or more partially or fully executed counterparts, each of which will be deemed an original and will bind the signatory, but all of which together will constitute the same instrument, and (b) by facsimile or other electronic transmission of signatures.

 

[ Signature page follows ]

 

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In witness whereof , Hancock Jaffe has caused this Amendment to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   BENEDICT BROENNIMANN, M.D.
     
/s/ Yury Zhivilo   /s/ Benedict Broennimann, M.D.
Yury Zhivilo   Benedict Broennimann, M.D.
Chairman of the Board   Executive

 

Signature Page to Amendment to Employment Agreement

 

     
 

 

 

HANCOCK JAFFE LABORATORIES, INC.

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (“ Agreement ”), dated as of March 30, 2018 (the “ Effective Date ”), is made by and between Hancock Jaffe Laboratories, Inc. (“ Hancock Jaffe ”) and Robert A. Berman (“ Executive ,” and together with Hancock Jaffe, the “ Parties ”).

 

WHEREAS, Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement;

 

NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. POSITION AND DUTIES.

 

(a) Hancock Jaffe shall employ Executive as its Chief Executive Officer. Executive shall be responsible for such activities as are usual and customary for a chief executive officer of similar companies. Executive shall perform such other duties as may be reasonably assigned to Executive by the Board of Directors of Hancock Jaffe (the “ Board ”) from time to time.

 

(b) Executive shall report directly to the Board.

 

(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs (ii) managing Executive’s passive personal investments, and (iii) serving on other boards of directors, committees, or in an advisory capacity, so long as such activities set forth in (i), (ii), or (iii) do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.

 

2. AT-WILL EMPLOYMENT. Executive’s employment with Hancock Jaffe is “at will,” and, may be terminated at any time, with or without cause and with or without notice, for any reason, by either Employee or Hancock Jaffe. No individual, other than the Board, has the legal authority or ability to alter the “at-will” nature of the employment relationship and, by signing this Agreement, Employee is confirming that there are no oral, collateral, or other written statements by any employee or representative of Hancock Jaffe to the contrary. The Board can alter the “at-will” nature of the Executive’s employment relationship with Hancock Jaffe only in a written agreement signed both by the Board and Employee.

 

3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“ Base Salary ”) at an annual rate of Four Hundred Thousand Dollars ($400,000), paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Compensation Committee (the “ Committee ”) of the Board. In no event shall the Base Salary be reduced from the preceding year without the consent of Executive.

 

4. ANNUAL BONUS. Executive shall be eligible to receive a discretionary annual incentive bonus (the “ Annual Bonus ”) of up to fifty percent (50%) of the Base Salary. The amount of any Annual Bonus shall be determined by the Committee in its sole discretion. Any Annual Bonus shall be paid within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Committee makes all necessary determinations with respect to the Annual Bonus.

 

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5. EQUITY INCENTIVE. Subject to approval by the Committee, immediately prior to a firm commitment, underwritten Initial Public Offering (as defined in the Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan (the “ Plan ”)), Executive shall be granted a Non-qualified Stock Option (as defined in the Plan) to purchase six and one-half percent (6½%) (on a fully-diluted basis) of Hancock Jaffe’s total issued and outstanding shares of common stock at the time of the Initial Public Offering (the “ IPO Option ”). Once approved by the Committee and issued by Hancock Jaffe, twenty percent (20%) of the IPO Option shall be exercisable as of the Effective Date, and the remainder of the IPO Option shall become exercisable in substantially equal monthly installments during the twenty-four (24)-month period following the Effective Date. The IPO Option shall be granted under and subject to the Plan, and shall include, without limitation, the following terms: (a) immediate exercisability of the entire IPO Option upon (i) termination of this Agreement by Hancock Jaffe other than for Cause (as defined in Section 7 below) or (ii) a Change in Control (as defined in Section 8(d) below); (b) provided that such period does not extend beyond the ten (10) year expiration date of the IPO Option, a period of up to five (5) years following the termination of this Agreement for any reason other than Cause for Executive to exercise any exercisable portion of the IPO Option; and (c) a means by which the IPO Option may be exercised on a “cashless” basis or its equivalent.

 

6. EMPLOYEE BENEFITS.

 

(a) BENEFIT PLANS. Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. All healthcare and dental benefit premiums for Executive and Executive’s spouse shall be paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of the requirement in the preceding sentence to pay healthcare and dental benefit premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time. Hancock Jaffe reserves the right to modify or cancel benefit plans offered to its employees, consistent with applicable law.

 

(b) VACATION. Executive shall be entitled to vacation in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided , however , that Executive shall be entitled to no less than thirty-five (35) days of paid vacation per calendar year, prorated for any partial years of employment. Vacation accrues to a maximum of 1.5 times the annual accrual (37.5 days). Once the maximum accrual is reached, no further vacation shall accrue until some is used.

 

(c) HOLIDAYS AND SICK LEAVE. Executive shall be entitled to holidays in accordance with Hancock Jaffe policy (currently twelve (12) paid holidays per calendar year). Unused holidays may not be carried forward from one calendar year to any subsequent calendar year. Sick leave will be provided under Hancock Jaffe’s paid sick leave policy.

 

(d) PENSION AND PROFIT SHARING PLANS. Executive shall be entitled to participate in any pension or profit sharing plan or other type of plan adopted by Hancock Jaffe for the benefit of its executives and/or employees generally.

 

(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be promptly reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive and in connection with the performance of Executive’s duties hereunder.

 

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7. TERMINATION. Executive’s employment under this Agreement is at-will, as set forth in Section 2, supra. However, for purposes of post-termination obligations set forth under Section 8, infra, the following definitions shall apply:

 

(a) DISABILITY. Disability ” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than twelve (12) months, as certified by a physician selected by the Board and consistent with applicable law.

 

(b) DEATH. The death of Executive.

 

(c) CAUSE. Cause ” shall mean Executive’s:

 

(i) willful failure to perform Executive’s duties to Hancock Jaffe to follow the lawful directives of the Board resulting in material adverse harm to Hancock Jaffe (other than as a result of death or Disability);

 

(ii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;

 

(iii) failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;

 

(iv) any material act of theft, , embezzlement, fraud, malfeasance, breach of fiduciary duty, misappropriation of Hancock Jaffe’s property, or failure to comply with obligations regarding Hancock Jaffe’s confidential and/or trade secret information;

 

(v) Executive’s conduct which is a breach of his fiduciary duty, including, without limitation, failure to disclose a conflict of interest or self-dealing, or engaging in a conflict of interest or self-dealing without the Board’s written consent; or

 

(vii) Executive’s material breach of this Agreement.

 

Before terminating Executive for Cause pursuant to clauses (i), (ii), (iv) or (vii) of subsection 7(c), Hancock Jaffe shall give Executive written notice of its intention to terminate his employment for such Cause. Executive shall have thirty (30) days after receiving such notice in which to cure the conduct at issue. If Executive is unable or unwilling to cure, then Executive’s employment shall terminate effective as of the end of such 30-day cure period

 

(d) GOOD REASON. Good Reason ” shall mean the occurrence of any of the following events, without the written consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within thirty (30) days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:

 

(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;

 

(ii) material diminution in Executive’s authority or duties (for sake of clarity, a change in title solely shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law, including but not limited to termination from the Board;

 

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(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or

 

(iv) a material breach by Hancock Jaffe of a material term of this Agreement.

 

Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within thirty (30) days after the first occurrence of such circumstances, and may actually terminate employment within thirty (30) days following the expiration of Hancock Jaffe’s thirty (30)-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.

 

(e) WITHOUT CAUSE. Upon thirty (30) days’ written notice by Hancock Jaffe to Executive, an involuntary termination without Cause by Hancock Jaffe (other than for death or Disability).

 

(f) VOLUNTARY TERMINATION. Upon thirty (30) days’ written notice by Executive to Hancock Jaffe, Executive’s voluntary termination of employment without Good Reason.

 

8. CONSEQUENCES OF TERMINATION.

 

(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 8(a)(i) through 8(a)(iv) below to be paid within sixty (60) days following termination of employment, or such earlier date as may be required by applicable law):

 

(i) any unpaid Base Salary through the date of termination;

 

(ii) any Annual Bonus earned but unpaid prior to the date of termination;

 

(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;

 

(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and

 

(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 8(a)(i) through 8(a)(v) hereof shall be hereafter referred to as the “ Accrued Benefits ”).

 

(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall immediately pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 8(a)(ii) above).

 

(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment is terminated by Hancock Jaffe other than for Cause or Disability or if Executive’s employment is terminated by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:

 

(i) the Accrued Benefits; and

 

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(ii) a lump sum payment equal to (1) six (6) months of Executive’s Base Salary, if such termination occurs before the two (2)-year anniversary of the Effective Date; (2) twelve (12) months of Executive’s Base Salary, if such termination occurs on or after the two (2)-year anniversary of the Effective Date; and (3) in lieu of (A) or (B) above, twenty four (24) months of Executive’s Base Salary if such termination occurs within twenty-four (24) months after a Change in Control (collectively, the “ Severance Amount ”).

 

Payments and benefits provided under this Section 8(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.

 

(d) CHANGE IN CONTROL. The term “ Change in Control ” shall have the meaning ascribed to it in the Plan.

 

(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within ten (10) days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.

 

(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment under this Section 8 shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.

 

(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits under this Section 8 , and amounts payable under this Section 8 shall not be offset or reduced by any amounts received by Executive from other sources.

 

(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.

 

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9. INDEMNIFICATION AND RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release must be executed and delivered (and no longer subject to revocation, if applicable) within thirty (30) days following termination (or such longer period to the extent required by law). Hancock Jaffe shall enter into an indemnification agreement with Executive which includes indemnification coverage similar to other senior executives and members of the Board, but in no event less than the maximum indemnification allowed by Delaware law.

 

10. RESTRICTIVE COVENANTS.

 

(a) Confidentiality.

 

(i) Company Information. At all during employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “ Confidential Information ” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.

 

(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.

 

(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.

 

(b) Nonsolicitation of Employees. During employment and for a period of twelve (12) months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.

 

(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“ Affiliates ”) or any of their officers, directors, managers, employees, consultants, equity holders, agents or products. Hancock Jaffe agrees that the members of the Board and officers of Hancock Jaffe while employed by Hancock Jaffe or serving as a director of Hancock Jaffe shall not make negative comments or otherwise disparage Executive in any manner that is likely to be harmful to Executive’s business or personal reputation. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe. Nothing in this Agreement, however, including any obligations under this subsection or subsection 10(e), infra, or restricts Executive from initiating communications directly with, responding to an inquiry from, or providing testimony before any self-regulatory organization or any other federal or state regulatory authority, including but not limited to communications with the Securities and Enforcement Commission (SEC).

 

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(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “ Claims ”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 10(d) , and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.

 

(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during Executive’s employment with Hancock Jaffe and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.

 

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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During employment and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.

 

(iii) Moreover, if during employment, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during employment and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided , however , that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.

 

(iv) Notwithstanding the foregoing provisions of this Section 10(e) , pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 10(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.

 

(v) The federal Defense of Trade Secrets Act provides for the following immunities: (1) An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that (A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney, and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. (2) An individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (A) files any document containing the trade secret under seal and (B) does not disclose the trade secret, except pursuant to court order. (f)

 

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(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).

 

11. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 10 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.

 

12. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 12 , neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.

 

13. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.

 

14. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.

 

15. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.

 

16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.

 

17. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.

 

(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.

 

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(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.

 

(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.

 

18. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.

 

19. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.

 

20. TAX MATTERS.

 

(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.

 

(b) SECTION 409A COMPLIANCE.

 

(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“ Section 409A ”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “ Code ”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.

 

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(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six (6) month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 20(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six (6)-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

 

(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.

 

(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.

 

(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.

 

(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “ Payment ”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three (3) times the “base amount,” as defined in Code Section 280G (the “ Parachute Threshold ”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “ Excise Tax ”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero (0)) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 8 above.

 

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By signing this Agreement Below, Executive acknowledges that Executive:

 

  (1) has read and understood the entire Agreement;
     
  (2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and
     
  (3) agrees to be bound by it.

 

In witness whereof , Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.

 

HANCOCK JAFFE LABORATORIES, INC.   EXECUTIVE
     
/s/ Yury Zhivilo   /s/ Robert A. Berman
Yury Zhivilo   Robert A. Berman
Chairman of the Board    

 

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AMENDMENT No. 6

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement DRICBDH0615 (the “Amendment”) is made and entered into as of January 11, 2018, by and between Biodyne Holding SA, a Swiss corporation (the “Lender”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “Borrower”).

 

RECITALS

 

WHEREAS, the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.

 

WHEREAS, the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.

 

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

Section 1.1 of the Loan Agreement is hereby amended to read as follows:

 

Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200 ,000 (two million two hundred thousand US Dollars) in several installments through March 31, 2018.

 

Section 5 of the loan agreement is hereby amended to read as follows:

 

Section 5: REPAYMENT

 

  5.1. The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower
     
  5.2. Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on March 31, 2018.
     
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by March 31, 2018. The Borrower is entitled to repay the loan and the accrued interests at any time before March 31, 2018 without penalty.

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.

 

  “LENDER”
   
  BIODYNE HOLDING SA
   
  /s/ Yury Zhivilo
  Yury Zhivilo
  Managing Director

 

  “BORROWER”
   
  HANCOCK JAFFE LABORATORIES, INC.
   
  /s/ William Abbott.
  William Abbott
  Senior Vice President and
  Chief Financial Officer

 

 

 

 

 

AMENDMENT No. 7

 

TO LOAN AGREEMENT

 

This Amendment to Loan Agreement DRICBDH0615 (the Amendment”) is made and entered into as of March 30, 2018, by and between Biodyne Holding SA, a Swiss corporation (the “Lender”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation , (the Borrower”).

 

RECITALS

 

WHEREAS , the Lender and the Borrower are party to a Loan Agreement , dated as o f June 30 , 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.

 

WHEREAS, the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.

 

NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

 

Section 1.1 of the Loan Agreement is hereby amended to read as follows:

 

Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200,000 (two million two hundred thousand US Dollars) in several installments through June 30 , 2018.

 

Section 5 of the loan agreement is hereby amended to read as follows: Section 5: REPAYMENT

 

  5.1. The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower
     
  5.2. Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on June 30, 2018.
     
  5.3. The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by June 30, 2018. The Borrower is entitled to repay the loan and the accrued interests at any time before June 30 , 2018 without penalty.

 

 

 

 

IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.

 

  “LENDER”
   
  BIODYNE HOLDING SA
   
  /s/ Yury Zhivilo
  Yury Zhivilo
  Managing Director

 

  “BORROWER”
   
  HANCOCK JAFFE LABORATORIES, INC.
   
  /s/ William Abbott.
  William Abbott
  Senior Vice President and
  Chief Financial Officer

 

 

 

 

 

Independent Registered Public Accounting Firm’s Consent

 

We consent to the inclusion in this Registration Statement of Hancock Jaffe Laboratories, Inc. on Form S-1 Amendment No. 5 [File No. 333-220372] of our report dated April 13, 2018, which includes an explanatory paragraph as the Company’s ability to continue as a going concern, with respect to our audits of the financial statements of Hancock Jaffe Laboratories, Inc. as of December 31, 2017 and 2016 and for the years ended December 31, 2017 and 2016 , which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.

 

/s/ Marcum LLP

Marcum llp

New York, New York

April 13, 2018