UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from ___ to ___
Commission File Number: 001-37428
RITTER PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its Charter)
Delaware | 20-1295171 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
1880 Century Park East, Suite 1000 |
Los Angeles, CA 90067 |
(Address and zip code of principal executive offices) |
1801 Century Park East #1820 |
Los Angeles, CA 90067 |
(Former address of principal executive offices) |
Registrant's Telephone Number, Including Area Code: (310) 203-1000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | ¨ |
Non-Accelerated Filer | ¨ | Smaller Reporting Company | x |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 6, 2015, there were 7,792,433 shares of the issuer’s common stock, par value $0.001 per share, outstanding.
1 |
CONDENSED BALANCE SHEETS
September 30, | December 31, | |||||||
2015 | 2014 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 16,244,741 | $ | 2,747,248 | ||||
Prepaid expenses | 303,073 | 57,115 | ||||||
Total current assets | 16,547,814 | 2,804,363 | ||||||
Other assets | 15,624 | 10,331 | ||||||
Deferred offering costs | - | 143,454 | ||||||
Property and equipment, net | 14,250 | 5,172 | ||||||
Total Assets | $ | 16,577,688 | $ | 2,963,320 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 836,953 | $ | 1,083,597 | ||||
Accrued expenses | 296,109 | 168,635 | ||||||
Other liablities | - | 2,518 | ||||||
Total current liabilities | 1,133,062 | 1,254,750 | ||||||
Preferred stock subject to redemption, $0.001 par value; no shares authorized, issued and outstanding as of September 30, 2015; 16,378,646 shares authorized, 13,399,668 shares issued and outstanding as of December 31, 2014 | - | 16,203,612 | ||||||
Stockholders’ equity (deficit) | ||||||||
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding as of September 30, 2015; 8,887,500 shares authorized, issued and outstanding as of December 31, 2014 | - | 8,888 | ||||||
Common stock, $0.001 par value; 25,000,000 shares authorized, 7,792,433 shares issued and outstanding as of September 30, 2015; 50,000,000 shares authorized, 465,378 shares issued and outstanding as of December 31, 2014 | 7,792 | 465 | ||||||
Additional paid-in capital | 40,296,961 | 3,399,924 | ||||||
Accumulated deficit | (24,860,127 | ) | (17,904,319 | ) | ||||
Total stockholders’ equity (deficit) | 15,444,626 | (14,495,042 | ) | |||||
Total Liabilities and Stockholders’ Equity (Deficit) | $ | 16,577,688 | $ | 2,963,320 |
See accompanying notes to unaudited condensed financial statements
2 |
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | $ | 1,505,116 | $ | 57,745 | $ | 1,584,086 | $ | 69,161 | ||||||||
Patent costs | 47,611 | 29,891 | 160,033 | 94,055 | ||||||||||||
General and administrative | 1,555,938 | 166,301 | 4,860,676 | 763,388 | ||||||||||||
Total operating costs and expenses | 3,108,665 | 253,937 | 6,604,795 | 926,604 | ||||||||||||
Operating loss | (3,108,665 | ) | (253,937 | ) | (6,604,795 | ) | (926,604 | ) | ||||||||
Other income (expense) | ||||||||||||||||
Interest income (expense), net | 18,853 | (12,471 | ) | 23,157 | (17,210 | ) | ||||||||||
Other income | 9,590 | - | 16,682 | - | ||||||||||||
Total other income (expense) | 28,443 | (12,471 | ) | 39,839 | (17,210 | ) | ||||||||||
Net loss | $ | (3,080,222 | ) | $ | (266,408 | ) | $ | (6,564,956 | ) | $ | (943,814 | ) | ||||
Cumulative preferred stock dividends | - | 147,128 | 327,569 | 441,913 | ||||||||||||
Accretion of discount on Series C preferred stock | - | - | 63,283 | - | ||||||||||||
Net loss applicable to common stockholders | $ | (3,080,222 | ) | $ | (413,536 | ) | $ | (6,955,808 | ) | $ | (1,385,727 | ) | ||||
Net loss per common share – basic and diluted | $ | (0.40 | ) | $ | (0.92 | ) | $ | (2.35 | ) | $ | (3.07 | ) | ||||
Weighted average common shares outstanding – basic and diluted | 7,792,050 | 451,393 | 2,961,263 | 451,393 |
See accompanying notes to unaudited condensed financial statements
3 |
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (6,564,956 | ) | $ | (943,814 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation | 1,022 | 3,175 | ||||||
Stock based compensation | 2,432,045 | 3,448 | ||||||
Accretion of debt discount | - | 6,416 | ||||||
Prepaid forward sale to supplier (Note 5) | 416,000 | - | ||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses | (245,958 | ) | (54,921 | ) | ||||
Other assets | (5,293 | ) | 5,033 | |||||
Accounts payable | (246,644 | ) | 90,545 | |||||
Accrued expenses | (86,087 | ) | 4,734 | |||||
Other liabilities | (2,698 | ) | (1,159 | ) | ||||
Net cash used in operating activities | (4,302,569 | ) | (886,543 | ) | ||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (10,100 | ) | (1,166 | ) | ||||
Net cash used in investing activities | (10,100 | ) | (1,166 | ) | ||||
Cash flows from financing activities | ||||||||
Commissions and issuance costs of initial public offering | (2,194,375 | ) | - | |||||
Proceeds from issuance of shares upon closing of initial public offering | 20,000,000 | - | ||||||
Proceeds from exercising of options on common stock | 4,537 | - | ||||||
Bank overdraft | - | 11,483 | ||||||
Proceeds of borrowing under notes payable | - | 455,000 | ||||||
Repayment of note payable | - | (27,000 | ) | |||||
Net cash provided by financing activities | 17,810,162 | 439,483 | ||||||
Net increase (decrease) in cash and cash equivalents | 13,497,493 | (448,226 | ) | |||||
Cash and cash equivalents at beginning of period | 2,747,248 | 448,226 | ||||||
Cash and cash equivalents at end of period | $ | 16,244,741 | $ | - | ||||
Non-cash financing activities: | ||||||||
Accrual of commissions and issuance costs of the initial public offering | $ | 213,561 | $ | - | ||||
Deferred offering costs reclassified to additional paid-in capital | $ | 665,603 | $ | - | ||||
Conversion of all oustanding preferred stock into common stock | $ | 8,888 | $ | - | ||||
Conversion of all oustanding preferred stock subject to redemption into common stock | $ | 16,594,464 | $ | - | ||||
Common stock subject to repurchase | $ | 180 | $ | - | ||||
Cumulative preferred stock dividends | $ | 327,569 | $ | 441,913 | ||||
Accretion of discount on Series C preferred stock | $ | 63,283 | $ | - | ||||
Cash paid for interest | $ | - | $ | - | ||||
Cash paid for taxes | $ | - | $ | - |
See accompanying notes to unaudited condensed financial statements
4 |
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND PRINCIPAL ACTIVITIES
Ritter Pharmaceuticals, Inc. (“Ritter” or the “Company”) is a Delaware corporation headquartered in Los Angeles, California. The Company was formed as a Nevada limited liability company on March 29, 2004 under the name Ritter Natural Sciences, LLC, and converted into a Delaware corporation on September 16, 2008.
Ritter Pharmaceuticals, Inc. develops therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. The Company conducts human gut health research by exploring metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics. The Company’s lead compound, RP-G28 is currently under development for the treatment of lactose intolerance. There currently is no drug approved by the Food and Drug Administration (“FDA”) for the treatment of lactose intolerance, a debilitating disease that affects over 1 billion people worldwide.
On June 24, 2015, the Company’s registration statement on Form S-1 (File No. 333-202924) relating to its initial public offering of its common stock was declared effective by the Securities and Exchange Commission (“SEC”). The shares began trading on the NASDAQ Capital Market on June 24, 2015. The initial public offering closed on June 29, 2015, and 4,000,000 shares of common stock were sold at an initial public offering price of $5.00 per share.
The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering. In addition, the Company incurred expenses of approximately $1 million in connection with the offering. Thus, the net offering proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.4 million.
NOTE 2 — BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented. All common share amounts and per share amounts reflected in this Quarterly Report on Form 10-Q have been adjusted to reflect a 1-for-7.15 reverse stock split of the Company’s common stock effected on June 17, 2015.
The accompanying interim period unaudited condensed financial statements have also been prepared in accordance with GAAP and applicable rules and regulations of the SEC regarding interim financial reporting. The condensed balance sheet as of September 30, 2015, the condensed statements of operations for the three and nine months ended September 30, 2015 and 2014, and the condensed statements of cash flows for the nine months ended September 30, 2015 and 2014, are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. The condensed balance sheet at December 31, 2014 has been derived from audited financial statements included in Registration Statement on Form S-1 declared effective by the SEC on June 24, 2015. The results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results expected for the full fiscal year or any other period.
The accompanying interim period unaudited condensed financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Registration Statement on Form S-1 declared effective by the SEC on June 24, 2015.
The Company currently operates in one business segment focusing on the development and commercialization of RP-G28. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does not currently operate any separate lines of business or separate business entities.
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Liquidity
At September 30, 2015, after consummation of the Company’s initial public offering, the Company had working capital of approximately $15.4 million, an accumulated deficit of approximately $24.9 million, and cash and cash equivalents of approximately $16.2 million. The Company has not generated any product revenues and has not achieved profitable operations. There is no assurance that profitable operations will ever be achieved, and, if achieved, could be sustained on a continuing basis. In addition, development activities, clinical and pre-clinical testing, and commercialization of the Company’s products will require significant additional financing.
The Company believes that its existing cash will be sufficient to enable the Company to continue as a going concern for at least the next twelve months. However, the Company will need to secure additional funding in the future, from one or more equity or debt financings, collaborations, or other sources, in order to carry out all of its planned research and development activities. If the Company is unable to obtain additional financing or generate license or product revenue, the lack of liquidity could have a material adverse effect on the Company’s future prospects.
NOTE 3 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended December 31, 2014 included in the Company’s Registration Statement on Form S-1 declared effective by the SEC on June 24, 2015. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those detailed below.
Cash and Cash Equivalents
The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.
Deferred Offering Costs
Deferred offering costs, which primarily consist of direct, incremental banking, legal and accounting fees relating to the initial public offering of the Company’s common stock, are capitalized within long term assets. The deferred offering costs were reclassified to additional paid-in capital upon the consummation of the offering on June 29, 2015.
Net Loss Per Share
The Company determines basic loss per share and diluted loss per share in accordance with the provisions of Accounting Standards Codification (“ASC”) 260, “ Earnings per Share .” Basic net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding during the period. Diluted net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding during the period using the treasury stock method or the two-class method, whichever is more dilutive. The potentially dilutive stock options issued under the 2015 Equity Incentive Plan (described in Note 8) and warrants on the Company’s common stock (described in Note 7) were not considered in the computation of diluted net loss per share because they would be anti-dilutive.
All common share amounts and per share amounts have been adjusted to reflect a 1-for-7.15 reverse stock split of the Company’s common stock effected on June 17, 2015.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
requires related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management is currently evaluating the new guidance and has not determined the impact this standard may have on the Company’s financial statements.
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
September 30, | December 31, | |||||||||
Estimated Life | 2015 | 2014 | ||||||||
Computers and equipment | 5 years | $ | 6,636 | $ | 5,487 | |||||
Furniture and fixtures | 7 years | 13,221 | 4,270 | |||||||
Total property and equipment | 19,857 | 9,757 | ||||||||
Accumulated depreciation | (5,607 | ) | (4,585 | ) | ||||||
Total property and equipment, net of accumulated depreciation | $ | 14,250 | $ | 5,172 |
Depreciation expense of approximately $400 and $600 was recognized for the three months ended September 30, 2015 and 2014, respectively, and approximately $1,000 and $3,000 for the nine months ended September 30, 2015 and 2014, respectively and is classified in general and administrative expense in the accompanying Unaudited Condensed Statements of Operations.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
Employment Agreements
Michael Step
On December 2, 2014, Michael Step accepted an offer letter from the Company setting forth the terms of his employment as Chief Executive Officer. The offer letter provides that Michael Step is entitled to an annual base salary of $360,000 and a total of three grants of options to purchase the Company’s common stock.
The first two options entitle Michael Step to purchase 646,537 and 73,777 of the Company’s shares, respectively, for an exercise price of $5.86 per share. Each of these options was immediately exercisable in full as of the date of the grant, with 44/48ths of the total number of shares covered by each option subject to a right of repurchase by the Company upon termination of Michael Step’s employment with the Company for any reason. This right of repurchase lapses over a period of 44 months, with 1/44th of the total number of shares subject to the right of repurchase lapsing on January 1, 2015 and on the first day of each month thereafter. In addition, the right of repurchase will lapse in its entirety upon a termination of the employment under certain circumstances.
The third option became exercisable upon the closing of the Company’s initial public offering on June 29, 2015. The option is for a total of 163,799 shares of the Company’s common stock, which, together with the shares subject to the first option, represents 7.5% of the shares of common stock deemed to be outstanding at June 29, 2015 on a fully-diluted basis after giving effect to the number of shares subject to the third option. Seventy-five percent (75%) of the shares subject to the third option are subject to a right of repurchase by the Company upon termination of Michael Step’s employment for any reason. This right of repurchase lapses with respect to 1/36th of the total number of shares subject to the right of repurchase on the first day of each month following the date on which the third option became
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
exercisable. In addition, the right of repurchase will lapse in its entirety upon Michael Step’s termination of employment under certain circumstances.
Additionally, under the terms of his Executive Severance and Change in Control Agreement, also effective on December 2, 2014, Michael Step is entitled to receive certain payments in the event his employment is terminated under certain scenarios.
Andrew Ritter and Ira Ritter
On September 25, 2013, the Company’s Board of Directors approved the Executive Compensation Plan (the “Compensation Plan”) setting forth certain compensation to be paid to Andrew Ritter, the Company’s current President and former Chief Executive Officer, and Ira Ritter, the Company’s current Chief Strategic Officer (“CSO”) for their contributions to the Company. Effective June 29, 2015, in connection with the Company’s initial public offering, Andrew Ritter and Ira Ritter accepted offer letters from the Company setting forth the terms of their employment as President and CSO, respectively, of the Company. The offer letters superseded the Compensation Plan.
Their respective offer letters provide that that Andrew Ritter is entitled to an annual base salary of $310,000 and Ira Ritter is entitled to an annual base salary of $295,000. In accordance with his offer letter, Andrew Ritter also became entitled to receive up to $180,000 payable over a three year period for tuition reimbursement. As of September 30, 2015, the Company paid an aggregate of $60,000 and accrued $92,500 in tuition reimbursement for Andrew Ritter and recognized such amount in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the three and nine month periods ending September 30, 2015.
Additionally, under the terms of their Executive Severance and Change in Control Agreements, also effective on June 29, 2015, Andrew Ritter and Ira Ritter are entitled to receive certain payments in the event their employment is terminated under certain scenarios.
Pursuant to their respective offer letters, Andrew Ritter and Ira Ritter each have the opportunity to earn an annual bonus based upon a percentage of their base salary and the achievement of specific performance as determined by the Company. The initial target bonus opportunities are 40% and 35% of the base salary for Andrew Ritter and Ira Ritter, respectively.
Pursuant to the Compensation Plan, as in effect prior to entering into their offer letters, Andrew Ritter and Ira Ritter had bonus opportunities to, upon the satisfaction of the events described below, each potentially receive the following cash payments and each potentially receive the following options to purchase up to 48,951 shares of the Company’s common stock (the “Executive Options”) pursuant to the 2008 Stock Plan:
· | FDA Meeting Bonus Opportunities . Each executive was entitled to receive, and in April 2013 each executive received, a one-time cash bonus of $10,000 for a milestone associated with meeting with the FDA regarding RP-G28’s path to FDA approval. In addition, upon satisfaction of this milestone, the executives became entitled to 3,496 of the Executive Options. 2,360 shares of the Executive Options vested and became exercisable as of the grant date of September 25, 2013, with the balance of the 1,136 shares vesting ratably in 36 equal monthly installment beginning on September 30, 2013. |
· | Clinical Trial Funding Commitment Bonus Opportunities . Each executive was entitled to receive a one-time cash bonus of $75,000 upon the Company’s receipt of a commitment by a third party to fund a Phase 2 or later clinical trial; provided, however, that no such bonus would be paid at any time the Company had less than $2,000,000 in available cash. In addition, upon the satisfaction of this milestone, 35% of 10,489 shares of the Executive Options would vest and become exercisable, with the balance of the 10,489 shares vesting in 36 equal monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone was satisfied; accordingly, each executive received a bonus of $75,000 which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed |
8 |
RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Statements of Operations in the nine month periods ending September 30, 2015. In addition, 3,671 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 6,818 shares vesting ratably on a monthly basis beginning July 31, 2015.
· | Fundraising Bonus Opportunities . Each executive was entitled to receive (i) a one-time cash bonus of $50,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012, and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $2,000,000 and (ii) a one-time cash bonus of $150,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012 and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $10,000,000 (which such bonus would be reduced by any cash bonus paid under subsection (i)); provided, however, that no bonus under subsection (i) or (ii) would be paid at any time the Company had less than $2,000,000 in available cash. In addition, upon the satisfaction of the milestone described in subsection (i), 35% of 6,993 shares of the Executive Options would vest and become exercisable, with the balance of the 6,993 shares vesting in 36 equal monthly installments beginning on the last day of the following month, and, upon satisfaction of the milestone described in subsection (ii), 35% of 13,986 shares of the Executive Options would vest and become exercisable, with the balance of the 13,986 shares vesting in 36 monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone as described in subsection (ii) above was satisfied upon the closing of the Company’s initial public offering on June 29, 2015 raising approximately $17.4 million, net of offering costs; accordingly, each executive received a bonus of $150,000 which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the nine month periods ending September 30, 2015. In addition, 4,895 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015. |
· | License Event Bonus Opportunities . Each executive was entitled to receive the following bonus payments in connection with the closing of an exclusive license of RP-G28 and/or any future product candidate developed by the Company from time to time during the term of the Compensation Plan by and/or any option to exclusively license such product candidate to a third party (referred to under the Compensation Plan as a “License Event”) with a minimum upfront payment to the Company of $2,000,000: |
o | A graduated cash bonus equal to (i) 5% of the Initial Period License Payment (as defined in the Compensation Plan) up to $5,000,000; (ii) 4% of the Initial Period License Payment in excess of $5,000,000 up to $10,000,000; and (iii) 3% of the Initial Period License Payment in excess of $10,000,000. In addition, upon the Company’s receipt of an Initial Period License Payment of more than $2,000,000, 35% of 45,454 shares of their Executive Options will vest and become exercisable, with the balance of the 45,454 shares vesting in 36 monthly installments beginning on the last day of the following month. |
o | A cash bonus equal to 3% of any Annual Excess Milestone Payments (as defined in the Compensation Plan); provided, however that no such bonus may be paid at any time the Company has less than $1,000,000 in available cash. In addition, upon the Company’s receipt of an Annual Excess Milestone Payment, 35% of 6,993 shares of their Executive Options will vest and become exercisable, with the balance of the 6,993 shares vesting in 36 monthly installments beginning on the last day of the following month. |
As of September 30, 2015, 27,972 of the maximum 48,951 Executive Options potentially issuable to each executive had been issued to each executive subject to the vesting conditions described above.
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Research and Development Arrangement
Effective July 24, 2015, the Company entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”) with Ricerche Sperimentali Montale SpA (“Ricerche”) and Inalco SpA (collectively, “RSM”). The Amended Supply Agreement amends certain terms of the Clinical Supply and Cooperation Agreement, dated December 16, 2009, amended on September 25, 2010 (the “Existing Supply Agreement”).
Under the Existing Supply Agreement, RSM granted the Company an exclusive worldwide option in a specified field and territory to assignment of all right, title and interest to a purified Galacto-oligosaccharides product (“Improved GOS”), the composition of matter of the Improved GOS and any information relating to the Improved GOS, including certain specified technical information and other intellectual property rights (the “Improved GOS IP”). Pursuant to the amended terms, the Company may exercise the option by paying RSM $800,000 within ten days after the effective date of the Amended Supply Agreement. The Company exercised the option on July 30, 2015 and RSM is transferring the Improved GOS IP to the Company. Under the terms of the existing agreement, if a further option payment of $1 million due in the future is not made, the Company may be required to return the Improved GOS IP to RSM.
The Amended Supply Agreement also provides that the Company must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by the Company using Improved GOS as its active pharmaceutical ingredient. In addition, the Company agreed to purchase 350 kilos of Improved GOS for the sum of $250 per kilo for clinical supply of Improved GOS instead of $2,000 per kilo as under the Existing Supply Agreement.
In consideration for RSM entering into the Amended Supply Agreement, the Company will issue 100,000 shares of the Company’s common stock, par value $0.001 per share (the “Shares”), to RSM. The Shares are to be issued within 90 days of the effective date of the Amended Supply Agreement pursuant to a stock purchase agreement to be negotiated by the parties in good faith. The stock purchase agreement is to include a lock-up agreement by RSM in favor of the Company pursuant to which RSM will not be able to sell the Shares for a period ending on the earlier of (i) the public release by the Company of the final results of its Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of its Form 10-Q with the Securities and Exchange Commission for the fiscal quarter in which the Company receives the results of its Phase 2b/3 clinical trial of RP-G28. The shares will be issued to RSM upon the execution of the stock purchase agreement by RSM.
The agreement for 100,000 shares issuance to RSM has been recognized pursuant to ASC 815-10-15-9 as a fully prepaid forward sale contract on the Company’s common stock. The fully prepaid forward sale contract is a hybrid instrument comprising (1) a debt host instrument and (2) an embedded forward sale contract, requiring the Company to issue 100,000 shares of the Company’s common stock for no further consideration. Fair value of these shares as of effective date of the agreement totaling $416,000 was recognized in stockholders’ equity in the Condensed Balance Sheet as of September 30, 2015.
Leases
Until September 30, 2015, the Company leased office and storage space for its headquarters in California pursuant to a two-year agreement which called for a minimum monthly rent of approximately $5,000 and an annual increase of 3%. Rent expense, recognized on a straight-line basis, was approximately $15,000 for each of the three months ended September 30, 2015 and 2014. The Company recognized approximately $45,000 in each of the nine months ended September 30, 2015 and 2014 in rent expense. Rent expense is recorded in general and administrative expenses in the Unaudited Condensed Statements of Operations.
On July 9, 2015, the Company entered into a lease with Century Park, a California limited partnership, pursuant to which the Company is leasing approximately 2,780 square feet of office space in Los Angeles, California for the Company’s headquarters. The lease provides for a term of sixty-one (61) months, commencing on October 1, 2015. The Company will pay no rent for the first month of the term and base rent of $9,174 per month for months 2 through 13 of the term, with increasing base rent for each twelve month period thereafter under the term of the lease to a maximum of $10,325 per month for months 50 through 61. The base rent payments do not include the Company’s proportionate share of any operating expenses, including real estate taxes. The Company has the option to extend the
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
term of the lease for one five-year term, provided that the rent would be subject to market adjustment at the beginning of the renewal term. The Company will recognize rent expense on a straight-line basis over the lease term.
Legal
The Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.
NOTE 6 — STOCKHOLDERS’ EQUITY (DEFICIT) AND PREFERRED STOCK SUBJECT TO REDEMPTION
Common Stock
As of December 31, 2014, the Company was authorized to issue 50,000,000 shares of common stock with a par value of $0.001 per share. Effective June 17, 2015, the Company effected a 1-for-7.15 reverse stock split and all common share amounts and per share amounts reflected in this Quarterly Report on Form 10-Q have been adjusted to reflect that reverse stock split. The Company amended and restated its Certificate of Incorporation on June 29, 2015 (“the Amended Certificate”) and reduced the authorized shares of the Company’s common stock to 25,000,000 with a par value of $0.001 per share.
As of September 30, 2015, the Company has a total of 7,792,433 shares of common stock issued and outstanding.
Preferred Stock
The Company’s Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the authorized shares of preferred stock in series and to establish the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereon.
Pursuant to the Amended Certificate, as of June 29, 2015, the Company was authorized to issue 5,000,000 shares of preferred stock, $0.001 par value per share. Prior to the Amended Certificate and as of December 31, 2014, the Company was authorized to issue 7,200,000 shares, 1,687,500 shares, 4,220,464 shares, 7,658,182 shares, and 4,500,000 shares of Series A-1, Series A-2, Series A-3, Series B, and Series C preferred stock, respectively, with a par value of $0.001 per share.
Upon the closing of the Company’s initial public offering, all outstanding shares of convertible preferred stock and preferred stock subject to redemption were converted into an aggregate of 3,322,650 shares of common stock. The following provides material terms and certain historical information regarding the Series A-1, Series A-2, Series A-3, Series B and Series C Preferred Stock prior to their conversion to common stock:
· | Redemption. At any time after five years following the date of the initial issuance of the Series A-3, Series B, or Series C preferred stock, as applicable, and at the option of the holders of a majority of the then outstanding shares of Series A-3, Series B, and Series C preferred stock, voting together as a single class, the Company was required to redeem any outstanding shares that have not been converted by paying cash in an amount per share equal to the liquidation preference of $0.62 and $1.30 for the Series A-3 and Series C preferred stock, |
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
respectively, and $1.19 per share, plus any accrued but unpaid dividends, for the Series B preferred stock. Given the holders’ redemption option, the Series A-3, Series B, and Series C preferred stock is classified as preferred stock subject to redemption in the accompanying unaudited Condensed Balance Sheets.
· | Dividends. The holders of outstanding shares of preferred stock were entitled to receive dividends, when, as and if declared by the Company’s Board of Directors. The annual dividend rate was $0.00556 per share for the Series A-1 preferred stock, $0.032 per share for the Series A-2 preferred stock, $0.04957 per share for the Series A-3 preferred stock, $0.09524 per share for the Series B preferred stock, and $0.104 for Series C preferred stock (subject to adjustment). The right to receive dividends on shares of Series B preferred stock was cumulative and the dividends accrue to holders of Series B preferred stock whether or not dividends are declared or paid in a calendar year. Undeclared dividends in arrears for the Series B preferred stock was approximately $2 million and $1.7 million as of June 29, 2015 and December 31, 2014, respectively. The right to receive dividends on shares of Series A and Series C preferred stock was not cumulative and no right to such dividends accrued to holders of Series A or Series C preferred stock. |
· | Liquidations. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, Series B and Series C preferred stockholders receive an amount per share equal to the sum of the original purchase price of $1.19 plus all cumulative but unpaid dividends for Series B, and $1.30 for Series C. If upon the liquidation, the available assets are insufficient to permit payments to Series B and Series C holders, the entire assets legally available will be distributed in a pro rata basis among the holders in proportion to the full amounts they would otherwise be entitled to receive. Upon the completion of the distribution to the holders of the Series B and Series C preferred stock, the holders of the Series A preferred stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of all other capital stock by reason of their ownership of such stock, an amount per share equal to the sum of the original issue price per share of $0.07, $0.40, and $0.62 for Series A-1, Series A-2, and Series A-3 preferred stock, respectively, plus any accrued but unpaid dividends on the preferred stock. Any remaining assets are distributed pro rata among the preferred and common shareholders. |
Stock Transactions
Initial Public Offering
On June 29, 2015, the Company closed its initial public offering, selling 4,000,000 shares of the Company’s common stock at an initial public offering price of $5.00 per share, for aggregate gross proceeds to the Company of $20 million. The Company paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering, and approximately $1 million of other expenses in connection with the offering. Effective prior to the closing of the initial public offering, the Company converted all of its outstanding shares of Series A-1, Series A-2, Series A-3, Series B, and Series C preferred into an aggregate of 3,322,650 shares of the Company’s common stock.
Series C Financing
In December 2014, the Company issued an aggregate of 2,369,228 shares of Series C preferred stock and warrants to purchase an aggregate of 331,358 shares of the Company’s common stock (the “Warrants”), for aggregate gross proceeds of $3,081,893 (the “Series C Financing”). All of these shares of Series C preferred stock were converted into 331,358 shares of the Company’s common stock prior to the closing of the initial public offering. Each Warrant has a term of seven years and provides for the holder to purchase one share of the Company’s common stock at a purchase price of $9.30 per share of common stock. The Warrants are indexed to the Company’s own stock and classified within stockholders’ equity pursuant to ASC 815-40. The gross proceeds were allocated to the Series C preferred stock and Warrants on a relative fair value basis, resulting in a value of $7.83 for the Series C preferred stock. The allocation of proceeds to the Warrants creates a discount of $1.47 in the initial carrying value of the Series C preferred stock, which was recognized as accretion, similar to preferred stock dividends, over the five-year period prior to optional redemption by the holders.
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
In connection with the Series C Financing, all of the 2014 Notes were converted into shares of Series C preferred stock and Warrants as follows:
· | $535,000 unpaid principal plus accrued interest of $18,342 on convertible notes converted into 567,529 shares of Series C preferred stock, which was later converted into 79,374 shares of the Company’s common stock, and 79,374 Warrants |
· | $70,000 unpaid principal plus accrued interest of $537 on note payable extinguished and converted into 54,259 shares of Series C preferred stock, which was later converted into 7,589 shares of the Company’s common stock and 7,589 Warrants |
Notes with an unpaid principal balance of $535,000 were converted into shares of Series C preferred stock and warrants to purchase shares of common stock at 75% of the price paid by other purchasers of the Series C Financing. The Company recognized additional interest expense of $184,445 upon conversion, calculated as the fair value of incremental shares and warrants received by the holders compared to converting the outstanding debt and accrued interest at 100% of the price paid by purchasers of the Series C Financing. The note with an unpaid principal balance of $70,000 was exchanged for shares of Series C preferred stock and warrants to purchase shares of common stock at a price per share equal to the price per share paid by purchasers of the Series C Financing. As such, there was no gain recognized or loss incurred upon extinguishment of the note in 2014.
Prepaid Forward Sale of Preferred Stock
On November 30, 2010, the Company concurrently entered into a Research and Development Agreement & License (“R&D Agreement”) and a Put and Call Option Agreement (“Option Agreement”) with two commonly controlled entities, Kolu Pohaku Technologies, LLC (“KPT”) and Kolu Pohaku Management, LLC (“KPM”). The R&D Agreement was subsequently amended on July 6, 2011, September 30, 2011, February 6, 2012 and November 4, 2013 to increase the funding received by the Company.
Research and Development Agreement & License
The R&D Agreement between the Company and KPM and KPT, a Qualified High Technology Business within the meaning of Hawaii Revised Statutes, called for KPT to make a series of payments to the Company totaling $1,750,000 in exchange for the Company performing research and development activities in Hawaii for the benefit of KPT (referred to herein as the KP Research). The KP Research consisted of the initial phase of research, including the conduct of Phase II clinical trials in Hawaii for RP-G28. Pursuant to the terms of the R&D Agreement, the Company maintained ownership of the results of the Company’s ongoing research related to RP-G28, but KPT maintained ownership of the results of the KP Research. Inventions, developments and improvements arising out of the KP Research were owned by KPT. Under the terms of the R&D Agreement, the Company would bear any costs involved in obtaining patents for any inventions, developments or improvements resulting from the Research Project. In exchange for the irrevocable, perpetual, exclusive, worldwide right and license to the results of the KP Research, as they are generated under this R&D Agreement, the Company agreed to pay a quarterly royalty payment to KPT of $32,000 commencing March 31, 2015 and continuing through December 31, 2035 or until such time as the KPM put or call option (as described below) was exercised. On March 26, 2015, the Company exercised the KPM put option and issued 1,469,994 shares of Series B preferred stock to KPM, resulting in the full satisfaction of the Company’s obligation to make royalty payments to KPT.
Option Agreement
Pursuant to the terms of the KPM Option Agreement, the Company had the right to put 1,469,994 shares of the Company’s Series B Preferred Stock (“Series B”) to KPM and KPM had the option to call the same amount of shares of Series B from the Company at any time after December 31, 2014. The number of shares was determined by dividing the $1,750,000 of payments made by KPT to the Company under the R&D Agreement by the Series B original issue
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
price of $1.19. Exercise of the put or call option would result in full satisfaction of the Company’s obligation to make royalty payments to KPT under the R&D Agreement and KPT’s right, title and interest in the research conducted pursuant to the R&D Agreement would become the property of the Company. On March 26, 2015, the Company exercised its right to the KPM put option and issued 1,469,994 shares of Series B preferred stock to KPM. Pursuant to the terms of the KPM Option Agreement, this resulted in the full satisfaction of the Company’s obligation to make royalty payments to KPT under the R&D Agreement and also resulted in the termination of the R&D Agreement and all of KPT’s right, title and interest in and to the KP Research, which rights now belong to the Company.
The R&D Agreement and the put or call option have been recognized on a combined basis, pursuant to ASC 815-10-15-9, as a fully prepaid forward sale contract on the Company’s Series B preferred stock. The fully prepaid forward sale contract is a hybrid instrument comprising (1) a debt host instrument and (2) an embedded forward sale contract, requiring the Company to issue 1,469,994 shares of the Company’s Series B for no further consideration. Payments received by the Company, totaling $1,750,000, are recognized as preferred stock subject to redemption in the Condensed Balance Sheet as of December 31, 2014. The Company converted these shares into an aggregate of 205,593 shares of the Company’s common stock upon the closing of the IPO.
NOTE 7 — WARRANTS
As described in Note 6, in 2014, the Company issued seven-year warrants (the “Warrants”) to investors for the purchase of 418,321 shares of the Company’s common stock at an exercise price of $9.30 per share.
The Company analyzed the Warrants in accordance with ASC Topic 815 to determine whether the Warrants meet the definition of a derivative and, if so, whether the Warrants meet the scope exception that provides for equity classification of derivative instruments issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity. The Company concluded these Warrants should be classified as equity since they contain no provisions, which would require recognition as a liability.
The following represents a summary of the warrants outstanding at September 30, 2015 and changes during the period then ended:
Weighted Average | ||||||||
Warrants | Exercise Price | |||||||
Outstanding at December 31, 2014 | 418,321 | $ | 9.30 | |||||
Granted | - | - | ||||||
Exercised/Expired/ Forfeited | - | - | ||||||
Outstanding at September 30, 2015 | 418,321 | $ | 9.30 | |||||
Exercisable at September 30, 2015 | 418,321 | $ | 9.30 |
NOTE 8 — STOCK-BASED COMPENSATION
Terms of the Company’s share-based compensation are governed by the Company’s 2015 Equity Incentive Plan, 2009 Stock Plan and 2008 Stock Plan (collectively the “Plans”.) The Plans permit the Company to grant non-statutory stock options, incentive stock options and other equity awards to the Company’s employees, outside directors and consultants; however, incentive stock options may only be granted to the Company’s employees. Beginning June 29, 2015, no further awards may be granted under the 2009 Stock Plan or 2008 Stock Plan. As of September 30, 2015, the aggregate number of shares of common stock available for issuance under the 2015 Equity Incentive Plan is 206,448. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under the 2015 Equity Incentive Plan.
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
The exercise price for an option issued under the Plans is determined by the Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a nonstatutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the Plans shall vest as determined by the Board of Directors but shall not exceed a ten-year period.
Options Issued to Directors and Employees as Compensation
Pursuant to the terms of the Plans, from inception to December 31, 2013, the Company issued options to purchase an aggregate of 206,172 shares to its executive officers and employees of the Company. The exercise prices of these option grants, as determined by the Company’s Board of Directors, range from $0.79 to $1.27 per share, and a portion of these vest subject to certain performance conditions described in Note 5. In addition, the Company granted additional non-qualified 10-year term options to its executive officers to purchase an aggregate of 1,790,540 shares of the Company’s common stock in December 2014. As of December 31, 2014, an aggregate of 82,107 options were expired or exercised, and an aggregate of 1,914,605 options issued to executive officers and employees remained outstanding.
During the nine months ended September 30, 2015, no additional options were granted and an aggregate of 41,958 options to purchase the Company’s common stock were automatically terminated due to certain performance conditions not being met. As of September 30, 2015, the Company has a total of 1,872,647 options issued to its executive officers and employees outstanding.
The Company recognized stock based compensation expense for these services within general and administrative expense in the accompanying Unaudited Condensed Statements of Operations of approximately $2.4 million and $2,500 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was approximately $2.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.6 years.
In addition to annual cash compensation payable to the Company’s non-employee directors for their services on the Board and its committees, the Board of Directors determined to award non-employee director an option to acquire 10,000 shares of the Company’s common stock to vest 25% upon the first anniversary of the nonemployee director’s approximate date of joining the Board of Directors with the remaining options vesting monthly in equal amounts over 36 months. As of September 30, 2015, no stock based compensation had been granted to the nonemployee directors.
Options Issued to Nonemployees for Services Received
From inception to September 30, 2015, the Company issued options to consultants to the Company to purchase an aggregate of 106,573 shares of the Company’s common stock under the Plans. Of these, 73,985 options were forfeited or exercised, and 32,588 options remain outstanding as of September 30, 2015. The exercise prices of the outstanding options, as determined by the Company’s Board of Directors, range from $0.72 to $1.14 per share. These outstanding options, with the exception of an option to purchase an aggregate of 7,271 shares granted to a consultant, vest 25% upon the first anniversary of the vesting commencement date with the remaining options vesting monthly in equal amounts over 36 months. In March 2011, the Company granted an option to a consultant to purchase an aggregate of 7,271 shares with an exercise price of $1.00 which vests 25% on the date of grant with the remaining options vesting monthly in equal amounts over 36 months. The Company recognized stock based compensation expense for these services of approximately $700 and $1,000 for the nine months ended September 30, 2015 and 2014, respectively, within research and development expense in the accompanying Unaudited Condensed Statements of Operations.
Options Valuation
The Company calculates the fair value of stock-based compensation awards granted to employees and nonemployees using the Black-Scholes option-pricing method. If the Company determines that other methods are more reasonable,
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company’s stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant.
Stock-based compensation expense to non-employees affects the Company’s general and administrative expenses and research and development expenses.
The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. The assumptions used in the Black-Scholes option-pricing method for the three months and nine months ended September 30, 2015 and 2014 are set forth below:
Three months ended September 30, | Nine months ended September 30, | |||||||
2015 | 2014 | 2015 | 2014 | |||||
Expected dividend yield | (1) | 0.00% | 0.00% | 0.00% | ||||
Expected stock-price volatility | (1) | 56.12% - 64.24% | 51.45% - 67.08% | 55.32% - 64.24% | ||||
Risk-free interest rate | (1) | 0.94% - 2.58% | 0.77% - 2.07% | 0.94% - 3.04% | ||||
Term of options | (1) | 10 | 10 | 10 | ||||
Stock price | (1) | $5.86 | $5.86 | $1.17 - $5.86 |
(1) During the three months ended September 30, 2015, the Company has no unvested options for non-employees and no new option was granted to either employees and non-employees during the period.
· | Expected dividend yield. The expected dividend is assumed to be zero as the Company has never paid dividends and has no current plans to pay any dividends on the Company’s common stock. |
· | Expected stock-price volatility. As the Company’s common stock only recently became publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within the Company’s industry that the Company considers to be comparable to the Company’s business over a period approximately equal to the expected term. |
· | Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. |
· | Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. The Company’s historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, the Company estimates the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
In addition to the assumptions used in the Black-Scholes option-pricing model, the Company also estimates a forfeiture rate to calculate the stock-based compensation for the Company’s equity awards. The Company will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for the Company’s stock-based compensation calculations on a prospective basis.
Stock-based Compensation Summary Tables
Information regarding the Company’s stock option grants to the Company’s employees and non-employees, along with the estimated fair value per share of the underlying common stock, for stock options granted since 2005 is summarized as follows:
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RITTER PHARMACEUTICALS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Number of Common | Exercise Price | Estimated Fair Value | ||||||||||
Shares Underlying | per Common | per Share of | Intrinsic Value | |||||||||
Grant Date | Options Granted | Share | Common Stock | Option | ||||||||
2005 | 58,321 | $0.07 | $1.79 | $1.72 | ||||||||
2009 | 60,559 | $0.72 - $0.79 | $4.43 | $3.71 - $3.64 | ||||||||
2011 | 33,846 | $1.00 | $1.00 | $0.00 | ||||||||
2012 | 60,019 | $1.14 | $1.14 | $0.00 | ||||||||
2013 | 100,000 | $1.14 - $1.30 | $1.14 | $0.00 | ||||||||
2014 | 1,626,740 | $5.86 - $13.23 | $5.86 | $0.00 |
The following represents a summary of the options granted to employees and non-employees outstanding at September 30, 2015 and changes during the period then ended:
Weighted Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2014 | 1,952,516 | $ | 7.022 | |||||
Granted | - | - | ||||||
Exercised/ Expired/ Forfeited | (47,281 | ) | (1.249 | ) | ||||
Outstanding at September 30, 2015 | 1,905,235 | $ | 7.165 | |||||
Exercisable at September 30, 2015 | 584,960 | $ | 5.202 | |||||
Expected to be vested | 1,320,275 | $ | 8.034 |
NOTE 9 — RELATED PARTY TRANSACTIONS
A director of the Company is a managing director of Javelin Venture Partners GP, LLC, the general partner of Javelin Venture Partners GP, L.P., which held a significant investment in the Company’s Series A-2, Series A-3, Series B, and Series C preferred stock that was converted to common stock prior to the Company’s initial public offering. Two directors of the Company have acted as a managing director of Stonehenge Partners LLC, which held a significant investment in the Company’s Series A-1 preferred stock and also held investments in the Company’s Series A-2 and Series B preferred stock that was converted to common stock prior to the Company’s initial public offering.
Prior to and during his employment with the Company, Mr. Ira Ritter served as CEO of Andela Group Inc., (“Andela”) a company he founded in 1987, which is involved in corporate management, strategic and financial consulting. The Company incurred no expenses for services received from Andela during the three months and nine months ended September 30, 2015, and approximately $48,000 and $146,000, respectively, during the three months and nine months ended September 30, 2014, all of which were classified in general and administrative expenses in the Unaudited Condensed Statements of Operations.
Other than disclosed, the Company has not entered into or been a participant in any transaction in which a related party had or will have a direct or indirect material interest.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed financial statements and related notes included in this Quarterly Report on Form 10-Q and the audited financial statements and notes thereto as of and for the year ended December 31, 2014 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our final prospectus dated June 24, 2015 filed pursuant to Rule 424(b)(4) of the Securities Act with the SEC on June 26, 2015. As used in this report, unless the context suggests otherwise, “we,” “us,” “our,” or “Ritter” refer to Ritter Pharmaceuticals, Inc. All common share amounts and per share amounts in this Quarterly Report on Form 10-Q have been adjusted to reflect a 7.15-to-1 reverse stock split of our common stock. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.
Cautionary Note Regarding Forward-Looking Statements and Industry Data
This quarterly report contains forward-looking statements. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
· | our ability to obtain additional financing; | |
· | our use of the net proceeds from our initial public offering; | |
· | the accuracy of our estimates regarding expenses, future revenues and capital requirements; | |
· | the success and timing of our preclinical studies and clinical trials; | |
· | our ability to obtain and maintain regulatory approval of RP-G28 and any other product candidates we may develop, and the labeling under any approval we may obtain; | |
· | regulatory developments in the United States and other countries; | |
· | the performance of third-party manufacturers; | |
· | our plans to develop and commercialize our product candidates; | |
· | our ability to obtain and maintain intellectual property protection for our product candidates; | |
· | the successful development of our sales and marketing capabilities; | |
· | the potential markets for our product candidates and our ability to serve those markets; | |
· | the rate and degree of market acceptance of any future products; | |
· | the success of competing drugs that are or become available; and | |
· | the loss of key scientific or management personnel. |
These forward-looking statements are only predictions and we may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, so you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our business, financial condition and operating results. We have included important factors in the cautionary statements included in this quarterly report, particularly in the “Risk Factors” section, that could cause actual future results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
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The forward-looking statements in this quarterly report represent our views as of the date of this quarterly report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this quarterly report.
This quarterly report contains estimates made, and other statistical data published, by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this quarterly report from our own research as well as from industry and general publications, surveys and studies conducted by third parties. This data involves a number of assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions and estimates.
Overview
Ritter Pharmaceuticals, Inc. develops novel therapeutic products that modulate the human gut microbiome to treat gastrointestinal diseases. We are advancing human gut health research by exploring the metabolic capacity of the gut microbiota and translating the functionality of prebiotic-based therapeutics into applications intended to have a meaningful impact on a patient’s health. We have completed a Phase 2a clinical trial of our leading product candidate, RP-G28, an orally administered, high purity oligosaccharide.
We have devoted substantially all of our resources to development efforts relating to RP-G28, including conducting clinical trials of RP-G28, providing general and administrative support for these operations and protecting our intellectual property. We currently do not have any products approved for sale and we have not generated any revenue from product sales since our inception. From our inception through June 28, 2015, we have funded our operations primarily through the private placement of preferred stock, common stock and promissory notes.
On June 24, 2015, our registration statement on Form S-1 (File No. 333-202924) relating to our initial public offering of our common stock was declared effective by the Securities and Exchange Commission (the “SEC”). The shares began trading on the NASDAQ Capital Market on June 24, 2015. The initial public offering closed on June 29, 2015, and 4,000,000 shares of common stock were sold at an initial public offering price of $5.00 per share, for aggregate gross proceeds to us of $20 million.
We paid to the underwriters underwriting discounts and commissions of approximately $1.6 million in connection with the offering. In addition, we incurred expenses of approximately $1 million in connection with the offering. Thus, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were approximately $17.4 million.
We have incurred net losses in each year since our inception, including net losses of approximately $3.1 million and $6.6 million for the three and nine months ended September 30, 2015. We had an accumulated deficit of approximately $24.9 million as of September 30, 2015. Substantially all our net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.
We expect to continue to incur significant expenses and increasing operating losses for at least the next several years. We anticipate that our expenses will increase substantially as we:
· | complete the development of our lead product candidate, RP-G28, for the reduction of symptoms associated with lactose intolerance in patients; |
· | seek to obtain regulatory approvals for RP-G28; |
· | outsource the commercial manufacturing of RP-G28 for any indications for which we receive regulatory approval; |
· | contract with third parties for the sales, marketing and distribution of RP-G28 for any indications for which we receive regulatory approval; |
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· | maintain, expand and protect our intellectual property portfolio; |
· | continue our research and development efforts; |
· | add operational, financial and management information systems and personnel, including personnel to support our product development and commercialization efforts; and |
· | operate as a public company. |
We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Accordingly, we anticipate that we will need to raise additional capital in addition to the net proceeds received in our initial public offering prior to the commercialization of RP-G28 or any other product candidate. Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our operating activities through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements as and when needed would have a negative impact on our financial condition and our ability to develop our product candidates.
Financial Overview
Revenue
We have not generated any revenue since our inception. Our ability to generate revenue in the future will depend almost entirely on our ability to successfully develop, obtain regulatory approval for and then successfully commercialize RP-G28 in the United States. In the event we choose to pursue a partnering arrangement to commercialize RP-G28 or other products outside the United States, we would expect to initiate additional research and development and clinical trial activities in the future.
Research and Development Expenses
Since our inception, we have focused our resources on our research and development activities, including conducting nonclinical studies and clinical trials, manufacturing development efforts and activities related to regulatory filings for RP-G28. Our research and development expenses consist primarily of:
· | fees paid to consultants and CROs, including in connection with our nonclinical and clinical trials, and other related clinical trial fees, such as for investigator grants, patient screening, laboratory work, clinical trial database management, clinical trial material management and statistical compilation and analysis; |
· | costs related to acquiring and manufacturing clinical trial materials; |
· | depreciation of leasehold improvements, laboratory equipment and computers; |
· | costs related to compliance with regulatory requirements; and |
· | overhead expenses for personnel in research and development functions. |
From inception through September 30, 2015, we have incurred approximately $5.3 million in research and development expenses. We plan to increase our research and development expenses for the foreseeable future as we continue the development of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients and other indications, subject to the availability of additional funding.
The successful development of our clinical and preclinical product candidates is highly uncertain. At this time, we cannot reasonably estimate the nature, timing or costs of the efforts that will be necessary to complete the remainder of the development of any of our clinical or preclinical product candidates or the period, if any, in which material net cash inflows from these product candidates may commence. This is due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:
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· | the scope, rate of progress and expense of our ongoing, as well as any additional, clinical trials and other research and development activities; |
· | future clinical trial results; and |
· | the timing and receipt of any regulatory approvals. |
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development of a product candidate or if we experience significant delays in enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development.
RP-G28
The majority of our research and development resources are focused on the Phase 2b and Phase 3 RP-G28 trials and our other planned clinical and nonclinical studies and other work needed to submit RP-G28 for the reduction of symptoms associated with lactose intolerance in patients for regulatory approval in the United States and Europe. We have incurred and expect to continue to incur expenses in connection with these efforts, including:
· | conduct our Phase 2b/3 clinical trials as an adaptive design Phase 2b/3 clinical trials; |
· | working with our CRO to prepare for launch of the Phase 2b/3 and Phase 3 trials; and |
· | working with our third-party drug formulator to produce sufficient drug product for the adaptive design Phase 2b/3 clinical trials and other contemplated trials. |
Patent Costs
Patent costs consist primarily of professional fees for legal services to prosecute patents and maintain patent rights.
General and Administrative Expenses
General and administrative expenses include allocation of facilities costs, salaries, benefits, and stock-based compensation for employees, professional fees for directors, fees for independent contractors and accounting and legal services.
We expect that our general and administrative expenses will increase as we operate as a public company and due to the potential commercialization of RP-G28. We believe that these increases will likely include increased costs for director and officer liability insurance, and increased fees for outside consultants, lawyers and accountants. We also expect to incur increased costs to comply with corporate governance, internal controls and similar requirements applicable to public companies.
Interest Income and Interest Expense
Interest income consists of interest earned on our cash. We expect our interest income to increase due to the receipt of net proceeds from our initial public offering as we invest the net proceeds from the offering pending their use in our operations.
Interest expense pertains to interest accrued on our promissory notes.
Critical Accounting Policies and Estimates
This management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our financial statements. On an ongoing basis,
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we evaluate our estimates and judgments, including those related to fair value of financial instruments, research and development costs, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes in our critical accounting policies as discussed in our Registration Statement on Form S-1 declared effective by the SEC on June 24, 2015.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern , which provides guidance regarding management’s responsibility to assess whether substantial doubt exists regarding the ability to continue as a going concern and requires related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This ASU is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Management is currently evaluating the new guidance and has not determined the impact this standard may have on our financial statements.
Stock-based Compensation
In June 2015, we adopted a new equity incentive plan (“2015 Equity Incentive Plan”) to replace our prior 2008 Stock Plan and 2009 Stock Plan. Terms of our share-based compensation are governed by the 2015 Equity Incentive Plan, 2009 Stock Plan and 2008 Stock Plan (collectively the “Plans”). The Plans permit us to grant non-statutory stock options, incentive stock options and other equity awards to our employees, outside directors and consultants; however, incentive stock options may only be granted to our employees. Beginning June 29, 2015, no further awards may be granted under the 2009 Stock Plan or 2008 Stock Plan. As of September 30, 2015, the aggregate number of shares of common stock available for issuance under the 2015 Equity Incentive Plan is 206,448. However, to the extent awards under the 2008 Plan or 2009 Plan are forfeited or lapse unexercised or are settled in cash, the common stock subject to such awards will be available for future issuance under the 2015 Equity Incentive Plan.
The exercise price for options issued under the Plans is determined by our Board of Directors, but will be (i) in the case of an incentive stock option (A) granted to an employee who, at the time of grant of such option, is a 10% stockholder, no less than 110% of the fair market value per share on the date of grant; or (B) granted to any other employee, no less than 100% of the fair market value per share on the date of grant; and (ii) in the case of a nonstatutory stock option, no less than 100% of the fair market value per share on the date of grant. The options awarded under the Plans shall vest as determined by our Board of Directors but shall not exceed a ten-year period.
Options Issued to Directors and Employees as Compensation
We recognize compensation costs related to stock options granted to employees based on the estimated fair value of the awards on the date of grant, net of estimated forfeitures. We estimate the grant date fair value, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The grant date fair value of stock-based awards is expensed on a straight-line basis over the vesting period of the respective award. Performance-based awards vest and are expensed over the performance period when the related performance goal is probable of being achieved.
Pursuant to the terms of the Plans, from inception to December 31, 2013, we issued options to purchase an aggregate of 206,172 shares to our executive officers and employees. The exercise prices of these option grants, as determined by our Board of Directors, range from $0.79 to $1.27 per share, and a portion of these vest subject to certain performance conditions. In addition, we granted additional non-qualified 10-year term options to our executive officers to purchase an aggregate of 1,790,540 shares of our common stock in December 2014. As of December 31,
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2014, an aggregate of 82,107 options were expired or exercised, and an aggregate of 1,914,605 issued to executive officers and employees options remained outstanding.
During the nine months ended September 30, 2015, no additional options were granted and an aggregate of 41,958 options to purchase our common stock were automatically terminated due to certain performance conditions not being met. As of September 30, 2015, we have a total of 1,872,647 options issued to our executive officers and employees outstanding.
We recognized stock based compensation expense for these services within general and administrative expense in the accompanying Unaudited Condensed Statements of Operations of approximately $2.4 million and $2,500 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015, there was approximately $2.4 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over a weighted average period of 1.6 years.
In addition to annual cash compensation payable to certain non-employee directors for their services on the Board and its committees, the Board of Directors determined to award certain non-employee directors an option to acquire 10,000 shares of our common stock to vest 25% upon the first anniversary of the nonemployee director’s approximate date of joining the Board of Directors with the remaining options vesting monthly in equal amounts over 36 months. As of September 30, 2015, no stock based compensation had been granted to the nonemployee directors.
Options Issued to Non-Employees for Service Received
We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. The compensation costs of these arrangements are subject to re-measurement over the vesting terms as earned.
From inception to September 30, 2015, we have issued options to its consultants to purchase an aggregate of 106,573 shares of our common stock under the Plans. Of these, 73,985 options were forfeited or exercised, and 32,588 options remain outstanding as of September 30, 2015. The exercise prices of the outstanding options, as determined by our Board of Directors, range from $0.72 to $1.14 per share. These outstanding options, with the exception of an option to purchase an aggregate of 7,271 shares granted to a consultant, vest 25% upon the first anniversary of the vesting commencement date with the remaining options vesting monthly in equal amounts over 36 months. In March 2011, we granted an option to a consultant to purchase an aggregate of 7,271 shares with an exercise price of $1.00 which vests 25% on the date of grant with the remaining options vesting monthly in equal amounts over 36 months. We recognized stock based compensation expense for these services of approximately $700 and $1,000 for the nine months ended September 30, 2015 and 2014, respectively, within research and development expense in the accompanying Unaudited Condensed Statements of Operations.
Option Valuation
We calculate the fair value of stock-based compensation awards granted to employees and nonemployees using the Black-Scholes option-pricing method. If we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives would result in an increase to stock-based compensation expense to non-employees determined at the date of grant. Stock-based compensation expense to non-employees affects our general and administrative expenses and research and development expenses.
The Black-Scholes option-pricing model requires the use of highly subjective and complex assumptions, which determine the fair value of stock-based awards. The assumptions used in the Black-Scholes option-pricing method for the three months and nine months ended September 30, 2015 and 2014 are set forth below:
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Three months ended September 30, | Nine months ended September 30, | |||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||
Expected dividend yield | (1) | 0.00% | 0.00% | 0.00% | ||||||||
Expected stock-price volatility | (1) | 56.12% - 64.24% | 51.45% - 67.08% | 55.32% - 64.24% | ||||||||
Risk-free interest rate | (1) | 0.94% - 2.58% | 0.77% - 2.07% | 0.94% - 3.04% | ||||||||
Term of options | (1) | 10 | 10 | 10 | ||||||||
Stock price | (1) | $5.86 | $5.86 | $1.17 - $5.86 |
(1) During the three months ended September 30, 2015, the Company has no unvested options for non-employees and no new option was granted to either employees and non-employees during the period.
· | Expected dividend. The expected dividend is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock. |
· | Expected volatility. As our common stock only recently became publicly traded, the expected volatility is derived from the average historical volatilities of publicly traded companies within our industry that we consider to be comparable to our business over a period approximately equal to the expected term. |
· | Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the expected term. |
· | Expected term. The expected term represents the period that the stock-based awards are expected to be outstanding. Our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore we estimate the expected term by using the simplified method provided by the SEC. The simplified method calculates the expected term as the average of the time-to-vesting and the contractual life of the options. |
In addition to the assumptions used in the Black-Scholes option-pricing model, we also estimate a forfeiture rate to calculate the stock-based compensation for our equity awards. We will continue to use judgment in evaluating the expected volatility, expected terms and forfeiture rates utilized for our stock-based compensation calculations on a prospective basis.
Stock-based Compensation Summary Tables
Information regarding our stock option grants to our employees and non-employees, along with the estimated fair value per share of the underlying common stock, for stock options granted since 2005 is summarized as follows:
Number of Common | Exercise Price | Estimated Fair Value | ||||||||||
Shares Underlying | per Common | per Share of | Intrinsic Value | |||||||||
Grant Date | Options Granted | Share | Common Stock | Option | ||||||||
2005 | 58,321 | $ 0.07 | $ 1.79 | $ 1.72 | ||||||||
2009 | 60,559 | $0.72 - $0.79 | $ 4.43 | $3.71 - $3.64 | ||||||||
2011 | 33,846 | $ 1.00 | $ 1.00 | $ 0.00 | ||||||||
2012 | 60,019 | $ 1.14 | $ 1.14 | $ 0.00 | ||||||||
2013 | 100,000 | $1.14 - $1.30 | $ 1.14 | $ 0.00 | ||||||||
2014 | 1,626,740 | $5.86 - $13.23 | $ 5.86 | $ 0.00 |
The following represents a summary of the options granted to employees and non-employees outstanding at September 30, 2015 and changes during the period then ended:
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Weighted Average | ||||||||
Options | Exercise Price | |||||||
Outstanding at December 31, 2014 | 1,952,516 | $ | 7.022 | |||||
Granted | - | - | ||||||
Exercised/ Expired/ Forfeited | (47,281 | ) | (1.249 | ) | ||||
Outstanding at September 30, 2015 | 1,905,235 | $ | 7.165 | |||||
Exercisable at September 30, 2015 | 584,960 | $ | 5.202 | |||||
Expected to be vested | 1,320,275 | $ | 8.034 |
JOBS Act
On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act 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 (the Securities Act), for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for complying with new or revised accounting standards under Section 102(b)(1) of the JOBS Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates.
We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission.
Results of Operations
Comparison of the Three Months Ended September 30, 2015 and 2014
The following table summarizes our results of operations for the three months ended September 30, 2015 and 2014, together with the changes in those items in dollars and as a percentage:
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For the Three Months Ended September 30, | Dollar | Percentage | ||||||||||||||
2015 | 2014 | Change | Change | |||||||||||||
Statement of Operations Data: | ||||||||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | $ | 1,505,116 | $ | 57,745 | $ | 1,447,371 | 2,506% | |||||||||
Patent costs | 47,611 | 29,891 | 17,720 | 59% | ||||||||||||
General and administrative | 1,555,938 | 166,301 | 1,389,637 | 836% | ||||||||||||
Total operating costs and expenses | 3,108,665 | 253,937 | 2,854,728 | 1,124% | ||||||||||||
Loss from operations | (3,108,665 | ) | (253,937 | ) | (2,854,728 | ) | 1,124% | |||||||||
Interest income (expense) | 18,853 | (12,471 | ) | 31,324 | 251% | |||||||||||
Other income | 9,590 | - | 9,590 | |||||||||||||
Total other income (expense) | 28,443 | (12,471 | ) | 40,914 | 328% | |||||||||||
Net Loss | $ | (3,080,222 | ) | $ | (266,408 | ) | $ | (2,813,814 | ) | 1,056% |
Research and Development Expenses
Research and development expenses were approximately $1.5 million and $60,000 for the three months ended September 30, 2015 and 2014, respectively. The increase in research and development expenses of approximately $1.4 million, or 2,506%, primarily reflects our manufacturing ramp-up costs to prepare product for clinical trials.
Patent Costs
Patent costs were approximately $48,000 and $30,000 for the three months ended September 30, 2015 and 2014, respectively, representing an increase of $18,000, or 59%. This increase was primarily due to our transition to a new service provider.
General and Administrative Expenses
General and administrative expenses were approximately $1.6 million and $200,000 for the three months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expenses is approximately $1.4 million, or 836%. This increase in general and administrative expenses was primarily due to the increase in stock based compensation related to the options granted to our executives and employees in December 2014, increase in headcount and in salary for our officers in 2015, and the increase in expenses related to the closing of our initial public offering.
Other Income (Expense)
Net interest income (expenses) was approximately $19,000 and ($12,000) for the three months ended September 30, 2015 and 2014, respectively. The increase of approximately $31,000, or 251%, was primarily a result of interest expense incurred on our outstanding promissory notes in the three months ended September 30, 2014 and, to a lesser extent, on interest earned from the proceeds of our initial public offering during the three months ended September 30, 2015.
Other income was $9,590 and $0 for the three months ended September 30, 2015 and 2014, respectively. The increase of $9,590 was a result of a gain on the settlement of accounts payable.
Comparison of the Nine Months Ended September 30, 2015 and 2014
The following table summarizes our results of operations for the nine months ended September 30, 2015 and 2014, together with the changes in those items in dollars and as a percentage:
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For the Nine Months Ended September 30, | Dollar | Percentage | ||||||||||||||
2015 | 2014 | Change | Change | |||||||||||||
Statement of Operations Data: | ||||||||||||||||
Operating costs and expenses | ||||||||||||||||
Research and development | $ | 1,584,086 | $ | 69,161 | $ | 1,514,925 | 2,190% | |||||||||
Patent costs | 160,033 | 94,055 | 65,978 | 70% | ||||||||||||
General and administrative | 4,860,676 | 763,388 | 4,097,288 | 537% | ||||||||||||
Total operating costs and expenses | 6,604,795 | 926,604 | 5,678,191 | 613% | ||||||||||||
Loss from operations | (6,604,795 | ) | (926,604 | ) | (5,678,191 | ) | 613% | |||||||||
Other income (expense) | ||||||||||||||||
Interest income (expense), net | 23,157 | (17,210 | ) | 40,367 | 235% | |||||||||||
Other income | 16,682 | - | 16,682 | |||||||||||||
Total other income (expense) | 39,839 | (17,210 | ) | 57,049 | 331% | |||||||||||
Net Loss | $ | (6,564,956 | ) | $ | (943,814 | ) | $ | (5,621,142 | ) | 596% |
Research and Development Expenses
Research and development expenses were approximately $1.6 million and $70,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in research and development expenses of approximately $1.5 million, or 2,190%, primarily reflects our manufacturing ramp-up costs to prepare product for clinical trials.
Patent Costs
Patent costs were approximately in $160,000 and $94,000 for the nine months ended September 30, 2015 and 2014, respectively, representing an increase of $66,000, or 70%. This increase was primarily due to our transition to a new service provider.
General and Administrative Expenses
General and administrative expenses were approximately $4.9 million and $800,000 for the nine months ended September 30, 2015 and 2014, respectively. The increase in general and administrative expenses is $4.1 million, or 537%. This increase in general and administrative expenses was primarily due to the increase in stock based compensation related to the options granted to our executives and employees in December 2014, increase in headcount and in salary for our officers in 2015, and the increase in expenses related to the closing of our initial public offering.
Other Income (Expense)
The increase in net interest income was approximately $40,000, or 235%. Net interest income for the nine months ended September 30, 2015 was approximately $23,000, which was primarily a result of increased cash resulting from the net proceeds of our initial public offering. Net interest expense for the nine months ended September 30, 2014 was approximately $17,000, which primarily represented interest costs associated with our outstanding promissory notes.
Other income was $16,682 and $0 for the nine months ended September 30, 2015 and 2014, respectively. The increase of $16,682 was a result of a gain on the settlement of accounts payable.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have incurred net losses and negative cash flows from operations. We incurred net losses of approximately $3.1 million and $6.6 million for the three and nine months ended September 30, 2015, respectively. Net cash used in operating activities was approximately $4.3 million for the nine months ended September 30, 2015. We had an accumulated deficit of approximately $24.9 million as of September 30, 2015. Substantially all our
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net losses resulted from costs incurred in connection with our research and development programs, stock-based compensation, and from general and administrative costs associated with our operations.
At September 30, 2015, after consummation of our initial public offering, we had working capital of $15.4 million, and cash of $16.2 million. We have not generated any product revenues and have not achieved profitable operations.
Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below:
For the Nine Months Ended September 30, | ||||||||
2015 | 2014 | |||||||
Net cash provided by (used in): | ||||||||
Operating activities | $ | (4,302,569 | ) | $ | (886,543 | ) | ||
Investing activities | (10,100 | ) | (1,166 | ) | ||||
Financing acitivities | 17,810,162 | 439,483 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 13,497,493 | $ | (448,226 | ) |
Operating Activities
Net cash used in operating activities of approximately $4.3 million during the nine months ended September 30, 2015 was primarily a result of our net loss of approximately $6.6 million, offset by stock based compensation of approximately $2.4 million and an increase in prepaid and other assets of approximately $251,000 and a decrease in accounts payable and accrued expenses of approximately $343,000.
Net cash used in operating activities of approximately $887,000 during the nine months ended September 30, 2014 was primarily a result of our net loss of approximately $944,000 and an increase of approximately $50,000 in prepaid and other assets, offset by an increase in accounts payable and accrued expenses of approximately $95,000.
Investing Activities
Net cash used in investing activities of approximately $10,000 during the nine months ended September 30, 2015 was resulted from purchasing of office furniture and equipment.
Financing Activities
Net cash provided by financing activities of approximately $17.8 million during the nine months ended September 30, 2015 resulted from net proceeds received upon closing of our initial public offering, selling 4,000,000 shares of our common stock offset partially by commissions and issuance costs of approximately $2.2 million.
Net cash provided by financing activities during the nine months ended September 30, 2014 of $455,000 resulted from proceeds borrowed under notes payable, partially offset by repayment of a note payable of $27,000.
Future Funding Requirements
To date, we have not generated any revenue. We do not know when, or if, we will generate any revenue from product sales. We do not expect to generate significant revenue from product sales unless and until we obtain regulatory approval of and commercialize RP-G28 or any of our other product candidates. At the same time, we expect our expenses to increase in connection with our ongoing development activities, particularly as we continue the research, development and clinical trials of, and seek regulatory approval for, our product candidates. Additionally, we expect to incur additional costs associated with operating as a public company. In addition, subject to obtaining regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We anticipate that we will need substantial additional funding in connection with our continuing operations.
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Based upon our current operating plan, we believe that the net proceeds from our initial public offering will enable us to fund our operating expenses and capital expenditure requirements through the first quarter of 2017. We intend to devote our existing financial resources to fund the continued clinical development of RP-G28 for the reduction of symptoms associated with lactose intolerance, including our anticipated Phase 2b/3 trials; to fund expenses associated with the manufacture and product development of RP-G28; to explore potential orphan indications; and for general corporate purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our intellectual property.
Our future capital requirements will depend on many factors, including:
· | the progress, costs, results of and timing of implementing a Phase 2b/3 clinical trials for the reduction of symptoms associated with lactose intolerance in patients; |
· | the willingness of the EMA or other regulatory agencies outside the United States to accept our Phase 2b/3 and any Phase 3 trials of RP-G28, as well as our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28 in the European Union for the reduction of symptoms associated with lactose intolerance in patients; |
· | the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals; |
· | the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development; |
· | the ability of our product candidates to progress through clinical development successfully; |
· | our need to expand our research and development activities; |
· | the costs associated with securing and establishing commercialization and manufacturing capabilities; |
· | market acceptance of our product candidates; |
· | the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies; |
· | our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights; |
· | our need and ability to hire additional management and scientific and medical personnel; |
· | the effect of competing technological and market developments; |
· | our need to implement additional internal systems and infrastructure, including financial and reporting systems; |
· | the economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future; and |
· | the costs of operating as a public company. |
Until such time, if ever, as we can generate substantial revenue from product sales, we expect to finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of our common stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through government or other third-party funding, commercialization, marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
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Contractual Obligations and Commitments
Lease Agreement
Until September 30, 2015, we leased office and storage space for our headquarters in California pursuant to a two-year agreement which called for a minimum monthly rent of approximately $5,000 and an annual increase of 3%. Rent expense, recognized on a straight-line basis, was approximately $15,000 for each of the three months ended September 30, 2015 and 2014. We recognized approximately $45,000 in each of the nine months ended September 30, 2015 and 2014 in rent expense. Rent expense is recorded in salaries, general and administrative expenses in the Unaudited Condensed Statements of Operations.
On July 9, 2015, we entered into a lease with Century Park, a California limited partnership, pursuant to which we are leasing approximately 2,780 square feet of office space in Los Angeles, California for our headquarters. The lease provides for a term of sixty-one (61) months, commencing on October 1, 2015. We will pay no rent for the first month of the term and base rent of $9,174 per month for months 2 through 13 of the term, with increasing base rent for each twelve month period thereafter under the term of the lease to a maximum of $10,325 per month for months 50 through 61. The base rent payments do not include our proportionate share of any operating expenses, including real estate taxes. We have the option to extend the term of the lease for one five-year term, provided that the rent would be subject to market adjustment at the beginning of the renewal term.
Employment Agreements
Michael Step
On December 2, 2014, Michael Step accepted an offer letter from us setting forth the terms of his employment as Chief Executive Officer. The offer letter provides that Michael Step is entitled to an annual base salary of $360,000 and a total of three grants of options to purchase our common stock.
The first two options entitle Michael Step to purchase 646,537 and 73,777 of our shares, respectively, for an exercise price of $5.86 per share. Each of these options was immediately exercisable in full as of the date of the grant, with 44/48ths of the total number of shares covered by each option subject to a right of repurchase by us upon termination of Michael Step’s employment with us for any reason. This right of repurchase lapses over a period of 44 months, with 1/44th of the total number of shares subject to the right of repurchase lapsing on January 1, 2015 and on the first day of each month thereafter. In addition, the right of repurchase will lapse in its entirety upon a termination of the employment under certain circumstances.
The third option became exercisable upon the closing of our initial public offering on June 29, 2015. The option is for a total of 163,799 shares of our common stock, which, together with the shares subject to the first option, represents 7.5% of the shares of common stock deemed to be outstanding at June 29, 2015 on a fully-diluted basis after giving effect to the number of shares subject to the third option. Seventy-five percent (75%) of the shares subject to the third option are subject to a right of repurchase by us upon termination of Michael Step’s employment for any reason. This right of repurchase lapses with respect to 1/36th of the total number of shares subject to the right of repurchase on the first day of each month following the date on which the third option became exercisable. In addition, the right of repurchase will lapse in its entirety upon Michael Step’s termination of employment under certain circumstances.
Additionally, under the terms of his Executive Severance and Change in Control Agreement, also effective on December 2, 2014, Michael Step is entitled to receive certain payments in the event his employment is terminated under certain scenarios.
Andrew Ritter and Ira Ritter
On September 25, 2013, our Board of Directors approved the Executive Compensation Plan (the “Compensation Plan”) setting forth certain compensation to be paid to Andrew Ritter, our current President and former Chief Executive Officer, and Ira Ritter, our current Chief Strategic Officer (“CSO”) for their contributions to our company. Effective June 29, 2015, in connection with our initial public offering, Andrew Ritter and Ira Ritter accepted offer letters from us setting forth the terms of their employment as President and CSO, respectively, of the Company. The offer letters superseded the Compensation Plan.
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Their respective offer letters provide that that Andrew Ritter is entitled to an annual base salary of $310,000 and Ira Ritter is entitled to an annual base salary of $295,000. In accordance with his offer letter, Andrew Ritter also became entitled to receive up to $180,000 payable over a three year period for tuition reimbursement. As of September 30, 2015, we paid an aggregate of $60,000 and accrued $92,500 in tuition reimbursement for Andrew Ritter and recognized such amount in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the three and nine month periods ending September 30, 2015.
Additionally, under the terms of their Executive Severance and Change in Control Agreements, also effective on June 29, 2015, Andrew Ritter and Ira Ritter are entitled to receive certain payments in the event their employment is terminated under certain scenarios.
Pursuant to their respective offer letters, Andrew Ritter and Ira Ritter each have the opportunity to earn an annual bonus based upon a percentage of their base salary and the achievement of specific performance as determined by the Company. The initial target bonus opportunities are 40% and 35% of the base salary for Andrew Ritter and Ira Ritter, respectively.
Pursuant to the Compensation Plan, as in effect prior to entering into their offer letters, Andrew Ritter and Ira Ritter had bonus opportunities to, upon the satisfaction of the events described below, each potentially receive the following cash payments and each potentially receive the following options to purchase up to 48,951 shares of our common stock (the “Executive Options”) pursuant to the 2008 Stock Plan:
· | FDA Meeting Bonus Opportunities . Each executive was entitled to receive, and in April 2013 each executive received, a one-time cash bonus of $10,000 for a milestone associated with meeting with the FDA regarding RP-G28’s path to FDA approval. In addition, upon satisfaction of this milestone, the executives became entitled to 3,496 of the Executive Options. 2,360 shares of the Executive Options vested and became exercisable as of the grant date of September 25, 2013, with the balance of the 1,136 shares vesting ratably in 36 equal monthly installment beginning on September 30, 2013. |
· | Clinical Trial Funding Commitment Bonus Opportunities . Each executive was entitled to receive a one-time cash bonus of $75,000 upon our receipt of a commitment by a third party to fund a Phase 2 or later clinical trial; provided, however, that no such bonus would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of this milestone, 35% of 10,489 shares of the Executive Options would vest and become exercisable, with the balance of the 10,489 shares vesting in 36 equal monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone was satisfied; accordingly, each executive received a bonus of $75,000 which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the nine month periods ending September 30, 2015. In addition, 3,671 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 6,818 shares vesting ratably on a monthly basis beginning July 31, 2015. |
· | Fundraising Bonus Opportunities . Each executive was entitled to receive (i) a one-time cash bonus of $50,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012, and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $2,000,000 and (ii) a one-time cash bonus of $150,000 upon the sale of additional equity capital for cash, in one or more closings after July 17, 2012 and/or the actual deployment of funds by a third party for a clinical trial in an aggregate amount in excess of $10,000,000 (which such bonus would be reduced by any cash bonus paid under subsection (i)); provided, however, that no bonus under subsection (i) or (ii) would be paid at any time we had less than $2,000,000 in available cash. In addition, upon the satisfaction of the milestone described in subsection (i), 35% of 6,993 shares of the Executive Options would vest and become exercisable, with the balance of the 6,993 shares vesting in 36 equal monthly installments beginning on the last day of the following month, and, upon satisfaction of the milestone described in subsection (ii), 35% of 13,986 shares of the Executive Options would vest and become exercisable, with the balance of the 13,986 shares vesting in 36 monthly installments beginning on the last day of the following month. The Board of Directors determined that this milestone as described in subsection (ii) above was satisfied upon the closing of our initial public offering on June 29, 2015 raising approximately $17.4 million, net of offering costs; |
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accordingly, each executive received a bonus of $150,000 which has been recognized in general and administrative expenses in the accompanying Unaudited Condensed Statements of Operations in the nine month periods ending September 30, 2015. In addition, 4,895 shares of the Executive Options vested and became exercisable as of June 29, 2015, with the balance of 9,091 shares vesting ratably on a monthly basis beginning July 31, 2015.
· | License Event Bonus Opportunities . Each executive was entitled to receive the following bonus payments in connection with the closing of an exclusive license of RP-G28 and/or any future product candidate developed by the Company from time to time during the term of the Compensation Plan by and/or any option to exclusively license such product candidate to a third party (referred to under the Compensation Plan as a “License Event”) with a minimum upfront payment to the Company of $2,000,000: |
o | A graduated cash bonus equal to (i) 5% of the Initial Period License Payment (as defined in the Compensation Plan) up to $5,000,000; (ii) 4% of the Initial Period License Payment in excess of $5,000,000 up to $10,000,000; and (iii) 3% of the Initial Period License Payment in excess of $10,000,000. In addition, upon our receipt of an Initial Period License Payment of more than $2,000,000, 35% of 45,454 shares of their Executive Options will vest and become exercisable, with the balance of the 45,454 shares vesting in 36 monthly installments beginning on the last day of the following month. |
o | A cash bonus equal to 3% of any Annual Excess Milestone Payments (as defined in the Compensation Plan); provided, however that no such bonus may be paid at any time the Company has less than $1,000,000 in available cash. In addition, upon our receipt of an Annual Excess Milestone Payment, 35% of 6,993 shares of their Executive Options will vest and become exercisable, with the balance of the 6,993 shares vesting in 36 monthly installments beginning on the last day of the following month. |
As of September 30, 2015, 27,972 of the maximum 48,951 Executive Options potentially issuable to each executive had been issued to each executive subject to the vesting conditions described above.
Research and Development Arrangement
Effective July 24, 2015, we entered into an amended Clinical Supply and Cooperation Agreement (the “Amended Supply Agreement”) with Ricerche Sperimentali Montale SpA (“Ricerche”) and Inalco SpA (collectively, “RSM”). The Amended Supply Agreement amends certain terms of the Clinical Supply and Cooperation Agreement, dated December 16, 2009, amended on September 25, 2010 (the “Existing Supply Agreement”).
Under the Existing Supply Agreement, RSM granted us an exclusive worldwide option in a specified field and territory to assignment of all right, title and interest to a purified Galacto-oligosaccharides product (“Improved GOS”), the composition of matter of the Improved GOS and any information relating to the Improved GOS, including certain specified technical information and other intellectual property rights (the “Improved GOS IP”). Pursuant to the amended terms, we may exercise the option by paying RSM $800,000 within ten days after the effective date of the Amended Supply Agreement. We exercised the option on July 30, 2015 and RSM is transferring the Improved GOS IP to us. Under the terms of the existing agreement, if a further option payment due in the future is not made, we may be required to return the Improved GOS IP to RSM.
The Amended Supply Agreement also provides that we must pay RSM $400,000 within 10 days following FDA approval of a new drug application for the first product owned or controlled by us using Improved GOS as its active pharmaceutical ingredient. In addition, we agreed to purchase 350 kilos of Improved GOS for the sum of $250 per kilo for clinical supply of Improved GOS instead of $2,000 per kilo as under the Existing Supply Agreement.
In consideration for RSM entering into the Amended Supply Agreement, we will issue 100,000 shares of our common stock, par value $0.001 per share (the “Shares”), to RSM. The Shares are to be issued within 90 days of the effective date of the Amended Supply Agreement pursuant to a stock purchase agreement to be negotiated by the parties in good faith. The stock purchase agreement is to include a lock-up agreement by RSM in favor of us pursuant to which
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RSM will not be able to sell the Shares for a period ending on the earlier of (i) the public release by us of the final results of our Phase 2b/3 clinical trial of RP-G28 and (ii) the filing of our Form 10-Q with the Securities and Exchange Commission for the fiscal quarter in which we receive the results of our Phase 2b/3 clinical trial of RP-G28. The shares will be issued to RSM upon the execution of the stock purchase agreement by RSM.
We recognized the agreement for 100,000 shares issuance to RSM as a fully prepaid forward sale contract on our common stock. The fully prepaid forward sale contract is a hybrid instrument comprising (1) a debt host instrument and (2) an embedded forward sale contract, requiring us to issue 100,000 shares of our common stock for no further consideration. Fair value of these shares as of effective date of the agreement totaling $416,000 was recognized in stockholders’ equity in the Condensed Balance Sheet as of September 30, 2015.
Off-Balance Sheet Arrangements
Through September 30, 2015, we do not have any off-balance sheet arrangements, as defined by applicable under Securities and Exchange Commission regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015, the end of the period covered by this Quarterly Report on Form 10-Q.
Based on our evaluation, we believe that our disclosure controls and procedures as of September 30, 2015 were effective to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our third fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters.
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This section discusses risk factors that may affect our business, operations, and financial condition. If any of these risks, as well as other risks and uncertainties that we have not yet identified or that we currently think are not material, actually occur, we could be materially adversely affected and the value of our common stock could decline.
Risks Relating to Our Financial Position and Need for Additional Capital
We have incurred net losses in each year since our inception. Currently, we have no products approved for commercial sale. As a result, our ability to reduce our losses and reach profitability is unknown, and we may never achieve or sustain profitability.
We have incurred net losses in each year since our inception. The accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. We had net losses of approximately $6.6 million and $944,000 for the nine months ended September 30, 2015 and 2014, respectively, and had net cash used in operating activities of approximately $4.3 million and $887,000 for the nine months ended September 30, 2015 and 2014, respectively.
To date, we have devoted most of our financial resources to our corporate overhead and research and development, including our drug discovery research, preclinical development activities and clinical trials. We currently have no products that are approved for commercial sale. We expect to continue to incur net losses and negative operating cash flow for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for, RP-G28, and other product candidates, prepare for and begin the commercialization of any approved products, and add infrastructure and personnel to support our product development efforts and operations as a public company. We anticipate that any such losses could be significant for the next several years as we begin our Phase 2b/3 and any Phase 3 clinical trials for RP-G28 for the reduction of symptoms associated with lactose intolerance and related activities required for regulatory approval of RP- G28. If RP-G28 or any of our other product candidates fails in clinical trials or does not gain regulatory approval, or if our product candidates do not achieve market acceptance, we may never become profitable. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. In addition, our expenses could increase if we are required by the FDA or the EMA, to perform studies or trials in addition to those currently expected, or if there are any delays in completing our clinical trials or the development of our product candidates. The amount of future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues.
We will require substantial additional funding, which may not be available to us on acceptable terms, or at all, and, if not so available, may require us to delay, limit, reduce or cease our operations.
We are currently advancing RP-G28 through clinical development. Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is expensive. As of September 30, 2015, we have a total of approximately $16.2 million in cash. In addition to our currently available funds, we will need to secure additional financing following our initial public offering in order to complete clinical development and commercialize RP-G28 and to fund our operations generally. For instance, to complete the work necessary to file a new drug application, or NDA, and a Marketing Authorization Application, or MAA, for RP-G28 as a treatment for patients with lactose intolerance, which is currently anticipated to occur in 2019, we estimate that our RP-G28 clinical trials, and our planned clinical and nonclinical studies, as well as other work needed to submit RP-G28 for regulatory approval in the United States, Europe and other countries, will cost approximately $85 million, including the internal resources needed to manage the program. If the FDA or EMA requires that we perform additional nonclinical studies or clinical trials, our expenses would further increase beyond what we currently expect and the anticipated timing of any potential NDA or MAA would likely be delayed.
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We intend to use substantially all of the net proceeds from our recent initial public offering to fund (i) the continued clinical development of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients, including implementing a Phase 2b/3 clinical trial and non-clinical development, (ii) expenses associated with the manufacture and product development of RP-G28, and (iii) the exploration of potential therapeutic indications and orphan indications. Any remaining amounts will be used for general corporate purposes, general and administrative expenses, capital expenditures, working capital and prosecution and maintenance of our intellectual property. As such, the expected net proceeds from our initial public offering will not be sufficient to complete the clinical development of RP-G28, or any product candidates we may develop in the future. Accordingly, we will continue to require substantial additional capital beyond the expected proceeds of our initial public offering to continue our clinical development and commercialization activities. Because successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to complete research and development and commercialize RP-G28, and any other product candidates we may develop in the future.
The amount and timing of our future funding requirements will depend on many factors, including but not limited to:
· | the progress, costs, results of and timing of implementing a Phase 2b/3 clinical trial for RP-G28 for the reduction of symptoms associated with lactose intolerance in patients; |
· | the willingness of the EMA or other regulatory agencies outside the United States to accept our Phase 2b/3 and any Phase 3 trials of RP-G28, as well as our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28 in the European Union for the reduction of symptoms associated with lactose intolerance in patients; |
· | the outcome, costs and timing of seeking and obtaining FDA, EMA and any other regulatory approvals; |
· | the number and characteristics of product candidates that we pursue, including our product candidates in preclinical development; |
· | the ability of our product candidates to progress through clinical development successfully; |
· | our need to expand our research and development activities; |
· | the costs associated with securing and establishing commercialization and manufacturing capabilities; |
· | market acceptance of our product candidates; |
· | the costs of acquiring, licensing or investing in businesses, products, product candidates and technologies; |
· | our ability to maintain, expand and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights; |
· | our need and ability to hire additional management and scientific and medical personnel; |
· | the effect of competing technological and market developments; |
· | our need to implement additional internal systems and infrastructure, including financial and reporting systems; and |
· | the economic and other terms, timing of and success of our existing licensing arrangements and any collaboration, licensing or other arrangements into which we may enter in the future. |
Some of these factors are outside of our control. Based upon our currently expected level of operating expenditures, we believe that we will be able to fund our operations through at least through the first quarter of 2017. This period could be shortened if there are any significant increases in planned spending on development programs or more rapid progress of development programs than anticipated. We do not expect our existing capital resources along with the intended net proceeds from our initial public offering, to be sufficient to enable us to complete the commercialization of RP-G28, if approved, or to initiate any clinical trials or additional development work for other product candidates, other than as described above. Accordingly, we expect that we will need to raise additional funds in the future.
We may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements. Additional funding may not be available to us on acceptable terms or at all.
To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. If the Company is not able to raise additional capital when required or on
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acceptable terms, the Company may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders and the issuance of additional shares by us, or the possibility of such issuance, may cause the market price of our shares to decline.
If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborative partners or otherwise that may require us to relinquish rights to some of our technologies or product candidates or otherwise agree to terms unfavorable to us.
Our financial condition and operating results have varied significantly since our formation and are expected to continue to fluctuate significantly from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control.
Our operations since 2010 have been limited to developing our technology and undertaking preclinical studies and clinical trials of our lead product candidate, RP-G28. We have not yet obtained regulatory approvals for RP-G28, or any other product candidate. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had approved products on the market. Our financial condition and operating results have varied significantly since our formation and are expected to continue to significantly fluctuate from quarter-to-quarter or year-to-year due to a variety of factors, many of which are beyond our control. Factors relating to our business that may contribute to these fluctuations include:
· | any delays in regulatory review and approval of our product candidates in clinical development, including our ability to receive approval from the FDA and the EMA for RP-G28 for the reduction of symptoms associated with lactose intolerance in patients based on our Phase 2b/3 and any Phase 3 trials of RP-G28, and our other completed and planned clinical and nonclinical studies and other work, as the basis for review and approval of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients; |
· | delays in the commencement, enrollment and timing of clinical trials; |
· | difficulties in identifying and treating patients suffering from our target indications; |
· | the success of our clinical trials through all phases of clinical development, including our Phase 2b/3 and any Phase 3 trials of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients; |
· | potential side effects of our product candidates that could delay or prevent approval or cause an approved drug to be taken off the market; |
· | our ability to obtain additional funding to develop our product candidates; |
· | our ability to identify and develop additional product candidates; |
· | market acceptance of our product candidates; |
· | our ability to establish an effective sales and marketing infrastructure directly or through collaborations with third parties; |
· | competition from existing products or new products that may emerge; |
· | the ability of patients or healthcare providers to obtain coverage or sufficient reimbursement for our products; |
· | our ability to adhere to clinical study requirements directly or with third parties such as contract research organizations, or CROs; |
· | our dependency on third-party manufacturers to manufacture our products and key ingredients; |
· | our ability to establish or maintain collaborations, licensing or other arrangements; |
· | the costs to us, and our ability and our third-party collaborators’ ability to obtain, maintain and protect our intellectual property rights; |
· | costs related to and outcomes of potential intellectual property litigation; |
· | our ability to adequately support future growth; |
· | our ability to attract and retain key personnel to manage our business effectively; and |
· | potential product liability claims. |
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Accordingly, the results of any quarterly or annual periods should not be relied upon as indications of future operating performance.
Risks Relating to Regulatory Review and Approval of Our Product Candidates
We are substantially dependent on the success of our current product candidate, RP-G28.
We currently have no products approved for sale and we cannot guarantee that we will ever have marketable products. We currently invest nearly all of our efforts and financial resources in the research and development of RP-G28, which is currently our only product candidate. Our business currently depends entirely on the successful development and commercialization of RP-G28.
We cannot be certain that RP-G28 will receive regulatory approval, and without regulatory approval we will not be able to market RP-G28 as a prescription drug.
The development of a product candidate and issues relating to its approval and marketing are subject to extensive regulation by the FDA in the United States, the EMA in Europe, and regulatory authorities in other countries, with regulations differing from country to country. We are not permitted to market our product candidates in the United States or Europe until we receive approval of a NDA from the FDA or a MAA from the EMA, respectively. We have not submitted any marketing applications for RP-G28.
NDAs and MAAs must include extensive preclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each desired indication. NDAs and MAAs must also include significant information regarding the chemistry, manufacturing and controls for the product. Obtaining approval of a NDA or a MAA is a lengthy, expensive and uncertain process, and we may not be successful in obtaining approval. The FDA and the EMA review processes can take years to complete and approval is never guaranteed. If we submit a NDA to the FDA, the FDA must decide whether to accept or reject the submission for filing. We cannot be certain that any submissions will be accepted for filing and review by the FDA. Regulators of other jurisdictions, such as the EMA, have their own procedures for approval of product candidates. Even if a product is approved, the FDA or the EMA, as the case may be, may limit the indications for which the product may be marketed, require extensive warnings on the product labeling or require expensive and time-consuming clinical trials or reporting as conditions of approval. Regulatory authorities in countries outside of the United States and Europe also have requirements for approval of drug candidates with which we must comply prior to marketing in those countries. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure that we will be able to obtain regulatory approval in any other country. In addition, delays in approvals or rejections of marketing applications in the United States, Europe or other countries may be based upon many factors, including regulatory requests for additional analyses, reports, data, preclinical studies and clinical trials, regulatory questions regarding different interpretations of data and results, changes in regulatory policy during the period of product development and the emergence of new information regarding our product candidates or other products. Also, regulatory approval for any of our product candidates may be withdrawn.
We have completed one Phase 2a trial for RP-G28. Before we submit a NDA to the FDA or a MAA to the EMA for RP-G28 for the treatment of pain and the reduction in the frequency of symptomatic episodes of lactose intolerance, we must successfully complete a Phase 2b/3 trial and Phase 3 trials. Following analysis of the Phase 2a clinical trial, discussions with the FDA during the Type C meeting in 2013 about our clinical development plan, and further discussions with our regulatory consultants, we intend to conduct our planned Phase 2b clinical trial as an adaptive design Phase 2b/3 clinical trial. A trial that is designed as an adaptive seamless clinical trial refers to a trial that combines the objectives of what are typically separate trials into a single uninterrupted trial with multiple objectives.
Neither the FDA nor any other comparable governmental agency has considered this Phase 2b/3 study or our current development plan for RP-G28, and we do not intend to request a meeting with the FDA to discuss these matters. Regulatory authorities in the United States and Europe have both published guidance documents on the use and implementation of adaptive design trials. These documents include description of adaptive trials and include a requirement for prospectively written standard operating procedures and working processes for executing adaptive trials and a recommendation that sponsor companies engage with CROs that have the necessary experience in running
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such trials. In addition, the regulations governing INDs are extensive and involve numerous notification requirements including that, generally, an IND supplement must be submitted to and cleared by the FDA before a sponsor or an investigator may make any change to the investigational plan that may affect its scientific soundness or the rights, safety or welfare of human subjects. We intend to comply with these requirements and believe we will need to submit an IND supplement containing amended protocols for the Phase 2b/3 adaptive trial. There can be no assurance that the FDA will provide clearance for an amended IND for a Phase 2b/3 trial in a timely manner, if at all, and that this trial and other trials will not be delayed or disrupted as a result.
In addition, guidelines adopted by the FDA and established by the International Conference on Harmonization of Technical Requirements for Registration of Pharmaceuticals for Human Use (ICH) require nonclinical studies that specifically address female fertility to be completed before the inclusion of women of child bearing potential in large-scale or long-duration clinical trials (e.g., Phase 3 trials). In the United States, such assessments of embryo-fetal development can be deferred until before Phase 3 using precautions to prevent pregnancy in clinical trials. As the FDA recommended in their June 28, 2010 advice letter, we will continue to evaluate females of child-bearing potential who are willing to use appropriate contraception throughout the duration of any study. To support any Phase 3 study, we plan to perform ICH-compliant embryo- fetal developmental toxicology studies (in two species) and the ICH-recommended standard battery of genotoxicity tests using RP-G28. We also intend to perform work on the characterization of compounds and analytical specifications for RP-G28. The design of our Phase 2b/3 trial will need to account for these FDA and ICH requirements, and we may need to complete all nonclinical studies that specifically address female fertility before we complete a Phase 2b/3 clinical trial. We cannot predict whether our future trials and studies will be successful or whether regulators will agree with our conclusions regarding the preclinical studies and clinical trials we have conducted to date.
If we are unable to obtain approval from the FDA, the EMA or other regulatory agencies for RP-G28, or if, subsequent to approval, we are unable to successfully commercialize RP-G28, we will not be able to generate sufficient revenue to become profitable or to continue our operations.
Any statements in this document indicating that RP-G28 has demonstrated preliminary evidence of efficacy are our own and are not based on the FDA’s or any other comparable governmental agency’s assessment of RP- G28 and do not indicate that RP-G28 will achieve favorable efficacy results in any later stage trials or that the FDA or any comparable agency will ultimately determine that RP-G28 is effective for purposes of granting marketing approval.
The FDA and other regulatory agencies outside the United States, such as the EMA, may not agree to our proposed endpoint for approval of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients, in which case we would need to complete an additional clinical trial in order to seek approval outside the United States.
During our Type C Meeting with the FDA in February 2013, we had proposed that future studies with RP- G28 in subjects with lactose intolerance would utilize a total lactose intolerance symptom score, measured by a patient reporting instrument that we were going to develop, as the primary, stand-alone endpoint. However, based on RP-G28’s mechanism of action, data from the Phase 2a clinical study, further research conducted after the Type C Meeting with the FDA along with FDA guidance and products under the review of the Division of Gastroenterology and Inborn Errors Products, we now intend to use abdominal pain, measured by an 11-point validated scale, as the primary endpoint for the Phase 2b/Phase 3 study that assesses RP-G28 for the management of lactose intolerant patients with moderate to severe abdominal pain associated with lactose intake. We believe that evaluation of abdominal pain is a reliable clinical assessment of treatment response and treatment benefit in a lactose intolerant patient. Although no FDA-approved product exists for lactose intolerance, the use of a pain scale as a primary endpoint has been used as a validated primary measurement in many approved products, including other gastrointestinal products used to treat diseases such as Irritable Bowel Syndrome (IBS). We have not consulted with the FDA about our intent to use abdominal pain as a primary endpoint or our plan to convert our Phase 2b clinical trial into an adaptive design Phase 2b/3 pivotal clinical trial.
We do not know if the FDA, the EMA or regulatory authorities in other countries will agree with our final primary endpoint for approval of RP-G28. The FDA, the EMA and regulatory authorities in other countries in which we may seek approval for and market RP-G28, may require additional nonclinical studies and/or clinical trials prior to granting
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approval. It may be expensive and time consuming to conduct and complete additional nonclinical studies and clinical trials that the EMA and other regulatory authorities may require us to perform. As such, any requirement by the EMA or other regulatory authorities that we conduct additional nonclinical studies or clinical trials could materially and adversely affect our business, financial condition and results of operations. Furthermore, even if we receive regulatory approval of RP-G28 for the reduction of symptoms associated with lactose intolerance in patients, the labeling for RP-G28 in the United States, Europe or other countries in which we seek approval may include limitations that could impact the commercial success of RP-G28.
The results from our planned Phase 2b/3 trial with adaptive design may not be sufficiently robust to support the submission of marketing approval for RP-G28.
We intend to conduct our planned Phase 2b clinical trial as an adaptive design seamless Phase 2b/3 clinical trial. We do not intend to meet with the FDA to discuss the Phase 2b/3 study design or current development plan for RP-G28. The FDA standard for traditional approval of a drug generally requires two well-controlled Phase 3 studies. If the FDA disagrees with our choice of primary endpoint for our Phase 2b/3 trial or the results for the primary endpoint are not robust or significant relative to control, are subject to confounding factors, or are not adequately supported by other study endpoints, the FDA may not recognize the Phase 2b/3 trial as one of the required pivotal trials required for FDA approval. If the FDA or other regulatory authorities do not recognize this trial as a pivotal trial, we would incur increased costs and delays in the marketing approval process, which would require us to expend more resources than we have available.
Delays in the commencement, enrollment and completion of clinical trials could result in increased costs to us and delay or limit our ability to obtain regulatory approval for RP-G28 or our other product candidates.
Delays in the commencement, enrollment and completion of clinical trials could increase our product development costs or limit the regulatory approval of RP-G28 or other product candidates we may develop in the future. Although we anticipate that the net proceeds from our initial public offering, together with existing cash, and interest on our cash balances, will be sufficient to fund our projected operating requirements through the completion of the Phase 2b/3 and any Phase 3 trials of RP-G28, we may not be able to complete these trials on time or we may be required to conduct additional clinical trials or nonclinical studies not currently planned to receive approval for RP-G28 as a treatment for lactose intolerance. The commencement, enrollment and completion of clinical trials may be delayed or suspended for a variety of reasons, including:
· | inability to obtain sufficient funds required for a clinical trial; |
· | inability to reach agreements on acceptable terms with prospective CROs and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites; |
· | clinical holds, other regulatory objections to commencing or continuing a clinical trial or the inability to obtain regulatory approval to commence a clinical trial in countries that require such approvals; |
· | discussions with the FDA or non-U.S. regulators regarding the scope or design of our clinical trials; |
· | inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for the same indications targeted by our product candidates; |
· | inability to obtain approval from institutional review boards, or IRBs, to conduct a clinical trial at their respective sites; |
· | severe or unexpected drug-related adverse effects experienced by patients; |
· | inability to timely manufacture sufficient quantities of the product candidate required for a clinical trial; |
· | difficulty recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including meeting the enrollment criteria for our study and competition from other clinical trial programs for the same indications as our product candidates; |
· | inability to get FDA approval of our end points; and |
· | inability to retain enrolled patients after a clinical trial is underway. |
Changes in regulatory requirements and guidance may also occur and we may need to amend clinical trial protocols to reflect these changes with appropriate regulatory authorities. Amendments may require us to resubmit clinical trial
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protocols to IRBs for re-examination, which may impact the costs, timing or successful completion of a clinical trial. In addition, a clinical trial may be suspended or terminated at any time by us, our future collaborators, the FDA or other regulatory authorities due to a number of factors, including:
· | our failure or the failure of our potential future collaborators to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols; |
· | unforeseen safety issues or any determination that a clinical trial presents unacceptable health risks; |
· | lack of adequate funding to continue the clinical trial due to unforeseen costs or other business decisions; and |
· | a breach of the terms of any agreement with, or for any other reason by, future collaborators who have responsibility for the clinical development of our product candidates. |
In addition, if we or any of our potential future collaborators are required to conduct additional clinical trials or other nonclinical studies of our product candidates beyond those contemplated, our ability to obtain regulatory approval of these product candidates and to generate revenue from their sales would be similarly harmed.
Clinical failure can occur at any stage of clinical development. The results of earlier clinical trials are not necessarily predictive of future results and any product candidate we or our potential future collaborators advance through clinical trials may not have favorable results in later clinical trials or receive regulatory approval.
Clinical failure can occur at any stage of our clinical development. Clinical trials may produce negative or inconclusive results, and we or our collaborators may decide, or regulators may require us, to conduct additional clinical trials or nonclinical studies. In addition, data obtained from trials and studies are susceptible to varying interpretations, and regulators may not interpret our data as favorably as we do, which may delay, limit or prevent regulatory approval. Success in preclinical studies and early clinical trials does not ensure that subsequent clinical trials will generate the same or similar results or otherwise provide adequate data to demonstrate the efficacy and safety of a product candidate. A number of companies in the pharmaceutical industry, including those with greater resources and experience than us, have suffered significant setbacks in Phase 2b and/or Phase 3 clinical trials, including adaptive seamless clinical trials even after seeing promising results in earlier clinical trials.
In addition, the design of a clinical trial can determine whether its results will support approval of a product and flaws in the design of a clinical trial may not become apparent until the clinical trial is well-advanced. We may be unable to design and execute a clinical trial to support regulatory approval. Further, clinical trials of potential products often reveal that it is not practical or feasible to continue development efforts.
If RP-G28, or any of our other product candidates, is found to be unsafe or lack efficacy, we will not be able to obtain regulatory approval for it and our business would be harmed. For example, if the results of our Phase 2b/3 and any Phase 3 trials of RP-G28 do not achieve the primary efficacy endpoints or demonstrate expected safety, the prospects for approval of RP-G28 would be materially and adversely affected.
In some instances, there can be significant variability in safety and/or efficacy results between different trials of the same product candidate due to numerous factors, including changes in trial protocols, differences in composition of the patient populations, adherence to the dosing regimen and other trial protocols and the rate of dropout among clinical trial participants. We do not know whether any Phase 2, Phase 3 or other clinical trials we or any of our potential future collaborators may conduct will demonstrate the consistent or adequate efficacy and safety that would be required to obtain regulatory approval and market RP-G28. The adaptive Phase 2b/3 clinical trial for RP-G28 that we intend to conduct may not be deemed to be a pivotal trial by the FDA or may not provide sufficient support for NDA approval. The FDA may require us to make changes to the proposed study design for this adaptive trial or may require us to conduct one or more additional clinical trials, possibly involving a larger sample size or a different clinical trial design, or may require longer follow-up periods, particularly if the FDA does not find the results from an adaptive Phase 2b/3 clinical trial to be sufficiently persuasive as one of the required pivotal trials required for FDA approval. If we are unable to bring RP-G28 to market, our ability to create long-term stockholder value will be limited.
Our product candidates may have undesirable side effects which may delay or prevent marketing approval, or, if approval is received, require them to be taken off the market, require them to include safety warnings or otherwise limit their sales.
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Unforeseen side effects from RP-G28, or other product candidates we may develop in the future, could arise either during clinical development or, if approved, after the approved product has been marketed. The most common side effects observed in clinical trials of RP-G28 were headache (nine out of 57), nausea (three out of 57), upper respiratory tract infection, nasal congestion, and pain (two out of 57). No patients were withdrawn from the study for these side effects.
The results of future clinical trials may show that RP-G28 causes undesirable or unacceptable side effects, which could interrupt, delay or halt clinical trials, and result in delay of, or failure to obtain, marketing approval from the FDA and other regulatory authorities, or result in marketing approval from the FDA and other regulatory authorities with restrictive label warnings.
If RP-G28, or any other product candidate we develop in the future, receives marketing approval and we or others later identify undesirable or unacceptable side effects caused by such product:
· | regulatory authorities may require the addition of labeling statements, specific warnings, a contraindication or field alerts to physicians and pharmacies; |
· | we may be required to change instructions regarding the way the product is administered, conduct additional clinical trials or change the labeling of the product; |
· | we may be subject to limitations on how we may promote the product; |
· | sales of the product may decrease significantly; |
· | regulatory authorities may require us to take our approved product off the market; |
· | we may be subject to litigation or product liability claims; and |
· | our reputation may suffer. |
Any of these events could prevent us or our potential future collaborators from achieving or maintaining market acceptance of the affected product or could substantially increase commercialization costs and expenses, which in turn could delay or prevent us from generating significant revenues from the sale of our products.
Reimbursement decisions by third-party payors may have an adverse effect on pricing and market acceptance. If there is not sufficient reimbursement for our products, it is less likely that they will be widely used.
Market acceptance and sales of RP-G28, or any other product candidates we develop in the future, if approved, will depend on reimbursement policies and may be affected by, among other things, future healthcare reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will cover and establish payment levels. We cannot be certain that reimbursement will be available for RP-G28 or any other product candidates that we may develop. Also, we cannot be certain that reimbursement policies will not reduce the demand for, or the price paid for, our products. If reimbursement is not available or is available on a limited basis, we may not be able to successfully commercialize RP-G28, or other product candidates that we develop.
In the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation established Medicare Part D, which expanded Medicare coverage for outpatient prescription drug purchases by the elderly but provided authority for limiting the number of drugs that will be covered in any therapeutic class. The MMA also introduced a new reimbursement methodology based on average sales prices for physician-administered drugs. Any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower than the prices we might otherwise obtain in the United States. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that results from the MMA may result in a similar reduction in payments from non-governmental payors.
The United States and several other jurisdictions are considering, or have already enacted, a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell our products
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profitably. Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access to healthcare. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives. We expect to experience pricing pressures in connection with the sale of RP-G28, and any other product candidates that we develop, due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative proposals.
In March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act, or, collectively, the ACA, became law in the United States. The goal of the ACA is to reduce the cost of health care and substantially change the way health care is financed by both governmental and private insurers. While we cannot predict what impact on federal reimbursement policies this legislation will have in general or on our business specifically, the ACA may result in downward pressure on pharmaceutical reimbursement, which could negatively affect market acceptance of RP-G28 or any other product candidates that we may develop. In addition, some members of the U.S. Congress have been seeking to overturn at least portions of the legislation and we expect they will continue to review and assess this legislation and alternative health care reform proposals. We cannot predict whether new proposals will be made or adopted, when they may be adopted or what impact they may have on us if they are adopted.
If we do not obtain protection under the Hatch-Waxman Act and similar legislation outside of the United States by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of RP-G28, one of our U.S. patents may be eligible for a limited Patent Term Extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (which is sometimes referred to as the “Hatch-Waxman Act”), provided our U.S. patent claims a method of treating lactose intolerance that is approved by the FDA. The Hatch-Waxman Act, 35 U.S.C. §156, permits a patent extension of up to five years as compensation for patent term lost during the FDA regulatory review process. The scope of protection afforded by the patent during the extended term is not commensurate with the scope of the unextended portion of the patent; for example, the “rights derived” from a method of use patent during the extended period are “limited to any use claimed by the patent and approved for the product.” 35 U.S.C. §156(b)(2). We may not be granted an extension because of, for example, failing to apply for the extension within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable statutory and/or regulatory requirements including, for example, the requirement that the patent to be extended “claim” the approved product or a method of using the approved product. Moreover, the applicable period of extension could be less than we request. If we are unable to obtain patent term extension or if the term of any such extension is shorter than we request, the period during which we will be able to exclude others from marketing their versions of our product will be shortened and our competitors may obtain approval of generic products following our patent expiration, and our revenue could be reduced, possibly materially. Similar concerns are associated with obtaining Supplemental Protection Certificates (SPCs) of certain patents issued in Europe and owned by Inalco, to which we have an exclusive options of assignment, based upon patent terms lost during European regulatory review processes. In the event that we are unable to obtain any patent term extension, the issued patents for RP-G28 are expected to expire in 2030, assuming they withstand any challenge toothier validity and/or patentability.
If we market products in a manner that violates healthcare fraud and abuse laws, or if we violate government price reporting laws, we may be subject to civil or criminal penalties.
In addition to FDA restrictions on marketing of pharmaceutical products, several other types of state and federal healthcare laws, commonly referred to as “fraud and abuse” laws, have been applied in recent years to restrict certain marketing practices in the pharmaceutical industry. Other jurisdictions such as Europe have similar laws. These laws include false claims and anti-kickback statutes. If we market our products and our products are paid for by governmental programs, it is possible that some of our business activities could be subject to challenge under one or more of these laws.
Federal false claims laws prohibit any person from knowingly presenting, or causing to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a false statement to get a false claim
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paid. The federal healthcare program anti-kickback statute prohibits, among other things, knowingly and willfully offering, paying, soliciting or receiving remuneration to induce, or in return for, purchasing, leasing, ordering or arranging for the purchase, lease or order of any healthcare item or service covered by Medicare, Medicaid or other federally financed healthcare programs. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand and prescribers, purchasers or formulary managers on the other. Although there are several statutory exemptions and regulatory safe harbors protecting certain common activities from prosecution, the exemptions and safe harbors are drawn narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Most states also have statutes or regulations similar to the federal anti-kickback law and federal false claims laws, which apply to items and services covered by Medicaid and other state programs, or, in several states, apply regardless of the payor. Administrative, civil and criminal sanctions may be imposed under these federal and state laws.
Over the past few years, a number of pharmaceutical and other healthcare companies have been prosecuted under these laws for a variety of promotional and marketing activities, such as: providing free trips, free goods, sham consulting fees and grants and other monetary benefits to prescribers; reporting inflated average wholesale prices that were then used by federal programs to set reimbursement rates; engaging in off-label promotion; and submitting inflated best price information to the Medicaid Rebate Program to reduce liability for Medicaid rebates.
Any delay or disruption in the manufacture and supply of RP-G28 may negatively impact our operations.
We do not intend to manufacture the pharmaceutical products that we plan to sell. We currently have agreements with contract manufacturers for the production of the active pharmaceutical ingredients and the formulation of sufficient quantities of drug product for our Phase 2b/3 and any Phase 3 trials of RP-G28 and the other trials and nonclinical studies that we believe we will need to conduct prior to seeking regulatory approval. However, we do not have agreements for commercial supplies of RP-G28 and we may not be able to reach agreements with these or other contract manufacturers for sufficient supplies to commercialize RP-G28 if it is approved.
Reliance on third-party manufacturers entails risks, to which we would not be subject if we manufactured the product candidates ourselves, including:
· | the possibility that we are unable to enter into a manufacturing agreement with a third party to manufacture our product candidates; |
· | the possible breach of the manufacturing agreements by the third parties because of factors beyond our control; and |
· | the possibility of termination or nonrenewal of the agreements by the third parties before we are able to arrange for a qualified replacement third-party manufacturer. |
Any of these factors could cause the delay of approval or commercialization of our product candidates, cause us to incur higher costs or prevent us from commercializing our product candidates successfully. Furthermore, if RP-G28 or other product candidates are approved and contract manufacturers fail to deliver the required commercial quantities of finished product on a timely basis and at commercially reasonable prices and we are unable to find one or more replacement manufacturers capable of production at a substantially equivalent cost, in substantially equivalent volumes and quality and on a timely basis, we would likely be unable to meet demand for our products and could lose potential revenue. It may take several years to establish an alternative source of supply for our product candidates and to have any such new source approved by the government agencies that regulate our products. In the event we do need to identify alternative manufacturing partners, we may have to secure licenses to manufacturing and/or purification technologies, including third-party patent licenses, to allow us to manufacture RP-G28 that is suitable for the late-stage regulatory review process and/or adequate to manufacture commercial quantities of RP-G28.
If the FDA and EMA and other regulatory agencies do not approve the manufacturing facilities of our future contract manufacturers for commercial production, we may not be able to commercialize any of our product candidates.
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The facilities used by any contract manufacturer to manufacture RP-G28, or other product candidates we may develop in the future, must be the subject of a satisfactory inspection before the FDA or the regulators in other jurisdictions approve the product candidate manufactured at that facility. We are completely dependent on these third-party manufacturers for compliance with the requirements of U.S. and non-U.S. regulators for the manufacture of our finished products. If our manufacturers cannot successfully manufacture material that conform to our specifications and current good manufacturing practice requirements of any governmental agency whose jurisdiction to which we are subject, our product candidates will not be approved or, if already approved, may be subject to recalls.
Even if our product candidates receive regulatory approval, we may still face future development and regulatory difficulties.
RP-G28 and any other product candidates we develop in the future, if approved, will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, record-keeping and submission of safety and other post-market information. In addition, approved products, manufacturers and manufacturers’ facilities are required to comply with extensive FDA and EMA requirements and requirements of other similar agencies, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMPs. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMPs. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and EMA and other similar agencies and to comply with certain requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved label. Accordingly, we may not promote our approved products, if any, for indications or uses for which they are not approved.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, it may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
· | issue warning letters; |
· | mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners; |
· | require us or our potential future collaborators to enter into a consent decree or permanent injunction, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance; |
· | impose other administrative or judicial civil or criminal penalties; |
· | withdraw regulatory approval; |
· | refuse to approve pending applications or supplements to approved applications filed by us or our potential future collaborators; |
· | impose restrictions on operations, including costly new manufacturing requirements; or |
· | detain, seize and/or condemn and destroy products. |
Risks Relating to the Commercialization of Our Products
Even if approved, our product candidates may not achieve broad market acceptance among physicians, patients and healthcare payors, and as a result our revenues generated from their sales may be limited.
The commercial success of RP-G28, if approved, will depend upon its acceptance among the medical community, including physicians, health care payors and patients. The degree of market acceptance of RP-G28, or other product candidates we may develop in the future, will depend on a number of factors, including:
· | limitations or warnings contained in our product candidates’ FDA-approved labeling; |
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· | changes in the standard of care or availability of alternative therapies at similar or lower costs for the targeted indications for such product candidates; |
· | limitations in the approved clinical indications for such product candidates; |
· | demonstrated clinical safety and efficacy compared to other products; |
· | lack of significant adverse side effects; |
· | sales, marketing and distribution support; |
· | availability of reimbursement from managed care plans and other third-party payors; |
· | timing of market introduction and perceived effectiveness of competitive products; |
· | the degree of cost-effectiveness; |
· | availability of alternative therapies at similar or lower cost, including generics and over-the-counter products; |
· | enforcement by the FDA and EMA of laws and rulings that prohibit the illegal sale of RP-G28 (or any other product candidate) as a dietary supplement; |
· | the extent to which our product candidates are approved for inclusion on formularies of hospitals and managed care organizations; |
· | whether our product candidates are designated under physician treatment guidelines for the treatment of or reduction of symptoms associated with the indications for which we have received regulatory approval; |
· | adverse publicity about our product candidates or favorable publicity about competitive products; |
· | convenience and ease of administration of our product candidates; and |
· | potential product liability claims. |
If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, patients, the medical community and healthcare payors, sufficient revenue may not be generated from these products and we may not become or remain profitable. In addition, efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.
We have no internal sales, distribution and/or marketing capabilities at this time and we will have to invest significant resources to develop those capabilities or enter into acceptable third-party sales and marketing arrangements.
We have no internal sales, distribution and/or marketing capabilities at this time. To develop these capabilities, we will have to invest significant amounts of financial and management resources, some of which will be committed prior to any confirmation that RP-G28 will be approved. For product candidates for which we decide to perform sales, marketing and distribution functions ourselves or through third parties, we could face a number of additional risks, including:
· | we or our third-party sales collaborators may not be able to attract and build an effective marketing or sales force; |
· | the cost of securing or establishing a marketing or sales force may exceed the revenues generated by any products; and |
· | our direct sales and marketing efforts may not be successful. |
We may have limited or no control over the sales, marketing and distribution activities of these third parties. Our future revenues may depend heavily on the success of the efforts of these third parties.
We may not be successful in establishing and maintaining development and commercialization collaborations, which could adversely affect our ability to develop RP-G28 or other product candidates and our financial condition and operating results.
Because developing pharmaceutical products, conducting clinical trials, obtaining regulatory approval, establishing manufacturing capabilities and marketing approved products are expensive, we may seek to enter into collaborations with companies that have more experience. Additionally, if RP-G28, or any other product candidate we develop in the future, receives marketing approval, we may enter into sales and marketing arrangements with third parties with respect to our unlicensed territories. If we are unable to enter into arrangements on acceptable terms, we may be unable to effectively market and sell our products in our target markets. We expect to face competition in seeking appropriate
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collaborators. Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement and they may require substantial resources to maintain. We may not be successful in our efforts to establish and implement collaborations or other alternative arrangements for the development of our product candidates.
When we collaborate with a third party for the development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. For example, we may relinquish the rights to RP-G28 in jurisdictions outside of the United States. Our collaboration partner may not devote sufficient resources to the commercialization of our product candidates or may otherwise fail in their commercialization. The terms of any collaboration or other arrangement that we establish may not be favorable to us. In addition, any collaboration that we enter into may be unsuccessful in the development and commercialization of our product candidates. In some cases, we may be responsible for continuing preclinical and initial clinical development of a product candidate or research program under a collaboration arrangement, and the payment we receive from our collaboration partner may be insufficient to cover the cost of this development. If we are unable to reach agreements with suitable collaborators for our product candidates, we would face increased costs, we may be forced to limit the number of our product candidates we can commercially develop or the territories in which we commercialize them and we might fail to commercialize products or programs for which a suitable collaborator cannot be found. If we fail to achieve successful collaborations, our operating results and financial condition will be materially and adversely affected.
The Company’s pipeline of product candidates beyond RP-G28 is limited.
We intend to develop and commercialize drug candidates in addition to RP-G28 through our research program. Even if we are successful in completing preclinical and clinical development and receiving regulatory approval for one commercially viable drug for the treatment of one disease, we cannot be certain that we will be able to develop and receive regulatory approval for other drug candidates for the treatment of other forms of that disease or other diseases. If we fail to develop and commercialize RP-G28 for the reduction of symptoms associated with lactose intolerance, we will not be successful in developing a pipeline of potential drug candidates to follow RP-G28, and our business prospects could be significantly limited.
Risks Relating to Our Business and Strategy
We may face competition from other biotechnology and pharmaceutical companies and our operating results will suffer if we fail to compete effectively.
Although we know of no other drug candidates in advanced clinical trials for treating lactose intolerance, the biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological change. We have potential competitors in the United States, Europe and other jurisdictions, including major multinational pharmaceutical companies, established biotechnology companies, specialty pharmaceutical and generic drug companies and universities and other research institutions. Many of these potential competitors have greater financial and other resources, such as larger research and development staff and more experienced marketing and manufacturing organizations. Large pharmaceutical companies, in particular, have extensive experience in clinical testing, obtaining regulatory approvals, recruiting patients and manufacturing pharmaceutical products. These companies also have significantly greater research, sales and marketing capabilities and collaborative arrangements in our target markets with leading companies and research institutions. Established pharmaceutical companies may also invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make the product candidates that we develop obsolete. As a result of all of these factors, these potential competitors may succeed in obtaining patent protection and/or FDA approval or discovering, developing and commercializing drugs for the diseases that we are targeting before we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies. Some of the pharmaceutical and biotechnology companies we expect to compete with include microbiome based development companies: Second Genome, Inc., Seres Health, Inc., Enterome SA, Vedanta Biosciences, Inc., and Microbiome Therapeutics, LLC. In addition, many universities and private and public research institutes may become active in our target disease areas. These potential competitors may succeed in developing, acquiring or licensing on an exclusive basis, technologies and drug products that are more effective or less costly than RP-G28 or any other
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product candidates that we are currently developing or that we may develop, which could render our products obsolete and noncompetitive.
We believe that our ability to successfully compete will depend on, among other things:
· | the results of our and our potential strategic collaborators’ clinical trials and preclinical studies; |
· | our ability to recruit and enroll patients for our clinical trials; |
· | the efficacy, safety and reliability of our product candidates; |
· | the speed at which we develop our product candidates; |
· | our ability to design and successfully execute appropriate clinical trials; |
· | our ability to maintain a good relationship with regulatory authorities; |
· | the ability to get FDA approval of our end points; |
· | the timing and scope of regulatory approvals, if any; |
· | our ability to commercialize and market any of our product candidates that receive regulatory approval; |
· | the price of our products; |
· | adequate levels of reimbursement under private and governmental health insurance plans, including Medicare; |
· | our ability to protect intellectual property rights related to our products; |
· | our ability to manufacture and sell commercial quantities of any approved products to the market; and |
· | acceptance of our product candidates by physicians and other health care providers. |
If our competitors market products that are more effective, safer or less expensive than ours, or that reach the market sooner than ours, we may not achieve commercial success. In addition, the biopharmaceutical industry is characterized by rapid technological change. Because our research approach integrates many technologies, it may be difficult for us to stay abreast of the rapid changes in each technology. If we fail to stay at the forefront of technological change, we may be unable to compete effectively. Technological advances or products developed by our competitors may render our technologies or product candidates obsolete, less competitive or not economical.
We depend on third-party contractors for a substantial portion of our operations and may not be able to control their work as effectively as if we performed these functions ourselves.
We outsource substantial portions of our operations to third-party service providers, including the conduct of preclinical studies and clinical trials, collection and analysis of data, and manufacturing. Our agreements with third-party service providers and CROs are on a study-by-study and project-by-project basis. Typically, we may terminate the agreements with notice and are responsible for the supplier’s previously incurred costs. In addition, any CRO that we retain will be subject to the FDA’s and EMA’s regulatory requirements and similar standards outside of the United States and Europe and we do not have control over compliance with these regulations by these providers. Consequently, if these providers do not adhere to applicable governing practices and standards, the development and commercialization of our product candidates could be delayed or stopped, which could severely harm our business and financial condition.
Because we have relied on third parties, our internal capacity to perform these functions is limited to management oversight. Outsourcing these functions involves the risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at all. Although we have not experienced any significant difficulties with our third-party contractors, it is possible that we could experience difficulties in the future. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties, which could increase the risk that this information will be misappropriated. There are a limited number of third-party service providers that specialize or have the expertise required to achieve our business objectives. Identifying, qualifying and managing performance of third-party service providers can be difficult, time consuming and cause delays in our development programs. We currently have a small number of employees, which limits the internal resources we have available to identify and monitor third-party service providers. To the extent we are unable to identify, retain and successfully manage the performance of third-party service providers in the future, our business may be adversely affected, and we may be subject to the imposition of civil or criminal penalties if their conduct of clinical trials violates applicable law.
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A variety of risks associated with our possible international business relationships could materially adversely affect our business.
We may enter into agreements with other third parties for the development and commercialization of RP-G28, or other product candidates we develop in the future, in international markets. International business relationships subject us to additional risks that may materially adversely affect our ability to attain or sustain profitable operations, including:
· | differing regulatory requirements for drug approvals internationally; |
· | potentially reduced protection for intellectual property rights; |
· | potential third-party patent rights in the United States and/or in countries outside of the United States; |
· | the potential for so-called “parallel importing,” which is what occurs when a local seller, faced with relatively high local prices, opts to import goods from another jurisdiction with relatively low prices, rather than buying them locally; |
· | unexpected changes in tariffs, trade barriers and regulatory requirements; |
· | economic weakness, including inflation, or political instability, particularly in non-U.S. economies and markets, including several countries in Europe; |
· | compliance with tax, employment, immigration and labor laws for employees traveling abroad; |
· | taxes in other countries; |
· | foreign currency fluctuations, which could result in increased operating expenses and reduced revenue, and other obligations incident to doing business in another country; |
· | workforce uncertainty in countries where labor unrest is more common than in the United States; |
· | production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and |
· | business interruptions resulting from geo-political actions, including war and terrorism, or natural disasters, including earthquakes, volcanoes, typhoons, floods, hurricanes and fires. |
We will need to expand our operations and increase the size of our company, and we may experience difficulties in managing growth.
As we increase the number of ongoing product development programs and advance our product candidates through preclinical studies and clinical trials, we will need to increase our product development, scientific and administrative headcount to manage these programs. In addition, to meet our obligations as a public company, we will need to increase our general and administrative capabilities. Our management, personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively manage our operations, growth and various projects requires that we:
· | successfully attract and recruit new employees or consultants with the expertise and experience we will require; |
· | manage our clinical programs effectively, which we anticipate being conducted at numerous clinical sites; |
· | develop a marketing and sales infrastructure; and |
· | continue to improve our operational, financial and management controls, reporting systems and procedures. |
If we are unable to successfully manage this growth and increased complexity of operations, our business may be adversely affected.
We may not be able to manage our business effectively if we are unable to attract and retain key personnel and consultants.
We may not be able to attract or retain qualified management, finance, scientific and clinical personnel and consultants due to the intense competition for qualified personnel and consultants among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel and consultants to accomplish our business
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objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.
We are highly dependent on the development, regulatory, commercialization and business development expertise of Michael D. Step, our Chief Executive Officer, Andrew J. Ritter, our Founder and President, and Ira E. Ritter, our Executive Chairman and Chief Strategic Officer. If we were to lose one or more of these key employees, our ability to implement our business strategy successfully could be seriously harmed. Any of our executive officers may terminate their employment at any time. Replacing any of these persons would be difficult and could take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully.
There is also a risk that other obligations could distract our officers and employees, including any of our other part-time employees, from our business, which could have negative impact on our ability to effectuate our business plans.
In addition, we have scientific and clinical advisors and consultants who assist us in formulating our research, development and clinical strategies. Competition to hire and retain consultants from a limited pool is intense. Further, because these advisors are not our employees, they may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, and typically they 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, our advisors may have arrangements with other companies to assist those companies in developing products or technologies that may compete with ours.
Failure to build our finance infrastructure and improve our accounting systems and controls could impair our ability to comply with the financial reporting and internal controls requirements for publicly traded companies.
As a public company, we will operate in an increasingly demanding regulatory environment, which requires us to comply with the Sarbanes-Oxley Act, and the related rules and regulations of the SEC, expanded disclosure requirements, accelerated reporting requirements and more complex accounting rules. Company responsibilities required by the Sarbanes-Oxley Act include establishing corporate oversight and adequate internal control over financial reporting and disclosure controls and procedures. Effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent financial fraud.
We have begun implementing our system of internal controls over financial reporting and preparing the documentation necessary to perform the evaluation needed to comply with Section 404(a) of the Sarbanes-Oxley Act. However, we anticipate that we will need to retain additional finance capabilities and build our financial infrastructure as we transition to operating as a public company, including complying with the requirements of Section 404 of the Sarbanes-Oxley Act. As we begin operating as a public company following our initial public offering, we will continue improving our financial infrastructure with the retention of additional financial and accounting capabilities, the enhancement of internal controls and additional training for our financial and accounting staff.
Section 404(a) of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. However, for as long as we remain an “emerging growth company” as defined in the JOBS Act, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
Until we are able to expand our finance and administrative capabilities and establish necessary financial reporting infrastructure, we may not be able to prepare and disclose, in a timely manner, our financial statements and other required disclosures or comply with the Sarbanes-Oxley Act or existing or new reporting requirements. If we cannot
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provide reliable financial reports or prevent fraud, our business and results of operations could be harmed and investors could lose confidence in our reported financial information.
Our employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could significantly harm our business.
We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with the regulations of the FDA and non-U.S. regulators, provide accurate information to the FDA and non-U.S. regulators, comply with health care fraud and abuse laws and regulations in the United States and abroad, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the health care industry 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. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We have adopted an employee handbook, but it is not always possible to identify and deter employee misconduct, 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 have a significant impact on our business, including the imposition of significant fines or other sanctions.
We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.
The use of our product candidates in clinical trials and the sale of any products for which we may obtain marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us or our potential future collaborators by participants enrolled in our clinical trials, patients, health care providers or others using, administering or selling our products. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:
· | withdrawal of clinical trial participants; |
· | termination of clinical trial sites or entire trial programs; |
· | costs of related litigation; |
· | substantial monetary awards to patients or other claimants; |
· | decreased demand for our product candidates and loss of revenues; |
· | impairment of our business reputation; |
· | diversion of management and scientific resources from our business operations; and |
· | the inability to commercialize our product candidates. |
We expect to obtain product liability insurance coverage for our clinical trials in the United States and in selected other jurisdictions where we intend to conduct clinical trials at levels we believe are sufficient and consistent with industry standards for companies at our stage of development. However, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash resources and adversely affect our business.
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Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.
We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include general liability ($2 million coverage), employment practices liability, workers’ compensation, and directors’ and officers’ insurance at levels we believe are typical for a company in our industry and at our stage of development. We do not currently carry clinical trial liability insurance or products liability insurance, but we are currently seeking to purchase such insurance prior to the beginning of our clinical trials at levels we believe are sufficient and consistent with industry standards for companies at our stage of development. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results of operations.
If we engage in an acquisition, reorganization or business combination, we will incur a variety of risks that could adversely affect our business operations or our stockholders.
From time to time we have considered, and we will continue to consider in the future, strategic business initiatives intended to further the expansion and development of our business. These initiatives may include acquiring businesses, technologies or products or entering into a business combination with another company. If we pursue such a strategy, we could, among other things:
· | issue equity securities that would dilute our current stockholders’ percentage ownership; |
· | incur substantial debt that may place strains on our operations; |
· | spend substantial operational, financial and management resources to integrate new businesses, technologies and products; |
· | assume substantial actual or contingent liabilities; |
· | reprioritize our development programs and even cease development and commercialization of our product candidates; or |
· | merge with, or otherwise enter into a business combination with, another company in which our stockholders would receive cash and/or shares of the other company on terms that certain of our stockholders may not deem desirable. |
Although we intend to evaluate and consider acquisitions, reorganizations and business combinations in the future, we have no agreements or understandings with respect to any acquisition, reorganization or business combination at this time.
Risks Relating to Our Intellectual Property
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection. If our patent position does not adequately protect our product candidates, others could compete against us more directly, which would harm our business, possibly materially.
Our commercial success will depend in part on obtaining, maintaining and enforcing patent protection and on developing, preserving and enforcing current trade secret protection. In particular, it will depend in part on our ability to obtain, maintain and enforce patents, especially those related to methods of using our current product, RP-G28, and other future drug candidates, and those related to the methods used to develop and manufacture our products, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products depends on the extent to which we have rights under valid and enforceable patents (and/or trade secrets) that cover these activities. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications filed by us in the future, nor can we be sure that any of our existing patents or any patents that may be granted to us in the future will withstand subsequent challenges to their validity and or patentability, or if they will be commercially useful in protecting our product candidates, discovery programs and processes. Furthermore, we cannot be sure that our existing
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patents and patent applications will embrace (or “claim”) the particular uses for RP-G28 that will be approved by FDA.
The patent positions of biotechnology and pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved.
No consistent policy regarding the patentability and/or validity of patent claims related to pharmaceutical patents has emerged, to date, in the United States or in most jurisdictions outside of the United States. Changes in either the patent laws (be they substantive or procedural) or in the interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims that will issue or will be enforceable in the patents that have or may be issued from the patents and applications we currently own or may in the future own or license from third parties. Further, if any patents we obtain, or to which we obtain licenses, are deemed invalid, unpatentable and unenforceable, our ability to commercialize or license our technology could be adversely affected.
In the future others may file patent applications covering products, uses for products, and manufacturing techniques and related technologies that are similar, identical or competitive to ours or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us in the future, or that we or our licensors will not be involved in interference, opposition, inter partes review or invalidity proceedings before U.S. or non-U.S. patent offices or courts.
The degree of future protection for our proprietary rights is uncertain because legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:
· | others may be able to develop a platform similar to, or better than, ours in a way that is not covered by the claims of our patents; |
· | others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents; |
· | others may be able to manufacture compounds that are similar or identical to our product candidates using processes that are not covered by the claims of our method of making patents; |
· | others may obtain regulatory approval for uses of compounds, similar or identical to our product, that are not covered by the claims of our method of use patents; |
· | we may not be able to obtain licenses for patents that are essential to the process of making the product; |
· | we might not have been the first to make the inventions covered by our pending patent applications; |
· | we might not have been the first to file patent applications for these inventions; |
· | others may independently develop similar or alternative technologies or duplicate any of our technologies; |
· | any patents that we obtain may not provide us with any competitive advantages; |
· | we may not develop additional proprietary technologies that are patentable; or |
· | the patents of others may have an adverse effect on our business. |
Patents covering methods of using RP-G28 expire in 2030 if the appropriate maintenance fee renewal, annuity, or other government fees are paid, unless a patent term extension based on regulatory delay is obtained. We expect that expiration in 2030 of some of our method-of-use patents covering use of RP-G28 for treating lactose intolerance will have a limited impact on our ability to protect our intellectual property in the United States, where we have additional issued patents covering this use that extend until 2030. In other countries, our pending patent applications covering use of RP-G28 for treating other indications, if issued, would expire in 2030. We will attempt to mitigate the effect of patent expiration by seeking data exclusivity, or the foreign equivalent thereof, in conjunction with product approval, as well as by filing additional patent applications covering improvements in our intellectual property.
We expect that the other patent applications for the RP-G28 portfolio, if issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, would expire in 2030. We own pending applications in the United States and Europe covering RP-G28 analogs, and uses of such analogs as therapeutics to treat a variety of
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disorders, including lactose intolerance. Patent protection, to the extent it issues, would be expected to extend to 2030, unless a patent term extension based on regulatory delay is obtained.
Due to the patent laws of a country, or the decisions of a patent examiner in a country, or our own filing strategies, we may not obtain patent coverage for all of our product candidates or methods involving these candidates in the parent patent application. We plan to pursue divisional patent applications or continuation patent applications in the United States and other countries to obtain claim coverage for inventions which were disclosed but not claimed in the parent patent application.
We may also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or feasible. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.
RP-G28 does not have composition of matter patent protection.
Although we own certain patents and patent applications with claims directed to specific methods of using RP-G28 to treat lactose intolerance, RP-G28 has no composition of matter patent protection in the United States or elsewhere. As a result, we may be limited in our ability to list our patents in the FDA’s Orange Book if the use of our product, consistent with its FDA-approved label, would not fall within the scope of our patent claims. Also, our competitors may be able to offer and sell products so long as these competitors do not infringe any other patents that we (or third parties) hold, including patents with claims directed to the manufacture of RP-G28 and/or method of use patents. In general, method of use patents are more difficult to enforce than composition of matter patents because, for example, of the risks that FDA may approve alternative uses of the subject compounds not covered by the method of use patents, and others may engage in off-label sale or use of the subject compounds. Physicians are permitted to prescribe an approved product for uses that are not described in the product’s labeling. Although off-label prescriptions may infringe our method of use patents, the practice is common across medical specialties and such infringement is difficult to prevent or prosecute. FDA approval of uses that are not covered by our patents would limit our ability to generate revenue from the sale of RP-G28, if approved for commercial sale. Off-label sales would limit our ability to generate revenue from the sale of RP-G28, if approved for commercial sale.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.
If we choose to go to court to stop another party from using the inventions claimed in any patents we obtain, that individual or company may seek a post grant review (including inter parte review) of our patents, and has the right to ask the court to rule that such patents are invalid or should not be enforced against that third party. These lawsuits and administrative proceedings are expensive and would consume time and resources and divert the attention of managerial and scientific personnel even if we were successful in stopping the infringement of such patents. In addition, there is a risk that the court or administrative body will decide that such patents are not valid or unpatentable and that we do not have the right to stop the other party from using the inventions. There is also the risk that, even if the validity/patentability of such patents is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe our rights to such patents. In addition, the U.S. Supreme Court and the Court of Appeals for the Federal Circuit have recently articulated and/or modified certain tests used by the U.S. Patent and Trademark Office, or USPTO, in assessing patentability and by the courts in assessing validity and claim scope, which may decrease the likelihood that we will be able to obtain patents and increase the likelihood that others may succeed in challenging any patents we obtain or license.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our product candidates.
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Our success will depend in part on our ability to operate without infringing the proprietary rights of third parties. We cannot guarantee that our products, our methods of manufacture, or our uses of RP-G28 (or our other product candidates), will not infringe third-party patents. Furthermore, a third party may claim that we or our manufacturing or commercialization collaborators are using inventions covered by the third party’s patent rights and may go to court to stop us from engaging in our normal operations and activities, including making or selling our product candidates. These lawsuits are costly and could affect our results of operations and divert the attention of managerial and scientific personnel. There is a risk that a court would decide that we or our commercialization collaborators are infringing the third party’s patents and would order us or our collaborators to stop the activities covered by the patents. In that event, we or our commercialization collaborators may not have a viable way around the patent and may need to halt commercialization of the relevant product. In addition, there is a risk that a court will order us or our collaborators to pay the other party damages for having violated the other party’s patents. In the future, we may agree to indemnify our commercial collaborators against certain intellectual property infringement claims brought by third parties. The pharmaceutical and biotechnology industries have produced a proliferation of patents, and it is not always clear to industry participants, including us, which patents cover various types of products or methods of use. The scope of coverage of a patent is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement, the patentee would need to demonstrate, by a preponderance of the evidence that our products or methods infringe the patent claims of the relevant patent, and we would need to demonstrate either that we do not infringe or, by clear and convincing evidence, that the patent claims are invalid; we may not be able to do this. Proving invalidity is difficult. For example, in the United States, proving invalidity requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents. Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings, which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, which may not be available, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have infringed patents declared invalid, we may incur substantial monetary damages, encounter significant delays in bringing our product candidates to market and be precluded from manufacturing or selling our product candidates.
We cannot be certain that others have not filed patent applications for technology covered by our pending applications, or that we were the first to invent the technology, because:
· | some patent applications in the United States may be maintained in secrecy until the patents are issued; |
· | patent applications in the United States are typically not published until at least 18 months after the earliest asserted priority date; and |
· | publications in the scientific literature often lag behind actual discoveries. |
Our competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent application may have priority over our patent applications, which could further require us to obtain rights to issued patents covering such technologies. If another party has filed a U.S. patent application on inventions similar to ours, we may have to participate in an interference proceeding declared by the USPTO to determine priority of invention in the United States. The costs of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful if, unbeknownst to us, the other party had independently arrived at the same or similar invention prior to our own invention, resulting in a loss of our U.S. patent position with respect to such inventions. Other countries have similar laws that permit secrecy of patent applications, and may be entitled to priority over our applications in such jurisdictions.
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.
Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.
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Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies and this outside firm has systems in place to ensure compliance on payment of fees. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.
We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers. If we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology and products could be significantly diminished.
As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
We rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. For example, the FDA, as part of its Transparency Initiative, is currently considering whether to make additional information publicly available on a routine basis, including information that we may consider to be trade secrets or other proprietary information, and it is not clear at the present time how the FDA’s disclosure policies may change in the future, if at all. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Failure to secure trademark registrations could adversely affect our business.
We have not developed a trademark for our RP-G28 product. Hence, we do not currently own any actual or potential trademark rights associated with our RP-G28 product. If we seek to register additional trademarks, including trademarks associated with our RP-G28 product, our trademark applications may not be allowed for registration or our registered trademarks may not be maintained or enforced. During trademark registration proceedings, we may receive rejections. Although we are given an opportunity to respond to those rejections, we may be unable to overcome such rejections. In addition, in the USPTO and in comparable agencies in many other jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, and our trademarks may not survive such proceedings. If we do not secure registrations for our trademarks, we may encounter more difficulty in enforcing them against third parties than we otherwise would.
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Risks Relating to Our Common Stock
An active trading market may not develop or be sustained following our initial public offering.
Prior to our initial public offering, there was no public market for our common stock. An active trading market may not develop as a result of our initial public offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
Our share price may be volatile, which could subject us to securities class action litigation and prevent you from being able to sell your shares at or above your purchase price.
The market price of shares of our common stock could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
· | results of our clinical trials; |
· | results of clinical trials of our competitors’ products; |
· | regulatory actions with respect to our products or our competitors’ products; |
· | actual or anticipated fluctuations in our financial condition and operating results; |
· | actual or anticipated changes in our growth rate relative to our competitors; |
· | actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate; |
· | competition from existing products or new products that may emerge; |
· | announcements by us, our potential future collaborators or our competitors of significant acquisitions, strategic collaborations, joint ventures, or capital commitments; |
· | issuance of new or updated research or reports by securities analysts; |
· | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
· | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
· | additions or departures of key management or scientific personnel; |
· | disputes or other developments related to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; |
· | announcement or expectation of additional financing efforts; |
· | sales of our common stock by us, our insiders or our other stockholders; |
· | market conditions for biopharmaceutical stocks in general; and |
· | general economic and market conditions. |
Furthermore, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of shares of our common stock. In addition, such fluctuations could subject us to securities class action litigation, which could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
We have three significant stockholders, which will limit your ability to influence corporate matters and may give rise to conflicts of interest.
Javelin Venture Partners I SPV I, LLC, or Javelin I, Javelin Venture Partners, L.P., or Javelin, and Stonehenge Partners LLC, or Stonehenge, are our largest stockholders. Javelin I is beneficially owns shares representing approximately 8.0% of our common stock, Javelin beneficially owns shares representing approximately 27.4% of our common stock, and Stonehenge beneficially owns shares representing 10.5% of our common stock. Accordingly, Javelin I, Javelin and Stonehenge may exert significant influence over us and any action requiring the approval of the holders of our common stock, including the election of directors and the approval of significant corporate transactions. This concentration of voting power makes it less likely that any other holder of our common stock or our directors will be able to affect the way we are managed and could delay or prevent an acquisition of us on terms that other stockholders may desire. Furthermore, the interests of Javelin I, Javelin and Stonehenge may not always coincide with your interests or the interests of other stockholders and Javelin I, Javelin and Stonehenge may act in a manner that advances
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their best interests and not necessarily those of other stockholders, including seeking a premium value for their common stock, and might affect the prevailing market price for our common stock.
Being a public company will increase our expenses and administrative burden.
As a public company, we will incur significant legal, insurance, accounting and other expenses that we did not incur as a private company. In addition, our administrative staff will be required to perform additional tasks. For example, as a public company, we will bear all of the internal and external costs of preparing and distributing periodic public reports in compliance with our obligations under the securities laws. In addition, laws, regulations and standards applicable to public companies relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act and related regulations implemented by the SEC and NASDAQ, are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.
We are an “emerging growth company” and will be able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) 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 shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will 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.
We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.” We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
A significant portion of our total outstanding shares of common stock is restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market could occur in the future. These sales, or the perception in the market that the holders of a large number of shares of common stock intend to sell shares, could reduce the market price of our common stock. We had 7,792,433 outstanding shares of common stock as of September 30, 2015. Of these shares, 4,000,000 shares may be resold in the public market immediately and the remaining shares are currently restricted under securities laws or as a result of lock-up agreements that expire in
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December 2015. We also intend to register all shares of common stock that we may issue under our equity compensation plans.
Future sales and issuances of our common stock or rights to purchase common stock pursuant to our equity incentive plans could result in additional dilution of the percentage ownership of our stockholders and could cause our share price to fall.
We expect that significant additional capital will be needed in the future to continue our planned operations. To the extent we raise additional capital by issuing equity securities, our stockholders may experience substantial dilution. We may sell common stock, convertible securities or other equity securities in one or more transactions at prices and in a manner we determine from time to time. If we sell common stock, convertible securities or other equity securities in more than one transaction, investors may be materially diluted by subsequent sales. Such sales may also result in material dilution to our existing stockholders, and new investors could gain rights superior to our existing stockholders.
We cannot predict what effect, if any, market sales of shares held by any stockholder or the availability of shares for future sale will have on the market price of our common stock.
As of September 30, 2015, we had options to purchase 1,905,234 shares outstanding under our stock plans. Sales of shares granted under our equity incentive plans may result in material dilution to our existing stockholders, which could cause our share price to fall.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our share price and trading volume could decline.
The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. There can be no assurance that analysts will cover us or provide favorable coverage. If one or more of the analysts who cover us downgrade our stock or change their opinion of our stock, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.
Our failure to meet the continued listing requirements of NASDAQ could result in a de-listing of our common stock.
If 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’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become 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 NASDAQ’s listing requirements.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of our company, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions provide that:
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· | the authorized number of directors can be changed only by resolution of our board of directors; |
· | our bylaws may be amended or repealed by our board of directors or our stockholders; |
· | stockholders may not call special meetings of the stockholders or fill vacancies on the board of directors; |
· | our board of directors is authorized to issue, without stockholder approval, preferred stock, the rights of which will be determined at the discretion of the board of directors and that, if issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to prevent an acquisition that our board of directors does not approve; |
· | our stockholders do not have cumulative voting rights, and therefore our stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors; and |
· | our stockholders must comply with advance notice provisions to bring business before or nominate directors for election at a stockholder meeting. |
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Claims for indemnification by our directors and officers may reduce our available funds to satisfy successful stockholder claims against us and may reduce the amount of money available to us.
As permitted by Section 102(b)(7) of the DGCL, our amended and restated certificate of incorporation limits the liability of our directors to the fullest extent permitted by law. In addition, as permitted by Section 145 of the DGCL, our restated certificate of incorporation and our amended and restated bylaws provide that we shall indemnify, to the fullest extent authorized by the DGCL, each person who is involved in any litigation or other proceeding because such person is or was a director or officer of our company or is or was serving as an officer or director of another entity at our request, against all expense, loss or liability reasonably incurred or suffered in connection therewith. Our amended and restated certificate of incorporation provides that the right to indemnification includes the right to be paid expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that such advance payment will only be made upon delivery to us of an undertaking, by or on behalf of the director or officer, to repay all amounts so advanced if it is ultimately determined that such director is not entitled to indemnification. If we do not pay a proper claim for indemnification in full within 60 days after we receive a written claim for such indemnification, except in the case of a claim for an advancement of expenses, in which case such period is 20 days, our restated certificate of incorporation and our restated bylaws authorize the claimant to bring an action against us and prescribe what constitutes a defense to such action.
Section 145 of the DGCL permits a corporation to indemnify any director or officer of the corporation against expenses (including attorney’s fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any action, suit or proceeding brought by reason of the fact that such person is or was a director or officer of the corporation, if such person acted in good faith and in a manner that he reasonably believed to be in, or not opposed to, the best interests of the corporation, and, with respect to any criminal action or proceeding, if he or she had no reason to believe his or her conduct was unlawful. In a derivative action, (i.e., one brought by or on behalf of the corporation), indemnification may be provided only for expenses actually and reasonably incurred by any director or officer in connection with the defense or settlement of such an action or suit if such person acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, the best interests of the corporation, except that no indemnification shall be provided if such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action or suit was brought shall determine that the defendant is fairly and reasonably entitled to indemnity for such expenses despite such adjudication of liability.
The rights conferred in the restated certificate of incorporation and the restated bylaws are not exclusive, and we are authorized to enter into indemnification agreements with our directors, officers, employees and agents and to obtain insurance to indemnify such persons. We have entered into or plan to enter into indemnification agreements with each of our officers and directors.
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The above limitations on liability and our indemnification obligations limit the personal liability of our directors and officers for monetary damages for breach of their fiduciary duty as directors by shifting the burden of such losses and expenses to us. Although we plan to increase the coverage under our directors’ and officers’ liability insurance, certain liabilities or expenses covered by our indemnification obligations may not be covered by such insurance or the coverage limitation amounts may be exceeded. As a result, we may need to use a significant amount of our funds to satisfy our indemnification obligations, which could severely harm our business and financial condition and limit the funds available to stockholders who may choose to bring a claim against our company.
We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
We do not anticipate paying cash dividends in the future. As a result, only appreciation of the market price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2014, we had federal net operating loss carryforwards, or NOLs, of approximately $9.7 million which begin to expire in 2028. Our ability to utilize our NOLs may be limited under Section 382 and 383 of the Internal Revenue Code. The limitations apply if an ownership change, as defined by Section 382, occurs. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage in a testing period (typically three years). Although we have not undergone a Section 382 analysis, it is possible that the utilization of the NOLs, could be substantially limited. Additionally, U.S. tax laws limit the time during which these carryforwards may be utilized against future taxes. As a result, we may not be able to take full advantage of these carryforwards for federal and state tax purposes. Future changes in stock ownership may also trigger an ownership change and, consequently, a Section 382 limitation.
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Incorporated by Reference | ||||||||||
Exhibit No. | Description | Form | File No. | Exhibit | Filing Date | |||||
3.1 | Amended and Restated Certificate of Incorporation of Ritter Pharmaceuticals, Inc. | 8-K | 001-37428 | 3.1 | 7/1/2015 | |||||
3.2 | Amended and Restated Bylaws of Ritter Pharmaceuticals, Inc. | 8-K | 001-37428 | 3.2 | 7/1/2015 | |||||
10.1* | Lease Agreement, dated July 9, 2015 | |||||||||
10.2 * | Amendment No. 2 to Clinical Supply and Cooperation Agreement, effective July 24, 2015, between Ritter Pharmaceuticals, Inc., Ricerche Sperimentali Montale SpA, and Inalco SpA | |||||||||
10.3 + | Offer Letter, dated August 14, 2015, by and between Ritter Pharmaceuticals, Inc. and Ellen Mochizuki | |||||||||
10.4 * | Letter of Agreement, dated October 20, 2015 between Ritter Pharmaceuticals, Inc. and Chord Advisors, LLC | |||||||||
31.1 * | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||
31.2 * | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||||||||
32 .1** | Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||
101.INS** | XBRL Instance Document. | |||||||||
101.SCH ** | XBRL Taxonomy Schema Linkbase Document. | |||||||||
101.CAL ** | XBRL Taxonomy Calculation Linkbase Document. | |||||||||
101.DEF ** | XBRL Taxonomy Definition Linkbase Document. | |||||||||
101.LAB ** | XBRL Taxonomy Labels Linkbase Document. | |||||||||
101.PRE ** | XBRL Taxonomy Presentation Linkbase Document. | |||||||||
* | - Filed herewith. |
**
|
- Furnished herewith. |
+
|
- Management contract or compensatory plan. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
November 10, 2015 | RITTER PHARMACEUTICALS, INC. | |
By: | /s/ Michael D. Step | |
Name: Michael D. Step | ||
Title: Chief Executive Officer |
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Exhibit 10.1
LEASE
THIS LEASE (“Lease”), dated for reference purposes only July 1, 2015, is made by and between Century Park , a California Limited Partnership (“Landlord”) and Ritter Pharmaceuticals, Inc . (“Tenant”), upon the following terms and conditions:
1. | Premises and Basic Lease Information. |
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions set forth in this Lease, those certain premises (the “Premises”) described in Article 1.1.1 below, as well as the right to use, in common with others, the Common Areas (as hereinafter defined). The Premises are situated in that certain office building (the “Building”) located at 1880 Century Park East , Los Angeles, California 90067. The land upon which the Building is located together with the Building and related facilities and appurtenances and Common Areas is herein called the “Project.” The terms and conditions of this Lease include, without limitation, the following:
1.1.1 Premises: Suite 1000 consisting of approximately 2,780 rentable square feet on the Tenth Floor (10 th ) of the Building and cross-hatched on Exhibit “A” hereto. The exact area of the Premises shall be determined by applying the BOMA method of measurement (ANSI Z65.1-1996) to calculate the square footage per the final space plan for the Premises. Should the square footage measured from the space plan vary from that set forth in this Article 1.1.1, Landlord shall revise the Base Rent, Security Deposit, Tenant’s Percentage and other terms in this Lease that are affected by the square footage, and Landlord and Tenant shall amend this Lease accordingly.
1.1.2 Lease Term: The term of this Lease (the “Lease Term” or “Term”) shall begin on the later of the following dates (the “Commencement Date”): (a) October 1, 2015 (the “Scheduled Commencement Date”) or, where applicable, (b) upon Substantial Completion of the Tenant Improvements, and shall expire on the last day of the month that is Sixty (60) months after the first day of the month after the Commencement Date, unless sooner terminated pursuant to this Lease.
1.1.3 Base Rent: The base rent (“Base Rent”) for the Premises shall be as follows:
Months | Rate per rentable sf | Rent per Month | ||||||
1 | $ | 0.00 | $ | 0.00 | ||||
2-13 | $ | 3.30 | $ | 9,174.00 | ||||
14-25 | $ | 3.40 | $ | 9,449.22 | ||||
26-37 | $ | 3.50 | $ | 9,732.70 | ||||
38-49 | $ | 3.61 | $ | 10,024.68 | ||||
50-61 | $ | 3.71 | $ | 10,325.42 |
1.1.4 Additional Rent: All amounts payable by Tenant under this Lease except Base Rent.
1.1.5 Base Year: 2016 is the Base Year.
1.1.6 Tenant’s Percentage Share: 0.89% “Tenant’s Percentage Share” shall be a fraction, the numerator of which shall be the rentable square footage of the Premises and the denominator of which shall be 311,400 which is the approximate rentable square feet for the Building.
1.1.7 Security Deposit: $10,325.42 shall be Tenant’s Security Deposit, pursuant to Article 5 below.
1.1.8 Permitted Use: General offices and uses related thereto that do not conflict with the Building’s certificate of occupancy, that comply with all applicable codes and statutes, and that are uses commonly found in similar first class office buildings in the Project vicinity which, for purposes of this Lease, shall mean Century City.
1.1.9 Address For Notices:
Tenant (prior to Commencement Date) | Tenant (after Commencement Date) |
Ritter Pharmaceuticals, Inc. | Ritter Pharmaceuticals, Inc. |
1801 Century Park East, Suite #1820 | 1880 Century Park East, Suite #1000 |
Los Angeles, CA 90067 | Los Angeles, CA 90067 |
Contact: Andrew J. Ritter | Contact: Andrew J. Ritter |
Phone: 310.203.1000 | Phone: 310.203.1000 |
Landlord Century Park, a California Limited Partnership, c/o Held Properties, Inc., 1880 Century Park East, Suite 500, Los Angeles, CA 90067. See also Article 25 of this Lease.
1.1.10 Parking Rights: Tenant shall have the right to eight (8) automobile spaces at the Building’s prevailing parking rates. Of the eight, one (1) may be reserved on any level, one (1) may be reserved on either P-2 or P-3 level and one (1) may be VIP Valet. See also Article 31 herein.
1.1.11 Guarantor(s): None (See Addendum)
1.1.12 Broker: Both Tenant and Landlord are represented by Held Properties, Inc.
1.2 Common Areas. The term “Common Area(s)” as used in this Lease shall mean all areas and facilities in the Project which are provided and designated from time to time by Landlord for the general use and convenience of Tenant and other tenants of the Project and their respective employees and invitees. Common Areas include, without limitation, the lobby areas, walkways, parking facilities, landscaped areas, sidewalks, corridors, washrooms (if not part of the Premises), stairways, elevators, exterior walls at the window lines, common telephone and electrical closets, loading docks, plazas, service areas, and all other areas of the Project intended for common use. [Floors wholly occupied by Tenant or any other tenant shall not have any facilities which shall be used in common with other tenants, except for elevators, fire stairs, shafts, utility and service closets, and similar installations.] Tenant, its employees and invitees shall have a nonexclusive right to use the Common Areas, subject to Landlord’s rights and duties as set forth in this Lease. So long as Tenant’s access to the Premises or ability to conduct business therefrom is not materially impaired and provided that Landlord uses reasonable effort (including performing such work after normal business hours, if reasonably required) to minimize any interference with Tenant’s use and access of the Premises during normal business hours, Landlord shall have the right to do the following without Tenant’s consent and without liability to Tenant:
1.2.1 Establish and enforce in a nondiscriminatory, consistently applied manner, reasonable rules and regulations concerning the maintenance, management, use and operation of the Common Areas;
1.2.2 Temporarily close any Common Area for maintenance, repair, alterations or improvements;
1.2.3 Select, appoint and/or contract with any person or entity for the purpose of operating and maintaining the Common Areas; and
1.2.4 Change the size, use, shape or nature of the Common Area provided that doing so does not materially affect the existing ingress and egress to the Building, or change the character of the Building to less than a first class office building.
2. | Commencement Date; Early Entry; Holding Over. |
2.1 This Lease shall not be void or voidable, nor shall Landlord be subject to any liability if Landlord is unable to deliver the Premises to Tenant on the Commencement Date for any reason. If this Lease is not a renewal or extension of a prior lease and if there is a Construction Agreement attached to this Lease, then, except for Tenant Delays, as defined in said Construction Agreement, payment of rent shall not commence until the Premises are available for occupancy by Tenant with all work to be performed pursuant to the Construction Agreement substantially completed.
2.2 If Section 1.1.2 of this Lease does not provide for a fixed Commencement Date, then within thirty (30) business days after Tenant’s occupancy of the Premises, or as soon thereafter as possible, Landlord and Tenant shall execute a written statement setting forth the Commencement Date, and the date of expiration of this Lease and Tenant’s confirmation that it has accepted the Premises as being in the condition required under the Construction Agreement; provided, however, the enforceability of this Lease shall not be affected should either party fail or refuse to execute such statement. If Tenant fails to execute and return or object to any such written statement within ten (10) days of its delivery from Landlord to Tenant, Tenant shall be deemed to have acknowledged and confirmed the information contained in said statement.
2.3 Provided that Tenant or Tenant’s agents do not interfere with or delay the Substantial Completion of Landlord’s Work in the Premises, or otherwise cause additional cost or expense to Landlord, Tenant and Tenant’s agents shall be permitted to enter the Premises up to fourteen (14) days prior to the Commencement Date for the purpose of installing telephones, cabling, fixtures and equipment. Such early entry shall be subject to all reasonable rules imposed by Landlord or Landlord’s contractor and all of the provisions of this Lease including, without limitation, Tenant’s insurance obligations under Section 12 of this Lease, except that Tenant shall not be required to pay Rent during such period of early entry. Tenant shall not have the right to use the Premises for the conduct of its business prior to the Commencement Date without Landlord’s prior written consent.
2.4 Should
Tenant (or any subtenant, assignee or other party occupying the Premises by, through, under, or with the permission of Tenant),
without Landlord’s written consent, hold over after termination of this Lease, Tenant shall, at Landlord’s option,
become either a tenant at sufferance or a month-to-month tenant upon each and all of the terms herein provided as may be applicable
to such a tenancy and any such holding over shall not constitute an extension of this Lease. During such holding over, Tenant
shall pay in advance, monthly, Basic Rental at a rate equal to one hundred fifty percent (150%) times the rate in effect for the
last month of the Term of this Lease, in addition to, and not in lieu of, all other payments required to be made by Tenant hereunder
including but not limited to Tenant’s Proportionate Share of any increase in Direct Costs. Nothing contained in this Section
2.4 shall be construed as consent by Landlord to any holding over of the Premises by Tenant, and Landlord expressly reserves the
right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or earlier
termination of the Term. If Tenant fails to surrender the Premises after the expiration or termination of this Lease, Tenant agrees
to indemnify, defend and hold Landlord harmless from and against all costs, loss, expense or liability_
, including w
i
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limitation, cla
i
ms made by any succ
ee
ding t
e
nant
and real estate brokers
claims and attorney’s fees and costs
, unless it is a claim made bv any succeeding tenant
.
3. | Base Rent; Adjustments; General Rent Provisions. |
3.1 Tenant shall pay to Landlord as Base Rent for the Premises, without prior notice or demand, the amount specified in Article 1.1.3, in advance, on or before the first day of each and every calendar month during the Lease Term. All payments received by Landlord from Tenant shall be applied to the oldest payment obligation owed by Tenant to Landlord.
3.2 For any period during the Lease Term which is less than one (1) month, Base Rent, Additional Rent (defined in Article 4.1), and any other sums which are payable by Tenant under this Lease (all of which shall be deemed “Rent”) shall be prorated based upon a thirty (30) day month.
3.3 Rent under this Lease shall be paid to Landlord, without deduction, offset or abatement (except as otherwise may be specifically set forth in this Lease) at Landlord’s address specified in Article 1.1.9 above. Landlord shall have the right to accept all payments of Rent and other payments, whether full or partial, and to negotiate checks in payment thereof without any waiver of its rights, unless there has been a mutually agreed upon accord and satisfaction, irrespective of any conditions to the contrary sought to be imposed by Tenant. Rent paid by check shall not be deemed paid to Landlord until funds clear and the check is honored. If any check, draft or similar instrument is not paid by the bank or other financial institution on which it is drawn, Landlord shall have the right to require Tenant to make future payments by certified funds.
4. | Additional Rent. |
4.1 Computation of Additional Rent. In December of each year of the Lease Term, or as soon thereafter as reasonably practical, Landlord shall provide Tenant with its good faith written estimate of the amount, if any, by which the Tax Costs (as defined in Article 4.3 below) and/or the Operating Costs (as defined in Article 4.4 below) for the coming calendar year are projected to exceed those of the Base Year (collectively, the “Estimated Pass-through Costs”). On or before the first day of each month during the ensuing calendar year, Tenant shall pay to Landlord as Additional Rent, in addition to and at the time provided for payment of Base Rent, one-twelfth (1/12th) of the amount computed by multiplying Tenant’s Percentage Share by the amount of the Estimated Pass-through Costs for Taxes and Operating Costs. In the event that Landlord does not provide Tenant with such written estimate in December, Tenant shall continue to make monthly payments of Additional Rent on the basis of the prior year’s Estimated Pass-through Costs until the first day of the month after Landlord provides such written estimate to Tenant, at which time Tenant shall commence making monthly Additional Rent payments based upon the revised Estimated Pass-through Costs, and additionally Tenant shall pay to Landlord a one-time retroactive sum for each month that has elapsed since December the amount by which the Additional Rent payable pursuant to the revised Estimated Pass-through Costs exceeds the amount Tenant paid based on the prior year’s Estimated Pass-through Costs. Under no circumstances shall the provisions of this Article 4 cause the Base Rent to be reduced. Neither Landlord’s failure to deliver, nor the late delivery of such statement or statements shall constitute a default by Landlord hereunder, nor a waiver of Landlord’s right to receive any Additional Rent or to later collect Additional Rent accrued as provided above. The Tax Costs and Operating Costs for the Base Year shall be deemed to constitute Landlord’s agreed contribution to Operating Costs and Tax Costs and is neither a representation nor a warranty that such Base Year costs will reflect actual Operating Costs or Tax Costs for any succeeding year. If, during any calendar year including the Base Year, the Building is less than ninety-five percent (95%) occupied, then for the purpose of computing Additional Rent due hereunder, the variable components of the Operating Costs and Tax Costs actually incurred during such calendar year shall be increased to approximate the amounts which would have been payable if the Building had been ninety-five percent (95%) occupied.
4.2 Reconciliation of Estimated Pass-through Costs to Actual. By July 1st of each year after the Base Year or as soon thereafter as practical, Landlord shall furnish to Tenant a written statement of reconciliation (the “Reconciliation”), showing Landlord’s actual Operating Costs and Taxes for the preceding calendar year, together with a statement of adjustments necessary to reconcile any sums paid by Tenant hereunder during such calendar year pursuant to Article 4.1 with those sums actually payable and due hereunder for such calendar year. Any reference to Landlord’s “actual” Operating Costs or Tax Costs in this Article 4 shall be deemed to include an allowance for adjustment to reflect the level of occupancy of the Building to the extent provided above. If the Reconciliation shows that Tenant owes additional sums hereunder, Tenant shall pay such sums to Landlord within thirty (30) days after receipt of the Reconciliation. If the Reconciliation shows that Tenant overpaid Additional Rent, such overpayment shall be refunded or credited to Tenant within thirty (30) days after Tenant’s receipt of the Reconciliation. Landlord’s obligation to reconcile, Tenant’s obligation to pay, and Landlord’s obligation to credit or refund shall survive the expiration or sooner termination of the Lease. Landlord’s failure to deliver the Reconciliation to Tenant as provided herein shall not constitute a default by Landlord nor waive Landlord’s right to collect all Additional Rent and other sums due hereunde r, nor shall it waive Tenant’s right to receive any refund or credit due hereunder . Where only a portion of a calendar year falls within the Lease Term, Landlord shall reasonably prorate the estimated (or actual) Operating Costs and/or Tax Costs for such calendar year.
4.3 Tax Costs. “Tax Costs” shall mean the sum of the following: any and all real property taxes, assessments (including, but not limited to, general and special assessments and possessory interests), charges, surcharges, license and other fees, levies, cost of improvement bonds and any and all other taxes (other than net income, franchise, inheritance and estate or gift taxes of Landlord) on or relating to all or a portion of the Project including any legal or equitable interest of Landlord therein, that may be imposed, levied, assessed or charged for any reason by any authority having the direct or indirect power to tax including, but not limited to, the United States or the state, county or city in which the Project is located, or any other local governmental authority, agency, district or political subdivision thereof, together with personal property taxes, assessments, fees and charges (other than those paid by Tenant pursuant to Article 26 below) and fees of tax consultants and attorneys retained to seek a reduction, to contest or to act in some
other manner in connection with any of the foregoing Tax Costs, together with any tax, assessment or other amounts (including, without limitation, commercial rental taxes) imposed, levied or charged as a substitute for or a supplement to the foregoing. Tax Costs shall include increases caused by increases in tax rates as well as increases caused by additional or increased assessed values for any reason including changes in ownership of the Building or the Project.
4.4 Operating Costs.
4.4.1 Definition of Operating Costs. “Operating Costs” shall mean the sum of any and all costs, expenses and disbursements of any kind paid or incurred by Landlord in connection with the ownership, management, operation, security, maintenance, and repair of the Project, including, but not be limited to, salaries, wages, benefits and related costs for employees; management fees, either as charged to Landlord by outside management companies or not exceeding the amount typically charged by outside management companies if Landlord or Landlord’s affiliate manages the Project; charges for utilities and services provided to all tenants in accordance with Article 13.1 herein, including but not limited to janitorial services, window cleaning, elevator services, HVAC services, security services (including any taxes thereon); the cost of insurance; outside accounting and legal fees; office supplies; building cleaning supplies and materials; garbage and waste collection; the cost of performing Required Alterations (defined below) and a reasonable allowance for depreciation (or amortization) with respect to machinery and equipment and other capital expenditures and improvements; provided, however, that the only depreciation (or amortization and expenditures) includable in Operating Costs shall be a reasonable allowance for depreciation (or amortization) over the useful life of the improvements, as determined by Landlord’s accountants to conform with applicable tax laws.
4.4.2 Definition of Required Alterations. “Required Alterations” are any changes, alterations or improvements to the Project (excluding those attributable exclusively to Tenant’s specific use and occupancy of the Premises, which alterations shall be Tenant’s sole responsibility), including, but not limited to, the installation or modification of electrical, mechanical, water sprinkler, or other energy or life safety systems or components, required by any rule, regulation or law which is enacted after the Commencement Date. The capital costs relating to such Required Alterations, including all related financing costs, shall be amortized over the useful life of the Required Alterations, as determined by Landlord’s accountants to conform with applicable tax laws.
4.5 Audit. If Tenant disputes the amount of any Additional Rent due under Article 4 as set forth on a Reconciliation, Tenant shall have the right, within ninety (90) days of receipt of the Reconciliation and at a mutually convenient time, to inspect Landlord’s accounting records relating to Operating Costs and Tax Costs at Landlord’s accounting office during its normal business hours and, if after such inspection Tenant still disputes the amount of Additional Rent owed, Tenant may retain a mutually-acceptable national or regionally-recognized independent certified public accounting firm to certify to the parties its determination of the proper amount of Operating Costs and Tax Costs payable by Tenant. After such determination has been made, and if a dispute continues to exist between Tenant and Landlord, an independent accountant mutually-agreed upon by both Landlord and Tenant may be retained to determine the amount of any Additional Rent due. If the certification discloses that the Operating Costs and Tax Costs charged to Tenant exceed the audited operating costs by more than five percent (5%), the cost of such certification shall be borne by Landlord. Otherwise, the cost of the certification shall be borne by Tenant. No accountant or other firm or individual designated under this Section 4.5 may be compensated on a contingent basis. Tenant’s failure to object to any Reconciliation within ninety (90) days of its delivery to Tenant shall constitute Tenant’s agreement with same.
5. Security Deposit. Concurrently with Tenant’s execution of the Lease hereof, Tenant shall pay to Landlord a security deposit in the amount specified in Article 1.1.7 to secure the performance and observance of all obligations and covenants hereunder. Landlord may apply such deposit to remedy any failure by Tenant to perform or observe any of its obligations and covenants hereunder or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default. If Landlord applies all or any portion of such security deposit pursuant to the foregoing, Tenant shall immediately upon receipt of notice thereof replenish such security deposit in full. Provided that Tenant complies with and performs all of its obligations under this Lease, Landlord shall return any unapplied portion of such security deposit to Tenant not later than thirty (30) days after the expiration or sooner termination of this Lease. Landlord shall not be required to keep such security deposit separate from its general funds and Tenant shall not be entitled to any interest on such security deposit.
6. | Restrictions on Use; Compliance with Laws. |
6.1 Tenant shall use and occupy the Premises only for the specific uses, and those related thereto, specified in Article 1.1.8 above, and for no other purpose whatsoever. Tenant shall use and occupy the Premises in accordance with Article 36, Rules and Regulations. In addition to the rules and regulations in Article 36, Tenant shall not: (a) do or permit anything to be done in or about the Premises which will in any way obstruct or materially interfere with the rights of other tenants or occupants of the Building or injure or annoy them; (b) use or allow the Premises to be used for any unlawful purpose; (c) cause or maintain or permit any nuisance in or about the Premises; (d) cause or permit any hazardous or toxic waste, substance or material, other than generally used office materials, to be brought to the Premises or used, handled, stored or disposed of in or about the Premises; (e) conduct business or other activity in or about the Premises that places an unreasonable or excessive burden upon the public and Common Areas or the utility systems of the Project; or (f) commit or suffer the commission of any waste in or about the Premises.
6.2 Tenant shall not place a load upon any floor that exceeds 70 pounds per square foot, without Landlord’s prior written approval. Tenant shall not install any equipment, apparatus or device in the Premises which causes vibrations or excessive noise.
6.3 Tenant shall not use the Premises or permit anything to be done in or about the Premises which in any way conflicts with any law, statute, ordinance or governmental rule, requirement or regulation now in force or which may hereafter be enacted or promulgated (collectively, “Applicable Laws”). Tenant shall, at its sole cost and expense, promptly comply with all Applicable Laws, and with the requirements of any board of fire underwriters or other similar body now or hereafter constituted relating to or affecting the use or occupancy of the Premises. Tenant shall not do or permit anything to be done in or about the Premises or bring or keep anything therein which will in any way increase the rate of any insurance upon the Building or any of its contents, or cause cancellation of said insurance or otherwise affect said insurance in any manner. Tenant shall be responsible for any increase in cost of Landlord’s insurance caused by or resulting from Tenant’s breach of the obligations contained herein.
6.4 Pursuant to Article 6.1(d) above, other than commonly used business office supplies used in accordance with all laws and regulations, Tenant shall not permit nor use, generate, store, transport or dispense on the Premises any Hazardous Materials (defined below) without the prior written consent of Landlord which consent may be withheld in Landlord’s sole and absolute discretion. Any such Landlord consent shall be conditioned upon (a) Tenant’s separate written agreement to handle, store, use and dispose of such materials in accordance with all Applicable Laws, and (b) Tenant’s separate written agreement to indemnify and hold Landlord harmless from any and all liability including consequential damages directly or indirectly arising out of Tenant’s storage, use, or disposal of such materials, including without limitation the cost of any required or necessary repair, clean up or detoxification as a result thereof. Tenant’s failure to provide a separate written agreement to handle, store, use and dispose and to indemnify Landlord shall not abrogate or eliminate Tenant’s obligations hereunder.
6.5 As used herein, the term “Hazardous Material” means any hazardous or toxic substance, material or waste which is or becomes regulated by any local governmental authority, the state in which the Project is located or the United States Government. The term “Hazardous Material” includes, without limitation, any material or substance that is (i) defined as a “Hazardous Substance” under appropriate state law provisions, (ii) petroleum, (iii) asbestos, (iv) designated as a “Hazardous Substance” pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. section 1321), (v) defined as a “Hazardous Waste” pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. section 6901 et seq., (vi) defined as a “Hazardous Substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. sections 9601 et seq., or (vii) defined as a “Regulated Substance” pursuant to Subchapter IX, Solid Waste Disposal Act (Regulation of Underground Storage Tanks), 42, U.S.C. sections 6991 et seq.
6.6 Excluding any preexisting asbestos and asbestos containing materials (“ACMs”) in the Building, Tenant shall, at Tenant’s sole expense and with counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord and Landlord’s shareholders, directors, officers, employees, partners, affiliates, and agents (“Landlord Indemnitees”) with respect to all losses arising out of or resulting from the release of any Hazardous Material in or about the Premises or the Project, or the violation of any Applicable Environmental Law, by Tenant or Tenant’s agents, contractors or invitees (other than Landlord and Landlord Indemnitees) pursuant to Article 6.4(b) above. This indemnification includes all losses including, without limitation, diminution of value, liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders or judgments), damages (including consequential damages, and punitive damages and costs (including attorney, consultant and expert fees and expenses)) resulting from the release of any Hazardous Substances or violation of any Applicable Environmental Law. This indemnification shall survive the expiration or sooner termination of the Lease.
6.7 TENANT ACKNOWLEDGES THAT LANDLORD HAS ADVISED TENANT THAT THE BUILDING CONTAINS, OR, BECAUSE OF ITS AGE, IS LIKELY TO CONTAIN ASBESTOS-CONTAINING MATERIALS (“ACMS”). CONSTRUCTION AND MAINTENANCE MATERIALS CONTAIN PROPOSITION 65-LISTED CHEMICALS, SUCH AS ROOFING MATERIALS MANUFACTURED WITH VINYL CHLORIDE MONOMER, BENZENE AND CERAMIC FIBERS, WHICH ARE KNOWN TO CAUSE CANCER, OR BIRTH DEFECTS OR OTHER REPRODUCTIVE HARM. CONSTRUCTION MATERIALS USED IN WALLS, FLOORS, CEILINGS AND OUTSIDE CLADDING CONTAIN CHEMICALS, SUCH AS FORMALDEHYDE RESIN, ASBESTOS, ARSENIC, CADMIUM AND CREOSOTE, WHICH ARE RELEASED AS GASES OR VAPORS DURING NORMAL DEGRADATION OR DETERIORATION, AND AS DUST OR PARTICULATE WHEN DISTURBED DURING REPAIRS, MAINTENANCE OR RENOVATION, ALL OF WHICH CAN LEAD TO EXPOSURES.
7. | Improvements and Alterations. |
7.1 Alterations, Additions or Improvements. Without the prior written consent of Landlord, Tenant shall not make nor cause to be made alterations, additions, or improvements (collectively, “Alterations”) in, on or to any part of the Premises or the Project, except to install freestanding furniture, where such freestanding furniture does not place a load on the floor that exceeds 70 pounds per square foot. Any Alterations to the Premises desired by Tenant shall be made in accordance with plans and specifications approved in advance in writing by Landlord, in accordance with all Applicable Laws and pursuant to any applicable governmental permits. Landlord’s approval of Tenant’s plans and specifications shall not constitute Landlord’s representation or warranty as to the adequacy of the plans and specifications or their compliance with Applicable Laws. Landlord shall have the absolute right to withhold its consent to any proposed Alterations which (i) would adversely affect the Building’s heating, ventilation and air conditioning,
sanitary, electrical, life safety or other Building systems, (ii) would affect the structure of the Building, (iii) would be visible from outside of the Premises, (iv) would materially interfere with or disrupt other tenants in the Building or any work then being carried out therein by Landlord or its contractors.
7.2 Contractors for Improvements. All Alterations to the Premises desired by Tenant, other than any specified in the Approved Plans as defined in Exhibit B, if any, shall be made by Landlord or contractors selected by Landlord for Tenant’s account.
7.3 Landlord’s Consent to Improvements. Landlord may impose as a condition to its consent to Alterations desired by Tenant such requirements as Landlord may reasonably deem necessary including, without limitation, requirements relating to the manner in which the work is done and the times during which the work is to be accomplished or an additional security deposit to cover the potential damage caused by removing such improvements at the expiration or sooner termination of the Lease. Landlord shall also have the right to require Tenant to obtain a completion bond for any Alterations to be made by Tenant. At Landlord’s request, but at Tenant’s sole cost and expense, at the expiration or sooner termination of this Lease, Tenant shall have Landlord’s contractor remove any and all Alterations in the Premises caused to be installed by Tenant other than the initial Tenant Improvements described in Article 7.4 below except that Landlord may require that Tenant remove any voice or data wiring and cabling whether installed by Tenant or by Landlord for Tenant. Landlord’s contractor at Tenant’s sole cost and expense shall repair any damage done to the Premises in connection with such removal.
7.4 Initial Tenant Improvements. If this Lease is not a renewal or extension of a prior lease, then Landlord shall construct or have Landlord’s contractor construct the initial improvements in the Premises (the “Tenant Improvements”), if any, pursuant to Exhibit B, if any. Tenant may install certain movable personal property (e.g., file systems, furniture) in the Premises, which Tenant shall remove upon the expiration or earlier termination of the Lease.
7.5 Standard for Improvements. All Alterations to the Premises shall be manufactured and installed in a good, workmanlike, diligent, prompt and expeditious manner in compliance with all Building specifications and Applicable Laws.
8. | Repairs and Maintenance. |
8.1 The Premises at Tenant’s move-in will be in good operating condition, free of debris and structurally sound in accordance with industry standards in the Project area. By taking possession of the Premises, Tenant shall be deemed to have conclusively agreed to accept the Premises as being in good order, condition and repair, subject to “punchlist” items of which Tenant notifies Landlord within ten (10) days of taking occupancy and latent defects. Except as required by Article 20 below and ordinary wear and tear, Tenant shall, at all times during the Lease Term and at Tenant’s sole cost and expense, keep the Premises and every part thereof in good condition, order and repair except repairs resulting from the negligence or willful misconduct of Landlord or Landlord’s representatives, employees or other agents (collectively, “Landlord’s Agents”). Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, or maintain any nonstandard items installed in the Premises by or at the request of Tenant, except as specified in Articles 13 and 20 below or in Exhibit B, if any. No representations relating to the condition of the Premises, the Building or the Project have been made by Landlord or Landlord’s Agents to Tenant, except as may be specifically set forth in this Lease.
8.2 Subject to the provisions of Article 8.1 above and Article 20 below, Landlord shall maintain the Common Areas, the foundation and structural portions of the Building, and the plumbing, heating, ventilation and air conditioning (“HVAC”), fire, life, safety, mechanical and electrical systems outside of the Premises providing the services and utilities to be furnished by Landlord pursuant to Article 13.1 below, in good order and condition; provided, however if any maintenance and repairs are caused by the act, neglect, fault, or omission of any duty by Tenant or Tenant’s agents, servants, employees, or invitees (collectively, “Tenant’s Agents”), Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure persists for an unreasonable time after Tenant gives written notice to Landlord of the need for such repairs or maintenance. Notwithstanding anything in this Lease to the contrary, in the event of an interruption in essential services to the Premises (defined for these purposes as the failure to provide HVAC service, electrical service, elevator service, water or restroom facilities) or Tenant’s access to Premises is materially impaired, and such interruption or impairment is caused by Landlord’s or Landlord’s Agent’s negligent or willful misconduct and continues for a period of five (5) consecutive business days or twenty (20) days in any one calendar year, Tenant shall be entitled to an abatement of Rent for the period that such services are not provided where such interruption or impairment materially interferes with the normal business conduct of Tenant in the Premises and Tenant is unable to and does not use the Premises. If any such interruption occurs during a period when Tenant is not otherwise required to pay Rent, Tenant’s free rent period shall be extended for the number of days that the services were not provided. Tenant waives the right to make repairs at Landlord’s expense or terminate this Lease under any law, statute or ordinance now or hereafter in effect.
9. Liens. Tenant shall keep the Project free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. If within ten (10) days following written notice to Tenant of the imposition of any such lien, Tenant does not cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other remedies provided herein and at law or in equity, the right to cause the lien to be released by such means as it deems proper including, but not limited to, payment of the claim giving rise to such lien without inquiry into the validity of such lien. All such sums paid by Landlord and all expenses incurred in connection therewith shall be considered Additional Rent and shall
be payable to Landlord by Tenant immediately after receipt of notice from Landlord, with interest at the Interest Rate (as defined in Article 27 below). Landlord shall have the right at all times to post and keep posted on the Premises, any notices permitted or required by law, or which Landlord shall deem proper, for the protection of Landlord, the Project and by other parties having an interest therein from mechanic’s and materialmen’s liens. Tenant shall give Landlord at least fifteen (15) business days prior written notice of commencement of any work on the Premises.
10. | Assignment and Subletting. |
10.1 Tenant shall not have the right to assign the Lease, or sublease all or any portion of the Premises (a “Transfer”) without Landlord’s prior written consent, which shall not be unreasonably withheld, conditioned or delayed. Any Transfer without Landlord’s prior written consent shall be voidable, and, in Landlord sole election, shall constitute a material default under this Lease. In no event shall Tenant pledge or otherwise hypothecate this Lease or its interest in this Lease.
10.2 Landlord and Tenant agree that, in addition to such other reasonable grounds Landlord may assert for withholding its consent, it shall be reasonable to withhold its consent to any proposed Transfer where any one or more the following conditions exist:
(a) The proposed assignee or sublessee (a “Transferee”) is, in Landlord’s judgment of a character or reputation that is not consistent with those businesses customarily found in a Class A office building in Century City.
(b) The proposed Transferee is engaged in a business or intends to use all or any portion of the Premises for purposes that are not consistent with those generally found in the Building or other Class A buildings in Century City or which is materially different from Tenant’s use of the Premises.
(c) The proposed Transferee is not a party of sufficient financial worth or financial stability in light of the responsibilities involved under the sublease, if a sublessee, or the Lease, if an assignee, on the date consent is requested, or has demonstrated a prior history of credit instability or credit unworthiness.
(d) The proposed Transfer will result in more than a reasonable and safe number of occupants within the Premises.
(e) The proposed Transferee’s proposed use of the Premises may be detrimental to the business of one or more other tenants of the Building or will cause Landlord to be in violation of another lease or agreement to which Landlord is a party, or would give another occupant of the Building a right to cancel its lease.
(f) The proposed Transfer would cause a breach by Landlord of any loan obligation or agreement, any covenants, conditions, restrictions and lease obligations of record, or any insurance policy. (Upon Tenant’s request, Landlord shall provide Tenant with a list of any existing rights in favor of any other tenant in the Building.)
(g) The proposed Transferee is an existing tenant in the Building and Landlord has sufficient space available in the Building to accommodate such tenant.
(h) The proposed Transferee is a party with whom Landlord is then negotiating for space in the Building or with whom Landlord has negotiated for space in the Building within the prior six (6) months.
10.3 If at any time during the Term, Tenant wishes to Transfer this Lease or any interest therein, then Tenant shall give Landlord not less than thirty (30) days’ prior written notice of its intention to transfer this Lease (“Transfer Notice”). Tenant shall submit the following information on Landlord-approved forms with the Transfer notice and with a written request for Landlord’s consent to any Transfer:
(i) All Transfer agreements and related documents;
(ii) Business and personal credit applications completed on Landlord’s standard application forms, and information (including references and such financial documentation as Landlord shall reasonably prescribe) concerning the character and financial condition of the proposed Transferee, including but not limited to financial statements or other financial information, certified by a certified public accountant, sufficient to enable Landlord to make an informed judgment as to the financial capabilities of the proposed Transferee, and
(iii) Such other information, related to the proposed Transfer and the parties involved therein as Landlord reasonably requests in writing.
Tenant shall also deliver to Landlord with any request for a Transfer the fee required by Landlord (not to exceed the sum of $2,000) to defray Landlord’s legal fees and administrative costs of reviewing Tenant’s request.
10.4 Landlord’s Consent.
10.4.1 Landlord shall have thirty (30) days after Tenant’s Transfer Notice is received, together with the information required pursuant to Section 10.5 above and such other information as may reasonably be requested by Landlord, to advise Tenant of Landlord’s (i) termination of this Lease as provided in Section 10.4.2 below, (ii) consent to such proposed Transfer or (iii) withholding of consent to such proposed Transfer.
10.4.2 If Tenant proposes to assign this Lease or sublet all or substantially all of the Premises, Landlord shall have the right, in its sole and absolute discretion, to terminate this Lease. If Landlord elects to terminate this Lease, this Lease shall terminate as of the effective date of the proposed Transfer as set forth in Tenant’s notice, and Landlord shall have the right (but no obligation) to enter into a direct lease with the proposed Transferee.
10.4.3 Tenant acknowledges that if Landlord consents to a Transfer, Landlord’s consent shall be based upon the criteria listed in Sections 10.4.3 (a) through (d) below, and subject to Landlord’s right to unilaterally disapprove of any proposed Transfer, based on the existence of any condition contained herein. If Landlord provides its consent within the time period specified, Tenant shall be free to complete the Transfer to the Transferee contained in Tenant’s notice, subject to the following conditions:
(a) The Transfer shall be on the same terms as were set forth in the notice given to Landlord;
(b) The Transfer shall be documented in a written format that is reasonably acceptable to Landlord, which form shall specifically include the Transferee’s acknowledgement and acceptance of Tenant’s obligations contained in this Lease, insofar as applicable;
(c) The Transfer shall not be valid, nor shall the Transferee take possession of the Premises, or subleased portion thereof, until an executed duplicate original of such Transfer has been delivered to Landlord; and
(d) The Transferee shall have no further right to assign this Lease and/or sublease the Premises.
10.4.4 If Landlord consents to a proposed sublease: (a) each subtenant shall agree that if Landlord gives such subtenant notice that Tenant is in default under this Lease, such subtenant shall thereafter make all sublease or other payments directly to Landlord, which sublease payments will be received by Landlord without any liability to honor the sublease (except to credit such payments against sums due under the Lease) and, (b) each subtenant shall agree that, upon Landlord’s request, it will attorn to Landlord or its successors and assigns should the Lease be terminated for any reason, voluntarily, or otherwise, except that in no event shall Landlord or its successors or assigns be obligated to accept such attornment.
10.4.5 If Tenant contends that Landlord has acted unreasonably in withholding its consent to a proposed Transfer, Tenant’s sole remedy shall be an action for declaratory relief and in no event shall Landlord be liable for monetary damages nor shall Tenant have the right to terminate this Lease as a result of Landlord’s withholding of consent to a proposed Transfer.
10.5 The parties acknowledge that Landlord’s economic stake in the Project is significantly greater than Tenant’s economic stake in this Lease. Accordingly, the parties have expressly bargained for the following allocation of any consideration to be derived by Tenant from any Transfer of this Lease. Tenant shall be required to pay Landlord fifty percent (50%) of any rent, key money, transfer consideration, or other premiums of any kind or nature in connection with the Transfer in excess of the Base Rent payable by Tenant under this Lease on a per rentable square foot basis net of Tenant’s reasonable out of pocket costs incurred (including broker fees) to facilitate the transfer (the “Transfer Premium”). Such payments shall be paid in the same manner and at the same time as Tenant receives such Transfer Premium, whether such Transfer Premium is in the form of an increased rental, a lump sum payment or any other form of consideration. If such Transfer pertains to a portion of the Premises only, any Transfer Premium shall be computed on the assumption that Tenant’s Rent and other sums due hereunder are allocable on a pro rata per square foot basis.
10.6 The provisions of this Article 10 shall apply regardless of whether or not the Transfer is made in compliance with the provisions of this Lease. Any payments made to Landlord pursuant to this Article 10 shall not cure any default under this Lease arising from such Transfer. Tenant shall not artificially structure any Transfer or take any other steps to circumvent or to reduce the amount payable to Landlord under this Article 10. If Tenant does so, then the amount payable to Landlord under this Article 10 shall be the amount that would have been payable to Landlord had the Tenant not artificially structured the Transfer or otherwise tried to circumvent this Article 10.
10.7 No Transfer shall release Tenant from any of its obligations under this Lease. Landlord’s consent to any one Transfer shall apply only to the specific transaction thereby authorized and such consent shall not waive the duty of Tenant or any Transferee to obtain Landlord’s consent to any other or subsequent Transfer, or modify or limit Landlord’s rights hereunder in any way. Landlord’s acceptance of Rent directly from any Transferee shall not be construed as Landlord’s consent thereto nor Landlord’s agreement to accept the attornment of any subtenant in the event of any termination of this Lease. In no event shall
Landlord’s enforcement of any provision of this Lease against a Transferee be deemed a waiver of Landlord’s right to enforce any Lease provision against Tenant or any other person.
10.8 If Tenant is a corporation, an unincorporated association or a partnership (including, without limitation, a limited liability company (“LLC”) or a limited liability partnership (“LLP”)), any cumulative transfer, assignment or hypothecation of any stock or interest in such corporation, association or partnership greater than thirty percent (30%) thereof, or any cumulative transfer, assignment or hypothecation (other than in the ordinary course of business) of any asset of such corporation, association, partnership, LLC or LLP greater than thirty percent (30%) thereof (“Change in Control”), shall be deemed an assignment within the meaning and provisions of this Article 10. The foregoing shall not apply to corporations where thirty percent (30%) or more of the stock is traded through a regional, national or over-the-counter exchange. Provided that the Transferee’s use is permitted under the Lease and provided that Tenant notifies Landlord of its intention at least thirty (30) days prior to such Transfer, then notwithstanding anything in this Lease to the contrary, Tenant shall have the right, without obtaining Landlord’s consent or paying any Transfer Premium, to do the following: (a) assign this Lease or sublet all or any part of the Premises to a parent, wholly-owned subsidiary or affiliate of Tenant; (b) transfer a majority or controlling interest in the Tenant to an entity with a tangible net worth greater than or equal to that of Tenant either on the date of Transfer of the date of execution of this Lease, whichever is higher; or (c) assign this Lease or sublet all or any part of the Premises to an entity into which Tenant is merged or by which it has been acquired provided the Transferee has a tangible net worth greater than or equal to that of Tenant either on the date of Transfer or the date of execution of this Lease, whichever is higher.
10.9 Notwithstanding any of the foregoing provisions, covenants and conditions to the contrary, in the event that this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, 11 U.S.C. 101 et seq. (the “Bankruptcy Code”), any and all moneys or other consideration payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of the Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all moneys or other consideration constituting Landlord’s property under the preceding sentence not paid or delivered to Landlord shall be held in trust by the bankruptcy trustee in possession or debtor in possession for the benefit of the Landlord and shall promptly be paid to or turned over to Landlord. If Tenant proposes to assign this Lease pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment setting forth (a) the name and address of such person, (b) all of the terms and conditions of such offer, (c) the adequate assurance provided by Tenant to assure such person’s future performance under the Lease including, without limitation, the assurance referred to in Section 365 of the Bankruptcy Code, or any such successor or substitute legislation or rule thereto, shall be given to Landlord by Tenant no later than twenty (20) days after receipt of such bona fide offer by Tenant. Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption. Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions, attorneys’ fees, tenant improvement costs or other charges which may be payable out of the consideration to be paid by such person for the assignment of this Lease. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. Subject to this Article 10 and Article 20 below, the Lease provisions shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns.
10.10 Any Transfer that does not comply with provisions of this Article 10 shall be voidable at Landlord’s sole election.
11. | Waiver; Indemnity. |
11.1 Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to personal property of Tenant, or injury to persons in or about the Premises. Notwithstanding any contrary provision herein, and except to the extent arising from the negligence or willful misconduct of Landlord, or Landlord’s Agents, Landlord shall not be liable and Tenant hereby waives all claims against Landlord for any injury or damage to any person or property or any other loss (including, but not limited to loss of income), which may be sustained by the person, goods, wares, merchandise or property of Tenant, or Tenant’s Agents, or any other person in or about the Premises, the Building, or the Project by or from any cause whatsoever. Without limiting the generality of the foregoing, Landlord shall not be liable for any damage caused by or resulting from: (a) water leakage of any character from the roof, walls, windows, basement, or any other portion of the Premises or the Project; (b) fire, steam, electricity, gas or oil, or by any interruption of utilities or services, or by any tenant, occupant, or other person; or (c) any other cause whatsoever, in, on or about the Premises or the Project. Notwithstanding any contrary provision in this Lease, Landlord shall not in any event be liable for consequential damages hereunder.
11.2 Subject to Article 12.7 below, except to the extent that claims arise from the negligence or willful misconduct of Landlord, Tenant shall indemnify and hold Landlord (as used in this Article 11.2, “Landlord” shall refer to Landlord and Landlord’s Agents) harmless from and against any and all claims, demands, losses, damages, liabilities, costs and expenses (including, but not limited to, reasonable attorney’s fees and costs) arising in or about the Premises or from Tenant’s use or enjoyment of the Project, the conduct of Tenant’s business, any act or omission, work or thing done, permitted or suffered by Tenant (or any officer, employee, agent, contractor, representative, licensee, guest, invitee or visitor thereof) in or about the
Project, or any default under this Lease by Tenant. If any action or proceeding is brought against Landlord by reason of any such matter, Tenant shall, upon notice from Landlord, defend Landlord in such action or proceeding at Tenant’s expense. The provisions of this Article 11 shall survive the expiration or termination of this Lease.
11.3 Except to the extent that claims arise from the negligence or willful misconduct of Tenant or Tenant’s Agents, and except as provided in Section 12.7 below, Tenant shall not be liable for and Landlord shall indemnify Tenant and hold Tenant harmless from and against all suits, actions, damages, liability and expense in connection with loss of life, bodily or personal injury or property damage arising from the negligence or willful misconduct of Landlord or Landlord’s Agents.
12. | Insurance. |
12.1 Throughout the Lease Term (and during any period prior to the Lease Term during which Tenant or Tenant’s Agents are in the Premises), Tenant shall carry and maintain, at its own expense, the following types, amounts and forms of insurance:
12.1.1 Commercial General Liability Insurance. A policy of commercial general liability insurance with a combined single limit of One Million Dollars ($1,000,000) per occurrence with Two Million Dollars ($2,000,000) aggregate coverage, in the name of Tenant (naming, as additional insureds, Landlord, its management company Held Properties, Inc., and, if requested by Landlord, any mortgagee, trust deed holder, or secured party with an interest in this Lease). Tenant’s liability coverage shall include, without limitation, all coverage typically provided by the Broad Form Comprehensive General Liability Endorsement, including broad form property damage, and premises-operations coverage, products-completed operations coverage, owners and contractors protective coverage, and the broadest form of contractual liability coverage, the last of which shall cover the insuring provisions of this Lease and the performance by Tenant of the indemnity agreements in Article 11 above. Such policy shall provide coverage on an occurrence basis. The amount of such insurance required hereunder shall be subject to adjustment from time to time as reasonably requested by Landlord, but Landlord shall not raise such coverage amounts to an extent where they materially exceed that customarily carried by prudent tenants in first class office buildings in the Project area.
12.1.2 Tenant’s Property Insurance. Property insurance coverage for: (a) all office furniture, trade fixtures, office equipment, merchandise and all other items of Tenant’s property in, on or about the Premises and the Project, including property installed by, for or at the expense of Tenant and (b) the Tenant Improvements and any Alterations. Tenant’s property insurance shall be written on the broadest available “all risk” (special causes of loss) policy form and shall include an agreed amount endorsement for no less than one hundred percent (100%) of the full replacement cost (new, without deduction for depreciation) of the covered items and property regardless of which party paid for the Tenant Improvements. The property insurance coverage shall include vandalism and malicious mischief coverage, sprinkler leakage coverage and earthquake sprinkler leakage coverage. In addition, Tenant shall maintain Worker’s Compensation Insurance in amounts required by law and business interruption, loss of income and extra expense insurance covering any damage, destruction or interruption to Tenant’s business equipment and covering all other perils, failures or interruptions sufficient to cover a period of interruption of not less than twelve (12) months.
12.2 Recovery for Tenant’s Negligence. All policies that Tenant is required to obtain pursuant to the provisions of Article 12.1 above shall be issued by companies legally authorized to do business in California with a Best Rating of not less than A(viii). Although named as an additional insured and subject to the provisions of Article 12.7 of this Lease, Landlord shall be entitled to recover under said policies for any loss occasioned to it, its servants, agents and employees, by reason of the negligence or willful misconduct of Tenant.
12.3 Delivery of Certificate, Policy and Endorsements. Prior to Tenant’s occupancy of the Premises, Tenant shall provide Landlord with evidence of compliance with Tenant’s insurance requirements under the Lease, including the endorsements specified in Article 12.1, and a certified copy of Tenant’s liability policies and certified certificates for all insurance policies regarding the Premises, executed by an authorized agent of the insurer or insurers. Each insurance policy shall provide that it may not be modified or canceled without thirty (30) days prior written notice to Landlord (by any means described in Article 25 below) and to any other additional insureds. At least thirty (30) days prior to the expiration of any of such policies, Tenant shall furnish Landlord with a renewal or binder therefor.
12.4 Blanket Insurance. Tenant may carry insurance by a combination of primary, excess and umbrella policies, provided that the policies are absolutely concurrent in all respects regarding the coverage afforded by the policies. The coverage of any excess or umbrella policy must be at least as broad as the coverage of the primary policy. All insurance policies carried by Tenant for Tenant’s Premises and personal property shall be primary and non-contributory with respect to any other insurance available to and purchased by Landlord.
12.5 Tenant’s Failure to Obtain Insurance. If Tenant fails to carry any insurance policy required hereunder or to furnish certificates pursuant hereto, Landlord may, upon not less than ten (10) days prior written notice, and without waiving Tenant’s default, obtain such insurance. Landlord may, at Tenant’s sole cost and expense, but is not required to purchase such insurance on behalf of Tenant. In such case, Tenant shall reimburse Landlord on demand for the cost thereof including interest at the Interest Rate specified in Article 27.
12.6 Landlord’s Insurance. During the Lease Term, Landlord shall procure and maintain property and liability insurance for the Project in such reasonable amounts, and with such reasonable coverage, as would be carried by a prudent owner of a similar building in Century City, or as any lien holder may require. Tenant acknowledges that it shall not be a named insured or an additional insured in such policies, and that it has no right to receive any proceeds from any such insurance policies carried by Landlord. Landlord may but shall not be required to carry insurance coverage for damages caused by flood or earthquake.
12.7 Waiver of Subrogation. Landlord and Tenant hereby waive all causes of action and rights of recovery against each other, against all subtenants or assignees of Tenant and against any other person or entity holding an interest in the Project (together, the “Affected Parties”) and against the agents, officers and employees of the Affected Parties for any loss occurring to the property of the Affected Parties resulting from any of the perils insured against under any and all insurance policies (including self-insurance) in effect at the time of any such loss or which are customarily covered by a policy required to be maintained under this Lease, regardless of cause or origin of such loss, including the negligence or willful misconduct of the Affected Parties or the agents, officers or employees of the Affected Parties. Landlord and Tenant shall each use commercially reasonable efforts to cause their respective insurers to issue an endorsement denying such insurer any rights of subrogation against the other party.
12.8 Increases in Premiums due to Tenant’s Use or Occupancy. If, after Landlord provides notice to Tenant that the insurance carrier is proposing increased premiums to the Project due to Tenant’s use or occupancy of the Premises, and Tenant fails to cease the offending use within ten (10) business days after receipt of such notice, Tenant shall pay said increases in insurance premiums upon Landlord’s demand therefor.
13. | Services and Utilities. |
13.1 Throughout the Lease Term, Landlord shall provide the following services and utilities twenty-four (24) hours per day on every day during the Lease Term, unless otherwise stated below.
13.1.1 Subject to all governmental rules, regulations and guidelines applicable thereto, Landlord shall provide heating, ventilation and air conditioning (“HVAC”) to the Premises in a manner consistent with a first class office building from Monday through Friday, from 8:00 a.m. to 6:00 p.m. and on Saturday from 9:00 a.m. to 1:00 p.m., except for the celebratory days of the following holidays: New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas (collectively “Business Hours”).
13.1.2 Landlord shall at all times provide electricity to the Premises for lighting and power of not less than three (3) watts per rentable square foot demand load on a continuous annualized basis. Landlord shall also provide electrical lighting in all Common Areas, parking facilities or storage areas and replace building standard lamps and ballasts as required.
13.1.3 Landlord shall provide hot and cold water to the Building’s rest rooms (and, as applicable, to any sink, refrigerator or dishwasher in the Premises).
13.1.4 Landlord shall provide passenger elevator service at all times; provided, however, after Business Hours, Landlord may decrease the availability of passenger elevator service so long as at least one car services the floor on which the Premises are located.
13.1.5 Landlord shall provide non-exclusive freight elevator service to Tenant, subject to reasonable and non-discriminatory scheduling by Landlord. After Business Hours, Tenant may be charged at a rate equal to Landlord’s cost of providing such freight elevator service.
13.1.6 Landlord shall provide janitorial services five (5) days per week, similar to that furnished in comparable office buildings in Century City and in accordance with the building standard janitorial and cleaning service specifications.
13.1.7 Landlord shall provide grounds care, including the sweeping of walkways and parking areas, and maintenance of the landscaping in an attractive manner consistent with other office buildings in Century City.
13.1.8 Landlord shall operate and maintain the Project in accordance with the standards of maintenance and operation as are customary for other comparable buildings in Century City.
13.1.9 Landlord shall provide controlled access to the Premises 24 hours a day, every day.
13.2 Without the prior written consent of Landlord, Tenant shall not use in the Premises any apparatus, device, machine or equipment that uses excess lighting, heating, ventilation or air conditioning, electricity or water; nor shall Tenant connect any apparatus or device to sources of electrical current or water except through existing electrical outlets or water pipes in the Premises. If Tenant requires electricity in excess of the amount provided pursuant to Article 13.1.2 herein, or any other resource in excess of that customarily supplied for use of similar premises in comparable buildings in the Project area or if Tenant requires heating, ventilating or air conditioning during non-Business Hours, Tenant shall first request the consent of Landlord. As a condition to its consent, Landlord may cause a separate metering device to be installed in the Premises, at Tenant’s cost and expense. Whether or not a separate meter is installed, Tenant shall promptly pay the cost of all excess resources consumed within the Premises, together with any additional administrative expenses incurred by Landlord in connection therewith. Any sums payable by Tenant to
Landlord under this Article 13 also shall be considered Additional Rent and may be included in any installment of Rent thereafter becoming due.
13.3 Landlord shall not be in default or be liable for any damages directly or indirectly resulting from any interruption of utilities or services caused by: (a) the installation or repair of any equipment in connection with the furnishing of utilities or services; (b) acts of God or the elements, labor disturbances of any character, any other accidents or any other conditions beyond the reasonable control of Landlord, or due to repairs or improvements to the Premises or the Project; or (c) the limitation, curtailment, rationing or restriction imposed by any governmental agency or service or utility supplier on use of water or electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or the Project. Furthermore, without any obligation or compensation to Tenant, Landlord shall be entitled to cooperate voluntarily in a reasonable manner with the efforts of national, state or local governmental agencies or service or utility suppliers in reducing energy or other resource consumption. If Landlord so cooperates, Tenant shall also reasonably cooperate therewith, provided it does not materially interfere with Tenant’s use of the Premises.
14. | Estoppel Certificate. Within ten (10) days after any written request from Landlord, Tenant shall execute and deliver to Landlord a certificate (the “Estoppel Certificate”) provided by Landlord’s current or prospective lender or prospective purchaser stating: (a) that this Lease is then in full force and effect and has not been modified (or if modified, setting forth all modifications or attaching all amendments to the Lease), (b) the then current Base Rent and the date to which said Rent has been paid, (c) whether or not Landlord is then under default of this Lease and if so, the nature of such default and date notice of default was given Landlord, and (d) such other matters as the party requesting such certificate may reasonably request. Landlord and Tenant intend that any existing or prospective lender or any prospective purchaser or assignee of Tenant may rely on such Estoppel Certificate. Failure of Tenant to provide Landlord with said Estoppel Certificate as provided above shall be a default under the Lease. |
15. | Subordination; Requirements of Lenders. |
15.1 This Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist affecting all or any portion of the Project, and (b) the lien of any mortgage or deed of trust which may now exist affecting all or any portion of the Project.
15.2 If any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a deed in lieu of foreclosure is made for any reason, then Tenant shall, at the request of the party succeeding to Landlord’s interest under this Lease, and notwithstanding any subordination, attorn to and become the tenant of the successor-in-interest. It shall be a condition to any future subordination of this Lease that the ground lessor, air space lessor, or mortgagee or beneficiary requesting such subordination shall agree that so long as Tenant is not in default under this Lease, Tenant’s possession of the Premises shall not be disturbed as a result of such termination, foreclosure or deed in lieu of foreclosure. Tenant shall execute and deliver, within fifteen (15) days of demand by Landlord, any additional, commercially reasonable documents evidencing the priority or subordination of this Lease and the attornment of Tenant with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust.
16. | Access by Landlord. |
16.1 Landlord (and its agents, contractors and employees) reserves the right, without abatement of Rent, to enter the Premises at any time to inspect the Premises, to supply janitorial services and any other service to be provided by Landlord to Tenant hereunder, to show the Premises to any prospective purchaser, beneficiary, mortgagee, to post notices of non-responsibility, to make any alteration, improvement or repair to the Premises required by law or voluntary governmental compliance or consented to by Tenant, or, during the last six (6) months of the Lease Term, to show the Premises to prospective tenants. For the purpose of making any alterations, improvement or repair to the Premises or any portion of the Project, Landlord may erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Project and the Premises where reasonably required by the character of the work to be performed and in conformance with good construction practices, provided that entrance to the Premises shall not be blocked thereby, and provided further that Landlord works expeditiously and uses its commercially reasonable efforts to minimize any interference with Tenant’s use of and access to the Premises. At Tenant’s election, Tenant may accompany Landlord and all persons entering under the authority or right of Landlord, during any such entry. Tenant hereby waives any claim for damages or abatement of Rent for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby, except as otherwise set forth in the Lease or to the extent arising from the negligence or willful misconduct of Landlord or Landlord’s Agents.
16.2 For each of the aforesaid purposes, Landlord shall at all times have and retain a key to all of the doors in, upon and about the Premises, excluding Tenant’s vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem reasonably necessary or proper to open said doors in any emergency, and any such entry to the Premises or portions thereof by Landlord shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. If at any time during the Lease Term Tenant wishes to re-key its Premises, all such re-keying shall be done by Landlord with locks and hardware supplied by Landlord all at Tenant’s sole cost and expense.
17. | Default by Tenant. |
17.1 The occurrence of any of the following shall constitute a breach of the Lease, and a default if not cured by Tenant within the time provided below to cure such breach:
17.1.1 Failure by Tenant to pay Rent or any amount due hereunder when such amount becomes payable in accordance with this Lease, or to duly, promptly and completely perform any obligation of Tenant under Articles 14 or 15 above, and continuation of such failure for a period of three (3) business days after receipt of the written statutory notice from Landlord to Tenant specifying the nature of such failure.
17.1.2 Failure by Tenant in the due, prompt and complete performance or observance of any other express or implied covenant, agreement or obligation of Tenant contained in this Lease, and the continuation of such failure for a period of thirty (30) days after written notice from Landlord to Tenant specifying the nature of such failure; provided, however, that if any such failure cannot reasonably be cured within such period, Tenant shall not be deemed to be in default hereunder if Tenant promptly commences such cure within such period and thereafter diligently pursues such cure to completion and completes such cure within ninety (90) days.
17.1.3 Tenant’s abandoning the Premises, which shall mean for these purposes, Tenant’s absence for a period of more than two (2) weeks from the Premises while otherwise in default of the terms and conditions of this Lease.
17.1.4 Tenant, its assignee, sublessee, other transferee, successor or any guarantor of this Lease gives to Landlord any financial statement or representation which proves to be materially false or materially misleading.
17.1.5 The insolvency of Tenant; the making by Tenant of any assignment for the benefit of creditors; the filing by or against Tenant of a petition to have Tenant adjudged bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy, insolvency or creditors’ rights in general (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); the appointment of a trustee or receiver to take possession of all or a substantial part of Tenant’s assets or of Tenant’s interest under this Lease, where such seizure is not discharged within sixty (60) days. The occurrence of any of the acts or events referred to in this Article with respect to any Guarantor of this Lease shall also constitute a default hereunder.
17.1.6 The attachment, execution or other judicial seizure of a substantial portion of Tenant’s assets or of Tenant’s interest in this Lease, where such seizure is not discharged within sixty (60) days.
17.2 The notices referred to in Article 17.1.1 and 17.1.2 above shall be in lieu of, and not in addition to, any notice required under Section 1161 et seq. of the California Code of Civil Procedure.
18. | Remedies of Landlord. |
18.1 In the event of Tenant’s default under this Lease as provided in Article 17 above, Landlord, at Landlord’s option, and without limiting Landlord in the exercise of any other right or remedy Landlord may have on account of such default, and without any further demand or notice, may terminate this Lease, recover possession of the Premises and/or, to the extent permitted by California Civil Code Section 1951.3 or any other law, remove all persons and property from the Premises, which property shall be stored by Landlord at a warehouse or elsewhere at the risk, expense and for the account of Tenant.
18.2 On termination of this Lease as provided in Article 18.1 above, Landlord shall be entitled to recover from Tenant the aggregate of:
18.2.1 The worth at the time of the award of the unpaid Rent, as defined in Article 3.2, late charges and interest earned as of the date of the termination hereof;
18.2.2 The worth at the time of the award of the amount by which the unpaid Rent, late charges, interest and other amounts due hereunder, which would have been earned after the date of termination hereof until the time of the award, exceeds the amount of such unpaid Rent, late charges and interest that Tenant proves could have been reasonably avoided by Landlord mitigating its damages;
18.2.3 The worth at the time of the award of the amount by which the unpaid Rent for the balance of the term hereof after the time of the award exceeds the amount of such unpaid Rent, interest and late charges that Tenant proves could have been reasonably avoided by Landlord mitigating its damages; and
18.2.4 Any other amount necessary to compensate Landlord for the detriment proximately caused by Tenant’s uncured default under this Lease, including but not limited to brokerage commissions and advertising expenses, expenses incurred for removing and storing any of Tenant’s property remaining on the Premises, expenses of remodeling the Premises for a new tenant and any special concessions made to obtain a new tenant.
18.3 For the purposes of this Article 18, the “time of the award” shall mean the date upon which the judgment in any action brought by Landlord against Tenant by reason of such default is entered or such earlier date as the court may determine; the “worth at the time of award” (referred to in Articles 18.2.1 and
18.2.2) shall be computed by including interest at the Interest Rate and late charges set forth in Article 27 below; and the “worth at the time of award” (referred to in Article 18.2.3) shall be computed by applying the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%) per annum.
18.4 Nothing in this Article 18 shall be deemed to alter Landlord’s right to indemnification under the indemnification clause or other provisions of this Lease for claims or liabilities arising from events occurring prior to the termination of this Lease.
18.5 Notwithstanding anything to the contrary set forth herein, Landlord’s reentry into the Premises to perform acts of maintenance or preservation of, or in connection with efforts to relet the Premises, or any portion thereof, or the appointment of a receiver upon Landlord’s initiative to protect Landlord’s interest under this Lease shall not terminate Tenant’s right to possession of the Premises or any portion thereof and, until Landlord does elect to terminate this Lease, this Lease shall continue in full force. Landlord has the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee’s breach or abandonment and recover rent as it becomes due, if lessee has right to sublet or assign, subject only to reasonable limitations).
18.6 If Tenant abandons the Premises, or if Landlord elects to reenter or take possession of the Premises pursuant to any legal proceeding or pursuant to any notice provided by law, and until Landlord elects to terminate this Lease, Landlord may, from time to time, without terminating this Lease, recover all Rent as it becomes due under Article 18.5 above, subject to interest and late charges as set forth in Article 27, and/or relet the Premises or any part thereof for the account of and on behalf of Tenant, on any terms, for any term (whether or not longer than the Lease Term) and at any rental rate as Landlord in its reasonable discretion may deem advisable, and Landlord may make any alterations and repairs to the Premises in connection therewith. In the event that Landlord shall elect to so relet the Premises on behalf of Tenant, then base rent and additional rent received by Landlord from such reletting shall be applied:
18.6.1 First, to reimburse Landlord for the reasonable costs and expenses of such reletting (including, without limitation, legal and other costs and expenses of repossessing the Premises, removing persons and property therefrom, obtaining new tenants, brokerage fees, costs of preparing the Premises for occupancy by such new tenants, and, if Landlord maintains and operates the Premises, the costs thereof).
18.6.2 Second, to the payment of any indebtedness of Tenant to Landlord other than Base Rent, adjustments to Base Rent, Additional Rent and other sums due and unpaid hereunder.
18.6.3 Third, to the payment of Rent and other sums due and unpaid hereunder; the residue, if any, shall be held by Landlord and applied in payment of other or future obligations of Tenant to Landlord as they may become due and payable.
18.7 Should the rent received from such reletting, when applied in the manner and order indicated above, be less than the total amount owing from Tenant pursuant to this Lease, then Tenant shall pay such deficiency to Landlord, and if Tenant does not pay such deficiency within five (5) days of its receipt of written notice, Landlord may bring an action against Tenant for recovery of such deficiency or pursue its other remedies hereunder or under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law.
18.8 All rights, powers and remedies of Landlord under the Lease and any other agreement between Landlord and Tenant shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to Landlord at law or in equity. The exercise of any one or more of such rights or remedies shall not impair Landlord’s right to exercise any other right or remedy, including, without limitation, any and all rights and remedies of Landlord under California Civil Code Section 1951.8, California Code of Civil Procedure Section 1161 et seq., or any similar, successor or related provision of law.
18.9 As security for Tenant’s performance and satisfaction of all of its duties and obligations under this Lease, Tenant does hereby assign and grant to Landlord a security interest under the California Commercial Code in and to Tenant’s personal property, inventory, accounts receivable and Tenant’s right, power and authority to receive the Tenant’s share of rents, issues, profits or other payments received under any sublease or other transfer of part or all of Tenant’s interest in the Premises, reserving unto Tenant the right prior to any default hereunder to collect and retain the Tenant’s share of said rents, issues and profits as they become due and payable, except that nothing contained herein shall be construed to alter the provisions of Article 10 above. Tenant shall execute any documents required by Landlord to perfect its security interest. Upon any such default, Landlord shall have the right, without notice (except as may be provided for herein) to exercise its rights under the California Uniform Commercial Code.
18.10 If Tenant abandons the Premises and leaves behind any items of personal property, then Landlord shall store such property at Tenant’s cost and expense at a warehouse or any other location at the risk of Tenant, and Tenant’s property shall be released only upon Tenant’s payment of any and all moving and storage charges, as well as any expense or damages incurred as a result of the removal, moving and storage of such property, together with all sums due and owing under this Lease. If Tenant does not reclaim such property within the period permitted by law, Landlord may sell such property in accordance with law and apply the proceeds of such sale to any sums due and owing hereunder, or retain said property, granting Tenant credit against sums due and owing hereunder for the reasonable value of such property.
18.11 To the extent permitted by law, Tenant and Landlord each hereby waive all provisions of, and protection under, any decisions, statutes, rules, regulations and other laws of the State of California to the extent same are inconsistent and in conflict with specific terms and provisions of this Article 18.
19. | Default by Landlord; Limitation of Liability. |
19.1 Landlord shall not be deemed to be in default hereunder unless Landlord does not perform its obligations under the Lease after written notice of Landlord’s breach by Tenant to Landlord and to such other parties whose names and addresses are furnished to Tenant and the expiration of thirty (30) days, provided, however, that if the nature of such obligations is such that more than thirty (30) days are reasonably required for their cure, Landlord shall not be deemed to be in default hereunder if Landlord or any such other party(ies) commences such cure within such thirty (30) day period and thereafter diligently pursues such cure to completion.
19.2 If Landlord is in default hereunder and, as a consequence thereof, Tenant recovers a judgment against Landlord, such judgment may be satisfied only out of the right, title and interest of Landlord in the Project and out of the rent or other revenue receivable by Landlord from the Project, or out of the proceeds receivable by Landlord from the sale or other disposition of all or any portion of Landlord’s right, title and interest in the Project. Neither Landlord nor any of the partners of Landlord shall be personally liable for any deficiency or otherwise.
20. | Damage and Destruction. |
20.1 If the Project (whether or not including the Premises) is damaged by an insured casualty (or a casualty for which Landlord is required to insure under the terms of this Lease) occurring more than six (6) months prior to the expiration of this Lease, Landlord shall forthwith repair same, or cause same to be repaired, to the extent that insurance proceeds are made available to Landlord therefor and provided that such repairs can, in Landlord’s reasonable opinion, be made within one hundred eighty (180) days from the date of such damage under the laws and regulations of the federal, state and local governmental authorities having jurisdiction thereof.
20.2 If (a) the Premises or the Project is damaged by an uninsured casualty, (b) the casualty repair requires more than one hundred eighty (180) days to complete without payment of overtime or other premium, or (c) if the Premises, or the Project is damaged by a casualty as described in Article 20.1 above within the last six (6) months of this Lease including any extensions thereof which have been exercised, then Landlord shall have the option within forty-five (45) days from the date of such damage either to (1) notify Tenant of its election to continue the Lease, in which event Landlord shall thereafter repair such damage; or (2) notify the Tenant of its election to immediately terminate this Lease, in which event this Lease shall be so terminated. Landlord shall refund to Tenant any Rent previously paid for any period of time subsequent to the earlier of such termination or untenantability of the Premises less any amounts then owing from Tenant to Landlord.
20.3 Until the Premises are restored, Rent shall be abated in the proportion that the area of the Premises rendered unusable by Tenant bears to the total area of the Premises. Except for abatement of Rent, Tenant shall have no claim against the Landlord for any damage suffered by reason of (a) any damage to the Premises or the Project, (b) the making of repairs to the Premises or the Project, or (c) any inconvenience, interruption, annoyance, loss of business, or continued expense of operation caused by such damage or repair.
20.4 Should the Premises be damaged or destroyed by fire or other casualty insured under a standard fire and casualty insurance policy (or which could be insured under a standard fire and casualty insurance policy), Landlord shall within sixty (60) days of the date of the casualty, notify Tenant in writing of Landlord’s good faith estimate of the time necessary to repair and rebuild the Premises. If such estimate sets forth a period of one hundred eighty (180) days or less, Landlord shall, except as otherwise provided herein this Article, repair and/or rebuild the same with reasonable diligence. Landlord’s obligation hereunder shall be limited to the Building and Tenant Improvements originally provided by Landlord at the Commencement Date, and any alterations provided by Landlord that Landlord has not requested Tenant to remove upon expiration of the Lease Term.
20.5 Notwithstanding any contrary provision herein, Landlord shall not be required to repair any casualty damage to the property of Tenant nor shall Landlord be obligated to repair or replace the Tenant Improvements or any alterations made by or for Tenant unless and until Tenant delivers to Landlord sufficient insurance proceeds or its own funds to pay the cost of such repair or replacement, or to repair or replace any paneling, decorations, railings, floor coverings, alterations, additions, fixtures or improvements installed on the Premises by or at the expense of Tenant. Tenant hereby waives the provisions of Section 1932, subdivision 2, and Section 1933, subdivision 4, of the Civil Code of California, and any similar law, statute or ordinance now or hereafter in effect.
21 . | Eminent Domain. |
21.1 If the entire Premises, or enough thereof so as to render the balance thereof not reasonably usable for the conduct of Tenant’s business, is taken or appropriated by a governmental agency under the power of eminent domain or conveyed in lieu thereof, either party hereto may terminate this Lease by serving written notice upon the other party hereto within thirty (30) days thereafter. If any substantial part of the Project excluding the Premises is taken or appropriated by a governmental agency under the power of eminent
domain or conveyed in lieu thereof, Landlord may so terminate this Lease. In either event, Landlord shall receive (and Tenant shall assign to Landlord upon demand by Landlord) any income, Rent, award or any interest therein which may be paid in connection therewith, and Tenant shall have no claim for any part of any sum so paid, whether or not attributable to the value of the unexpired Lease Term; provided, however, that nothing herein shall prevent Tenant from pursuing a separate award in connection with the taking of Tenant’s removable tangible personal property placed in the Premises solely at Tenant’s expense, for Tenant’s relocation costs and for loss of goodwill.
21.2 If a part of the Premises is so taken, appropriated or conveyed by a governmental agency, and neither party elects to terminate this Lease, then Base Rent and Additional Rent payable hereunder shall be abated in the proportion that the portion of the Premises so taken, appropriated or conveyed bears to the area of the entire Premises.
21.3 Notwithstanding anything to the contrary contained in this Article 21, if the temporary use or occupancy of any part of the Premises (for a period not to exceed 60 days) is taken or appropriated by a governmental agency under the power of eminent domain or conveyed in lieu thereof during the Lease Term, this Lease shall be and remain unaffected by such taking, appropriation or conveyance and Tenant shall continue to pay in full all Rent payable by Tenant. In the event of any such temporary taking, appropriation or conveyance, Tenant shall be entitled to receive that portion of any award that represents compensation for loss of this use or occupancy of the Premises during the Lease Term, and Landlord shall be entitled to receive the balance of such award. To the extent that it is inconsistent with the provisions of this Article 21, each party hereto hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure allowing either party to petition a court to terminate this Lease in the event of a partial taking of the Premises.
22. | Sale by Landlord. If Landlord sells or transfers all or any portion of the Project including the Premises, Landlord shall, upon consummation of the sale or transfer, be released from any liability relating to its obligations or covenants thereafter to be performed or observed under this Lease, and Tenant agrees to look solely to Landlord’s successor-in-interest with respect to such liability. If Landlord transfers or credits any security deposit or prepaid Rent to Landlord’s successor-in-interest, then upon such transfer Landlord shall be discharged from any further liability therefor. |
23. | Surrender of Premises. Upon the expiration or sooner termination of the Lease, Tenant shall surrender to Landlord the Premises broom clean and free of debris, with all repairs, changes, alterations, additions and improvements thereto, in good order, condition and repair, ordinary wear and tear and damage from insured casualty excepted. At Tenant’s sole cost and expense, Tenant shall upon expiration or sooner termination of the Lease: (a) remove its personal property from the Premises; (b) remove any improvements to the Premises caused to be installed by Tenant that Landlord may require Tenant to remove pursuant to Article 7.3; and (c) repair any damage caused by the removal of any such property or improvements. If Tenant leaves any personal property at the Premises, Landlord may remove such personal property and dispose of it, at Tenant’s expense. |
24. | Quiet Enjoyment. So long as Tenant is not in default hereunder, Tenant shall have the right to the quiet peaceful enjoyment and possession of the Premises and the use of the Common Areas during the Lease Term, subject to the terms and conditions of this Lease. |
25. | Notices. Any notice, demand or other communication to be given under the provisions of this Lease shall be in writing to the appropriate address set forth in Article 1.1.9 (or such address furnished by either party hereto to the other party hereto in writing) and shall be (a) personally delivered, (b) mailed by United States registered or certified mail, return receipt requested, postage prepaid, (c) sent by a nationally recognized courier service (e.g. Federal Express) for next day delivery, to be confirmed in writing by such courier or (d) sent by electronic facsimile with appropriate provisions for confirmation of receipt. Service by mail shall be deemed complete on the day of actual delivery as shown by the addressee’s registered or certified mail receipt or at the expiration of the third business day after the date of mailing, whichever first occurs. Service by personal service or courier shall be deemed complete on receipt. Service by electronic facsimile shall be deemed complete on confirmation of receipt if received prior to the close of business, and on the next business day if received after the close of business. |
26. | Personal Property Taxes. Tenant shall pay before delinquency all taxes, assessments, license fees and other charges (collectively, “Tenant’s Taxes”) that are levied and assessed against Tenant’s trade fixtures and other personal property installed or located in or on the Premises that become payable during the Lease Term. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of such payments. If any taxes on Tenant’s personal property are levied against Landlord or Landlord’s property, or if the assessed value of the Building is increased by the inclusion of a value placed on Tenant’s personal property or above-standard leasehold improvements, Tenant, on demand, shall immediately reimburse Landlord for any such taxes. Landlord shall have the right to pay these taxes regardless of the validity of the levy. Notwithstanding the foregoing, Landlord agrees to: (a) notify Tenant in writing prior to paying any taxes under this Article 26 on Tenant’s behalf (“Landlord’s Tax Notice”), and (b) not pay any such taxes on Tenant’s behalf if (i) Tenant notifies Landlord in writing within five (5) business days after it receives Landlord’s Tax Notice that Tenant, in good faith, disputes that the assessed taxes are properly due and owing by Tenant, (ii) Tenant diligently pursues such dispute with the appropriate taxing authority in good faith within thirty (30) days from notice, and (iii) the nonpayment of the assessed taxes will not result in a lien against the Premises or the Project. |
27. | Interest and Late Charges. Any Rent, Additional Rent or other amount not paid by Tenant to Landlord when due hereunder shall bear interest from the due date until paid, unless otherwise specifically provided |
herein, at a rate (the “Interest Rate”) equal to the greater of (a) the rate per annum announced from time to time by Bank of America, N.A. as its prime rate (or, if such bank fails to announce such rate, then the prime rate announced by the Chase Manhattan Bank, USA, N.A.) plus four (4) percentage points, or (b) ten percent (10%) provided, however, that in no event shall such rate exceed the maximum rate permitted by law. The payment of such interest shall not excuse or cure any such default by Tenant under this Lease. In addition to such interest, if any Rent, Additional Rent or other amount is not paid within ten (10) days of when due, a late charge equal to five percent (5%) of such amount shall be assessed against Tenant, which late charge Tenant hereby agrees is a reasonable estimate of the damages Landlord would suffer as a result of Tenant’s late payment. The parties agree that it would be impracticable and extremely difficult to fix Landlord’s actual damages in such event. Such interest and late charges are separate and cumulative and are in addition to and shall not diminish or substitute for any or all of Landlord’s rights or remedies under any other provision of this Lease. |
28. | Collection Agency and Attorneys’ Fees. Tenant shall pay the costs incurred by Landlord if Landlord uses a collection agency or attorneys to collect any moneys unpaid by Tenant or to enforce the terms of this Lease. In any action to enforce or interpret this Lease, including any suit by Landlord for the recovery of Rent or possession of the Premises, the non-prevailing party shall pay to the prevailing party its actual attorneys’ fees and costs. The prevailing party will be determined by the court, arbitrator or arbitration panel before whom the action was brought based upon an assessment of which party’s major arguments or positions could fairly be said to have prevailed. Any attorneys’ fees and other costs and expenses incurred by the prevailing party in enforcing a judgment under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment in favor of the prevailing party. |
29. | Light and Air. Tenant covenants and agrees that no diminution of light, air or view by any structure that may hereafter be erected shall entitle Tenant to any reduction of Rent under this Lease, result in any liability of Landlord to Tenant, or in any other way affect this Lease or Tenant’s obligations hereunder. |
30. | Signs and Directory. |
30.1 Without the prior written consent of Landlord, Tenant shall not place, construct or maintain any sign, advertisement, awning, banner or other decoration on or visible from, or otherwise use, the exterior of the Premises or any other portion of the Project. All door signs on the exterior of the Premises must be installed by Landlord, at Tenant’s sole cost and expense or as part of any tenant improvement allowance, that the Landlord provides for installation of improvements to the Premises, and must conform to standards of the Project as to size, style, placement, color and number of the names, and other matters as reasonably determined by Landlord. In the event that Tenant violates the foregoing, Landlord may remove the sign without any liability, and may charge Tenant the expense incurred, including but not limited to the cost incurred for the repair of the wall, door surface or other area on which the sign was mounted.
30.2 Landlord shall place, construct and maintain a directory in the Building lobby and in such other locations, if any, as Landlord, in its sole discretion, may determine, which directory(ies) shall be for the display of the business names of Building tenants and their respective suite numbers. Landlord shall have the sole right to determine and change from time to time the type of such directory(ies) and all common Project signage, including, but not limited to, size of letters, style, color content and placement. Tenant shall have the right at Landlord’s cost to three (3) lines per directory per 1,000 rentable square feet of the Premises, but listings on such directory(ies) shall be limited to professional personnel of Tenant located principally at the Premises. Tenant shall notify Landlord in writing of the business names that it desires to include on any such directory and shall, upon demand by Landlord, pay the cost associated with any subsequent changes to such names on the directory.
31. |
Parking.
Subject to applicable
rules and regulations any other charges, fees and taxes to be collected by Landlord,
or other parking operator, Tenant shall have the right, but not the obligation, throughout
the Lease Term to lease the number of parking spaces in the parking facility that serves
the Building at such parking rate(s) and upon such other terms as may be specified in
Article 1.1.10.
|
32. | Brokerage Fees. Landlord shall have no obligation to pay commissions or fees to any real estate broker, finder or intermediary other than Tenant’s Broker, if any, listed in Article 1.1.12 and Held Properties, Inc., who represents Landlord. Landlord and Tenant each warrant that with respect to this Lease neither has dealt with any other real estate broker, finder or intermediary. To the extent that Tenant breaches the foregoing, any commissions or fees payable with respect to this Lease shall be paid exclusively by Tenant, and Landlord shall have no obligation of any kind with respect to such commissions or fees. Landlord shall pay any commission due Tenant’s Broker pursuant to a separate agreement. |
33. | Relocation Right. Landlord may, upon not less than sixty (60) days’ prior written notice to Tenant, substitute for the Premises space elsewhere in the Building that is reasonably similar in size, configuration, |
and quality and quantity of improvements. In such event, this Lease shall be deemed modified so as to eliminate the Premises leased hereunder and to substitute therefor such other premises (the “Substituted Premises.”). In all other respects this Lease shall remain in full force and effect, except that in no event shall Tenant’s rent for the Substituted Premises exceed Tenant’s Rent for the Premises during the Lease Term as a result of such relocation. The costs of preparing the Substituted Premises for Tenant’s use shall be borne by Landlord, along with Tenant’s other reasonable out of pocket costs of moving, including, but not limited to, the relocation of Tenant’s existing data and computer cabling and printing of stationery. |
34. | Authority. If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant represents and warrants that he or she is duly authorized to so execute and deliver this Lease, and within ten (10) days after its execution shall deliver to Landlord satisfactory evidence of such authority. If Tenant or Guarantor is a corporation, it shall, upon demand, also deliver satisfactory evidence of (a) good standing in California, and in Tenant’s or Guarantor’s state of incorporation, (b) qualification to do business in California, and (c) a corporate resolution duly certified by the secretary of Tenant or Guarantor authorizing execution and delivery of this Lease or Guarantee, as the case may be, by the parties who have signed it on behalf of Tenant or Guarantor. |
35. | Miscellaneous. |
35.1 If either Landlord or Tenant waives the performance of any term, covenant or condition contained in this Lease, such waiver shall not be deemed to waive any other breach of the same or of any other term, covenant or condition contained herein. Furthermore, the acceptance of Rent by Landlord shall not constitute a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord’s knowledge of such breach at the time of Landlord’s acceptance of such Rent. Failure by Landlord to enforce any of the terms, covenants or conditions of this Lease for any length of time shall not be deemed to waive or to affect the right of Landlord to insist thereafter upon strict performance by Tenant. Landlord’s or Tenant’s waiver of any term, covenant or condition of this Lease may only be made by a written document signed by the waiving party.
35.2 Any voluntary or other early surrender of this Lease by Tenant, mutual termination hereof or prior termination hereof by Landlord shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or sub-tenancies. If Landlord elects to assume any sublease or enter into a lease with any subtenant, such assumption shall not relieve Tenant of any remaining liability under this Lease.
35.3 This Lease shall not be recorded; and no memorandum of lease shall be recorded without Landlord’s prior written consent.
35.4 Rent, Additional Rent and all other sums payable under this Lease must be paid in lawful money of the United States of America.
35.5 This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease.
35.6 Nothing contained in this Lease shall be construed to create the relationship of principal and agent, partnership, joint venture or any other relationship between the parties hereto, other than the relationship of Landlord and Tenant.
35.7 Any provision of this Lease that proves to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and such other provisions shall remain in full force and effect.
35.8 The term “Premises” shall be deemed to include (unless, based on the context, such meaning would clearly be unintended) the space hereby demised and all improvements on or at any time hereafter constructed or built in such space.
35.9 The term “Tenant” or any pronoun used in place thereof shall indicate and include the masculine or feminine, the singular or plural number, individual, firms or corporations, and any Tenant’s successor in interest.
35.10 The section headings herein are for convenience of reference only and shall in no way define, increase, limit or describe the scope or intent of any provision of this Lease.
35.11 If this Lease is entered into by co-tenants, the obligations of such co-tenants hereunder shall be joint and several.
35.12 Time is of the essence of this Lease and all of its provisions.
35.13 The laws of California shall in all respects govern this Lease. The parties acknowledge that the laws of California may change by virtue of legislative enactment or judicial decision. The parties further acknowledge that they have entered into this Lease based on the laws of California at the time of the execution of this Lease, and each hereby expressly waives any future rights, benefits, or advantages derived from or as a result of any future changes in the law of California to the extent not inconsistent with the terms of the Lease. In any action or proceeding arising therefrom, Tenant hereby consents to (a) the jurisdiction of any competent court within the state of California, (b) service of process by any means authorized by the
laws of the state of California, and (c) trial without a jury except for actions primarily based upon personal injury.
35.14 This Lease contains the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any previous negotiations, and may not be modified, except by a written document executed by the parties hereto. There have been no representations or understandings made between the parties other than those set forth in this Lease. Without limiting the generality of the foregoing, Tenant specifically acknowledges and agrees that neither Landlord nor any broker, agent or representative thereof has made any warranty or representation with respect to the tenant mix of the Building, the identity of prospective tenants or other tenants of the Building, profitability or suitability of the Premises for Tenant’s use, the state of repair of the Project and the Premises, or the amount and extent of provided services, except as otherwise specifically set forth herein.
35.15 If any guarantee of this Lease is required by Landlord, such guarantee shall be in the form and content attached hereto or, if none, as supplied and/or approved by Landlord.
35.16 The words “person” and “persons” as used herein shall include individuals, firms, partnerships, associations and corporations.
35.17 The language in all parts of this Lease shall be construed simply according to its fair meaning, and not strictly for or against Landlord or Tenant. Any reference to any Article herein shall be deemed to include all subsections thereof unless otherwise specified or reasonably required from the context. Any reference to “days” or “months” herein shall refer to calendar days or months, respectively, unless specifically provided to the contrary. Unless clearly inconsistent with the context, any reference herein to the “term hereof” or “the Lease Term” shall refer to the term of this Lease as the same may be extended pursuant to any extension option(s) contained herein. The terms “herein”, “hereunder” and “hereof” as used in this Lease shall mean “in this Lease” and “under this Lease” or “of this Lease” respectively, except as otherwise specifically set forth in this Lease.
35.18 All exhibits and the addendum referred to in this Lease are incorporated herein as a part hereof.
35.19 Tenant hereby acknowledges and agrees that the exterior walls of the Building and the area between the demising walls of premises and the finished ceilings and floors of the Premises and the slab of the floor above or below have not been demised hereby and that the use thereof, together with the right to install, maintain, use, repair and replace pipes, ducts, conduits and wires leading through, under, above or alongside the Premises, is hereby reserved unto Landlord.
35.20 The submittal of this Lease by Landlord or its agent or representative for examination or execution by Tenant does not constitute an option or offer to lease the Premises upon the terms and conditions contained herein or a reservation of the Premises in favor of Tenant. This Lease shall become effective only upon the execution hereof by Landlord and Tenant and delivery of a fully executed counterpart hereof to Tenant.
35.21 Tenant warrants and represents that neither its execution of this Lease nor its performance hereunder will violate any agreement, instrument, contract, law, rule or regulation by which Tenant is bound. Tenant shall indemnify Landlord against any loss, cost, damage or liability including, without limitation, reasonable attorneys’ fees and related costs arising out of Tenant’s breach of this warranty and representation.
36. | Rules and Regulations. Tenant shall observe and comply with the rules and regulations set forth in this Article 36 and any and all reasonable modifications thereof and additions thereto established in writing by Landlord notice of which has been given to Tenant. Landlord shall not be responsible for the non-observance of, or noncompliance with, any of said rules and regulations by any other tenant or occupant of the Building, but Landlord shall use its reasonable efforts to enforce the rules and regulations in a non-discriminatory and consistent manner. In the event of any conflict between said rules and regulations and other provisions hereof, the latter shall control. |
36.1 Tenant shall not obstruct, encumber or use any sidewalks, entrance, passages, courts, elevators, vestibules, stairways, corridors or halls or Common Area for any purpose other than ingress and egress to and from the Premises or the Building.
36.2 Tenant shall neither attach any awning or other projection to the outside walls or windows of the Building, nor attach or hang any curtains, blinds, shades, drapes or screen to, in or on any window or door of the Premises without the prior written consent of Landlord. Such awnings, projections, curtains, blinds, shades, drapes, screens and other fixtures must be of a quality, type, design, color, material, installation and general appearance approved by Landlord. All electrical fixtures hung in offices or spaces along the window perimeter of the Premises must be of a quality, type, design, bulb color, size and general appearance approved by Landlord and must be installed by Landlord at Tenant’s cost.
36.3 Tenant shall not cover or obstruct the sashes, sash doors, skylights, windows, and doors that admit light or air into the interior Common Areas, nor shall any articles be placed on the windowsills of the Project.
36.4 No articles or signs shall be placed in front of or affixed to any part of the exterior of the Building, nor placed in public portions thereof without the prior written consent of Landlord.
36.5 The water and janitorial closets and other plumbing fixtures shall not be used for any purposes other than those for which they were constructed, and no sweepings, rubbish, rags or other substances shall be thrown or stored therein. All damages resulting from any misuse of the fixtures shall be borne by Tenant to the extent caused by Tenant or Tenant’s agents, servants, employees, contractors, visitors or licensees.
36.6 Tenant shall not mark, paint, drill into or in any way deface any part of the Premises or the Project, or string any wires except with the prior written consent of Landlord and as Landlord may direct. Notwithstanding the foregoing, Landlord hereby consents to the hanging of normal office decorations.
36.7 No animal (except for seeing-eye dogs or other ADA-approved animals), bird of any kind, or bicycles shall be brought into or kept in or about the Premises or the Building.
36.8 Prior to leaving the Premises for the day, Tenant shall use its best efforts to conserve energy and electricity, including but not limited to drawing or lowering window coverings and extinguishing all lights.
36.9 Tenant shall not make, or permit to be made, any unseemly or disturbing noises or smells, or disturb or interfere with occupants of or visitors to the Building or neighboring buildings. Tenant shall not throw anything out of the doors, windows or skylights or down the passageways. Tenant shall at all times keep the doors closed from Tenant’s suite into the Common Areas of the Project except upon prior written approval of Landlord.
36.10 Tenant shall not permit any principal, agent, servant, employee, contractor, visitor or licensee to smoke any tobacco products or any non-tobacco products in the Building. No smoking of any substance will be allowed in the Building at any time. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord’s judgment, is smoking any tobacco or non-tobacco products. If, in Landlord’s judgment, Tenant, or Tenant’s principals, agents, servants, employees, contractors, visitors or licensee continue to smoke after adequate warning continues to smoke any tobacco or non-tobacco product, then Landlord may provide Tenant with a notice of default and give Tenant 30 days to cure or quit the premises.
36.11 Neither Tenant nor any of Tenant’s agents, servants, employees, contractors, visitors or licensees shall at any time bring or keep upon the Premises any inflammable, combustible or explosive fluid, chemical or substance except in such small quantities and in original manufacturer’s containers as may reasonably be required for the proper operation and maintenance of Tenant’s office equipment. All quantities of the inflammable, combustible or explosive fluids, chemicals or substances shall be stored as per guidelines set forth on their containers in a safe manner. After use, any hazardous wastes shall be disposed of by certified hazardous waste methods in accordance with the manufacturers’ instructions.
36.12 Landlord shall deliver keys to Tenant upon Tenant’s occupancy. Tenant shall not place any additional locks, bolts or mail slots of any kind upon any of the doors or windows, nor shall Tenant change any existing locks or the mechanism thereof without Landlord’s prior written consent. Upon the termination of the tenancy, Tenant must turn over to Landlord all keys for the Premises or the Project and, in the event of the loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof.
36.13 Delivery or removal of any safes, freight, furniture, fixtures, bulky matter or heavy equipment of any description must take place during the hours which Landlord or its agent may reasonably determine from time to time, upon previous notice to the Landlord and in a manner and at times reasonably prescribed by Landlord, and the persons employed by Tenant for such work are subject to Landlord’s reasonable prior approval. Landlord reserves the right to prescribe the weight and position of all safes, or other extra heavy equipment or furniture or improvements so as to distribute the weight or to require reinforcing at the cost of Tenant. Landlord reserves the right to inspect all safes, freight or other bulky articles to be brought into the Building and to exclude from the Building all safes, freight or other bulky articles which violate any of these Rules and Regulations of this Lease, normal office equipment excluded.
36.14 Tenant shall not occupy or permit any portion of the Premises to be occupied in a way that is not otherwise permitted by and consistent with Article 1.1.8, or is not generally consistent with the character and nature of all other tenancies in the Building.
36.15 Tenant shall not purchase janitorial or maintenance or other like service from any company or persons not approved by Landlord, except that Landlord’s approval shall not be required in connection with any maintenance or other like service that does not affect the structure or other major systems of the Building. Landlord shall approve a sufficient number of sources of such services to provide Tenant with a reasonable selection, but only in such instances and to such extent, as Landlord in its judgment considers consistent with security and proper operation of the Building.
36.16 Landlord shall have the right to prohibit any advertising or business conducted by Tenant referring to the Building which, in Landlord’s opinion, tends to impair the reputation of the Building or its desirability as a first class office building, and upon notice from Landlord, Tenant shall refrain from or cease such advertising.
36.17 Outside of Business Hours, Landlord reserves the right to exclude from the Building all persons who are not otherwise authorized by Tenant to enter the Premises.
36.18 Tenant’s interior designers and installers of Tenant’s decoration, furniture, carpentry, wall coverings, and window coverings, shall, while in the Building or elsewhere in the Project, be subject to and under the control and direction of the Building manager (but not as agent or servant of said manager or of Landlord).
36.19 If the Premises is or becomes infested with vermin as a result of the use or any misuse or neglect by Tenant, its agents, servants, employees, contractors, visitors or licensees, then Landlord shall forthwith at Tenant’s expense cause the same to be exterminated by licensed exterminators to the satisfaction of Landlord and, as necessary, from time to time thereafter.
36.20 Tenant shall make requests for services at and as instructed by the office of the Building.
36.21 Canvassing, soliciting and peddling in the Building are prohibited and Tenant shall cooperate to prevent the same.
36.22 No air conditioning unit(s) shall be installed or used by Tenant without Landlord’s written consent.
36.23 No hand trucks or dollies, except those equipped with rubber tires and side guards, may be used in any space in the Project, either by Tenant or by jobbers or others. Tenant shall not permit its customers, clients or invitees to wait in the public corridors of the Building. Tenant shall not permit its employees to loiter or smoke in the interior Common Areas.
36.24 Tenant, Tenant’s agents, servants, employees, contractors, licensees or visitors shall not park or stop any vehicles in any driveways, service entrances, or areas posted as “No Parking” or “No Stopping.”
36.25 Landlord shall install and maintain for the Premises, at Landlord’s sole cost and expense, such safety equipment as may be mandated by applicable governmental authority.
36.26 Tenant shall not use the name of the Building for any purpose other than as the address of the Tenant’s business in the Premises, nor shall Tenant use any picture of the Building in its advertising, stationery or in any other manner without the prior written permission of Landlord. Landlord expressly reserves the right at any time to change name of the Building or Project without in any manner being liable to Tenant therefor.
37. | Compliance with Laws. Landlord shall pay the cost of any repairs, capital additions, replacements or take any other actions necessary to cause the Building to comply with governmental laws, statutes or regulations that are in effect, applicable to and enforced with respect to the Building and/or the Premises as of the Commencement Date, including but not limited to American with Disabilities Act (“ADA”). Landlord hereby advises Tenant in accordance with California Civil Code Section 1938 that Landlord has not performed an accessibility compliance inspection of the Building or Premises by a Certified Access Specialist. |
38. | Good Faith. Except as otherwise expressly provided in this Lease and except for matters which could adversely affect the structural components of the Building, the Building’s plumbing, HVAC, electrical, life safety or other systems, or the exterior appearance of the Building (in which case Landlord shall have the right to act in its sole and absolute discretion, exercised in good faith), any time the consent of Landlord or Tenant is required, such consent shall not be unreasonably withheld or delayed. Whenever the Lease grants Landlord or Tenant the right to take action, exercise discretion, establish rules and regulations or make allocations or other determinations, Landlord and Tenant shall act reasonably and in good faith and take no action which might result in the frustration of the reasonable expectations of a sophisticated tenant or landlord concerning the Lease. |
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of this 9 day of July, 2015.
LANDLORD | TENANT | |||
Century Park, | Ritter Pharmaceuticals, Inc. | |||
a California Limited Partnership | ||||
By: | Held Properties, Inc. | |||
Its: | Management Company |
By: | /s/ Joel R. Delman | By: | /s/ Andrew J. Ritter | |
Joel R. Delman Its: Director of Leasing | Andrew J. Ritter | |||
Its: | President |
ADDENDUM
This Addendum is attached to and made a part of that certain office lease (this “Lease”) dated July 1, 2015 between Century Park, a California Limited Partnership (“Landlord”) and Ritter Pharmaceuticals, Inc (“Tenant”) relating to the premises (“Premises”) known as Suite 1000 consisting of approximately 2,780 rentable square feet on the Tenth Floor of Building located at 1880 Century Park East, Los Angeles, California. The provisions set forth below shall supersede any inconsistent provisions set forth in the Lease. Except as otherwise provided below, capitalized items used below shall have their respective meaning set forth in the Lease.
39. Tenant Improvements . Landlord, at its expense, shall modify the Premises using building standard materials and quantities in general accordance with Space Plan dated April 6, 2015 prepared by Pace Design Group, which may be modified by Tenant subject to Landlord’s approval. Landlord will provide Tenant with its choice of building standard paint, carpet and / or vinyl flooring in the entire Premises. In addition Landlord will provide porcelain tile flooring and a transaction counter with stone top in the reception room. Landlord will install clerestory glass in conference room, 24” sidelights adjacent to doorways of offices with hallway frontage and window blinds, on all exterior window offices. Landlord will put matching laminate caps on low wall partitions dividing the “ASST’S” area #1063, on the Space Plan Landlord will provide built-in cabinets in building standard finishes selected by Tenant for all Kitchen cabinets uppers and lowers including, but not limited to, the cabinet and counter tops enclosing the kitchen sink and dishwasher.
Tenant, at Tenant’s cost, may increase the scope of work beyond that of the Space Plan referenced above. Tenant shall be responsible for its telephone and computer cabling in the Premises as well as the purchase of moveable furniture, fixtures and/or equipment (whether or not affixed to the Building. Landlord shall approve the design and construction of all improvements in the Premises prior to the commencement of any construction. Tenant shall use the Building’s contractor for the development, construction and coordination of all tenant Improvements. Landlord shall not receive any supervisory fee related to such improvements in addition to the general contractor’s overhead and profit.
40. Option to Renew at Prevailing Rate .
(a) Subject to the conditions set forth in sub-paragraph (c) below, Tenant shall have an option to renew (the “Option to Renew”) the Lease for one five (5) year term (the “Extended Term”).
(b) The Option to Renew may be exercised only by written notice delivered by Tenant to Landlord with not less than six (6) months nor more than nine (9) months prior written notice indicating its intention to exercise such option to renew. If Tenant fails to exercise in a timely manner the option to renew herein provided, said option to renew shall expire in accordance with the terms set forth herein and have no further force and effect.
(c) The Option to Renew shall be subject to the following conditions:
(1) | Tenant shall not, at the time of exercise of the Option to Renew, be in material uncured default under the Lease, or Tenant shall not have been in default under the Lease more than three (3) times during the term of the Lease; and | |
(2) | Tenant shall be in good standing under the Lease. For the purposes of this Option to Renew, “in good standing under the Lease” shall mean that Tenant has complied with all provisions of the Lease, including but not limited to the Rules and Regulations set forth in Section 36, as may be amended from time to time. |
(d) Base Rent and Additional Rent.
(1) The monthly Base Rent during the Extended Term shall be the prevailing Base Rent at that time for similar space then being negotiated by Landlord for lease with renewal or extension tenants in a similar location within the Building.
(2) Rent during the Extended Term shall continue to be subject to adjustment for increases in Recurring Building Operating Costs and Real Estate Taxes, based on a new Base Year that shall be established as the year in which the new five (5) year term commences.
(e) Tenant’s exercise of said Option to Renew shall not operate to cure any uncured default by Tenant of any of the terms or provisions in the Lease, nor to extinguish or impair any rights or remedies of Landlord arising by virtue of such default. If the Lease or Tenant’s right to possession of the Premises terminates in any manner whatsoever before Tenant exercises the option to renew herein provided, then immediately upon such termination the Option to Renew herein granted to extend the Lease Term shall simultaneously terminate and shall have no further force and effect.
(f) Such Option to Renew is personal to Tenant and may not be assigned by Tenant to any subtenant or assignee. Under no circumstances whatsoever shall the assignee of the Lease have any right to exercise the option to extend granted herein.
41. | Beneficial Occupancy. As consideration for Tenant’s full and timely performance of all obligations to be performed by Tenant under this Lease, Landlord hereby conditionally excuses Tenant from the payment of the monthly Base Rent for the first month of the Lease Term, provided Tenant is not in default hereunder. If Tenant shall, at any time during the Lease Term, be in monetary default under this Lease, and such monetary default is not timely cured after notice thereof then the total sum of such Base Rent so conditionally excused shall become immediately due and payable by Tenant to Landlord. If, at the date of expiration of the Lease Term, including any extensions thereof, Tenant is not in default hereunder, Landlord shall waive any payment of such Base Rent so excused. |
42. | No Increase in Pro Rata Share of Taxes in Event of Sale . Provided that Tenant is not in default under the terms of this Lease, any increases in real estate taxes resulting from a reassessment due to a sale or change of ownership in the Building during the initial Lease Term shall be excluded from Landlord’s calculation of Tax Costs under Section 4.3. However, should change of ownership or transfer of title occur as a result of a non-voluntary sale or transfer of interest, Landlord may include in its calculation of Tax Costs any increases in real estate taxes resulting therefrom. |
43. | Guaranty. Landlord shall not require a personal guaranty as long as Tenant maintains a net worth of at least ten (10) million dollars._ In the event Tenant’s net worth falls below this amount, Tenant will upon demand provide a security deposit equal to six (6) months of the then current Base Rent to Landlord. |
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of this 9 day of July, 2015.
LANDLORD | TENANT | |
Century Park, | Ritter Pharmaceuticals, Inc. | |
a California Limited Partnership | ||
By: | Held Properties, Inc. | |
Its: | Management Company |
By: | /s/ Andrew J. Ritter | ||
By: | /s/ Joel R. Delman | Andrew J. Ritter | |
Joel R. Delman Its: Director of Leasing | Its: | President |
EXHIBIT “A”
|
HELD PROPERITIES, INC., Landlord. 1880 Century Park East, #500, Los Angeles, CA 90067 Phone 310-300-2200 |
Exhibit 10.2
AMENDMENT No. 2
TO
CLINICAL SUPPLY AND COOPERATION AGREEMENT
This Amendment to the Clinical Supply and Cooperation Agreement (this “ Amendment ”) dated as of July 22, 2015 is by and between Ritter Pharmaceuticals, Inc., a Delaware corporation (“ Ritter ”) and Ricerche Sperimentali Montale SpA, an Italian company (“ Ricerche ”) and Inalco SpA, a Italian company (“ Inalco ”, together with Ricerche, “ RSM ”).
PRELIMINARY STATEMENTS
WHEREAS , Ritter and RSM are parties to that certain Clinical Supply and Cooperation Agreement dated December 16, 2009 and amended by Amendment No. 1 dated September 25, 2010 (together, the “ CSCA ”) pursuant to which RSM agreed to manufacture and supply to Ritter active pharmaceutical ingredient form of GOS of higher purity (95% purity or higher) for use in Ritter Product (the “ CSCA ”); and
WHEREAS , the Parties mutually desire to further amend the CSCA to revise certain terms and to add new terms.
NOW, THEREFORE , in consideration of the Preliminary Statements and the mutual covenants contained in this Amendment, the parties agree to amend the CSCA as follows:
1. | Definitions . All capitalized terms used but not otherwise defined herein shall have the meaning set forth in the CSCA. |
2. | Amendment to the CSCA . |
(a) | New Section 2.5(A) is added between Section 2.5 and Section 2.6 as follows: |
“Within ten (10) days following the approval by the FDA of the New Drug Application (commercial marketing authorization in the United States) for the first Ritter Product, Ritter shall pay RSM the sum of Four Hundred Thousand US Dollars (US $400,000) (“ Regulatory Approval Payment ”).”
(b) | New Sections 3.6 is added as follows: |
“From and after the Effective Date of this Amendment, and not withstanding anything in the CSCA to the contrary, the purchase price for clinical supply of Improved GOS shall be Two Hundred Fifty US Dollars (US $250) per kilo. The Improved GOS shall be supplied to Ritter by RSM in accordance with the terms of the CSCA. Ritter shall issue a purchase order on or before the Effective Date of this Amendment for the purchase of Three Hundred Fifty (350) kilos of Improved GOS for an aggregate purchase price of Eighty Seven Thousand Five Hundred Dollars (US$87,500).”
1 |
(c) | Section 5.2(a) is deleted in its entirety and replaced with the following: |
“RSM hereby grants to Ritter an exclusive option in the Field and in the Territory to assignment of all Improved GOS IP (“ Exclusive Option ”). Ritter may exercise the Exclusive Option by paying RSM the sum of Eight Hundred Thousand US Dollars (US $800,000), which payment shall be paid within ten (10) days following the Effective Date of this Amendment (“ First Payment Option ”).”
(d) | Section 5.2(b) is deleted in its entirety and replaced with the following: |
“Immediately following receipt of the First Payment Option, (i) RSM shall execute and deliver all instruments of assignment and other documentation necessary or reasonably requested by Ritter for the purpose of (1) assigning to Ritter the Improved GOS IP and Technical Information and/or (2) perfecting and/or maintaining such assignment to Ritter and Ritter’s ownership rights in the Improved GOS and Technical Information and (ii) RSM will perform at the request of Ritter all lawful acts and execute, acknowledge and deliver all documents, including assignments, deemed necessary, useful or appropriate by Ritter to vest in Ritter the entire right, title and interest in and to such Improved GOS IP and obtain and record title thereto and to enable Ritter to prepare, file and prosecute applications for and obtain and defend patents, copyrights and other forms of intellectual property protection thereon, so that Ritter shall be the sole owner of such Improved GOS IP in any and all countries in which Ritter may desire such protection.”
(e) | The following clarification statement is added to the end of Section 5.2(c) as follow: |
“For purposes of clarity, the Second Option Payment shall be made in addition to the Regulatory Approval Payment.”
(f) | New Article 5A is added between Article 5 and Article 6 as follows: |
“ 5A. STOCK ISSUANCE
In consideration for entering into the Amendment to the CSCA and without further cash consideration from RSM, Ritter shall issue to RSM in a private transaction One Hundred Thousand (100,000) shares of the common stock of Ritter (the “ Shares ”) within ninety (90) days of the Effective Date of this Amendment pursuant to the terms of a stock purchase agreement. Such stock purchase agreement will contain (a) a “lock up” agreement whereby RSM will agree not to sell the Shares until the earlier of (i) the public release by Ritter of the final results of Ritter’s Phase IIb/III clinical trial of RP-G28 and (ii) the filing of Ritter’s Form 10-Q with the Securities and Exchange Commission for the fiscal quarter in which Ritter receives the results of its Phase IIb/III clinical trial of RP-G28 and (b) investment and other warranties, representations and covenants on behalf of RSM as are usual and customary in connection with the sale of securities in a private transaction in the United States. For purposes of clarity, the issuance of Shares may only be issued following full execution of the stock purchase agreement.”
2 |
3. | Effective Date of Amendment . This Amendment shall take effect following receipt of the approval from the Board of Directors of Ritter which is anticipated to be on or before August 1, 2015. |
4. | Effect of Amendment . Except as amended in this Amendment, in all other respects the CSCA shall remain in full force and effect and be unaffected by this Amendment. |
* * *
[Signature Page Follows]
3 |
IN WITNESS WHEREOF , each of the Parties has caused this Amendment to be executed by its duly authorized representative on the date first above written.
RITTER PHARMACEUTICALS, INC. | |||
By: | /s/ANDREW J. RITTER | ||
Name: | Andrew J. Ritter | ||
Title: | President | ||
RICERCHE SPERIMENTALI MONTALE SPA, | |||
By: | /s/ GIOVANNI CIPOLLETTI | ||
Name: | Giovanni Cipolletti | ||
Title: | |||
INALCO SPA, | |||
By: | /s/ GIOVANNI CIPOLLETTI | ||
Name: | Giovanni Cipolletti | ||
Title: |
4 |
Exhibit 10.3
August 14, 2015
Ellen Mochizuki
[REDACTED]
Dear Ellen:
It is a pleasure to extend to you an offer of employment to join Ritter Pharmaceuticals, Inc. (“ Ritter ”), as Vice President, Finance. Your hire date will be September 21, 2015. This position reports to Ira E. Ritter, Chief Strategic Officer and Chairman.
The primary duties and areas of responsibility with which you will become involved have been discussed during your interviews. Please keep in mind these duties and responsibilities may change from time to time at Ritter’s sole discretion. Your compensation for this full-time, exempt position will be an annual base salary of $170,000.00, payable in accordance with Ritter’s standard payroll practices. You will also be eligible to earn a bonus based upon the achievement of agreed upon performance objectives for each year. Ritter will review your base salary and bonus opportunities at least annually for adjustments.
You will be eligible for Ritter’s comprehensive benefits package, as set forth in Ritter Employee Handbook. You will learn more about benefits and other information at your new employee orientation, but if you have any particular questions about the benefits package before deciding whether to accept this offer, please contact Andrew Ritter, our President.
Upon the commencement of your employment with Ritter, you are required to complete Form I-9, Employment Eligibility Verification, and show proof of your employment eligibility and identity.
Perhaps the most important consideration in making your career decision is the opportunity for personal development in a challenging and growing business environment. Although no company can guarantee what the future holds, we believe that the opportunities with Ritter are outstanding in terms of growth, responsibility and compensation. Your success, of course, depends in large part on your own job performance and your contributions to the success of Ritter. Based upon your past accomplishments, and the enthusiastic reactions of those who spoke with you, we believe that you have the potential to make a substantial contribution to our group. We also believe that we can provide a rewarding and challenging opportunity for you.
While we hope that our relationship will be long and mutually beneficial, it should be recognized that neither you, nor we, have entered into any contract of employment, expressed or implied, for any specific term. Our relationship is one of voluntary employment at-will . At-will means that the employment is for no set period of time. You may resign at any time, and Ritter may terminate the employment relationship at any time, with or without advance notice, and with or without cause or reason. Similarly, Ritter may change your position, job duties, the compensation arrangement between you and Ritter, and other terms and conditions of
E. Mochizuki
August 14, 2015
Page 2
employment with or without cause, and with or without advance notice, at any time in its sole discretion. Your employment at-will status cannot be modified by anyone in the company, unless done so by the Chief Executive Officer and only if done in a writing that expressly alters the at-will nature of the employment relationship and that is signed by the Chief Executive Officer. By accepting this offer, you are agreeing to the at-will nature of your employment relationship with Ritter, and you are acknowledging that no one has made any promises or commitments to you contrary to the foregoing.
Ellen, we would like to welcome you to our team and hope that you will consider our offer favorable. To indicate your acceptance, please sign and return this letter to me by the close of business on August 20, 2015. If you will be faxing your acceptance, please fax only this second page (signature page) to fax number (310) 919-1600.
Sincerely,
RITTER PHARMACEUTICALS, INC. | ||
By: | /s/IRA E. RITTER | |
Ira E. Ritter, Chief Strategic Officer and Chairman | ||
ACCEPTANCE | ||
By: | /s/ELLEN MOCHIZUKI | |
Ellen Mochizuki | ||
8/19/2015 | ||
Signature Date |
Exhibit 10.4
LETTER OF AGREEMENT
Date: October 20, 2015
Section 1. Services to be Rendered . The purpose of this letter is to set forth the terms and conditions on which Chord Advisors, LLC (“Chord”) agrees to provide Ritter Pharmaceuticals, Inc. (the “Company”) technical financial accounting advisory services. Chord will depend on the Company to provide information needed to perform the services and will rely on the Company for the accuracy and completeness of such information.
Section 2. Engagement Period . Unless sooner terminated as provided herein, the term of this agreement (the “ Engagement Period ”) shall commence on November 1, 2015 and shall continue until terminated by either party. The Company represents that it is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the nature of its activities requires such qualification. The Company further represents to Chord: (1) that it has full power and authority to carry on its business as presently or proposed to be conducted and to enter into and perform its obligations under this Agreement; (2) that this Agreement has been duly authorized by all necessary corporate actions; and (3) that this Agreement constitutes the valid and binding obligation of the Company, enforceable against the Company in accordance with its terms (except as such enforcement may be limited by bankruptcy, creditors’ rights laws or general principles of equity). Chord represents that it is validly existing under the laws of its jurisdiction of organization. Chord further represents to the Company: (1) that it has full power and authority to enter into and perform its obligations under this agreement; and (2) that this agreement constitutes the valid and binding obligation of Chord, enforceable against Chord in accordance with its terms (except as such enforcement may be limited by bankruptcy, creditors’ rights laws or general principles of equity).
Section 3. Advisory Fees . Chord will invoice the Company for actual time incurred in performing the services hereunder, at the following rates: $350 for partners/senior managing directors, $250 for directors and $100 for associates. Advisory Fees shall be payable monthly within 30 days after each month end during the engagement period. At no time shall Chord invoice Company in excess of $5,000 dollars in any individual month without notifying Company and receiving express written approval from Company.
Section 4. Expenses . In addition to all other fees payable to Chord hereunder, the Company hereby agrees to reimburse Chord for all reasonable out-of-pocket expenses incurred in connection with the performance of services hereunder. No individual
Confidential | Page 1 |
expenses over $50 per month will be expended without the prior written approval of the Company.
Section 5. Confidentiality . From time to time during the term of this agreement, the Company may disclose or make available to Chord information about its business affairs, finances, customers, products, services, technology, intellectual property, trade secrets, third-party confidential information and other sensitive or proprietary information, whether orally or in written, electronic or other form or media (collectively, “Confidential Information”). During the Engagement Period, and for a period of five (5) years thereafter, Chord shall: (a) protect and safeguard the confidentiality of the Confidential Information with at least the same degree of care as Chord would protect its own Confidential Information, but in no event with less than a commercially reasonable degree of care; (b) not use the Confidential Information, or permit it to be accessed or used, for any purpose other than to perform its obligations under this agreement; and (c) not disclose any such Confidential Information to any person or entity other than its employees on a need to know basis who are participating in this engagement, are advised of the confidentiality thereof and who are subject to maintain the confidentiality thereof. In the event that Chord or its representative is required by law or legal process to disclose any Confidential Information, Chord will, to the extent legally permitted, provide Company with prompt written notice of such requirement so that Company may seek an appropriate protective order or confidential treatment. If in the absence of a protective order or confidential treatment, Chord or its representative is required by law or legal process to disclose Confidential Information, Chord shall use commercially reasonable efforts to limit such disclosure to that portion of the Confidential Information that Chord or its representative is legally required to disclose. In such case, Chord or its representative will exercise commercially reasonable efforts to obtain assurance that confidential treatment will be accorded such Confidential Information.
Section 6. Indemnification . Each of the Company and Chord agrees to defend, indemnify and hold the other and its respective affiliates, stockholders, directors officers, agents, employees, successors and assigns (each an “ Indemnified Person ”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind whatsoever (including, without limitation, reasonable attorneys’ fees) which arise from the Company’s or Chord’s (as the case may be) breach of its obligations hereunder or any representation or warranty made by it herein. It is further agreed that the foregoing indemnity shall be in addition to any rights that either party may have at common law or otherwise, including, but not limited to, any right to contribution. Notwithstanding the foregoing, the indemnifying party is not obligated to indemnify, hold harmless or defend any Indemnified Person against any Claims (whether direct or indirect) if and to the extent such Claims arise out of or result from, in whole or in part, the: (a) negligence or more culpable act or omission (including recklessness or willful misconduct) of an Indemnified Person, or (b)
Confidential | Page 2 |
bad faith failure to materially comply with any of the obligations set forth in this agreement of an Indemnified Person.
Section 7. Termination of Agreement , (a) Subject to paragraph (b) below, either party may terminate this Agreement and Chord’s engagement hereunder, with or without cause, upon 30 days written notice given to the other party at any time during the Engagement Period hereunder. In such event, all compensation accrued to Chord prior to such cancellation, whether in the form of Advisory Fees, reimbursement for expenses or otherwise, will become due and payable promptly upon such termination and Chord shall be relieved of any and all further obligation to provide any services hereunder.
(b) Notwithstanding anything to the contrary herein contained, Sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 shall survive any termination or breach of this agreement by either party.
Section 8. Severability . In case any provision of this letter agreement shall be invalid, illegal, or unenforceable, the validity, legality and enforceability of the remaining provisions shall not be affected or impaired thereby.
Section 9. Consent to Jurisdiction . This agreement shall be governed and construed in accordance with the laws of the State of California without regard to conflicts of laws principles.
Section 10. Other Services . If the Company desires additional services not provided for in this agreement, any such additional services shall be covered by a separate agreement between the parties hereto.
Section 11. Entire Agreement . This letter agreement contains the entire agreement of the Company and Chord, and supersedes any and all prior discussions and agreements, whether oral or written, with respect to the matters addressed herein.
Section 12. Counterparts . This letter agreement may executed in two or more counterparts, each of which shall be considered an original and all of which, taken together, shall be considered as one and the same instrument.
Confidential | Page 3 |
Please evidence your acceptance of the provisions of this letter by signing below and returning a copy to Chord Advisors, LLC.
Very truly yours, | ||
/s/ Sam Lynn | ||
Sam Lynn | ||
Managing Director | ||
Chord Advisors, LLC |
ACCEPTED AND AGREED
AS OF THE DATE FIRST ABOVE WRITTEN:
By: | /s/ Andrew Ritter | |
Andrew Ritter | ||
Founder & President | ||
Ritter Pharmaceuticals, Inc. |
Confidential | Page 4 |
Exhibit 31.1
Certification of PRINCIPAL EXECUTIVE Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael D. Step, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ritter Pharmaceuticals, Inc., a Delaware corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
November 10, 2015 | ||
By: | /s/ Michael D. Step | |
Name: Michael D. Step Title: Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
Certification of PRINCIPAL Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Ellen Mochizuki, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Ritter Pharmaceuticals, Inc., a Delaware corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
November 10, 2015 | ||
By: | /s/ Ellen Mochizuki | |
Name: Ellen Mochizuki Title: Vice President, Finance (Principal Financial Officer) |
Exhibit 32.1
Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned, Michael D. Step, Chief Executive Officer of Ritter Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and Ellen Mochizuki, Vice President, Finance of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to their respective knowledge (1) the quarterly report on Form 10-Q of the Company for the three months ended September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 10, 2015 | ||
By: | /s/ Michael D. Step | |
Name: Michael D. Step Title: Chief Executive Officer (Principal Executive Officer) |
||
November 10, 2015 | ||
By: | /s/ Ellen Mochizuki | |
Name: Ellen Mochizuki Title: Vice President, Finance (Principal Financial Officer) |
These certifications accompanying and being “furnished” with this Report, shall not be deemed “filed” by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under that Section and shall not be deemed to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing.