As confidentially submitted to the Securities and Exchange Commission on February 13, 2017
This
draft registration statement has not been publicly filed with the Securities and Exchange Commission
and all information herein remains strictly confidential.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Hancock Jaffe Laboratories, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 3841 | 33-0936180 | ||
(State
or other jurisdiction of |
(Primary
Standard Industrial |
(I.R.S.
Employer |
70 Doppler
Irvine, California 92618
(949) 261-2900
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Benedict Broennimann, M.D.
Chief Executive Officer
Hancock Jaffe Laboratories, Inc.
70 Doppler
Irvine, California 92618
(949) 261-2900
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non-accelerated filer | [ ] (Do not check if a smaller reporting company) | Smaller reporting company | [ ] |
CALCULATION OF REGISTRATION FEE | ||||||||
Title of Each Class of Securities to be Registered | Proposed | Amount
of Registration Fee(2) | ||||||
Common Stock, $0.00001 par value per share | $ | $ |
(1) | Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act. Includes the offering price of additional shares that the underwriters have the option to purchase to cover over-allotments, if any. | |
(2) | Registration fee will be paid when registration statement is first publicly filed under the Securities Act. |
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2017
PRELIMINARY PROSPECTUS
Shares
Common Stock
This is the initial public offering of our common stock. Prior to this offering there has been no public market for our common stock. We are offering shares of common stock. We currently expect the initial public offering price to be between $ and $ per share.
We intend to apply to list our common stock on the Nasdaq Capital Market, or Nasdaq, under the symbol “ .” Upon the closing of this offering, we expect to be a “controlled company” within the meaning of applicable Nasdaq corporate governance rules.
On July 22, 2016 our board of Directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. All share and per share information in this prospectus gives effect to the 2.1144-for-1 forward split.
We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to take advantage of certain reduced public company reporting requirements for this prospectus and future filings.
Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page of this prospectus.
Per Share | Total | |||||||
Public offering price | $ | $ | ||||||
Underwriting discounts and commissions(1) | $ | $ | ||||||
Proceeds to us, before expenses | $ | $ |
(1) | We have also agreed to reimburse the underwriters for certain of their expenses. See “Underwriting” on page of this prospectus for more information about these arrangements. |
We have granted to the underwriters an option to purchase up to additional shares of common stock at the public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
Delivery of the shares of common stock is expected to be made on or about , 2017.
The date of this prospectus is , 2017
TABLE OF CONTENTS
We have not, and the underwriters have not, authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under the circumstances and in the jurisdictions where it is lawful to do so. The information contained in this prospectus or in any applicable free writing prospectus is current only as of its date, regardless of its time of delivery or any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus or any applicable free writing prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus and any applicable free writing prospectus must inform themselves, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.
Through and including , 2017 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
We use our registered trademarks, such as VENOVALVE™, in this prospectus. This prospectus also includes trademarks, trade names and service marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or that the applicable owner will not assert its rights, to these trademarks and trade names.
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● | ProCol® Vascular Bioprosthesis, |
● | Bioprosthetic Heart Valve, |
● | Coronary Artery Bypass Graft, Coreograft, |
● | Bioprosthetic Venous Valve, the VenoValve. |
Under the current supply agreement, there is an ongoing revenue stream through sub-contract manufacturing and royalty revenue from sales of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has been approved by the U.S. Food and Drug Administration. Operations are focused on development and manufacturing of implantable cardiovascular bioprosthetic devices indicated for the treatment of medical conditions with severe and/or life-threatening disabilities. We are in the process of obtaining necessary FDA approvals to have these devices classified as Class III devices. |
We have a strong record of regulatory and compliance conduct and operates in strict adherence to a “Quality System” motto to “develop and provide life-enhancing products and technologies in an environment where quality is the goal at every step of the process.” We maintain and preserve a strong proprietary estate of processes, validation procedures and related intellectual property. |
We develop and foster professional relationships with respected opinion leaders. These associations have helped in formulating routes for FDA approval for our medical devices. |
Our Products |
Developed Products |
ProCol® Vascular Bioprosthesis |
In March 2016, LeMaitre Vascular, Inc., or LMAT, (Nasdaq: LMAT), a provider of peripheral vascular devices and implants, acquired our ProCol® Vascular Bioprosthesis for dialysis access line of products for $2,805,297 plus a three-year royalty up to a maximum of $5 million. We will provide sub-contract manufacturing transition services to LMAT from its facility for up to three years. |
The ProCol® Vascular Bioprosthesis is a Class III vascular bioprosthesis for hemodialysis vascular access concomitant with end stage renal disease, or ESRD. The ProCol® Vascular Bioprosthesis is a natural biological graft derived from a bovine mesenteric vein. The patented tissue processing technology and sterilization process ensures a product that is flexible, easy to suture and one which exhibits physiologic pulsatile flow characteristics similar to a native fistula. The ProCol® Vascular Bioprosthesis may be implanted in a straight or loop configuration, according to the specific surgical need and has demonstrated clinical efficacy in the upper arm, forearm, and thigh |
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The ProCol® Vascular Bioprosthesis has received FDA PMA Approval for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft or consequent to failure of a prosthetic graft in terms of intent to treat. |
The outcomes of the FDA trials and subsequent studies demonstrate that the cumulative patency for the ProCol® Vascular Bioprosthesis implanted as a first access or after multiple failed prosthetic grafts is fundamentally that usually reported for AVFs as the first access or employed consequent to failed ePTFE grafts. As compared with the present standard of care ePTFE graft, the ProCol® Vascular Bioprosthesis has shown 3.7 times lower relative risk of infection, 1.4 times lower relative risk of interventions, and 1.7 times lower relative risk of thrombosis. We believe this is exemplified by the quantitative and qualitative similarities of the cumulative patency of the ProCol® Vascular Bioprosthesis to that reported for native arteriovenous fistulae in the Dialysis Outcome and Practice Patterns Study. We believe the results of these and other studies consistently demonstrate that as a vascular access bridge graft the ProCol® Vascular Bioprosthesis provides dramatically better cumulative patency compared to ePTFE grafts and exhibits a lower complication rate. Most importantly is the continued patient satisfaction associated with the paucity of complications and uninterrupted dialysis therapy. |
The PBV is stored in sterile saline, so preparation in the operating room is easily accomplished via a simple, quick rinsing process. The PBV is also highly biocompatible and elicits no antibody reactions in patients. Handling and suturing characteristics of the PBV are similar to a patient’s native tissue making it easy to work with during the implant procedure. The natural tissue of the PBV is easily punctured in the hemodialysis setting affording the ease of access associated with a native fistula and the highly elastic and compliant nature of the PBV enables it to handle high flow rates. Hemostasis is also readily achieved with minimal pressure following the removal of the hemodialysis needles. The PBV graft may be accessed for hemodialysis as soon as two weeks following implant, based upon the physician’s decision and patient tolerance. |
Products Under Development |
Over the past eight years we have been developing the following three implantable biomedical devices for heart and cardiovascular disease: |
● | Bioprosthetic Heart Valve: a bioprosthetic heart valve designed to function mimetic of a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients. |
● | Bioprosthetic Coronary Artery Bypass Graft (CoreoGraftTM): a bioprosthetic heart bypass graft for coronary artery bypass procedures, designed to eliminate the need for harvesting a patient’s saphenous vein and/or radial artery to facilitate a more complete revascularization of the heart muscle. |
● | Bioprosthetic Venous Valve, the VenoValve: a bioprosthetic venous valve for replacement of dysfunctional valves in the veins of individuals suffering with chronic deep venous insufficiency of the lower limb, a disease with no presently durable medical or surgical treatment available. The device is designed to restore venous flow back to the heart. |
Bioprosthetic Heart Valve |
The Bioprosthetic Heart Valve, or BHV, is a next generation bio-prosthetic heart valve designed to mimic and function like a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability of BHV have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients and we are aiming to have the BHV become the standard of care for pediatric heart valve replacement. |
Following an eight-year research and development effort, we completed the designing, prototyping and testing in accordance with the requisite International Organization for Standardization, or ISO, 5840 Part 1 (Cardiovascular Implants, Cardiac Valve Prostheses General Requirements) and Part 2 (Surgically Implanted Heart Valve Substitutes) of what we believe is an innovative ground-breaking heart valve bio-prosthesis for pediatric cardiac heart valve replacement. We believe that we have completed the necessary ISO 5840 pre-clinical data requirements in order to prepare a submission to the FDA to begin First-in-Human clinical trials in the United States in 2017. To that end, we have obtained a patent (U.S. Patent No. 7,815,677 “Reinforcement device for a biological valve and reinforced biological valve”) for the BHV. See “Intellectual Property.” We intend to produce 19 mm, 21 mm and 23 mm diameter bio-prosthetic heart valves to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease. |
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The BHV has been designed to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease. Based upon our patented technology, the BHV eliminates the need for external support structures technically referred to as a “stent” to maintain valve geometry and function. This is accomplished through a use of titanium wires embedded within the wall of the bioprosthetic valve. This greatly increases the size of the bioprosthesis that can be placed in the pediatric patient’s small annulus, the site of the inflow of the patient’s original valve. Thus, the BHV allows for effective functional results equal to a valve size two to three sizes larger than would be possible when implanting with an external stent. In addition, the internalized titanium supports are robust enough so as not to require additional suturing as is the case for weakly supported or stentless valves. This allows for the utilization of a single suture line for attachment of the valve to the recipient’s annulus and for an uninterrupted flow plane, which greatly increases the volume of blood with each heart beat. Conversely, conventional valve design requires that the valve tissue be sewn or mounted inside the external stent diminishing the effective diameter and resulting in poor performance, stress on the leaflets and ultimately to a decreased longevity. When a conventional bioprosthetic heart valve is placed in a small annulus, not only will the valve react adversely to increasing cardiac output but it will require a valve three sizes larger than the annulus to achieve a similar hemodynamic or functional result to the native valve; a feat not advisable or in any event accomplishable even with conventional root enlargement procedures. A patient prosthesis mismatch (the prosthesis is too small with regards to the patient’s size and weight) results in poor quality of life and in impairment of physical development and social integration. |
Similar flow advantages have been verified for our 23 mm BHV, the most common size implanted for mitral disease. Our 23 mm BHV has proven to provide an effective orifice area that mimics flow conditions of a younger active child. This is approximately 85% greater blood flow than presently available bioprosthetic heart valves with expected decreased recovery time from procedure of up to 75%. |
Additionally, for a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. The protrusion of our 23 mm BHV is up to 2 mm less when compared to other bioprosthetic valves. Our flatter more planar geometry comes closer to mimicking the native anatomy allowing for physiological, more efficient left ventricular and aortic outflow tract flow patterns. |
Bioprosthetic Coronary Artery Bypass Graft - CoreoGraftTM |
The CoreoGraft® CABG is a device for use as an alternate or supplemental coronary vascular conduit in coronary bypass surgery. The Coreograft® CABG is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and facilitate a more complete revascularization of the injured heart muscle. The device will allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures and patients suffering from chronic venous insufficiency. This device is fashioned from 3 mm diameter bovine mesenteric veins. The “feel” and suturing quality of the graft are mimetic of mammary arteries and requires no special suture considerations beyond those commonly used for autologous grafts. The Coreograft® CABG graft length is appropriate for all bypass requirements allowing exact trimming to the individually required length. |
The Coreograft® CABG is both anatomically and functionally similar to a natural artery and has been demonstrated in preliminary studies to sustain effective “coronary” hemodynamics and cardiac function. Outcomes of 25 procedures performed by Dr. Wade Dimitri and colleagues at Walsgrave Hospital, U.K., exemplify the utility of the ProCol® CAGB as an alternate or supplemental coronary vascular conduit in off-pump CABG. This preliminary clinical study was limited to patients without sufficient available autologous grafts or patients who could not be weaned from bypass perfusion because of incomplete cardiac revascularization. Twenty-six grafts were implanted in 24 patients requiring a complete myocardial revascularization subsequent to hospital admission for coronary artery bypass grafting. In all cases, the Coreograftl® CABG was used when it was determined that adequate or suitable autologous conduits were not available as a consequence of prior use, vascular pathology or contraindication associated with a comorbid condition. |
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During December 2016, we had a CE Mark pre-submission meeting with a European Notifying Body in order to receive feedback on the CE Mark submission for the CABG graft currently anticipated to be filed during the first quarter of 2017. Additionally, we believe that we have completed the necessary pre-clinical requirements to prepare an FDA IDE submission to begin human clinical trials in the United States for our bioprosthetic heart bypass graft, which we currently plan to begin in 2017. |
There are no presently approved biological vascular grafts for coronary artery bypass procedures. We believe that the availability of the readily available “off the shelf” Coreograft® CABG will encourage multiple graft placement without the surgeon forgoing additional procedures that are not cost-effective. |
Bioprosthetic Venous Valve, The VenoValve |
We have developed a bioprosthetic Venous Valve, the VenoValve, for use in treatment of lower limb chronic venous insufficiency. The VenoValve is a replacement of dysfunctional valves in the deep venous system in individuals suffering from lower limb chronic venous insufficiency. Restoration of valvular function in the deep system is the “Holy Grail” for treatment of CVI. The VenoValve comprises a biologic leaflet mounted in a supporting frame or “stent” that will allow for surgical insertion of VenoValve into the femoral vein, thereby re-establishing competence and anterograde venous flow back to the heart. |
Preclinical prototype testing, including in vivo animal studies and in vitro hemodynamic studies have demonstrated that the VenoValve is similar in function to a normal functioning venous valve. Ascending and descending venography of the VenoValve in sheep, demonstrated competency of the valve as well as patency in appropriate flow patterns. |
During November, 2016, we made an FDA submission through the FDA Expedited Access Program (EAP) in order to obtain expedited approval for commercialization of the HJL Venous Valve in the United States and possible early feasibility study in man. |
As there are no currently available medical or non-surgical treatment of lower limb chronic venous insufficiency, we believe the VenoValve will provide for a paradigm shift in the treatment of both primary and secondary causes of chronic venous insufficiency disease. |
Industry Overview |
Hemodialysis Market |
Hemodialysis is the main treatment for patients with end stage renal disease (most commonly known as kidney failure and sometimes referred to as ESRD). During a hemodialysis treatment, a machine pumps and cleans a patient’s blood by way of a flexible, plastic tube. In order to perform hemodialysis, an access must be created . This maybe a direct connection between the patient’s own artery and vein or if the vein is not of adequate size, then a connection between the artery and vein is created using a prosthetic device or conduit The most commonly used hemodialysis access grafts consist of various conduit designs fabricated from expanded polytetrafluoroethylene (or ePTFE). Despite historically mediocre performance, ePTFE grafts have continued to play a significant part in the hemodialysis market |
Several studies1) have shown that the Procol Graft has better patency rate than ePTFE grafts. Also in case of infection of an ePTFE graft, a Procol graft may be used at the same place without getting infected. Studies have shown that the overall patency and infection rate of Procol is superior to ePTFE in the leg position. |
In 2016 an investment analysis of the US market for hemodialysis access grafts estimated the market at approximately $5.1 billion in 2015 growing to $8.6 billion by 2024.2) Hemodialysis access is rapidly becoming one of the largest market segments for vascular grafts and with the average unit selling price rapidly approaching over $1,000. The market is expected to be about $110 million by 2015. Although vascular access is one of the most vital components of the treatment paradigm for ESRD, the yearly total access graft cost represents less than one half of one percent of the total annual ESRD treatment expenditures.
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1. | “Alternative graft materials for hemodialysis access”, Seminars in Vascular Surgery, March 2004; “Multicenter evaluation of the bovine mesenteric vein bioprostheses for hemodialysis access in patients with an earlier failed prosthetic graft”, Journal of the American College of Surgeons, August 2005; 1. “Conduits for hemodialysis access”, Seminars in Vascular Surgery, September 2007. | ||
2. | “Vascular Access Device Market to US$8.6 Billion by 2024; Peripheral Catheters to be Most Preferred Device Through 2024, Projects TMR”, Transparency Market Research, September 2016. | ||
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New Bioprosthetic Heart Valve Device Need |
Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. Aortic valve or mitral valve stenosis occurs when the heart’s valves narrow, preventing the valve from opening fully. This obstructs blood flow from the heart and to the rest of the body. When the valves are obstructed, the heart needs to work harder to pump blood to the body, eventually limiting the amount of blood it can pump and may weaken the heart muscle. Valve stenosis, if left untreated, can lead to serious heart problems. |
Mitral valve stenosis and prolapse, leakage or regurgitation related to inadequate or faulty closing, concerns a defective mitral valve, which is located between the left chambers of the heart. This valve works to keep blood flowing properly and allows blood to pass from the left atrium to the left ventricle but prevents it from flowing backward. When the mitral valve does not work properly, a person can experience symptoms such as fatigue and shortness of breath because the defective valve is allowing blood to flow backwards into the left atrium. Consequently, the heart will not pump enough blood out of the left ventricular chamber to supply the body with oxygen-filled blood. In certain cases, mitral valve disease, may, if left untreated, lead to heart failure or irregular heartbeats (“arrhythmias”), which may be life threatening. |
Historically, heart valve manufacturers have fabricated replacement heart valve types (mechanical, biological, pericardial, pig-origin) and sizes to accommodate a spectrum of patient age, body mass or special pathologic conditions. Typically, this consists of aortic valve sizes with outside diameters ranging from 19 millimeters (“mm”) to 27 mm in 2 mm increments and mitral valves sizes in 2 mm increments from 27 mm to 31 mm. Hospitals and surgeons generally used one biologic and/or one mechanical valve from a single manufacturer and until about the end of the last century hospitals tended to inventory a complete size range of valves typically from a single manufacturer. As the practice of heart valve replacement surgery developed, it became apparent that the recipient population demanded a more prospective view in terms of the various implant modalities, geometrical configuration and a patient’s comorbidities. Depending on age (patients under age 20 receive a mechanical valve due to their calcium metabolism) surgeons use either mechanical, pericardial or porcine biological valves. Porcine valves have shown better longevity than pericardial valves. |
Distinctive features of one particular valve may facilitate implantation or meet the particular demands of a patient’s unique pathology. This stimulated the development of various valve configurations, but in the end did not significantly improve hemodynamic performance or advance quality of life concerns. There is no disagreement and considerable evidence that for most cardiac valve related disorders presently available devices will improve graft recipients presenting conditions. |
However, we believe there is one patient cohort for whom the present devices fall short: very young children and adolescents requiring the smallest valve sizes, typically 19-21 mm in diameter. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple interventions to provide a larger valve replacement. Additionally, biological valves in younger patients will deteriorate as a consequence of what is known as dystrophic mineralization, a phenomenon most likely associated with skeletal growth. Children and adolescent receive historically mechanical valves, which show lower performance. The patient outgrows the valve size several times between age two and twenty, requiring three to five surgeries before adulthood (also referred to as patient prosthetic mismatch). |
Pediatric patients suffering from mitral valve prolapse, stenosis or rheumatic fever typically face complex issues such as alterations of the morphology and geometrical shape of the left heart chambers, which may compromise the chords that tether the mitral valve and the surrounding annular tissues that maintain the leaflet in a proper position (juxtaposition) leading to leakage or regurgitation. The common course for mitral valve disease in children is repair rather than replacement of the valve due to the potential complexity of pediatric mitral valve disease. However, when the mitral valve is not amenable to repair either as a consequence of surgeon skill and/or experience or the complexity of the pathology, a valve replacement procedure is necessary. Mitral valve stenosis and prolapse, leakage or regurgitation also results in significant changes in the morphology of the wall of the left ventricle, typically manifested as considerable thinning, and/or ventricle enlargement or thickening. For a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. This leads to a restricted passage of the blood through the aortic valve (aortic insufficiency). A too large aortic valve replacement may restrict the function of the mitral valve. It is therefore very important to match the respective valve with the size of the patient’s heart. |
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We believe that the effective orifice size of most, if not all, of the present commercially available small diameter bioprosthetic heart valves suited for pediatric aortic and mitral valve replacement are inadequate to provide the necessary hemodynamic result for up to 80% of the potential valve recipients suffering from congenital or acquired valvular disease. We believe that this shortcoming is a result of the reduced effective diameter of currently available bioprosthetic heart valves that uses conventional supporting structures and/or the resistance of the valve leaflets during the forward flow opening phase of the cardiac cycle. Most commonly, for developing children, the increasing body mass or body surface area as a child grows is frequently incongruent with the valve size that the patient’s heart can accommodate. Consequently, these recipients almost universally develop a condition designated as “patient prosthetic mismatch.” For valve replacement in both younger and older pediatric patients, patient prosthetic mismatch has been shown to be associated with longer recovery periods and diminished improvements in symptoms. This is reflected in decreased exercise capacity, decreased recovery of the thickened left ventricle, as a result of the ventricular adaptation to the flow resistance of the narrowed aortic valve outflow tract, and an increased number of adverse postoperative cardiac events. Older pediatric patients are especially susceptible to patient prosthetic mismatch with a marked persistence of symptoms. This is most likely related to the younger patient’s higher cardiac output requirements in association with a longer exposure to the consequences of patient prosthetic mismatch. |
According to American Heart Association each year, approximately 10 of every 1,000 children (approximately 1.3 million children) worldwide including 8 of every 1,000 in the U.S. are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 mm sized prostheses. The 2016 Global Data Report estimates the global heart valve market to be approximately $2 billion based on an average selling price for standard valve prostheses of $5,000-$9,000. This market is projected to grow to $19.6 billion by 2026.1) These patients above all would benefit from the HJL bioprosthetic heart valve, being safer, cost effective and reducing reoperations in the patient population |
Bioprosthetic Coronary Artery Bypass Graft Device Need |
The present standard procedure for coronary bypass surgery employs the use of the patient’s saphenous vein and/or internal mammary artery as conduits to re-establish blood flow, otherwise known as coronary artery bypass grafts (or CABG). While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. Balloon angioplasty also has not produced conclusive and consistent results and, in a large number of instances, may only provide short term relief necessitating subsequent and consequently more difficult surgical intervention. Coronary artery bypass remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. By the end of the last decade, more than 500,000 coronary artery bypass procedures requiring almost one million harvested autologous grafts were performed annually in the U.S. In 2015, 150,000 coronary artery bypass procedures were performed, which accounts for 425,000 bypass grafts.2) |
We believe that the recent trend toward off pump coronary graft surgery (surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation; decreases the surgery time by one hour), minimally invasive coronary artery bypass surgery has had considerable bearing on both perioperative and procedural safety and efficacy and has had a significant impact on the future of the procedure and attendant utility of prosthetic bypass grafts. Bypass graft harvest remains the most invasive and complication prone aspect of the minimally invasive bypass procedure. Present standard-of-care complications are described in recent published reports in major medical journals. The percentage of complications Can be as high as 43 percent. Fortunately, less than 50 percent of these wounds require operative intervention, but the ones that do can be major. |
Also recent articles substantiate that saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the 3 mechanisms that lead to venous graft failure. (Saphenous vein graft failure after coronary artery bypass surgery: pathophysiology, management, and future directions. Harskamp RE, Lopes RD, Baisden CE, de Winter RJ, Alexander JH. Ann Surg. 2013 May;257(5):824-33. Off-pump CABG with vein grafts show an increased rate of obstruction versus mammary artery graft CABG. (Ref. Comparison of graft patency between off-pump and on-pump coronary artery bypass grafting: an updated meta-analysis. Zhang B, Zhou J, Li H, Liu Z, Chen A, Zhao Q. Ann Thorac Surg. 2014 Apr;97(4):1335-41. Epub 2014 Jan 7). Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure.
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1. | “Prosthetic Heart Valve Market: Global Industry & Opportunity Assessment, 2016-2026”, Global Data.com, November 2016. | ||
2. | “Understand Your Risk for Congenital Heart Defects” American Heart Association, October 2016. | ||
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The increased incidence of chronic venous diseases of the lower limbs also reduce the possibility of harvesting good quality veins as well as the increase incidence of redo CABG bypasses.. An “off the shelf” bypass conduit would do away with the attendant complications and chronic postoperative discomfort frequently reported for autologous graft harvest and consistently afford sufficient material for more complete cardiac revascularization. The American Heart Association stated in 2015 that “complete revascularization was key to ensure long term survival and quality of life in patients with coronary disease” (Eagle, KA; Guyton RA; Davidoff R; et al. (October 5, 2004). “ACC/AHA 2004 guideline update for coronary artery bypass graft surgery: a report of the American College of Cardiology/American Heart Association Task Force on Practice Guidelines. An efficacious prosthetic bypass graft in concert with off pump and/or minimally invasive surgery would comprise an almost wholly “noninvasive procedure.” We believe the availability and appeal of such a modality would have considerable impact on the therapeutic balance between bypass revascularization and interventional cardiology regimens like stents, balloon catheterization, which only provide temporary relief. |
Coronary artery bypass surgery departs from the usual one procedure–one device paradigm. When revascularization requires more than an internal mammary graft, a conservative average of 2.5 additional grafts is required. The economics and surgeon reimbursement amounts for bypass procedures presently discourage multiple graft procedures as the time to harvest additional grafts is not economically justified in terms of the reimbursement amounts. Reimbursement codes for a single bypass graft versus five grafts on the same patient only differ by a few hundred dollars but the multiple grafts require up to three times the amount of time and operating costs of a single procedure. We believe that this discourages taking the time and incurring the operating room costs in harvesting additional bypass grafts resulting in suboptimal cardiac revascularization. Moreover patients requiring multiple bypasses for a complete revascularization often show comorbidities like chronic venous insufficiency of the lower limbs as well as redo patients. |
If only half of the annually performed procedures required multiple graft revascularization, the requisite number for the U.S. alone would be in excess of 110,000. On the basis that - consequent to an approved device - utilization was only 50% of the prospective market potential, market value for the U.S. alone would be approximately $660 million to $770 million for unit pricing of $6,000 to $7,000; the European and Pacific Asia markets combined would have a similar value for a worldwide market of $1-$2.0 billion. (CDC) |
Bioprosthetic Venous Valve Device Need |
Lower Limb Chronic Venous Insufficiency (CVI)) is a disease presently affecting tens of millions of patients worldwide with approximately 1.5 million new cases annually. In the U.S., based upon data from the Vascular Disease Foundation, approximately 20% of the population suffers from varicose veins and 5% (15 million) of the U.S. population are expected to develop DVT and approximately 65% (10 million) of the U.S. DVT population are expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the U.S., the present population of individuals suffering varying degrees of CVI is approximately 5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. In Western Europe, the incident rate of CVI is estimated at one million hospitalizations per year, the prevalent CVI population is estimated at 17.5 million, and the mean prevalence of CVI of the legs in the general population in Western Europe is 30%. Patients with CVI are plaqued with marked disability, either from leg swelling or development of non healing leg ulcers. |
The hallmark of the disease is the failure of damaged venous valves to allow for lower limb venous blood to return to the heart. It is a mechanical reflux problem. Presently no medical or nonsurgical treatment is available other than compression “garments” for early stage disease or leg elevation for more severe cases, which are, at best, only palliative. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected vein is an option. However, for the deep system, valve transplants has been used but with very poor results or creation of valves using fibrous tissue which is only performed in few centers world wide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI. |
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Our Strategy |
Our business strategy is focused primarily on research, development and manufacturing of biomedical device technologies for use in surgical procedures. We are also focused on the relatively large device markets where our technological advances and achievements provide an opportunity to offer our devices in an environment conducive and advantageous to their utilization and clinical benefit. Developing pathways to obtain FDA approval in the most expedient fashion is our main strategy for our products. |
Research and Development |
Our present strategy for the VenoValve is to obtain approval from the FDA for a first in man study that will quickly evolve into a study coordinated to demonstrate improvement in the quality of life for patients with CVI. We believe that the VenoValve will provide significant improvement in the quality of life measures for patients living with the disability |
Our Competitive Strengths |
Strong Proprietary Estate of Processes, Validation Procedures and Related Intellectual Property |
We believe that we possess an extensive assemblage of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our devices. Additionally, we believe our patents pertaining to unique design advantages and processing methods of valvular tissue as a bioprosthetic device provides intellectual advantage over potential competitors. See “—Intellectual Property.” |
Development of Facilities |
We operate a 16,500 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of biologic vascular grafts and is equipped for research and development, prototype fabrication, CGMP manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices. When fully staffed and utilized, we believe production capacity will be approximately 24,000 devices annually. |
Intellectual Property |
We possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long and trusted relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that extends device longevity, provides device functions and guarantees sterility. The FDA is familiar with the most essential aspects of our methodologies as they have been part of our process development. Our patents pertaining to the unique design advantages and processing methods of valvular tissue as a bioprosthetic device provides further intellectual advantage over potential competitors. |
We have also developed a unique Class III device cGMP documentation process central to bringing all of the various elements together during the fabrication processes affording a significant “barrier” to potential competitive efforts. Our cGMP documentation cannot be infringed on from a proprietary standpoint because of the specificity of each listed section and the associated validations and permissions. |
In addition, there are various specific intellectual property items related to each of our devices as described below. |
Bioprosthetic Heart Valve (BHV) |
The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010, and expires on July 9, 2027. |
Coreograft® CABG |
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A unique use patent will be filed to protect the specific indication based on the mimetic biomechanical properties of the wall of the Coreograft® CABG as it relates to pulsatile propagation of forward flow characteristic of coronary arteries. |
The VenoValve |
The VenoValve encompasses a unique intellectual estate comprising of dozens of proprietary processes and methodology from its initial development and manufacturing, through the finished device. Patents are pending for the unique design of the frame for this device. |
Leadership |
Experienced and seasoned leadership in research and development will help make us successful in its endeavors to obtain FDA approval of their devices. |
Competitive Markets |
Marketing and Sales |
We will develop an internal marketing and sales group to manage a combination of direct sales representatives and an independent distribution network. |
Cardiac surgeons generally develop a preference for one particular company’s device, whether based on an impression of superior performance or on developed relationships with the providers. We believe that by focusing on the pediatric segment we are not subject to this issue as the prospective user can focus on the best ethical approach to the patients need without “abandoning” prior affiliations. We believe the present “commodity” nature of the heart valve industry that the benefits of the BHV will position the device as a standard of care without a competitive “peer.” |
In addition, according to the American Heart Association – Heart Org Congenital Heart Defects, each year worldwide approximately 10 of every 1,000 children (approximately 1.3 million children) including 8 of every 1,000 in the United States are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 millimeter sized prostheses. The 2015 Global Data Report reported the global heart valve market to be approximately $2 billion being based on an average selling price for standard valve prostheses of $5,000-$9,000. Based on these statistics, we believe that at the proposed average selling price of $17,500 per unit for all sizes, the estimated market of the BHV is approximately $300 million in the U.S. and $500-600 million in Western Europe and Pacific Asia. On an equivalent cost basis, we believe the market value of its bioprosthetic valve would represent approximately 25% of the total market on a unit basis. |
Coreograft® CABG |
The CABG market is, to a more complex market to estimate on a procedural basis. This is largely due to the evolving attitude toward more complete vascularization of the infarcted heart and the varying number of placed grafts accompanying the cardiopulmonary bypass and off pump or beating heart procedures. In lieu of a multifaceted trend analysis, it is reasonable to approach the potential market on a conservative basis by assigning an average of 2.5 grafts per procedure which for the U.S. would be an equivalent of approximately 375,000 units annually representing a market value of approximately $3.25 billion; an even more conservative estimate based on graduated market penetration has a market potential of over $1 billion. As is the case for devices utilized as part of well- established surgical procedures, the “rest-of-world” market has been consistently equivalent to that of the U.S. |
When the total costs of coronary artery bypass procedures are estimated in terms of alternate treatments and especially for those patients for whom surgery is strongly indicated it appears that a cost for a device that substitutes for graft harvest, alleviates the inevitable cost of treatment subsequent to incomplete revascularization and limits the adjunct use of high ASP’s for stents would allow for reimbursement equivalent to less than 20% of the total procedure and hospital costs. In consideration of the above the anticipated price to the hospital will be $6,000.00 per unit. |
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HJL Venous Valve, The VenoValve |
In the U.S., based upon data from the Vascular Disease Foundation, approximately 5% (15 million) of the U.S. population are expected to develop DVT and approximately 65% (10 million) of the U.S. DVT population are expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the U.S., the present prevalent population of individuals suffering varying degrees of CVI is approximately 5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. For Western Europe, the incident rate of CVI disease is estimated at one million hospitalizations per year, the prevalent CVI disease population is estimated at 17.5 million, and the mean prevalence of CVI disease of the legs in the general population in Western Europe is 30%. |
Based upon the foregoing, we estimate that for the U.S., the candidate patient population for the VenoValve is at present approximately 5.5 million and at the time of commercialization of the product, the prevalent candidate population is expected to be 6.5-7 million with the candidate incidence rate at over half a million annually. With standardized average selling price across currencies, we estimate that the monetary value of the U.S. and Western European market for the VenoValve is on an incidence basis approximately $10 billion annually with the prevalent market value is in excess of $100 billion. |
There is no comparable device for purposes of price comparisons and/or reimbursement codes. Therefore, after consulting with industry analysts and vascular surgeons, examining the actual selling price sensitivity in terms of clinical benefit, and analyzing trends in reimbursement for similarly existing devices, we have developed a potential clinical value for the VenoValve. We have estimated a reimbursement of $6,500 - $11,000 per valve. |
A measure to estimate the cost effectiveness of an intervention is quality-adjusted life-years (or QALY). Presently for CVI, the cost per patient to maintain the status quo of CVI or no substantial improvement in QALY is approximately $50,000 annually. The VenoValve would improve the QALY over a 5-year period by at least 2.5 QALYs and would reduce the annual cost to maintain the improved longevity and life style by 60%. For device recipients, with a return to normal activity without pain, the QALY improvement would be 4; equivalent to reducing annual costs by 75%. Over a 5-year period the health care cost savings associated with use of the venous valve would be $150,000 - $200,000, equivalent to a 5 year savings of hundreds of billions of dollars for the present prevalent and anticipated incident patient population. In consideration of the above the anticipated price to the buyer these factors will be associated with the cost of the device. |
Summary Risks Related to Our Business |
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may adversely affect our business, financial condition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our common stock. These risks are discussed more fully in “Risk Factors” beginning on page of this prospectus. These risks include, but are not limited to, the following: |
● | We have a history of incurring net losses and, currently, we are not generating significant revenue. There can be no assurances that we will generate significant revenue in the future, achieve profitable operations or continue as a going concern. | ||
● | As a result of our current lack of financial liquidity, our auditors have expressed substantial doubt regarding our ability to continue as a “going concern.” | ||
● | We currently have no sales and marketing organization and need to depend on collaborations with third parties for key aspects of our business. If we are unable to secure a sales and marketing partner or establish satisfactory sales and marketing capabilities, we may not successfully commercialize our products. | ||
● | We will need substantial additional funding and if we are unable to raise capital when needed, we would be forced to delay, reduce or eliminate our product development and commercialization plans. |
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● | Raising additional capital may cause dilution to our stockholders, restrict our operations or require us to relinquish rights to our technologies or product candidates. | ||
● | Competition in the medical device industry and the target markets for our products and proposed products is intense and we expect competition to increase in the future. Our operating results will suffer if we fail to compete effectively. | ||
● | Our products are subject to a lengthy and uncertain domestic regulatory review process. If we do not obtain and maintain the necessary domestic regulatory authorizations, we will not be able to provide our products in the U.S. | ||
● | Our products are also subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to comply with applicable requirements could cause our business, results of operations and financial condition to suffer. | ||
● | Our competitive position and commercial success is contingent upon the protection of our intellectual property. It is difficult and costly to protect our proprietary rights and we may not be able to ensure their protection. | ||
● | There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity. |
Corporate Information |
We were incorporated in Delaware in December 22, 1999. Our principal executive offices are located at 70 Doppler, Irvine, California, 92618, and our telephone number is (949) 261-2900. Our corporate website address is www.hancockjaffe.com. The information contained on or accessible through our website is not a part of this prospectus, and the inclusion of our website address in this prospectus is an inactive textual reference only. |
Implications of Being an Emerging Growth Company |
As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in Section 2(a) of the Securities Act of 1933, as amended, or the Securities Act, as amended and modified by the Jumpstart Our Business Startups Act of 2012, or JOBS Act, enacted in April 2012. An “emerging growth company” may take advantage of certain exemptions for reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to: |
● | being permitted to present only two years of audited financial statements and only two years of related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this prospectus, in each case, instead of three years; | |
● | being permitted to present the same number of years of summary financial data as the years of audited financial statements presented, instead of five years; | |
● | not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act; | |
● | reduced disclosure obligations regarding executive compensation in our periodic reports, proxy statements and registration statements, including the omission of a compensation discussion and analysis; and | |
● | exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments. |
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We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the completion of this offering. However, if certain events occur prior to the end of such five-year period, including if we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock held by non-affiliates exceeds $700 million as of the last business day of the second fiscal quarter of such fiscal year, our annual gross revenue exceeds $1.0 billion or we issue more than $1.0 billion of non-convertible debt during the preceding three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. |
We have elected to take advantage of certain of the reduced disclosure obligations in the registration statement of which this prospectus is a part and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold securities. |
In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This provision allows an emerging growth company to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this extended transition period. |
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The Offering |
Common stock offered by us | shares
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Option to purchase additional shares | We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional shares.
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Common stock to be outstanding after this offering | shares
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Use of proceeds | We currently intend to use the net proceeds from this offering, together with our existing cash and cash equivalents, to fund our research and development activities and the regulatory review process for our product candidates, and the remainder for working capital and other general corporate purposes, including the additional costs associated with being a public company. See “Use of Proceeds” on page [__].
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Risk Factors | See “Risk Factors” on page [__] for a discussion of certain of factors to consider carefully before deciding to purchase any shares of our common stock.
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Proposed Nasdaq Capital Market symbol | “ ”
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Stock Split | On July 22, 2016 our board of Directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. |
The number of shares of our common stock to be outstanding after this offering is based on 12,247,358 shares of common stock outstanding as of September 30, 2016, and excludes: | |
● | 833,333 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2016, at an exercise price of $6.00 per share; and | |
● | 3,300,000 shares of our common stock reserved for future issuance under the 2016 Omnibus Incentive Plan. | |
Unless otherwise indicated, all information contained in this prospectus assumes: | ||
● | no exercise by the underwriters of their option to purchase up to an additional shares of our common stock; | |
● | no exercise of the outstanding stock options described above; | |
● | no exercise of the outstanding warrants described above; | |
● | no issuance of 93,570 shares of Series A preferred stock issuable upon the exercise of warrants outstanding as of September 30, 2016, at an exercise price of $5.00 per share; | |
● | the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 935,700 shares of our common stock, the conversion of which will occur immediately prior to the closing of this offering; and | |
● | the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws immediately prior to the closing of this offering |
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Summary Consolidated Financial Data
The following tables set forth a summary of our historical financial data as of, and for the periods ended on, the dates indicated. The consolidated statements of operations data for the years ended December 31, 2015 and 2014 and consolidated balance sheet data as of December 31, 2015 and December 31, 2014 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The consolidated statements of operations data for the [nine-month periods ended September 30, 2016 and 2015] and the consolidated balance sheet data as of [September 30, 2016] are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on the same basis as the audited consolidated financial statements. Our management believes that the unaudited consolidated financial statements reflect all adjustments necessary for the fair presentation of the financial condition and results of operations for such periods.
The following summary consolidated financial information should be read in connection with, and is qualified by reference to, our consolidated financial statements related notes thereto and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. Our historical results are not necessarily indicative of results to be expected in any future period.
On July 22, 2016 our board of Directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. All shares and per share amounts have been adjusted to reflect the 2.114-for-l forward split of our issued and outstanding shares, retroactively.
For The Nine Months Ended | For The Years Ended | |||||||||||||||
September 30, | December 31, | |||||||||||||||
2016 | 2015 | 2015 | 2014 | |||||||||||||
(unaudited) | ||||||||||||||||
Selected Statement of Operations Data: | ||||||||||||||||
Revenues | $ | 481,053 | $ | - | $ | - | $ | 236,500 | ||||||||
Cost of goods sold | 598,295 | - | - | 132,315 | ||||||||||||
Gross (Loss) Profit | (117,242 | ) | - | - | 104,185 | |||||||||||
Selling, general and administrative expenses | 3,406,367 | 706,342 | 1,289,851 | 1,056,844 | ||||||||||||
Loss from Operations | (3,523,609 | ) | (706,342 | ) | (1,289,851 | ) | (952,659 | ) | ||||||||
Other Expenses | 524,395 | 47,843 | 88,347 | 65,493 | ||||||||||||
Loss from Continuing Operations | (4,048,004 | ) | (754,185 | ) | (1,378,198 | ) | (1,018,152 | ) | ||||||||
Income (loss) from discontinued operations | 2,200,768 | (291,881 | ) | (225,815 | ) | (379,841 | ) | |||||||||
Net Loss | (1,847,236 | ) | (1,046,066 | ) | (1,604,013 | ) | (1,397,993 | ) | ||||||||
Cumulative dividend to Series A preferred stockholders | (243,938 | ) | - | (4,352 | ) | - | ||||||||||
Net Loss Attributable to Common Stockholders | $ | (2,091,174 | ) | $ | (1,046,066 | ) | $ | (1,608,365 | ) | $ | (1,397,993 | ) | ||||
Net loss per share from continuing operations attributable to common stockholders - basic and diluted | $ | (0.35 | ) | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.08 | ) | ||||
Income (loss) per share from discontinued operations, net of tax | $ | 0.18 | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.04 | ) | |||||
Weighted average number of common shares outstanding - basic and diluted | 12,027,040 | 12,000,000 | 12,000,000 | 12,000,000 |
December 31, | ||||||||||||
September 30, 2016 | 2015 | 2014 | ||||||||||
(unaudited) | ||||||||||||
Selected Balance Sheet Data: | ||||||||||||
Cash | 78,048 | 1,585,205 | 58,026 | |||||||||
Working capital deficit | (780,580 | ) | (2,770,602 | ) | (3,124,430 | ) | ||||||
Total assets | 1,907,141 | 2,874,791 | 1,597,575 | |||||||||
Total liabilities | 1,267,839 | 4,655,211 | 3,609,020 | |||||||||
Accumulated deficit | (26,188,096 | ) | (24,340,860 | ) | (22,736,847 | ) | ||||||
Total stockholders’ deficiency | (3,045,441 | ) | (3,576,904 | ) | (2,011,445 | ) |
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An investment in our common stock is speculative and illiquid and involves a high degree of risk, including the risk of a loss of your entire investment. You should carefully consider the risks and uncertainties described below and the other information contained in this prospectus before purchasing any of our common stock. The risks set forth below are not the only ones facing our Company. Additional risks and uncertainties presently unknown to us or that we currently consider immaterial or unlikely to occur could also adversely affect our business, operations and prospects. If any of the following risks actually materialize, our business, financial condition, prospects and operations could suffer. In such event, the value of our common stock could decline, and you could lose all or a substantial portion of the money that you pay for our common stock.
On July 22, 2016 our board of Directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. All shares and per share amounts have been adjusted to reflect the 2.114-for-l forward split of our issued and outstanding shares, retroactively.
Risks Related to Our Business and Industry
We have incurred significant losses since our inception, expert to incur significant losses in the future and may never achieve or sustain profitability.
We have historically incurred substantial net losses, including net losses of $1,847,236 for the nine months ended September 30, 2016, $1,604,013 for the year ended December 31, 2015 and $1,397,993 for the year ended December 31, 2014. As a result of our historical losses, we had an accumulated deficit of $26,188,096 as of September 30, 2016. Our losses have resulted principally from costs related to our research programs and the development of our products, as well as general and administrative costs relating to our operations. Currently, we are not generating significant revenue from operations, and we expect to incur losses for the foreseeable future as we seek to expand our commercial operations and incur increased sales and marketing costs. Additionally, we expect that our general and administrative expenses will increase due to the additional operational and reporting costs associated with being a public company. Due to the numerous risks and uncertainties associated with our commercialization efforts, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. Our failure to achieve and subsequently sustain profitability could harm or business, financial condition, results of operations and cash flows.
As a result of our current lack of financial liquidity, our independent registered accounting firm has expressed substantial doubt regarding our ability to continue as a “going concern.”
As a result of our current lack of financial liquidity, the report of our independent registered accounting firm that accompanies our audited consolidated financial statements for the years ended December 31, 2015 and 2014, respectively, which are included as part of this prospectus, contains a statement contains going concern qualifications, and our independent registered public accounting firm expressed substantial doubt regarding our ability to continue as a going concern, meaning that we may be unable to continue in operation for the foreseeable future or realize assets and discharge liabilities in the ordinary course of operations. Our lack of sufficient liquidity could make it more difficult for us to secure additional financing or enter into strategic relationships on terms acceptable to us, if at all, and may materially and adversely affect the terms of any financing that we may obtain and our public stock price generally.
In order to continue as a going concern, will need to, among other things, achieve positive cash flow from operations and, if necessary, seek additional capital resources to satisfy our cash needs. Our plans to achieve positive cash flow include engaging in offerings of equity and/or debt securities and negotiating up-front and milestone payments on pipeline products under development and royalties from sales of our products which secure regulatory approval and any milestone payments associated with such approved products. Our failure to obtain additional capital would have an adverse effect on our financial position, results of operations, cash flows, and business prospects, and ultimately on our ability to continue as a going concern.
We currently have no sales and marketing infrastructure and if we are unable to successfully secure a sales and marketing partner or establish a sales and marketing infrastructure, we may be unable to commercialize our products and may never generate sufficient revenues to achieve or sustain profitability.
In order to commercialize products that are approved for commercial sales, we must either collaborate with third parties that have such commercial infrastructure or develop our own sales and marketing infrastructure. At present, we have no sales or marketing personnel and rely on collaborations with third parties for key aspects of our business.
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There is a risk that we may not be able to maintain our current collaboration or to enter into additional collaborations on acceptable terms or at all, which would leave us unable to progress our business plan. We will face significant competition in seeking appropriate collaborators. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. If we are unable to maintain or reach agreements with suitable collaborators on a timely basis, on acceptable terms, or at all, we may have to curtail the development of our product candidates, reduce or delay development programs, delay potential commercialization our product candidates or reduce the scope of any sales or marketing activities, or increase our expenditures and undertake development or commercialization activities at our own expense.
Moreover, even if we are able to maintain and/or enter into such collaborations, such collaborations may pose a number of risks, including the following:
● | collaborators may not perform their obligations as expected; | |
● | disagreements with collaborators, including disagreements over proprietary rights, contract interpretation or the preferred course of development, might cause delays or termination of the research, development or commercialization of our product candidate, might lead to additional responsibilities for us with respect to such product candidate, or might result in litigation or arbitration, any of which would be time-consuming and expensive; | |
● | collaborators could independently develop or be associated with products that compete directly or indirectly with our product candidate; | |
● | collaborators could have significant discretion in determining the efforts and resources that they will apply to our arrangements with them, and thus we may have limited or no control over the sales, marketing and distribution activities; | |
● | should our product candidate achieve regulatory approval, a collaborator with marketing and distribution rights to our product candidate may not commit sufficient resources to the marketing and distribution of such product; | |
● | collaborators may not properly maintain or defend our intellectual property rights or may use our proprietary information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property or proprietary information or expose us to potential litigation; | |
● | collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability; and | |
● | collaborations may be terminated for the convenience of the collaborator and, if terminated, we could be required to either find alternative collaborators (which we may be unable to do) or raise additional capital to pursue further development or commercialization of our product candidate on our own. |
Our business would be materially or perhaps significantly harmed if any of the foregoing or similar risks comes to pass with respect to our key collaborations.
If we elect to establish a sales and marketing infrastructure, we may not realize a positive return on this investment. We will have to compete with established and well-funded medical device companies to recruit, hire, train and retain sales and marketing personnel. Once hired, the training process is lengthy because it requires significant education of new sales representatives to achieve the level of clinical competency with our products expected by specialists. Upon completion of the training, our sales representatives typically require lead time in the field to grow their network of accounts and achieve the productivity levels we expect them to reach in any individual territory. If we are unable to attract, motivate, develop and retain a sufficient number of qualified sales personnel, or if our sales representatives do not achieve the productivity levels in the time period we expect them to reach, our revenue will not grow at the rate we expect and our business, results of operations and financial condition will suffer. Also, to the extent we hire sales personnel from our competitors, we may be required to wait until applicable non-competition provisions have expired before deploying such personnel in restricted territories or incur costs to relocate personnel outside of such territories. In addition, we have been in the past, and may be in the future, subject to allegations that these new hires have been improperly solicited, or that they have divulged to us proprietary or other confidential information of their former employers. Any of these risks may adversely affect our ability to increase sales of our products. If we are unable to expand our sales and marketing capabilities, we may not be able to effectively commercialize our products, which would adversely affect our business, results of operations and financial condition.
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We presently rely on our supply agreement with LMAT for substantially all of our revenue, and if the supply agreement were terminated it could have a material adverse effect on our revenue and results of operations.
In March, 2016, we entered into the supply agreement with LMAT for the exclusive distribution and sales rights to the ProCol® Vascular Bioprosthesis for Hemodialysis Vascular Access concomitant with ESRD. We have generated almost all of our total revenue since March 2016 pursuant to the supply agreement. If the supply agreement were terminated, or if either party became unable to perform their obligations under the supply agreement, it would have a material adverse effect on our revenue and results of operation.
We may never be able to generate sufficient revenue from the commercialization of our proposed products to achieve and maintain profitability.
Our ability to operate profitably in the future will depend upon, among other items, our ability to (i) fully develop our new products, (ii) scale up our business and operational structure, (iii) obtain regulatory approval of our proposed products from the FDA, (iv) market and sale our products (v) successfully gain market acceptance of our products, and (vi) obtain sufficient and on-time supply of components from our third party suppliers. If we fail to successfully commercialize any of our proposed products, we may never receive a return on our investments in product development, sales and marketing, regulatory compliance, manufacturing and quality assurance, which may cause us to fail to generate revenue and gain economies of scale from such investments.
In addition, potential customers may decide not to purchase our products and, even if we succeed in increasing adoption of our products by physicians, hospitals and other healthcare providers, creating and maintaining relationships with customers and developing and commercializing new features or indications for our products, we may not be able to generate sufficient revenue to achieve or maintain profitability.
We depend upon third-party suppliers for certain components of our proposed products, making us vulnerable to supply problems and price fluctuations, which could harm our business.
We rely on a number of third-party suppliers to provide certain components of our proposed products. We do not have long-term supply agreements with most of our suppliers, and, in many cases, we purchase finished goods on a purchase order basis. Our suppliers may encounter problems during manufacturing for a variety of reasons, including unanticipated demand from larger customers, failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction, quality or yield problems and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these third-party suppliers also subjects us to other risks that could harm our business, including:
● | interruption of supply resulting from modifications to, or discontinuation of, a supplier’s operations; | |
● | delays in product shipments resulting from defects, reliability issues or changes in components from suppliers; | |
● | price fluctuations due to a lack of long-term supply arrangements for key components with our suppliers; | |
● | errors in manufacturing components, which could negatively impact the effectiveness or safety of our proposed products or cause delays in shipment of our proposed products; |
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● | discontinued production of components, which could significantly delay our production and sales and impair operating margins; | |
● | inability to obtain adequate supplies in a timely manner or on commercially reasonable terms; | |
● | difficulty locating and qualifying alternative suppliers, especially with respect to our sole-source supplies; | |
● | delays in production and sales caused by switching components, which may require product redesign and/or new regulatory submissions; | |
● | delays due to evaluation and testing of products from alternative suppliers and corresponding regulatory qualifications; | |
● | non-timely delivery of components due to our suppliers manufacturing products for a range of customers; | |
● | the failure of our suppliers to comply with strictly enforced regulatory requirements, which could result in disruption of supply or increased expenses; and | |
● | inability of suppliers to fulfill orders and meet requirements due to financial hardships. |
In addition, there are a limited number of suppliers and third-party manufacturers that operate under the FDA’s Quality System Regulation requirements, maintain certifications from the International Organization for Standardization that are recognized as harmonized standards in the EEA, and that have the necessary expertise and capacity to manufacture components for our products. As a result, it may be difficult for us to locate manufacturers for our anticipated future needs, and our anticipated growth may strain the ability of our current suppliers to deliver products, materials and components to us. If we are unable to arrange for third-party manufacturing of components for our products, or to do so on commercially reasonable terms, we may not be able to complete development of, market and sell our current or new products. Further, any supply interruption from our suppliers or failure to obtain additional suppliers for any of the components used in our proposed products would limit our ability to manufacture our proposed products. Failure to meet these commitments could result in legal action by our customers, loss of customers or harm to our ability to attract new customers, any of which could have a material adverse effect on our business, financial condition, results of operations and growth.
We will need to raise additional capital to fund our existing commercial operations, develop and commercialize new products and expand our operations.
Based on our current business plan, we believe our current cash and cash equivalents, revenue, and net proceeds of this offering will be sufficient to meet our anticipated cash requirements for at least the next [__] months. If our available cash balances, net proceeds from this offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, we may seek to sell common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing.
Our present and future capital requirements will be significant and will depend on many factors, including:
● | the progress and results of our development efforts for our products; | |
● | the costs, timing and outcome of regulatory review of our product candidates; | |
● | the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims; | |
● | the effect of competing technological and market developments; |
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● | market acceptance of our products; | |
● | our rate of progress in establishing coverage and reimbursement arrangements with domestic and international commercial third-party payors and government payors; | |
● | our ability to achieve revenue growth and improve gross margins; | |
● | the costs related to international expansion; | |
● | the extent to which we acquire or in-license other products and technologies; and | |
● | legal, accounting, insurance and other professional and business-related costs. |
Further, we expect our research and development expenses to increase in connection with our ongoing activities. Additionally, our expenses may increase beyond present expectations if, for example, applicable regulatory authorities, including the FDA, require that we perform studies in addition to those that we currently anticipate, in which case the timing of any potential product approval may be delayed. Until we can generate a sufficient amount of product revenue, if ever, we will need to seek additional capital, which may not be available at such times or in such amounts as we need. Even if capital is available, it may be available to us only on unfavorable terms. Any additional equity or convertible debt financing into which we enter could be dilutive to our existing stockholders. Any future debt financing into which we enter may impose covenants upon us that restrict our operations, including limitations on our ability to incur liens or additional debt, pay dividends, repurchase our stock, make certain investments and engage in certain merger, consolidation or asset sale transactions. Any debt financing or additional equity that we raise may contain terms that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to our technologies or our products, or grant licenses on terms that are not favorable to us. If access to sufficient capital is not available as and when needed, our business will be materially impaired and we may be required to cease operations, curtail one or more product development or commercialization programs, or we may be required to significantly reduce expenses, sell assets, seek a merger or joint venture partner, file for protection from creditors or liquidate all our assets. Any of these factors could harm our operating results.
We operate in a very competitive business environment and if we are unable to compete successfully against our existing or potential competitors, our sales and operating results may be negatively affected.
The medical device industry is intensely competitive and subject to rapid and significant technological change, as well as the introduction of new products or other market activities of industry participants. Our ability to compete successfully will depend on our ability to develop future products that reach the market in a timely manner, are well adopted by customers and receive adequate coverage and reimbursement from third-party payors.
We have numerous competitors, which include Medtronic and St. Jude Medical, many of whom have substantially greater name recognition, commercial infrastructure and financial, technical and personnel resources than us. Our competitors develop and/or patent competing products or processes earlier than we can or obtain regulatory clearance or approvals for competing products more rapidly than we can, which could impair our ability to develop and commercialize similar products or processes. Additionally, our competitors may, in the future, develop medical devices that render our products obsolete or uneconomical
Many of our current and potential competitors are publicly traded, or are divisions of publicly-traded, major medical device or technology companies that enjoy several competitive advantages. We face a challenge overcoming the long-standing preferences of some specialists for using the products of our larger, more established competitors. Specialists who have completed many successful procedures using the products made by these competitors may be reluctant to try new products from a source with which they are less familiar. If these specialists do not try and subsequently adopt our products and services, we may be unable to generate sufficient revenue or growth. In addition, many of our competitors enjoy other advantages such as:
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● | greater financial resources for marketing and aggressive discounting; | |
● | large and established sales, marketing and distribution networks with greater reach in both domestic and international markets; | |
● | significantly greater brand recognition; | |
● | established business and financial relationships with specialists, referring physicians, hospitals and medical schools; | |
● | greater existing market share in our product market; | |
● | greater resources devoted to research and development of competing products and greater capacity to allocate additional resources; | |
● | greater experience in obtaining and maintaining regulatory clearances and approvals for new products and product enhancements; | |
● | products supported by long-term clinical data; | |
● | more expansive patent portfolios and other intellectual property rights; and | |
● | broader product portfolios affording them greater ability to cross-sell their products or to incentivize hospitals or orthopedic surgeons to use their products. |
As a result of this increased competition, we believe there will be increased pricing pressure in the future. The entry of multiple new products and competitors may lead some of our competitors to employ pricing strategies that could adversely affect the pricing of our products and pricing in our markets generally. Additionally, because we expect that potential hospital and other healthcare provider customers will bill various third-party payors to cover all or a portion of the costs and fees associated with the procedures in which our valves and other products will be used, including the cost of the purchase of our products, changes in the amount such payors are willing to reimburse our customers for procedures using our products could create pricing pressure for us. If competitive forces drive down the prices we are able to charge for our products, our profit margins will shrink, which will adversely affect our ability to invest in and grow our business.
There can also be no assurance that our competitors will not seek to obtain agreements, exclusive or otherwise, with the same partners or licensees that we intend to approach in order to develop and market our proposed products. In addition, our competitors may be able to meet these requirements and develop products which are comparable or superior to our products or which would render our technology or products obsolete or non-competitive.
Our long-term growth depends on our ability to develop and commercialize additional devices.
The medical device industry is highly competitive and subject to rapid change and technological advancements. Therefore, it is important to our business that we continue to enhance our device offerings and introduce new devices. Developing new devices is expensive and time-consuming and could divert management’s attention away from our core business. Even if we are successful in developing additional devices, the success of any new device offering or enhancements to existing devices will depend on several factors, including our ability to:
● | properly identify and anticipate surgeon and patient needs; | |
● | develop and introduce new devices or device enhancements in a timely manner; | |
● | develop an effective and dedicated sales and marketing team; | |
● | avoid infringing upon the intellectual property rights of third-parties; | |
● | demonstrate, if required, the safety and efficacy of new devices with data from preclinical studies and clinical trials; |
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● | obtain the necessary regulatory clearances or approvals for new devices or device enhancements; | |
● | be fully FDA-compliant with marketing of new devices or modified devices; | |
● | provide adequate training to potential users of our devices; and | |
● | receive adequate coverage and reimbursement for procedures performed with our devices. |
If we are unsuccessful in developing and commercializing additional devices in other areas, our ability to increase our revenue may be impaired.
New technologies, techniques or products could emerge that might offer better combinations of price and performance than the products and services that we plan to offer. Existing markets for surgical devices are characterized by rapid technological change and innovation. It is critical to our success that we anticipate changes in technology and customer requirements and physician, hospital and healthcare provider practices. It is also important that we successfully introduce new, enhanced and competitive products to meet our prospective customers’ needs on a timely and cost-effective basis. At the same time, however, we must carefully manage our introduction of new products. If potential customers believe that such products will offer enhanced features or be sold for a more attractive price, they may delay purchases until such products are available. We may also continue to offer older obsolete products as we transition to new products, and we may not have sufficient experience managing product transitions. If we do not successfully innovate and introduce new technology into our anticipated product lines or successfully manage the transitions of our technology to new product offerings, our revenue, results of operations and business could be adversely impacted.
Our competitors may be able to respond more quickly and effectively than we can to new or changing opportunities, technologies, industry standards, distribution reach or customer requirements. We anticipate that we will face strong competition in the future as current or future competitors develop new or improved products and as new companies enter the market with novel technologies.
If we are unable to convince hospital facilities to approve the use of our devices, we may be unable to generate a substantial volume of sales of our products.
In the United States, in order for surgeons to use our devices, the hospital facilities where these surgeons treat patients will typically require us to receive approval from the facility’s value analysis committee, or VAC. VACs typically review the comparative effectiveness and cost of medical devices used in the facility. The makeup and evaluation processes for VACs vary considerably, and it can be a lengthy, costly and time-consuming effort to obtain approval by the relevant VAC. For example, even if we have an agreement with a hospital system for purchase of our products, in most cases, we must obtain VAC approval by each hospital within the system to sell at that particular hospital. Additionally, hospitals typically require separate VAC approval for each specialty in which our product is used, which may result in multiple VAC approval processes within the same hospital even if such product has already been approved for use by a different specialty group. We often need VAC approval for each different product to be used by the surgeons in that specialty. In addition, hospital facilities and group purchasing organizations, or GPOs, which manage purchasing for multiple facilities, may also require us to enter into a purchasing agreement and satisfy numerous elements of their administrative procurement process, which can also be a lengthy, costly and time consuming effort. If we do not receive access to hospital facilities in a timely manner, or at all, via these VAC and purchasing contract processes, or otherwise, or if we are unable to secure contracts on commercially reasonable terms in a timely manner, or at all, our operating costs will increase, our sales may decrease and our operating results may be harmed. Furthermore, we may expend significant effort in these costly and time-consuming processes and still may not obtain VAC approval or a purchase contract from such hospitals or GPOs.
We must demonstrate to surgeons and hospitals the merits of our products to facilitate greater adoption of our products.
Surgeons play a significant role in determining the devices used in the operating room and in assisting in obtaining approval by the relevant VAC. Educating surgeons on the benefits of our devices will require a significant commitment by our marketing team and sales organization. Surgeons and hospitals may be slow to change their practices because of familiarity with existing devices and/or treatments, perceived risks arising from the use of new devices, lack of experience using new devices, lack of clinical data supporting the benefits of such devices or the cost of new devices. There may never be widespread adoption of our devices by surgeons and hospitals. If we are unable to educate surgeons and hospitals about the advantages of devices incorporating our technology, as compared to surgical methods which do not incorporate such technology, we may face challenges in obtaining approval by the relevant VAC, and we will not achieve significantly greater market acceptance of our devices, gain momentum in our sales activities, significantly grow our market share or grow our revenue and our business and financial condition will be adversely affected.
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Our manufacturing resources are limited and if we are unable to produce an adequate supply of our proposed products for use in our current and planned clinical trials or for commercialization, our regulatory, development and commercialization efforts may be delayed.
Our manufacturing resources for our proposed products are limited and we rely on outside vendors for several materials and processes. We currently manufacture our proposed products for our clinical trials, research and development purposes and commercialization at our manufacturing facility in Irvine, California. If our existing manufacturing facility experiences a disruption, we would have no other means of manufacturing our proposed products until we are able to restore the manufacturing capability at our current facility or develop alternative manufacturing facilities. Additionally, any damage to or destruction of our facilities or our equipment, prolonged power outage or contamination at our facilities would significantly impair our ability to produce our proposed products.
Additionally, in order to produce our proposed products in the quantities that will be required for commercialization, we will have to increase or “scale up” our production process over the current level of production. We may encounter difficulties in scaling up our production, including issues involving yields, controlling and anticipating costs, quality control and assurance, supply and shortages of qualified personnel. If our scaled-up production process is not efficient or results in a product that does not meet quality or other standards, we may be unable to meet market demand and our revenues, business and financial prospects would be adversely affected. Further, third parties with whom we may develop relationships may not have the ability to produce the quantities of the materials we may require for clinical trials or commercial sales or may be unable to do so at prices that allow us to price our products competitively.
Our contemplated and future international operations could subject us to regulatory and legal risks and certain operating risks, which could adversely impact our business, results of operations and financial condition.
The sale and shipment of our products across international borders and the purchase of components from international sources subject us to U.S. and foreign governmental trade, import and export and customs regulations and laws. Compliance with these regulations and laws is costly and could expose us to penalties for non-compliance. We expect that our international activities will be dynamic over the foreseeable future as we continue to pursue to identify opportunities in international markets. Our contemplated and future international business operations are subject to a variety of risks, including:
● | fluctuations in foreign currency exchange rates; | |
● | difficulties in staffing and managing foreign and geographically dispersed operations; | |
● | third-party reimbursement policies that may require some of the patients who undergo procedures using our products or who use our services to directly absorb costs or that may necessitate the reduction of the selling prices of our products; | |
● | an inability, or reduced ability, to protect our intellectual property, including any effect of compulsory licensing imposed by government action | |
● | economic, political or social instability in certain countries and regions; | |
● | the imposition of additional U.S. and foreign governmental controls or regulations; | |
● | changes in duties and tariffs, license obligations and other non-tariff barriers to trade; | |
● | the imposition of costly and lengthy new export licensing requirements; |
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● | the imposition of restrictions on the activities of foreign agents, representatives and distributors; | |
● | the occurrence of an FDA inspection that results in adverse findings at our facilities, or the facilities of our vendors or suppliers, and any resulting import detention that prevents products made in such facilities from entering the United States; | |
● | scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; | |
● | availability of government subsidies or other incentives that benefit competitors in their local markets that are not available to us; | |
● | imposition of differing labor laws and standards; | |
● | the ability of a foreign government to exclude us from, or limit our ability to compete in, the markets under its jurisdiction through collective tender processes or otherwise; | |
● | longer payment cycles for products sold to customers outside the U.S.; | |
● | difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; and | |
● | the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity. |
We expect each international market we enter will pose particular regulatory and other hurdles to overcome and future developments in these markets, including the uncertainty relating to governmental policies and regulations, could harm our business. If we expend significant time and resources on expansion plans that fail or are delayed, our reputation, business and financial condition may be harmed.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We expect to expand our business operations to meet anticipated growth in demand for our proposed products. This future growth could strain our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and customer service, sales force management and general and financial administration. Our ability to effectively manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures.
As our commercial operations and sales volume grow, we will need to continue to increase our workflow capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We will also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increases in scale, expansion of personnel, purchase of equipment or process enhancements may not be successfully implemented.
Product liability lawsuits against us could cause us to incur substantial liabilities, limit sales of our existing products and limit commercialization of any products that we may develop.
Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, distribution, and sale of medical devices. This risk exists even if a device is cleared or approved for commercial sale by the FDA and manufactured in facilities licensed and regulated by the FDA or an applicable foreign regulatory authority. Manufacturing and marketing of our commercial devices and clinical testing of our devices under development, may expose us to product liability and other tort claims. Furthermore, surgeons may misuse our devices or use improper techniques if they are not adequately trained, potentially leading to injury and an increased risk of product liability. If our devices are misused or used with improper technique, we may become subject to costly litigation by our customers or their patients. Regardless of the merit or eventual outcome, product liability claims may result in:
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● | significant litigation costs; | |
● | distraction of management’s attention from our primary business operations; | |
● | decreased demand for our products and any products that we may develop; | |
● | damage to our reputation; | |
● | withdrawal of clinical trial participants; | |
● | substantial monetary awards to trial participants, patients or other claimants; | |
● | loss of revenue; and | |
● | the inability to commercialize any products that we may develop. |
Although we have, and intend to maintain, liability insurance, the coverage limits of our insurance policies may not be adequate, and one or more successful claims brought against us may have a material adverse effect on our business and results of operations. If we are unable to obtain insurance in the future at an acceptable cost or on acceptable terms with adequate coverage, we will be exposed to significant liabilities.
We bear the risk of warranty claims on our products.
We provide limited product warranties against manufacturing defects of the ProCol® Vascular Bioprosthesis, including component parts manufactured by third parties. Our product warranty requires us to repair defects arising from product design and production processes, and if necessary, replace defective components. Thus far, we have not accrued a significant liability contingency for potential warranty claims.
If we experience warranty claims in excess of our expectations, or if our repair and replacement costs associated with warranty claims increase significantly, we will incur liabilities for potential warranty claims that may be greater than we expect. An increase in the frequency of warranty claims or amount of warranty costs may harm our reputation and could have a material adverse effect on our business, results of operations and financial condition.
The loss of our executive officers or our inability to attract and retain qualified personnel may adversely affect our business, financial conditions and results of operations.
Our business and operations depend to a significant degree on the skills, efforts and continued services of our executive officers who have critical industry experience and relationships. Although we have entered into employment agreements with our executive officers, they may terminate their employment with us at any time. Accordingly, there can be no assurance that these executive officers will remain associated with us. The efforts of these persons will be critical to us as we continue to develop our products and business. We do not carry key person life insurance on any of our management, which would leave our Company uncompensated for the loss of any of our executive officer.
Further, competition for highly-skilled and qualified personnel is intense. As such, our future viability and ability to achieve sales and profit will also depend on our ability to attract, train, retain and motivate highly qualified personnel in the diverse areas required for continuing our operations. If we were to lose the services one or more of our current executive officers or if we are unable to attract, hire and retain qualified personnel, we may experience difficulties in competing effectively, developing and commercializing our products and implementing our business strategies, which could have a material adverse effect on our business, operations and financial condition.
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Our employees, consultants, independent sales agencies, distributors and other commercial partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements.
We are exposed to the risk that our employees, consultants, independent sales agencies, distributors and other commercial partners may engage in fraudulent or illegal activity. Misconduct by these parties could include intentional, reckless or negligent conduct or other unauthorized activities that violate the regulations of the FDA and non-U.S. regulators, including those laws requiring the reporting of true, complete and accurate information to such regulators, manufacturing standards, healthcare fraud and abuse laws and regulations in the United States and abroad or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and business arrangements in the healthcare industry, including the sale of medical devices, are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. It is not always possible to identify and deter misconduct by our employees, sales agencies, distributors and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us and we are not successful in defending ourselves or asserting our rights, those actions could result in the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings and curtailment of operations, any of which could adversely affect our ability to operate our business and our results of operations. Whether or not we are successful in defending against such actions or investigations, we could incur substantial costs, including legal fees, and divert the attention of management in defending ourselves against any of these claims or investigations.
We may not be able to successfully complete any future acquisitions and any acquisitions, joint ventures or other investments may result in dilution of our stockholders’ ownership, increase our debt or cause us to incur significant expense.
We may seek to grow our business through the acquisition of additional products, technologies, services or businesses that we believe have significant commercial potential. Growth through acquisitions will depend upon the continued availability of suitable acquisition candidates at favorable prices and on commercially acceptable terms and conditions. Even if these opportunities are present, we may be unable to successfully identify suitable acquisition candidates. In addition, we may not be able to successfully integrate any acquired companies or achieve the commercial potential or synergies projected for any acquisition. Future acquisitions may also divert management’s attention from other business activities. Further, any such acquisitions may result in the incurrence of debt, contingent liabilities or future write-offs of intangible assets or goodwill, any of which could have a negative impact on our cash flows, financial condition and results of operations.
Additionally, we may pursue strategic alliances and joint ventures that leverage our technology and industry experience. We may be unable to find suitable partners or, in the event we identify such a partner, we may be unable to realize the anticipated benefits of any such alliance or joint venture. To finance any such acquisitions, alliances or joint ventures, we may choose to issue shares of capital stock as consideration, which could dilute the ownership of our stockholders. If the price of our common stock is low or volatile, however, we may not be able to acquire other companies or fund a joint venture project using our stock as consideration.
Given seasonal and situational fluctuations, we may maintain high levels of inventory, which could consume a significant amount of our resources, reduce our cash flow and lead to inventory impairment charges.
As a result of certain seasonal and situational fluctuations, we are subject to the risk of inventory obsolescence and expiration, which may lead to inventory impairment charges. In order to market and sell our products effectively, we must maintain high levels of inventory and demonstration equipment. Our manufacturing processes and sourcing processes require lengthy lead times, during which components of our products may become obsolete due to design changes, and we may over- or under-estimate the amount needed of a given component, in which case we may expend extra resources or be constrained in the amount of end product that we can produce. Our dependence on third-party suppliers for our single use products exposes us to greater lead times, increasing our risk of inventory obsolesce comparatively. Furthermore, some of our products have a limited shelf life due to sterilization requirements and/or degradation, and part or all of a given product or component may expire and its value become impaired. In that instance, we would be required to record an impairment charge. If our estimates of required inventory are too high, we may be exposed to further inventory obsolesce risk. In the event that a substantial portion of our inventory becomes obsolete or expires, or in the event we experience a supply chain imbalance as described above, it could have a material adverse effect on our business, results of operations and financial condition due to the resulting costs associated with the inventory impairment charges and costs required to replace such inventory.
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If we experience significant disruptions in our information technology systems, our business may be adversely affected.
We depend on our information technology systems for the efficient functioning of our business, including accounting, data storage, compliance, purchasing and inventory management. We do not have redundant systems at this time. While we will attempt to mitigate interruptions, we may experience difficulties in implementing some upgrades, which would impact our business operations, or experience difficulties in operating our business during the upgrade, either of which could disrupt our operations, including our ability to timely ship and track product orders, project inventory requirements, manage our supply chain and otherwise adequately service our customers. In the event we experience significant disruptions as a result of the current implementation of our information technology systems, we may not be able to repair our systems in an efficient and timely manner. Accordingly, such events may disrupt or reduce the efficiency of our entire operation and have a material adverse effect on our results of operations and cash flows.
We are increasingly dependent on sophisticated information technology for our infrastructure. Our information systems require an ongoing commitment of significant resources to maintain, protect and enhance existing systems. Failure to maintain or protect our information systems and data integrity effectively could have a materially adverse effect on our business. For example, third parties may attempt to hack into systems and may obtain our proprietary information.
Our ability to use our net operating loss carry-forwards and certain other tax attributes may be limited.
As of December 31, 2015, we had federal net operating loss carryforwards, or NOLs, of approximately $5.0 million, which begin to expire in the year ending December 31, 2026, and California NOLs of approximately $3.3 million, which begin to expire in the year ending December 31, 2026. As of December 31, 2015, we also had federal research and development tax credit carryforwards of approximately $0.2 million. In general, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, a corporation that undergoes an “ownership change” (generally defined as a cumulative change in equity ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period) may be subject to limitations on its ability to utilize its NOLs and certain credit carryforwards to offset future taxable income and taxes. We are currently analyzing the tax impacts of any potential ownership changes on our federal NOLs and credit carryforwards. Future changes in our stock ownership, including this or future offerings, as well as other changes that may be outside of our control, could result in ownership changes. Our NOLs and credit carryforwards may also be limited under similar provisions of state law. We have recorded a full valuation allowance related to our NOLs and other deferred tax assets due to the uncertainty of the ultimate realization of the future tax benefits of such assets.
Risks Related to Regulatory Approval and Other Governmental Regulations
Our business and products are subject to extensive governmental regulation and oversight, and our failure to comply with applicable regulatory requirements could harm our business.
Our products and operations are subject to extensive regulation in the U.S. by the FDA and by regulatory agencies in other countries where we anticipate conducting business activities. The FDA regulates the development, testing, manufacturing, labeling, storage, record-keeping, promotion, marketing sales, distribution and post-market support and reporting of medical devices in the U.S. The regulations to which we are subject are complex and may become more stringent over time. Regulatory changes could result in restrictions on our ability to carry on or expand our operations, higher than anticipated costs or lower than anticipated sales.
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In order for us to market our Class II products for use in the U.S., we must first obtain clearance from the FDA pursuant to Section 510(k) of the Federal Food, Drug, and Cosmetic Act, or FFDCA. Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent to another device with 510(k) clearance or grandfathered, or pre-amendment, status or to a device that was reclassified from Class III to Class II or Class I (those are referred to as predicate devices). If we significantly modify our products after they receive FDA clearance, or seek to market them for additional indications for use, the FDA may require us to submit a separate 510(k) or premarket approval application, or PMA, for the modified product before we are permitted to market the products in the U.S. In addition, if we develop products in the future that are not considered to be substantially equivalent to a predicate device, we will be required to obtain FDA approval by submitting a PMA. The FDA may not act favorably or quickly in its review of our 510(k) or PMA submissions or we may encounter significant difficulties and costs in our efforts to obtain FDA clearance or approval, any of which could delay or preclude our sale of new products in the U.S. Furthermore, the FDA may request additional data or require us to conduct further testing, or compile more data, including clinical data and clinical studies, in support of a 510(k) submission. Regulatory policy affecting our products can change at any time. The changes and their impact on our business cannot be accurately predicted. For example, in 2011, the FDA announced a Plan of Action to modernize and improve the FDA’s premarket review of medical devices, and has implemented, and continues to implement, reforms intended to streamline the premarket review process. In addition, as part of the Food and Drug Administration Safety and Innovation Act of 2012, Congress enacted several reforms through the Medical Device Regulatory Improvements and additional miscellaneous provisions which will further affect both pre- and post-approval medical device regulation. Changes in the FDA 510(k) process could make clearance more difficult to obtain, increase delay, add uncertainty and have other significant adverse effects on our ability to obtain and maintain clearance for our products. The FDA may also, instead of accepting a 510(k) submission, require us to submit a PMA, which is typically a much more complex, lengthy and burdensome application than a 510(k) submission. To support a PMA, the FDA would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective. In some cases such studies may be requested for a 510(k) as well. We may not be able to meet the requirements to obtain 510(k) clearance or PMA approval, in which case the FDA may not grant any necessary clearances or approvals. In addition, the FDA may place significant limitations upon the intended use of our products as a condition to a 510(k) clearance or PMA approval. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following clearance or approval. Any delays or failure to obtain FDA clearance or approval of new products we develop, any limitations imposed by the FDA on new product use or the costs of obtaining FDA clearance or approvals could have a material adverse effect on our business, financial condition and results of operations.
In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a medical device, a company must, among other things, apply for and obtain Institutional Review Board, or IRB, approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the FDA) to human health, the sponsor of the investigation must also submit and obtain FDA approval of an Investigational Device Exemption, or IDE, application. Our system product is considered a significant risk device requiring IDE approval prior to investigational use. We may not be able to obtain FDA and/or IRB approval to undertake clinical trials in the U.S. for any new devices we intend to market in the U.S. in the future. If we obtain such approvals, we may not be able to conduct studies which comply with the IDE and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition and results of operations. Certainty that clinical trials will meet desired endpoints, produce meaningful or useful data and be free of unexpected adverse effects, or that the FDA will accept the validity of foreign clinical study data cannot be assured, and such uncertainty could preclude or delay market clearance or authorizations resulting in significant financial costs and reduced revenue.
Our products may also be subject to extensive governmental regulation in foreign jurisdictions, such as Europe, and our failure to comply with applicable requirements could cause our business, results of operations and financial condition to suffer.
In the EEA, our products will need to comply with the Essential Requirements laid down in Annex I to the EU Active Implantable Medical Devices Directive. Compliance with these requirements is a prerequisite to be able to affix the CE mark to a product, without which a product cannot be marketed or sold in the EEA. To demonstrate compliance with the Essential Requirements and obtain the right to affix the CE Mark to our products, we must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Except for low risk medical devices (Class I with no measuring function and which are not sterile), where the manufacturer can issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the Essential Requirements, a conformity assessment procedure requires the intervention of a Notified Body, which is an organization designated by a competent authority of an EEA country to conduct conformity assessments. Depending on the relevant conformity assessment procedure, the Notified Body would audit and examine the Technical File and the quality system for the manufacture, design and final inspection of our products. The Notified Body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the medical device and its manufacturer and their conformity with the Essential Requirements. This Certificate entitles the manufacturer to affix the CE mark to its medical products after having prepared and signed a related EC Declaration of Conformity.
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As a general rule, demonstration of conformity of medical products and their manufacturers with the Essential Requirements must be based, among other things, on the evaluation of clinical data supporting the safety and performance of the products during normal conditions of use. Specifically, a manufacturer must demonstrate that the device achieves its intended performance during normal conditions of use and that the known and foreseeable risks, and any adverse events, are minimized and acceptable when weighed against the benefits of its intended performance, and that any claims made about the performance and safety of the device (e.g., product labeling and instructions for use) are supported by suitable evidence. This assessment must be based on clinical data, which can be obtained from (1) clinical studies conducted on the devices being assessed, (2) scientific literature from similar devices whose equivalence with the assessed device can be demonstrated or (3) both clinical studies and scientific literature. The conduct of clinical studies in the EEA is governed by detailed regulatory obligations. These may include the requirement of prior authorization by the competent authorities of the country in which the study takes place and the requirement to obtain a positive opinion from a competent Ethics Committee. This process can be expensive and time-consuming.
In order to continue to sell our products in Europe, we must maintain our CE Mark and continue to comply with certain EU Directives. Our failure to continue to comply with applicable foreign regulatory requirements, including those administered by authorities of the EEA countries, could result in enforcement actions against us, including refusal, suspension or withdrawal of our CE Certificates of Conformity by our Notified Body (either the British Standards Institution, or BSI, or MEDCERT), which could impair our ability to market products in the EEA in the future.
The FDA regulatory approval, clearance and license process is complex, time-consuming and unpredictable.
In the United States, our product candidates are expected to be regulated as medical devices. Before our medical device product candidates can be marketed in the United States, we must submit and the FDA must approve a PMA. For the PMA approval process, the FDA must determine that a proposed device is safe and effective for its intended use based, in part, on extensive data, including, but not limited to, technical, pre-clinical, clinical trial, manufacturing and labeling data. In addition, modifications to products that are approved through a PMA application generally need FDA approval. The time required to obtain approval, clearance or license by the FDA to market a new therapy is unpredictable but typically takes many years and depends upon many factors, including the substantial discretion of the FDA.
Our product candidates could fail to receive regulatory approval, clearance or license for many reasons, including the following:
● | the FDA may disagree with the design or implementation of our clinical trials or study endpoints; | |
● | we may be unable to demonstrate to the satisfaction of the FDA that our product candidates are safe and effective for their proposed indications or that our product candidates provide significant clinical benefits; | |
● | the results of our clinical trials may not meet the level of statistical significance required by the FDA for approval, clearance or license or may not support approval of a label that could command a price sufficient for us to be profitable; | |
● | the FDA may disagree with our interpretation of data from preclinical studies or clinical trials; | |
● | the opportunity for bias in the clinical trials as a result of the open-label design may not be adequately handled and may cause our trial to fail; | |
● | our product candidates may be subject to an FDA advisory committee review, which may be requested at the sole discretion of the FDA, and which may result in unexpected delays or hurdles to approval; | |
● | the FDA may determine that the manufacturing processes at our facilities or facilities of third-party manufacturers with which we contract for clinical and commercial supplies are inadequate; and | |
● | the approval, clearance or license policies or regulations of the FDA may significantly change in a manner rendering our clinical data insufficient for approval. |
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Even if we were to obtain approval, clearance or license, the FDA may grant approval, clearance or license contingent on the performance of costly post-marketing clinical trials, or may approve our product candidates with a label that does not include the labeling claims necessary or desirable for successful commercialization of our product candidates. Any of the above could materially harm our product candidates’ commercial prospects.
Modifications to our devices may require new 510(k) clearances or approvals of PMAs or may require us to recall or cease marketing our devices until clearances or approvals are obtained.
Any modification to a 510(k)-cleared device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new 510(k) clearance or, possibly, approval of a PMA. The FDA requires every manufacturer to make this determination in the first instance, but the FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. We may make modifications or add additional features in the future that we believe do not require a new 510(k) clearance or approval of a PMA. If the FDA disagrees with our determination and requires us to submit new 510(k) notifications or PMA applications for modifications to our previously cleared products for which we have concluded that new clearances or approvals are unnecessary, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties.
Furthermore, the FDA’s ongoing review of the 510(k) clearance process may make it more difficult for us to make modifications to our previously cleared products, either by imposing more strict requirements on when a new 510(k) notification for a modification to a previously cleared product must be submitted, or applying more onerous review criteria to such submissions. For example, the FDA is currently reviewing its guidance describing when it believes a manufacturer is obligated to submit a new 510(k) for modifications or changes to a previously cleared device. The FDA is expected to issue revised guidance to assist device manufacturers in making this determination. It is unclear whether the FDA’s approach in this new guidance will result in substantive changes to existing policy and practice regarding the assessment of whether a new 510(k) is required for changes or modifications to existing devices. The FDA continues to review its 510(k) clearance process, which could result in additional changes to regulatory requirements or guidance documents, which could increase the costs of compliance or restrict our ability to maintain current clearances.
Even if our proposed products are approved by regulatory authorities, if we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with our proposed products, our products could be subject to restrictions or withdrawal from the market.
The manufacturing processes, post-approval clinical data and promotional activities of any product for which we obtain marketing approval will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Even if regulatory approval of our proposed products is granted in the United States, the approval may be subject to limitations on the indicated uses for which the product may be marketed or contain requirements for costly post-marketing testing and surveillance to monitor the safety or effectiveness of the product. Later discovery of previously unknown and unanticipated problems with our proposed products, including but not limited to unanticipated severity or frequency of adverse events, delays or problems with the manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.
Our products may in the future be subject to recalls or market withdrawals that could harm our business, results of operations and financial condition.
Manufacturers may, on their own initiative, initiate actions, including a non-reportable market withdrawal or a reportable product recall, for the purpose of correcting a material deficiency, improving device performance or other reasons. Additionally, the FDA and similar foreign governmental authorities have the authority to require the recall of commercialized devices in the event of material deficiencies or defects in the design, manufacture or labeling in the event that a product poses an unacceptable risk to health. In the case of the FDA, the authority to require a recall must be based on an FDA finding that there is a reasonable probability that the device would cause serious adverse health consequences or death. Manufacturers may, under their own initiative, conduct a device notification to inform surgeons of changes to instructions for use or of a deficiency, or of a suspected deficiency, found in a device. A government-mandated recall or voluntary recall by us or one of our distributors could occur as a result of component failures, manufacturing errors, design or labeling defects or other issues. Recalls, which include certain notifications and corrections as well as removals, of any of our devices, could divert managerial and financial resources and could have an adverse effect on our financial condition, harm our reputation with customers and reduce our ability to achieve expected revenues.
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Further, under the FDA’s Medical Device Reporting regulations, we are required to report to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury. Any adverse event involving our products could result in future voluntary corrective actions, such as product actions or customer notifications, or regulatory authority actions, such as inspection, mandatory recall or other enforcement action. Repeated product malfunctions may result in a voluntary or involuntary product recall, which could divert managerial and financial resources, impair our ability to manufacture our products in a cost-effective and timely manner and have an adverse effect on our reputation, financial condition and operating results.
Moreover, depending on the corrective action we take to redress a product’s deficiencies or defects, the FDA may require, or we may decide, that we will need to obtain new approvals or clearances for the device before we may market or distribute the corrected device. Seeking such approvals or clearances may delay our ability to replace the recalled devices in a timely manner. Moreover, if we do not adequately address problems associated with our devices, we may face additional regulatory enforcement action, including FDA warning letters, product seizure, injunctions, administrative penalties, withdrawals or clearances or approvals or civil or criminal fines. We may also be required to bear other costs or take other actions that may have a negative impact on our sales as well as face significant adverse publicity or regulatory consequences, which could harm our business, including our ability to market our products in the future.
We are required to report certain malfunctions, deaths and serious injuries associated with our products, which can result in voluntary corrective actions or agency enforcement actions.
Under FDA medical device reporting, or MDR, regulations, medical device manufacturers are required to submit information to FDA when they become aware of information that reasonably suggests a device may have caused or contributed to a death or serious injury or has malfunctioned, and, upon recurrence, the malfunction would likely cause or contribute to death or serious injury. If we determine that an MDR report is not required to be submitted for an event, and FDA disagrees with that determination, it could take enforcement action against us for failing to report the event. All manufacturers marketing medical devices in the EEA are legally bound to report incidents involving devices they produce or sell to the regulatory agency, or competent authority, in whose jurisdiction the incident occurred. Under the EU Medical Devices Directive (Directive 93/42/EEC), an incident is defined as any malfunction or deterioration in the characteristics and/or performance of a device, as well as any inadequacy in the labeling or the instructions for use which, directly or indirectly, might lead to or might have led to the death of a patient, or user or of other persons or to a serious deterioration in their state of health.
Malfunction or misuse of our products could result in future voluntary corrective actions, such as recalls, including corrections (e.g., customer notifications), or agency action, such as inspection or enforcement actions. If malfunctions or misuse do occur, we may be unable to correct the malfunctions adequately or prevent further malfunctions or misuse, in which case we may need to cease manufacture and distribution of the affected products, initiate voluntary recalls, and redesign the products or the instructions for use for those products. Regulatory authorities may also take actions against us, such as ordering recalls, imposing fines, or seizing the affected products. Any corrective action, whether voluntary or involuntary, will require the dedication of our time and capital, may distract management from operating our business, and may harm our business, results of operations and financial condition.
The potential misuse or off-label promotion of our future products may harm our reputation in the workplace, result in injuries that lead to product liability litigation or result in costly investigations and sanctions by regulatory bodies.
If and when our products are cleared by the FDA and CE Marked in the EEA for specific indications, we may only promote or market our products for their specifically cleared or approved indications. We will train our marketing and sales force against promoting our future products for uses outside of the cleared or approved indications for use, known as “off-label uses.”
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If the FDA determines that our promotional materials or training constitute promotion of unsupported claims or an off-label use, it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions, including the issuance or imposition of an untitled letter, which is used for violators that do not necessitate a warning letter, injunction, seizure, civil fine or criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our business activities to constitute promotion of an off-label use, which could result in significant penalties, including, but not limited to, criminal, civil and administrative penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs and the curtailment of our operations. Any of these events could significantly harm our business, results of operations and financial condition.
Further, the contemplated advertising and promotion of our products will be subject to EEA Member States laws implementing Directive 93/42/EEC concerning Medical Devices, or the EU Medical Devices Directive, Directive 2006/114/EC concerning misleading and comparative advertising, and Directive 2005/29/EC on unfair commercial practices, as well as other EEA Member State legislation governing the advertising and promotion of medical devices. EEA Member State legislation may also restrict or impose limitations on our ability to advertise our products directly to the general public. In addition, voluntary EU and national Codes of Conduct provide guidelines on the advertising and promotion of our products to the general public and may impose limitations on our promotional activities with healthcare professionals harming our business, results of operations and financial condition.
We are subject to federal, state and foreign healthcare laws and regulations, and a finding of failure to comply with such laws and regulations could have a material adverse effect on our business.
Our operations are, and will continue to be, directly and indirectly affected by various federal, state or foreign healthcare laws, including, but not limited to, those described below. These laws include:
● | the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs, such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the False Claims Act. Violations of the federal Anti-kickback Statute may result in substantial civil or criminal penalties, including criminal fines of up to $25,000, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law of up to $50,000 for each violation, plus three times the remuneration involved, civil penalties under the federal False Claims Act of up to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs; | |
● | the federal False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal third-party payors that are false or fraudulent. Suits filed under the False Claims Act, known as “qui tam” actions, can be brought by any individual on behalf of the government and such individuals, commonly known as “whistleblowers,” may share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims Act, the government may impose penalties of not less than $5,500 and not more than $11,000, plus three times the amount of the damages that the government sustains due to the submission of a false claim and exclude the entity from participation in Medicare, Medicaid and other federal healthcare programs; | |
● | the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier; |
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● | HIPAA, as amended by the HITECH Act, and their respective implementing regulations, which governs the conduct of certain electronic healthcare transactions and protects the security and privacy of protected health information. Failure to comply with the HIPAA privacy and security standards can result in civil monetary penalties up to $50,000 per violation, not to exceed $1.5 million per calendar year for non-compliance of an identical provision, and, in certain circumstances, criminal penalties with fines up to $250,000 per violation and/or imprisonment. State attorneys general can bring a civil action to enjoin a HIPAA violation or to obtain statutory damages up to $25,000 per violation on behalf of residents of his or her state. HIPAA also imposes criminal penalties for fraud against any healthcare benefit program and for obtaining money or property from a healthcare benefit program through false pretenses and provides for broad prosecutorial subpoena authority and authorizes certain property forfeiture upon conviction of a federal healthcare offense. Significantly, the HIPAA provisions apply not only to federal programs, but also to private health benefit programs. HIPAA also broadened the authority of the U.S. Office of Inspector General of the U.S. Department of Health and Human Services to exclude participants from federal healthcare programs; | |
● | the federal physician sunshine requirements under the PPACA, which requires certain manufacturers of drugs, devices, biologics and medical supplies to report annually to the U.S. Department of Health and Human Services information related to payments and other transfers of value to physicians, which is defined broadly to include other healthcare providers and teaching hospitals and ownership and investment interests held by physicians and their immediate family members. Manufacturers are required to submit reports to CMS by the 90th day of each calendar year. Failure to submit the required information may result in civil monetary penalties up to an aggregate of $150,000 per year (and up to an aggregate of $1 million per year for “knowing failures”) for all payments, transfers of value or ownership or investment interests not reported in an annual submission, and may result in liability under other federal laws or regulations; and | |
● | analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third- party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Any failure by us to ensure that our employees and agents comply with applicable state and foreign laws and regulations could result in substantial penalties or restrictions on our ability to conduct business in those jurisdictions, and our results of operations and financial condition could be materially and adversely affected. |
The risk of our being found in violation of these laws is increased by the fact that many of them have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available under such laws, it is possible that some of our business activities, including our relationships with surgeons and other healthcare providers, some of whom recommend, purchase and/or prescribe our devices, and our distributors, could be subject to challenge under one or more of such laws. For additional discussion of the healthcare laws and regulations applicable to us, see “Business — Government Regulation — Federal, State, and Foreign Fraud and Abuse, Data Privacy and Security and Physician Payment Transparency Laws.”
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply to us now or in the future, we may be subject to penalties, including civil and criminal penalties, damages, fines, disgorgement, exclusion from governmental health care programs and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business.
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Legislative or regulatory healthcare reform measures may have a material adverse effect on business, results of operations and financial condition.
FDA regulations and guidance are often revised or reinterpreted by FDA and such actions may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times for our product candidates. Delays in receipt of, or failure to receive, regulatory approvals for our product candidates would have a material adverse effect on our business, results of operations and financial condition.
In March 2010, the PPACA was signed into law, which includes a deductible 2.3% excise tax on any entity that manufactures or imports medical devices offered for sale in the United States, with limited exceptions, effective January 1, 2013. This excise tax is resulting in a significant increase in the tax burden on our industry, and if any efforts we undertake to offset the excise tax are unsuccessful as we begin to sell the product in the United States, the increased tax burden could have an adverse effect on our results of operations and cash flows. Other elements of the PPACA, including comparative effectiveness research, an independent payment advisory board and payment system reforms, including shared savings pilots and other provisions, may significantly affect the payment for, and the availability of, healthcare services and result in fundamental changes to federal healthcare reimbursement programs, any of which may materially affect numerous aspects of our business, results of operations and financial condition.
In addition, other legislative changes have been proposed and adopted in the United States since the PPACA was enacted. On August 2, 2011, the Budget Control Act of 2011 created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers up to 2% per fiscal year, which went into effect on April 1, 2013, and will remain in effect through 2024 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012, or the ATRA, was signed into law which further reduced Medicare payments to certain providers, including hospitals.
We expect that additional state and federal healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state governments will pay for healthcare products and services, which could result in reduced demand for our products and services or additional pricing pressures.
We could be negatively impacted by violations of global anti-bribery laws, including the FCPA.
Certain anti-bribery laws, including the FCPA or the UK Bribery Act of 2010, prohibit covered entities from offering, promising, authorizing or giving anything of value, directly or indirectly, to foreign officials or other commercial parties with the intent to influence the recipient’s act or decision, to induce action or inaction in violation of lawful duty or for the purpose of improperly obtaining or retaining business or other advantages. In addition, the FCPA imposes recordkeeping and internal controls requirements on publicly traded corporations and their foreign affiliates. As we expect to generate substantial revenue from countries outside the United States, we are subject to the risk that we, our employees, or any third parties such as sales agents and distributors acting our behalf in foreign countries may take action determined to be in violation of applicable anti-corruption laws, including the FCPA. Any violations of these laws, or even allegations of such violations, can lead to an investigation, which could disrupt our operations, involve significant management distraction, lead to significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition or operations. We could also suffer severe penalties, including criminal and civil penalties, disgorgement and other costly remedial measures.
Although we have implemented a program designed to ensure our employees and distributors comply with the FCPA and other anti-bribery laws, this program may not prevent all potential violations of the FCPA and other anti-corruption laws. Similarly, our books and records and internal control policies and procedures do not guarantee that we will, in all instances, comply with the accounting provisions of the FCPA.
Our relationships with physician consultants, owners and investors could be subject to additional scrutiny from regulatory enforcement authorities and could subject us to possible administrative, civil or criminal sanctions.
Federal and state laws and regulations impose restrictions on our relationships with physicians who are consultants, owners and investors. We have entered into, and intend to enter into, consulting agreements, license agreements and other agreements with physicians in which we provided stock options or cash or both as compensation. We have other written and oral arrangements with physicians, including for research and development grants and for other purposes as well.
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We could be adversely affected if regulatory agencies were to interpret our financial relationships with these physicians, who may be in a position to influence the ordering of and use of our products for which governmental reimbursement may be available, as being in violation of applicable laws. If our relationships with physicians are found to be in violation of the laws and regulations that apply to us, we may be required to restructure the arrangements and could be subject to administrative, civil and criminal penalties, including exclusion from participation in government healthcare programs, imprisonment, and the curtailment or restructuring of our operations, any of which could negatively impact our ability to operate our business and our results of operations.
Our business involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which may be expensive and restrict how we do business.
Our third-party manufacturers’ activities and our own activities involve the controlled storage, use and disposal of hazardous materials. We and our manufacturers are subject to federal, state, local and foreign laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these hazardous materials. We currently carry no insurance specifically covering environmental claims relating to the use of hazardous materials, but we do reserve funds to address these claims at both the federal and state levels. Although we believe that our safety procedures for handling and disposing of these materials and waste products comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of an accident, state or federal or other applicable authorities may curtail our use of these materials and interrupt our business operations. In addition, if an accident or environmental discharge occurs, or if we discover contamination caused by prior operations, including by prior owners and operators of properties we acquire, we could be liable for cleanup obligations, damages and fines. If such unexpected costs are substantial, this could significantly harm our financial condition and results of operations.
New regulations related to “conflict minerals” may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.
The Dodd-Frank Act required the SEC to establish new disclosure and reporting requirements for those companies that use certain minerals and metals mined in the Democratic Republic of Congo and adjoining countries, known as conflict minerals, in their products whether or not these products or the components containing such conflict minerals are manufactured by third parties. The new rule may affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to verify the origins for these minerals used in our products sufficiently through the due diligence procedures that we implement, which may prevent us from certifying our products as conflict-free, harming our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
Even if we are able to commercialize any product candidates, the products may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives, which would harm our business.
The regulations that govern marketing approvals, pricing, coverage and reimbursement for new medical products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals.
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Our ability to commercialize any product candidate also will depend in part on the extent to which coverage and adequate reimbursement for our product candidate will be available from government health administration authorities, private health insurers and other organizations. Government authorities and third party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and third party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Coverage and reimbursement may not be available for any product that we commercialize and, even if these are available, the level of reimbursement may not be satisfactory. Reimbursement may affect the demand for, or the price of, any product candidate for which we obtain marketing approval. Obtaining and maintaining adequate reimbursement for our products may be difficult. We may be required to conduct expensive pharmacoeconomic studies to justify coverage and reimbursement or the level of reimbursement relative to other therapies. If coverage and adequate reimbursement are not available or reimbursement is available only to limited levels, we may not be able to commercialize any product candidate for which we obtain marketing approval.
In addition, there may be significant delays in obtaining reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for reimbursement does not imply that a drug will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors. Third party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. Our inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise capital needed to commercialize products and our overall financial condition.
Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of some suppliers such as us from certain markets, which could have an adverse effect on our business, results of operations or financial condition.
Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend in the healthcare industry to aggregate purchasing power. As the healthcare industry consolidates, competition to provide products and services to industry participants has become and will continue to become more intense. This in turn has resulted and will likely continue to result in greater pricing pressures and the exclusion of certain suppliers, including us, from important market segments as GPOs, independent delivery networks and large single accounts continue to use their market power to consolidate purchasing decisions for hospitals. We expect that market demand, government regulation, third-party coverage and reimbursement policies and societal pressures will continue to change the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers, which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business, results of operations or financial condition.
If coverage and reimbursement from third-party payors for procedures using our products significantly decline, surgeons, hospitals and other healthcare providers may be reluctant to use our products and our sales may decline.
In the United States, healthcare providers who purchase our products generally rely on third-party payors, principally Medicare, Medicaid and private health insurance plans, to pay for all or a portion of the cost of our products in the procedures in which they are employed. Because there is often no separate reimbursement for instruments and supplies used in surgical procedures, the additional cost associated with the use of our products can impact the profit margin of the hospital or surgery center where the surgery is performed. Some of our target customers may be unwilling to adopt our products in light of the additional associated cost. Further, any decline in the amount payors are willing to reimburse our customers for the procedures using our products may make it difficult for existing customers to continue using, or adopt, our products and could create additional pricing pressure for us. We may be unable to sell our products on a profitable basis if third-party payors deny coverage or reduce their current levels of reimbursement.
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To contain costs of new technologies, governmental healthcare programs and third-party payors are increasingly scrutinizing new and even existing treatments by requiring extensive evidence of favorable clinical outcomes. Surgeons, hospitals and other healthcare providers may not purchase our devices if they do not receive satisfactory reimbursement from these third-party payors for the cost of the procedures using our devices.
In addition to uncertainties surrounding coverage policies, there are periodic changes to reimbursement. Third-party payors regularly update reimbursement amounts and also from time to time revise the methodologies used to determine reimbursement amounts. This includes annual updates to payments to physicians, hospitals and ambulatory surgery centers for procedures during which our products are used. Because the cost of our products generally will be recovered by the healthcare provider as part of the payment for performing a procedure and not separately reimbursed, these updates could directly impact the demand for our products. An example of payment updates is the Medicare program’s updates to hospital and physician payments, which are done on an annual basis using a prescribed statutory formula. With respect to physician payments, in the past, when the application of the formula resulted in lower payment, Congress has passed interim legislation to prevent the reductions. In April 2015, however, the Medicare Access and CHIP Reauthorization Act of 2015, or MACRA, was signed into law, which repealed and replaced the statutory formula for Medicare payment adjustments to physicians. MACRA provides a permanent end to the annual interim legislative updates that had previously been necessary to delay or prevent significant reductions to payments under the Medicare Physician Fee Schedule. MACRA extended existing payment rates through June 30, 2015, with a 0.5% update for July 1, 2015 through December 31, 2015, and for each calendar year through 2019, after which there will be a 0% annual update each year through 2025. In addition, MACRA requires the establishment of the Merit-Based Incentive Payment System, beginning in 2019, under which physicians may receive performance-based payment incentives or payment reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities and meaningful use of electronic health records. MACRA also requires Centers for Medicare & Medicaid Services, or CMS, beginning in 2019, to provide incentive payments for physicians and other eligible professionals that participate in alternative payment models, such as accountable care organizations, that emphasize quality and value over the traditional volume-based fee-for-service model. It is unclear what impact, if any, MACRA will have on our business and operating results, but any resulting decrease in payment may result in reduced demand for our products.
Moreover, some healthcare providers in the United States have adopted or are considering a managed care system in which the providers contract to provide comprehensive healthcare for a fixed cost per person. Healthcare providers may attempt to control costs by authorizing fewer surgical procedures or by requiring the use of the least expensive devices available. Additionally, as a result of reform of the U.S. healthcare system, changes in reimbursement policies or healthcare cost containment initiatives may limit or restrict coverage and reimbursement for our products and cause our revenue to decline.
Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have government-managed healthcare systems that govern reimbursement for laparoscopic procedures. Additionally, some foreign reimbursement systems provide for limited payments in a given period and therefore result in extended payment periods. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our devices may decline. For additional discussion of coverage and reimbursement, see “Business — Coverage and Reimbursement.”
We are currently, and in the future our contract manufacturers may be, subject to various governmental regulations related to the manufacturing of our product candidates, and we may incur significant expenses to comply with, experience delays in our product commercialization as a result of, and be subject to material sanctions if we or our contract manufacturers violate these regulations.
Our manufacturing processes and facility are required to comply with the FDA’s Quality System Regulation, or the QSR, which covers the procedures and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage, and shipping of our devices. Although we believe we are compliant with the QSRs, the FDA enforces the QSR through periodic announced or unannounced inspections of manufacturing facilities. We have been, and anticipate in the future being, subject to such inspections, as well as to inspections by other federal and state regulatory agencies. We are required to register our manufacturing facility with the FDA and list all devices that are manufactured. We also operate an International Organization for Standards, or ISO, 13485 certified facility and annual audits are required to maintain that certification. The suppliers of our components are also required to comply with the QSR and are subject to inspections. We have limited ability to ensure that any such third-party manufacturers will take the necessary steps to comply with applicable regulations, which could cause delays in the delivery of our products. Failure to comply with applicable FDA requirements, or later discovery of previously unknown problems with our products or manufacturing processes, including our failure or the failure of one of our third-party manufacturers to take satisfactory corrective action in response to an adverse QSR inspection, can result in, among other things:
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● | administrative or judicially-imposed sanctions; | |
● | injunctions or the imposition of civil penalties; | |
● | recall or seizure of our products; | |
● | total or partial suspension of production or distribution; | |
● | the FDA’s refusal to grant future clearance or pre-market approval for our products; | |
● | withdrawal or suspension of marketing clearances or approvals; | |
● | clinical holds; | |
● | warning letters; | |
● | refusal to permit the import or export of our products; and | |
● | criminal prosecution of us or our employees. |
Any of these actions, in combination or alone, could prevent us from marketing, distributing, or selling our products and would likely harm our business. In addition, a product defect or regulatory violation could lead to a government-mandated or voluntary recall by us. Regulatory agencies in other countries have similar authority to recall devices because of material deficiencies or defects in design or manufacture that could endanger health. Any recall would divert management attention and financial resources, could expose us to product liability or other claims, including contractual claims from parties to whom we sold products and harm our reputation with customers. A recall involving any of our products would be particularly harmful to our business and financial results and, even if we remedied a particular problem, would have a lasting negative effect on our reputation and demand for our products.
Risks Related to Our Intellectual Property
If we are unable to adequately protect our proprietary technology or maintain issued patents that are sufficient to protect our products, others could compete against us more directly, which could harm our business, financial condition and results of operations.
Our commercial success will depend in part on our success in obtaining and maintaining issued patents and other intellectual property rights in the United States and elsewhere and protecting our proprietary technology. If we do not adequately protect our intellectual property and proprietary technology, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could harm our business and ability to achieve profitability.
We have filed and are actively pursuing patent applications for our product candidates and manufacturing processes. As of February 2, 2017, the critical design components and function relationships for our bioprosthetic heart valve are protected by US patent 7,815,677 issued on October 19, 2010, and we owned 2 issued U.S. patents, zero issued foreign patents, 2 pending U.S. patent applications and zero pending foreign patent applications. Assuming all required fees are paid, individual patents or applications owned by us will expire between July 20, 2027 and November 20, 2029.
Our patents may not have, or our pending patent applications that mature into issued patents may not include, claims with a scope sufficient to protect our products, any additional features we develop for our current products or any new products. Other parties may have developed technologies that may be related or competitive to our products, may have filed or may file patent applications and may have received or may receive patents that overlap or conflict with our patent applications, either by claiming the same methods or devices or by claiming subject matter that could dominate our patent position. The patent positions of medical device companies, including our patent position, may involve complex legal and factual questions, and, therefore, the scope, validity and enforceability of any patent claims that we may obtain cannot be predicted with certainty. Patents, if issued, may be challenged, deemed unenforceable, invalidated or circumvented. Proceedings challenging our patents could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent application. In addition, such proceedings may be costly. Thus, any patents that we may own may not provide any protection against competitors. Furthermore, an adverse decision in an interference proceeding can result in a third party receiving the patent right sought by us, which in turn could affect our ability to commercialize our implant systems.
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Furthermore, though an issued patent is presumed valid and enforceable, its issuance is not conclusive as to its validity or its enforceability and it may not provide us with adequate proprietary protection or competitive advantages against competitors with similar products. Competitors may also be able to design around our patents. Other parties may develop and obtain patent protection for more effective technologies, designs or methods. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, suppliers, vendors, former employees and current employees. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these countries. If any of these developments were to occur, they each could have a negative impact on our business and competitive position.
Our ability to enforce our patent rights depends on our ability to detect infringement. It may be difficult to detect infringers who do not advertise the components that are used in their products. Moreover, it may be difficult or impossible to obtain evidence of infringement in a competitor’s or potential competitor’s product. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded if we were to prevail may not be commercially meaningful.
In addition, proceedings to enforce or defend our patents could put our patents at risk of being invalidated, held unenforceable or interpreted narrowly. Such proceedings could also provoke third parties to assert claims against us, including that some or all of the claims in one or more of our patents are invalid or otherwise unenforceable. If any of our patents covering our products are invalidated or found unenforceable, our financial position and results of operations could be negatively impacted. In addition, if a court found that valid, enforceable patents held by third parties covered one or more of our products, our financial position and results of operations could be harmed.
We rely upon unpatented trade secrets, unpatented know-how and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us and have non-compete agreements with some, but not all, of our consultants. It is possible that technology relevant to our business will be independently developed by a person that is not a party to such an agreement. Furthermore, if the employees and consultants who are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation, and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
We employ individuals who previously worked with other companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third party. Litigation may be necessary to defend against these claims. If we fail in defending any such claims or settling those claims, in addition to paying monetary damages or a settlement payment, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and/or be a distraction to management and other employees.
We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights and we may be unable to protect our rights to, or use, our technology.
The medical device industry is characterized by frequent and extensive litigation regarding patents and other intellectual property rights. Many medical device companies with substantially greater resources than us have employed intellectual property litigation as a way to gain a competitive advantage. We may become involved in litigation, interference proceedings, oppositions, reexamination, protest or other potentially adverse intellectual property proceedings as a result of alleged infringement by us of the rights of others or as a result of priority of invention disputes with third parties, either in the U.S. or abroad. We may also become a party to patent infringement claims and litigation or interference proceedings declared by the United States Patent and Trademark Office, or USPTO, to determine the priority of inventions. Third parties may also challenge the validity of any of our issued patents and we may initiate proceedings to enforce our patent rights and prevent others from infringing on our intellectual property rights. Any claims relating to the infringement of third-party proprietary rights or proprietary determinations, even if not meritorious, could result in costly litigation, lengthy governmental proceedings, diversion of our management’s attention and resources, or entrance into royalty or license agreements that are not advantageous to us. In any of these circumstances, we may need to spend significant amounts of money, time and effort defending our position. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
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Our collaborations with outside scientists and consultants may be subject to restriction and change.
We work with chemists, biologists and other scientists at academic and other institutions, and consultants who assist us in our research, development, regulatory and commercial efforts, including the members of our scientific advisory board. These scientists and consultants have provided, and we expect that they will continue to provide, valuable advice on our programs. These scientists and consultants are not our employees, may have other commitments that would limit their future availability to us and typically will not enter into non-compete agreements with us. If a conflict of interest arises between their work for us and their work for another entity, we may lose their services. In addition, we will be unable to prevent them from establishing competing businesses or developing competing products. For example, if a key scientist acting as a principal investigator in any of our clinical trials identifies a potential product or compound that is more scientifically interesting to his or her professional interests, his or her availability to remain involved in our clinical trials could be restricted or eliminated.
We have entered into non-competition agreements with certain of our employees. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a limited period. However, under current law, we may be unable to enforce these agreements against certain of our employees and it may be difficult for us to restrict our competitors from gaining the expertise our former employees gained while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
Recent changes in U.S. patent laws may limit our ability to obtain, defend and/or enforce our patents.
Recent patent reform legislation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents. The Leahy-Smith America Invents Act, or the Leahy-Smith Act, includes a number of significant changes to U.S. patent law. These include provisions that affect the way patent applications are prosecuted and also affect patent litigation. The U.S. Patent and Trademark Office recently developed new regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, which only became effective on March 16, 2013. The first to file provisions limit the rights of an inventor to patent an invention if not the first to file an application for patenting that invention, even if such invention was the first invention. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business.
However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the enforcement and defense of our issued patents. For example, the Leahy-Smith Act provides that an administrative tribunal known as the Patent Trial and Appeals Board, or PTAB, provides a venue for challenging the validity of patents at a cost that is much lower than district court litigation and on timelines that are much faster. Although it is not clear what, if any, long-term impact the PTAB proceedings will have on the operation of our business, the initial results of patent challenge proceedings before the PTAB since its inception in 2013 have resulted in the invalidation of many U.S. patent claims. The availability of the PTAB as a lower-cost, faster and potentially more potent tribunal for challenging patents could increase the likelihood that our own patents will be challenged, thereby increasing the uncertainties and costs of maintaining and enforcing them.
We may not be able to adequately protect our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
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Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.
If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.
Our registered or unregistered trademarks or trade names may be challenged, infringed, circumvented, declared generic or determined to be infringing on other marks or names. We may not be able to protect our rights in these trademarks and trade names, which we need in order to build name recognition with potential customers in our markets of interest. [In addition, third parties have registered trademarks similar and identical to our trademarks in foreign jurisdictions, and may in the future file for registration of such trademarks.] If they succeed in registering or developing common law rights in such trademarks, and if we were not successful in challenging such third-party rights, we may not be able to use these trademarks to market our products in those countries. In any case, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business, results of operations and financial condition may be adversely affected.
Risks Related to this Offering and Ownership of Our Common Stock
The market price of our common stock may be highly volatile, and you could lose all or part of your investment.
Prior to this offering, there was no public market for shares of our common stock. The offering price for the shares of our common stock sold in this offering will be determined by negotiation between the underwriters and us. This price may not reflect the market price of our common stock following this offering. As a result, the trading price of our common stock is likely to be volatile, which may prevent you from being able to sell your shares at or above the public offering price. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:
● | whether we achieve our anticipated corporate objectives; | |
● | actual or anticipated fluctuations in our financial condition and operating results; | |
● | changes in financial or operational estimates or projections; | |
● | the development status of our product candidates and when our products receive regulatory approval; | |
● | our execution of our sales and marketing, manufacturing and other aspects of our business plan; | |
● | performance of third parties on whom we rely to manufacture our products, product components and product candidates, including their ability to comply with regulatory requirements; | |
● | the results of our preclinical studies and clinical trials; | |
● | results of operations that vary from those of our competitors and the expectations of securities analysts and investors; |
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● | changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; | |
● | our announcement of significant contracts, acquisitions or capital commitments; | |
● | announcements by our competitors of competing products or other initiatives; | |
● | announcements by third parties of significant claims or proceedings against us; | |
● | regulatory and reimbursement developments in the United States and abroad; | |
● | future sales of our common stock; | |
● | product liability claims; | |
● | healthcare reform measures in the U.S. | |
● | additions or departures of key personnel; and | |
● | general economic or political conditions in the U.S. or elsewhere. |
In addition, the stock market, in general, and the stock of medical device companies like ours, in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the issuer. Such road market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.
We may be subject to securities litigation, which is expensive and could divert our management’s attention.
The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.
We have broad discretion in the use of the net proceeds from this offering and may invest or spend the proceeds in ways with which you disagree or that may not yield a return.
While we set forth our anticipated use for the net proceeds from this offering in the section titled “Use of Proceeds”, our management will have broad discretion on how to use and spend any proceeds that we receive from this offering and may use the proceeds in ways that differ from the anticipated uses set forth in this prospectus. Investors in this offering will need to rely upon the judgment of our management with respect to the use of proceeds with only limited information concerning management’s specific intentions. It is possible that we may decide in the future not to use the proceeds of this offering in the manner described in this offering. Our management may spend a portion or all of the net proceeds from this offering in ways that holders of our common stock may not desire or that may not yield a significant return or any return at all. Investors will receive no notice or vote regarding any such change and may not agree with our decision on how to use such proceeds. If we fail to utilize the proceeds we receive from this offering effectively, our business and financial condition could be harmed and we may need to seek additional financing sooner than expected. Pending their use, we may also invest the net proceeds from this offering in a manner that does not produce income or that loses value.
There is no existing market for our common stock and we do not know if one will develop to provide you with adequate liquidity.
Prior to this offering, there has not been a public market for our common stock. Although we intend to apply to have our common stock listed on the Nasdaq Capital Market, an active trading market for our common stock may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the trading market. You may not be able to sell your shares of our common stock at or above the price you paid in the offering. As a result, you could lose all or part of your investment. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic partnerships or acquire companies or products by using our shares of common stock as consideration.
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Our principal stockholders and management own a significant percentage of our capital stock and will be able to exert a controlling influence over our business affairs and matters submitted to stockholders for approval.
After this offering, it is anticipated that our officers and directors, together with holders of 5% or more of our outstanding common stock before this offering and their respective affiliates, will beneficially own or control shares of our common stock, which in the aggregate will represent approximately % of the outstanding shares of our common stock, or % if the underwriters’ option to purchase additional shares is exercised in full. As a result, if some of these persons or entities act together, they will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws, the approval of any business combination and any other significant corporate transaction. These actions may be taken even if they are opposed by other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares. Some of these persons or entities who make up our principal stockholders may have interests different from yours. See “Principal Stockholders” below for more information regarding the ownership of our outstanding common stock by our principal stockholders.
Our failure to meet the continued listing requirements of Nasdaq could result in a de-listing of our common stock.
If, after listing, we fail to satisfy the continued listing requirements of Nasdaq, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’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.
If our shares become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not obtain or retain a listing on Nasdaq and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
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Future sales of shares by existing stockholders could cause our stock price to decline.
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on 13,253,058 shares outstanding as of February 2, 2017 (after conversion of 1,005,700 shares of issued and outstanding Series A preferred stock), upon the completion of this offering, we will have outstanding shares of common stock, assuming no exercise of outstanding options or warrants. Of these shares, shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.
After the lock-up agreements pertaining to this offering expire and based on shares outstanding after this offering, an additional shares will be eligible for sale in the public market. In addition, upon issuance, the 3,300,000 shares subject to outstanding options under our stock option plans and the shares reserved for future issuance under our equity compensation plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately shares of our common stock, including 933,903 shares issuable upon exercise of our outstanding warrants, will have the right to require us to register these shares under the Securities Act of 1933, as amended, or the Securities Act, pursuant to our Agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business. We also intend to register all shares of common stock that we may issue under our equity compensation plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to volume limitations applicable to affiliates and the lock-up agreements described in the “Underwriting” section of this prospectus.
If you purchase shares of common stock in this offering, you will suffer immediate dilution of your investment.
The public offering price of our common stock will be substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our net tangible book value per share after this offering. To the extent shares subsequently are issued under outstanding stock options, you will incur further dilution. Based on an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $ per share, representing the difference between our pro forma net tangible book value per share, after giving effect to this offering, and the assumed initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately % of the aggregate price paid by all purchasers of our stock but will own only approximately % of our common stock outstanding after this offering. For further information on this calculation, see the section entitled “Dilution.”
We are an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. We may remain an “emerging growth company” until as late as December 31, 2022 (the fiscal year-end following the fifth anniversary of the completion of our initial public offering), though we may cease to be an “emerging growth company ” earlier under certain circumstances, including (1) if the market value of our common stock that is held by nonaffiliates exceeds $700 million as of any June 30, in which case we would cease to be an “emerging growth company” as of the following December 31, or (2) if our gross revenue exceeds $1 billion in any fiscal year. “Emerging growth companies” may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Investors could find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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In addition, Section 102 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. An “emerging growth company ” can therefore delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We will incur significant costs as a result of operating as a public company and our management expects to devote substantial time to public company compliance programs.
As a public company, we will incur significant legal, accounting and other expenses due to our compliance with regulations and disclosure obligations applicable to us, including compliance with the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission, or SEC, and Nasdaq. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact, in ways we cannot currently anticipate, the manner in which we operate our business. Our management and other personnel will devote a substantial amount of time to these compliance programs and monitoring of public company reporting obligations and as a result of the new corporate governance and executive compensation related rules, regulations and guidelines prompted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and further regulations and disclosure obligations expected in the future, we will likely need to devote additional time and costs to comply with such compliance programs and rules. These rules and regulations will cause us to incur significant legal and financial compliance costs and will make some activities more time-consuming and costly.
To comply with the requirements of being a public company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the SEC is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that information required to be disclosed in reports under the Securities Exchange Act of 1934, or the Exchange Act, is accumulated and communicated to our principal executive and financial officers. Our current controls and any new controls that we develop may become inadequate and weaknesses in our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls when we become subject to this requirement could negatively impact the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we may be required to include in our periodic reports we will file with the SEC under Section 404 of the Sarbanes-Oxley Act, harm our operating results, cause us to fail to meet our reporting obligations or result in a restatement of our prior period financial statements. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our common stock could decline. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq.
Our management team has limited experience managing a public company.
Most members of our management team have limited experience managing a publicly-traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition and operating results.
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Because we have elected to use the extended transition period for complying with new or revised accounting standards for an EGC our financial statements may not be comparable to companies that comply with public company effective dates.
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, and thus investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, the price for our common stock could be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our stock price could decline. In addition, if our operating results fail to meet the forecast of analysts, our stock price could decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price and trading volume to decline.
Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws that will become effective upon the consummation of this offering may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. In addition, these provisions may frustrate or prevent any attempt by our stockholders to replace or remove our current management by making it more difficult to replace or remove our board of directors. These provisions include:
● | a classified board of directors so that not all directors are elected at one time; | |
● | a prohibition on stockholder action through written consent; | |
● | no cumulative voting in the election of directors; | |
● | the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director; | |
● | a requirement that special meetings of stockholders be called only by the board of directors, the chairman of the board of directors, the chief executive officer or, in the absence of a chief executive officer, the president; | |
● | an advance notice requirement for stockholder proposals and nominations; | |
● | the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine; and | |
● | a requirement of approval of not less than 66 2/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend specific provisions of our amended and restated certificate of incorporation. |
In addition, Delaware law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person who, together with its affiliates, owns, or within the last three years has owned, 15% or more of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Delaware law may discourage, delay or prevent a change in control of the company.
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Furthermore, our amended and restated certificate of incorporation will specify that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for most legal actions involving actions brought against us by stockholders. We believe this provision benefits us by providing increased consistency in the application of Delaware law by chancellors particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, the provision may have the effect of discouraging lawsuits against our directors and officers.
Provisions in our charter documents and other provisions of Delaware law could limit the price that investors are willing to pay in the future for shares of our common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders, (3) any action asserting a claim arising pursuant to any provision of the Delaware General Corporate Law, or DGCL, or our amended and restated certificate of incorporation or amended and restated bylaws, (4) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws or (5) any action asserting a claim governed by the internal affairs doctrine. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have a material adverse effect on our business, financial condition or results of operations.
We do not anticipate paying any cash dividends on our common stock in the foreseeable future and, as such, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. In addition, and any future loan arrangements we enter into may contain, terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.
We will be a “controlled company” within the meaning of the Nasdaq on these exemptions in the future, you will not have the same protections afforded to stockholders of companies that are subject to such requirements.
Upon completion of this offering, Biodyne Holding, S.A. will continue to control a majority of the voting power of our company on account of its ownership of our common stock. As a result, we will be a “controlled company” within the meaning of the Nasdaq corporate governance requirements. Under these rules, a company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including the requirements:
● | that a majority of the board of directors consists of independent directors; | |
● | that we have a nominating and corporate governance committee that is composed entirely of independent directors; and | |
● | that we have a compensation committee that is comprised entirely of independent directors. |
We do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or any of our board committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and Nasdaq rules within the applicable time frame.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. The forward-looking statements are contained principally in the sections titled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” but are also contained elsewhere in this prospectus. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future, although not all forward-looking statements contain these words. These statements relate to future events or our future financial performance or condition and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievement to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements include, but are not limited to, statements about:
● | failure to obtain FDA approval to commercially sell our products in a timely manner or at all; | |
● | whether customers in our target markets accept our products or proposed products; | |
● | the expected growth of our business and our operations, and the capital resources needed to progress our business plan; | |
● | failure to scale up of the manufacturing process of our products in a timely manner, or at all; | |
● | failure to manufacture our products at a competitive price; | |
● | our ability to retain and recruit key personnel, including the continued development of a sales and marketing infrastructure; | |
● | reliance on third party suppliers for certain components of our products; | |
● | reliance on third parties to commercialize and distribute our products in the United States and overseas; | |
● | changes in external competitive market factors; | |
● | uncertainties in generating sustained revenue or achieving profitability; | |
● | unanticipated working capital or other cash requirements; | |
● | changes in FDA regulations, including testing procedures, of medical devices and related promotional and marketing activities; | |
● | our estimates of our expenses, ongoing losses, future revenue, capital requirements and our needs for, or ability to obtain, additional financing; | |
● | our ability to obtain and maintain intellectual property protection for our products; and | |
● | changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the medical device industry. |
You should read this prospectus, including the section titled “Risk Factors,” and the documents that we reference elsewhere in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual results may differ materially from what we expect as expressed or implied by our forward-looking statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.
These forward-looking statements represent our estimates and assumptions only as of the date of this prospectus regardless of the time of delivery of this prospectus or any sale of our common stock. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this prospectus. All subsequent forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to herein.
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[INDUSTRY AND MARKET DATA]
[______]1
1 NTD: Confirm whether any such data will be utilized.
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We estimate that the net proceeds to us from our issuance and sale of [______] shares of common stock in this offering will be approximately $[______] million (or $[______] million if the underwriters exercise their option to purchase additional shares of common stock in full), based upon an assumed initial public offering price of $[______] per share, which is the mid-point of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
Each $1.00 increase or decrease in the assumed initial public offering price of $[______] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $[______] million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase or decrease of 1.0 million in the number of shares we are offering at the assumed initial public offering price of $[______] per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, would increase or decrease, as applicable, the net proceeds to us from this offering by approximately $[______] million, assuming the assumed initial public offering price remains the same.
We intend to use the net proceeds from this offering as follows:
● | approximately $ million to fund our research and development activities; | |
● | approximately $ million to fund the regulatory review process for each of our product candidates; and | |
● | the remainder for working capital and other general corporate purposes, including the additional costs associated with being a public company. |
This expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve. The amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our development, the status of and results from clinical trials, our sales, marketing and manufacturing efforts, any collaborations that we may enter into with third parties for our products and any unforeseen cash needs. As a result, our management will retain broad discretion over the allocation of the net proceeds from this offering.
We believe opportunities may exist from time to time to expand our current business through the acquisition or in-license of complementary product candidates. While we have no current agreements or commitments for any specific acquisitions or in-licenses at this time, we may use a portion of the net proceeds for these purposes.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
We believe that the net proceeds from this offering will be sufficient to enable us to fund our operating expenses and capital expenditure requirements through at least [______]. We have based this estimate on assumptions that may prove to be incorrect, and we could use our available capital resources sooner than we currently expect.
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We have never declared or paid any cash dividends on our capital stock. We do not anticipate paying cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects, the requirements of current or then-existing debt instruments and other factors our board of directors may deem relevant.
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The following table sets forth our cash, cash equivalents and capitalization as of September 30, 2016:
● | on an actual basis; | |
● | on a pro forma basis to reflect (1) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, which will occur immediately prior to the closing of this offering, and (2) the filing of our amended and restated certificate of incorporation upon the closing of this offering; and | |
● | on a pro forma as adjusted basis to give further effect to our issuance and sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. |
The pro forma and pro forma as adjusted information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our common stock and other terms of this offering determined at pricing. You should read the following table in conjunction with “Use of Proceeds,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Capital Stock” and other financial information contained in this prospectus, including the consolidated financial statements and related notes appearing elsewhere in this prospectus.
As of September 30, 2016 | ||||||||||||
Actual | Pro Forma | Pro Forma As Adjusted(1) | ||||||||||
(unaudited) | ||||||||||||
Cash and cash equivalents | $ | 78,048 | $ | $ | ||||||||
Total debt | $ | 1,267,839 | $ | $ | ||||||||
Stockholders’ (deficit) equity: | ||||||||||||
Series A preferred stock, par value $0.00001 per share; 1,300,000 shares authorized, issued or outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted | 3,648,743 | |||||||||||
Series B convertible preferred stock, par value $0.00001 per share; 2,000,000 shares authorized, issued or outstanding, actual; no shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted | — | |||||||||||
Common stock, par value $0.00001 per share; 30,000,000 shares authorized, [_______] shares issued and outstanding, actual; 30,000,000 shares authorized, [_______] shares issued and outstanding, pro forma; [_______] shares authorized, [_______] shares issued and outstanding, pro forma as adjusted | 122 | |||||||||||
Additional paid-in capital | 23,142,533 | |||||||||||
Accumulated deficit | (26,188,096 | ) | ||||||||||
Total stockholders’ (deficit) equity | (3,045,441 | ) | ||||||||||
Total capitalization | $ | 1,907,141 | $ | $ |
(1) | A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by approximately $ million, assuming the number of shares offered by us, as stated on the cover page of this prospectus, remains unchanged and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares we are offering would increase or decrease, as applicable, each of cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $ million, assuming the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
The number of shares of our common stock to be outstanding after this offering is based on 12,247,358 shares of common stock outstanding as of September 30, 2016, and excludes:
● | 833,333 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2016, at an exercise price of $6.00 per share; and | |
● | 3,300,000 shares of our common stock reserved for future issuance under the 2016 Plan. |
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If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share of common stock is determined by dividing our total tangible assets less total liabilities by the number of outstanding shares of our common stock.
Our historical net tangible book value (deficit) as of September 30, 2016 was approximately ($624,243,) or ($0.05) per share of common stock. Our pro forma net tangible book value (deficit) as of September 30, 2016 was [ ] or [ ] per share of common stock, after giving effect to the conversion of all our outstanding shares of Series A preferred stock into 935,700 shares of common stock upon the completion of this offering.
Pro forma as adjusted net tangible book value (deficit) is our pro forma net tangible book value, after giving further effect to (i) the sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, and (ii) the application of the net proceeds from this offering as described in the section of this prospectus entitled “Use of Proceeds.” This amount represents an immediate increase in pro forma net tangible book value (deficit) of $ per share to our existing stockholders, and an immediate dilution of $ per share to new investors participating in this offering.
On July 22, 2016 our board of Directors approved a 2.1144-for-l forward split of our issued and outstanding shares of common stock and, on August 30, 2016, we filed the stock split with the Delaware Secretary of State. All shares and per share amounts have been adjusted to reflect the 2.114-for-l forward split of our issued and outstanding shares, retroactively.
The following table illustrates this dilution on a per share basis to new investors:
Assumed initial public offering price per share | $ | |||||||
Historical net tangible book value (deficit) per share as of September 30, 2016 | $ | (0.05 | ) | |||||
Increase in pro forma net tangible book value (deficit) attributable to conversion of our Series A preferred stock | ||||||||
Pro forma net tangible book value (deficit) per share as of September 30, 2016, before giving effect to this offering | ||||||||
Increase in pro forma net tangible book value (deficit) per share attributable to new investors participating in this offering | ||||||||
Pro forma as adjusted net tangible book value (deficit) per share after this offering | ||||||||
Dilution in pro forma net tangible book value (deficit) per share to new investors participating in this offering | $ |
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $ per share and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
Similarly, a 1.0 million share increase or decrease in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase or decrease, as appropriate, the pro forma as adjusted net tangible book value (deficit) per share after this offering by approximately $ and decrease or increase, as appropriate, the dilution in pro forma net tangible book value (deficit) per share to investors participating in this offering by approximately $ , assuming the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
The pro forma information discussed above is illustrative only and will change based on the actual initial public offering price, number of shares and other terms of this offering determined at pricing.
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If the underwriters exercise in full their option to purchase additional shares of our common stock in this offering, the pro forma as adjusted net tangible book value will increase to $ per share, representing an immediate increase in pro forma net tangible book value to existing stockholders of $ per share and an immediate dilution of $ per share to new investors participating in this offering.
The following table sets forth, as of September 30, 2016, on the pro forma as adjusted basis described above, the differences between our existing stockholders and the purchasers of shares of common stock in this offering with respect to the number of shares of common stock purchased from us, the total consideration paid to us and the weighted average price paid per share paid to us, based on an assumed initial public offering price of per share, which is the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration | Weighted Average Price | ||||||||||||||||||
Number | Percent | Amount | Percent | per Share | ||||||||||||||||
Existing stockholders | 12,247,358 | % | $ | 23,142,655 | % | $ | ||||||||||||||
New investors | ||||||||||||||||||||
Total | 100 | % | $ | % |
If the underwriters exercise in full their option to purchase additional shares of our common stock in this offering, the number of shares held by existing stockholders will be reduced to % of the total number of shares of common stock that will be outstanding upon completion of this offering, and the number of shares of common stock held by new investors participating in this offering will be further increased to % of the total number of shares of common stock that will be outstanding upon completion of the offering.
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as appropriate, the total consideration paid by new investors by $ million, assuming the number of shares we are offering, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as appropriate, the total consideration paid by new investors by $ million, assuming that the assumed initial price to the public remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
We may choose to raise additional capital through the sale of equity or equity-linked securities due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that any options are issued under our equity incentive plan or we issue additional shares of common stock or equity-linked securities in the future, there will be further dilution to investors purchasing in this offering.
Except as otherwise indicated, the tables and calculations above are based on 12,247,358 shares of common stock outstanding as of September 30, 2016, and exclude:
● | 833,333 shares of common stock issuable upon the exercise of warrants outstanding as of September 30, 2016, at an exercise price of $6.00 per share; and | |
● | 3,300,000 shares of our common stock reserved for future issuance under the 2016 Plan. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with [“Selected Consolidated Financial Data”], [“Unaudited Pro Forma Consolidated Financial Information,”] and our consolidated financial statements and related notes included elsewhere in this prospectus. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us,” “we,” “our,” and similar terms refer to Hancock Jaffe Laboratories, Inc., a Delaware corporation. This discussion and analysis and other parts of this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements” in this prospectus.
Overview
It is Hancock Jaffe Laboratories’ (“Hancock Jaffe” or the “Company”) mission to develop life-enhancing bioprosthetic devices and technologies for patients. To that end, we develop and sell biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.
Recent Developments
Asset Sale
In March 2014, we entered into an exclusive supply and distribution agreement for ProCol® Vascular Bioprothesis with Cryolife, Inc. (the “Cryolife Supply Agreement”).
On March 18, 2016, the Cryolife Supply Agreement was terminated without recourse, and we entered into an asset purchase agreement (the “Asset Purchase Agreement”) with LeMaitre whereby we sold all of our vascular bioprostheses assets (primarily related to an unrecorded patent, other intellectual property and inventory) to LeMaitre Vascular, Inc. (“LeMaitre”) for consideration of $665,000 in cash (of which, $332,500 is payable immediately, $166,250 is payable on September 18, 2016 and $166,250 is payable upon the earlier of (a) confirmation by LeMaitre of the commercial sale of a vascular bioprosthestic (the “Product”) manufactured by LeMaitre at its plant and (b) March 18, 2017). In addition, we are now be entitled to a royalty equal to 10% of LeMaitre’s net sales, as defined, of the Product during the three-year period ending March 18, 2019. The royalty shall be paid quarterly in arrears and shall not exceed $2 million in any 12-month period or $5 million in the aggregate, during the three-year period.
Development and Manufacturing Agreement
On April 1, 2016, we entered into a development and manufacturing agreement with a related party in which we hold a 30% investment interest, and of which our Vice President is an officer (the “Related Party”), pursuant to which: (1) we paid $445,200 for the exclusive right to provide development and manufacturing services to the Related Party for a period of ten years, and (2) we have the right to purchase up to 484,358 shares of Common Stock of the Related Party at $8.66 per share for an aggregate purchase price of $4,194,540 through April 1, 2021. Through the date of this report, no shares were purchased pursuant to the Common Stock Purchase Agreement.
Employee Warrant
On May 5, 2016, we granted a warrant for the purchase of 833,333 shares of common stock to our Business Development Manager. The warrant is immediately vested, contains cashless exercise provisions and is exercisable for 7 years at an exercise price of $6.00, (subject to adjustment in the event of certain stock dividends and distributions, stock splits, reclassifications or similar events affecting our common stock). Further, upon certain issuances of common stock or common stock equivalents at a price per share less than the exercise price in effect at the time of issuance, the exercise price of the warrant shall be reduced to a price equal to the consideration per share that we received with respect to those issuances.
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Amendment to Certificate of Incorporation
On August 30, 2016, the Company adopted an amendment to the existing Certificate of Incorporation, in order to effectuate a 2.1144 for 1.00 forward stock split which had been approved by the Board of Directors on September 1, 2015
Board of Directors
The death of the Company’s president on June 19, 2016 and the resignation of a member of the Board of Directors on July 22, 2016 resulted in two vacancies on the Board of Directors. On July 22, 2016, the CMO was appointed to the Board of Directors and the number of authorized members of the Board of Directors was decreased from three to two.
Appointment of Interim President
On July 22, 2016, our Chief Financial Officer (the “CFO”) was appointed the as our Secretary and Interim President.
Exchange of Debt for Equity
On August 31, 2016, principal and interest of $1,200,000 and $34,816, respectively, owed to a majority (78%) common stock holder in connection with a note payable were exchanged for 246,963 shares of our common stock at a price of $5.00 per share.
Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock) and Placement Agent Warrants
Subsequent to September 30, 2016, the Company has issued 70,000 additional shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the additional shares were $350,000 and the Company incurred cash offering costs of placement agent fees of $53,898. In connection with the sales of the Series A Preferred Stock, the placement agent also received 5-year warrants for the purchase of an aggregate of 7,000 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing.
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Results of Operations
The following table represents selected items in our consolidated statements of operations for the nine months ended September 30, 2016 and 2015 and for the years ended December 31, 2015 and 2014, and, respectively:
For The Nine Months Ended | For The Years Ended | |||||||||||||||
September 30, | December 31, | |||||||||||||||
2016 | 2015 | 2015 | 2014 | |||||||||||||
Revenues: | ||||||||||||||||
Research and development services - related party | $ | - | $ | - | $ | - | $ | 236,500 | ||||||||
Product sales | 412,400 | - | - | - | ||||||||||||
Royalty income | 68,653 | - | - | - | ||||||||||||
481,053 | - | - | 236,500 | |||||||||||||
Cost of goods sold | 598,295 | - | - | 132,315 | ||||||||||||
Gross Profit (Loss) | (117,242 | ) | - | - | 104,185 | |||||||||||
Selling, general and administrative expenses | 3,406,367 | 706,342 | 1,289,851 | 1,056,844 | ||||||||||||
Loss from Operations | (3,523,609 | ) | (706,342 | ) | (1,289,851 | ) | (952,659 | ) | ||||||||
Other Expense (Income): | ||||||||||||||||
Equity loss in unconsolidated affiliate | 487,900 | - | - | - | ||||||||||||
Interest expense, net | 50,471 | 47,843 | 88,524 | 65,493 | ||||||||||||
Change in fair value of derivative liabilities | (13,976 | ) | - | (177 | ) | - | ||||||||||
Total Other Expense | 524,395 | 47,843 | 88,347 | 65,493 | ||||||||||||
Loss from Continuing Operations | (4,048,004 | ) | (754,185 | ) | (1,378,198 | ) | (1,018,152 | ) | ||||||||
Discontinued Operations: | ||||||||||||||||
Loss from discontinued operations, net of tax | (298,286 | ) | (291,881 | ) | (225,815 | ) | (379,841 | ) | ||||||||
Gain on sale of discontinued operations, net of tax | 2,499,054 | - | - | - | ||||||||||||
Income (Loss) from Discontinued Operations, net of tax | 2,200,768 | (291,881 | ) | (225,815 | ) | (379,841 | ) | |||||||||
Net Loss | (1,847,236 | ) | (1,046,066 | ) | (1,604,013 | ) | (1,397,993 | ) | ||||||||
Cumulative dividend to Series A preferred stockholders | (243,938 | ) | - | (4,352 | ) | - | ||||||||||
Net Loss Attributable to Common Stockholders | $ | (2,091,174 | ) | $ | (1,046,066 | ) | $ | (1,608,365 | ) | $ | (1,397,993 | ) |
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Comparison of the nine months ended September 30, 2016 and 2015
Our net loss for the nine months ended September 30, 2016, increased by $801,170 or 77%, to $1,847,236 as compared to $1,046,066 for the nine months ended September 30, 2015, primarily due to an increase in selling, general and administrative expenses as described below.
Revenues
For the nine months ended September 30, 2016 we generated $412,000 of revenues for product sales and $68,653 of royalty income pursuant to the asset purchase agreement with LeMaitre. Revenues earned during the nine months ended September 30, 2015 resulted from the sale of vascular bioprostheses pursuant to a distribution agreement that was terminated in 2016. Accordingly, these revenues are recorded in loss from discontinued operations.
Cost of goods sold
For the nine months ended September 30, 2016, cost of sales was $598,295 which consisted primarily of direct labor costs and supplies and material cost used in the manufacturing process of units sold. Cost of goods sold recognized during the nine months ended September 30, 2015 are included in loss from discontinued operations.
Selling, general and administrative expenses
For the nine months ended September 30, 2016, selling, general and administrative expenses increased by $2,700,025 or 382%, from $706,342 to $3,406,367, as compared to the nine months ended September 30, 2015. The increase is primarily due an increase in stock-based compensation expense of $1,143,000, related to an employee warrant granted in May 2016, an increase in professional fees of $1,084,000 incurred in connection with preparing the registration statement and the issuance of Series A preferred stock, and an increase of $230,000 in administrative salaries as a result of hiring our Chief Financial Officer and Chief Medical Officer during 2016.
Equity loss in unconsolidated affiliate
For the nine months ended September 30, 2016, we recorded an equity loss of $487,900, representing our allocable share of the operating losses of the Related Party up to the amount of our investment (inclusive of loans).
Interest expense
For the nine months ended September 30, 2016, interest expense increased by $2,628, or 5%, as compared to the nine months ended September 30, 2015 resulting from an increase in loans payable outstanding during the period.
Change in fair value of derivative liability
For the nine months ended September 30, 2016, we recorded a gain of $13,976 from the change in the fair value of the derivative liabilities related to warrants issued during December 2015. There were no warrants outstanding during the nine months ended September 30, 2015.
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Loss from continuing operations
Loss from continuing operations was $4,048,004 for the nine months ended September 30, 2016 compared to $754,185 for the nine months ended September 30, 2015, representing an increase of $3,293,819 or 437%. The increase was primarily attributable to an increase in selling, general and administrative expenses of $2,700,025 as well as equity losses of $487,900 and gross loss of $117,242 recognized during the nine months ended September 30, 2016, as described above.
Loss from discontinued operations, net of tax
For the nine months ended September 30, 2016, income from discontinued operations increased by $2,492,649 to $2,200,768 as compared to a loss from discontinued operations of $291,881 for the nine months ended September 30, 2015, primarily due to a gain on the sale of the discontinued operations of $2,499,054 which was partially offset by an increase of $6,405 in the loss from discontinued operations.
Comparison of the years ended December 31, 2015 and 2014
Overview
We reported net losses of $1,604,013 and $1,397,993 for the years ended December 31, 2015 and 2014, representing an increase in net loss of $206,020 or 15%, resulting primarily from increases in operating expenses, as discussed below.
Revenues
For the year ended December 31, 2014 we generated $236,500 of revenues for research and development services performed on behalf of the Related Party, pursuant to a Development and Manufacturing agreement which was effective on February 1, 2013, and was terminated on September 30, 2014. Revenues earned during the year ended December 31, 2015 resulted from the sale of vascular bioprostheses pursuant to a distribution agreement that was terminated in 2016. Accordingly, these revenues are recorded in loss from discontinued operations.
Cost of goods sold
For the year ended December 31, 2014, cost of sales of $132,315 consisted primarily of labors costs and the costs of materials used for research and development. Cost of goods sold recognized during the year ended December 31, 2015 are included in loss from discontinued operations.
Selling, general and administrative expenses
Selling, general and administrative expenses increased by $233,007, or 22%, from $1,056,844 the year ended December 31, 2014 to $1,289,851 for the year ended December 31, 2015. The increase is primarily due to increased professional fees of approximately $63,000 incurred in connection with preparing the registration statement and the issuance of Series A preferred stock, an increase in compensation expenses of approximately $46,000 resulting from executive salary increases, an increase of approximately $26,000 in travel expenses due several investor trips that did not occur in 2014, and an increase of approximately $15,000 in utility bills due to the increase price of water due to the droughts in California.
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Interest expense
We recognized interest expense of $88,524 and $65,493 during the years ended December 31, 2015 and 2014, respectively, representing an increased of $23,031, or 35%. The increase in interest expense is primarily due to increased notes payable balances.
Change in fair value of derivative liability
For the year ended December 31, 2015, we recorded a gain of $177 from the change in the fair value of the derivative liabilities related to warrants issued during 2015. There were no warrants outstanding during 2014.
Loss from continuing operations
Our loss from continuing operations for the year ended December 31, 2015, increased by $360,046, or 35%, to $1,378,198 as compared to $1,018,152 for the year ended December 31, 2014. The increase was primarily attributable to a decrease in gross profit of $104,185 and an increase selling, general and administrative expenses of $233,007 as discussed above.
Loss from discontinued operations
Loss from discontinued operations was $225,815 and $379,841 for the years ended December 31, 2015 and 2014, respectively, representing a decrease of $154,026, or 41%. The decrease in loss from discontinued operations resulted primarily from a decrease in indirect labor and manufacturing costs.
Liquidity and Capital Resources
We measure our liquidity in a variety of ways, including the following:
September 30, | December 31, | |||||||||||||||
2016 | 2015 | 2015 | 2014 | |||||||||||||
Cash | $ | 78,048 | $ | 50,632 | $ | 1,585,205 | $ | 58,206 | ||||||||
Working Capital Deficiency | $ | (780,580 | ) | $ | (3,449,505 | ) | $ | (2,770,602 | ) | $ | (3,124,430 | ) |
Based upon our working capital situation as of September 30, 2016, we require additional equity and or debt financing in order to sustain operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern.
For the nine months ended September 30, 2016 and 2015
During the nine months ended September 30, 2016, we financed our activities from proceeds derived from sales of our Series A preferred stock of $1,970,665. During the nine months ended September 30, 2015, we financed our activities from proceeds derived from the issuance of a note payable of $626,696.
For the nine months ended September 30, 2016 and 2015, we used cash of $2,367,407 and $197,421, respectively, in operations. Our cash use for the nine months ended September 30, 2016 was primarily attributable to our net loss of $1,847,236, adjusted for net non-cash expenses in the aggregate amount of $770,826, partially offset by $250,655 of net cash used by changes in the levels of operating assets and liabilities. Our cash use for the nine months ended September 30, 2015 was primarily attributable to our net loss of $1,046,066, adjusted for net non-cash expenses in the aggregate amount of $96,274 partially offset by $752,371 of net cash provided by changes in the levels of operating assets and liabilities.
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During the nine months ended September 30, 2016, cash used in investing activities was $861,516, of which $370,200 was paid in anticipation of the agreement to acquire an exclusive right to provide development and manufacturing services to HJLA, $487,900 attributable to an investment in an affiliate and $3,416 for the purchase of property and equipment. Net cash used in investing activities was $46,669 during the nine months ended September 30, 2015, of which, $1,980 was used for purchases of property and equipment and $44,689 attributable to an investment in an affiliate.
Net cash provided by financing activities for the nine months ended September 30, 2016 was $1,721,766, of which $1,970,665 was provided in connection with proceeds from the issuance of Series A Preferred Stock and warrants, net of issuance costs of $527,835, partially offset by the repayments of notes payable of $111,000, repayments of notes payable – related party of $75,624 and payment of deferred offering cost associated with the initial public offering of $62,275. Cash provided by financing activities for the nine months ended September 30, 2015 was $236,696, of which $626,696 was provided from proceeds from issuances of notes payables, partially offset by the repayments of notes payable – related party of $390,000.
For the year ended December 31, 2015 and 2014
During the year ended December 31, 2015, we financed our activities primarily from proceeds derived from sales of our Series A preferred stock of $1,870,750 and proceeds from the issuance of notes payable of $ 1,310,512.
For the year ended December 31, 2015 and 2014, we (used) provided cash of ($2,019,463) and $121,742, respectively, in operations. Cash used during the year ended December 31, 2015 was primarily attributable to our net loss of $1,604,013, adjusted for net non-cash expenses in the aggregate amount of $125,246, partially offset by $540,696 of net cash used by changes in the levels of operating assets and liabilities. Our cash use for the year ended December 31, 2014 was primarily attributable to our net loss of $1,397,993, adjusted for net non-cash expenses in the aggregate amount of $134,127 partially offset by $1,385,608 of net cash provided by changes in the levels of operating assets and liabilities.
During the year ended December 31, 2015, cash used in investing activities was $77,620, of which $75,000 was paid in anticipation of the agreement to acquire an exclusive right to provide development and manufacturing services to HJLA and $2,620 for the purchase of property and equipment. Net cash used in investing activities was $30,882 during the year ended December 31, 2014, of which, $30,882 was used for purchases of property and equipment.
Net cash provided by financing activities for the year ended December 31, 2015 was $3,624,262, of which $1,870,750 was provided in connection with proceeds from the issuance of Series A Preferred Stock and warrants (net of issuance costs of $309,250), $1,310,512 was provided by proceeds from the issuance of notes payable, and $1,080,000 represented advances from a distributor, partially offset by the repayments of notes payable of $612,000 and payments of deferred offering costs associated with the initial public offering of $25,000. Cash used by financing activities for the year ended December 31, 2014 was $60,000 for the repayments of notes payable.
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Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. We are currently evaluating the impact of the adoption of ASU 2014-09 on our financial statements or disclosures. In addition, the FASB issued ASU 2016-08 in March 2016, to help provide interpretive clarifications on the new guidance in ASC Topic 606. We are currently evaluating the accounting, transition, and disclosure requirements of the standard to determine the impact, if any, on our financial statements.
In August 2014, the FASB issued 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” (“ASU 2014-15”). ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. We do not anticipate that the adoption of ASU 2014-15 will have a significant impact on our financial statement disclosures.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The adoption of ASU 2015-03 has not had a material impact on our financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 amends the existing guidance to require that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. We are currently evaluating the effects of ASU 2015–11 on our financial statements.
Critical Accounting Policies and Estimates
Investments
Equity investments in which the Company exercises significant influence but does not control, and is not the primary beneficiary, are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.
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Preferred Stock
We have applied the accounting standards generally accepted in the United States of America (“U.S. GAAP”) for distinguishing liabilities from equity, when determining the classification and measurement of our convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity. Our preferred shares feature certain redemption rights that are considered to be outside the Company’s control. Accordingly, the Series A Preferred Stock is presented as temporary equity on our balance sheets.
As of the issuance date, the carrying amount of the Series A Preferred Stock was less than the redemption value. If we were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.
Derivative Liabilities
During December 2015, we issued warrants for a fixed number of Series A Preferred Stock at an adjustable price. We determined that these warrants are derivative instruments pursuant to FASB ASC 815 “Derivatives and Hedging.”
The accounting treatment of derivative financial instruments requires that we record the warrants as a liability at fair value and mark-to-market the instruments at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. We reassess the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale or rendering of services is recorded as deferred revenue on the accompanying balance sheets.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).
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JOBS Act
Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of new or revised accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
For as long as we remain an “emerging growth company” under the recently enacted JOBS Act, we will, among other things:
● | be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act, which requires that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting; | |
● | be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and instead provide a reduced level of disclosure concerning executive compensation; and | |
● | be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report on the financial statements. |
Although we are still evaluating the JOBS Act, we currently intend to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us so long as we qualify as an “emerging growth company,” except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 102(b) of the JOBS Act. Among other things, this means that our independent registered public accounting firm will not be required to provide an attestation report on the effectiveness of our internal control over financial reporting so long as we qualify as an emerging growth company, which may increase the risk that weaknesses or deficiencies in our internal control over financial reporting go undetected. Likewise, so long as we qualify as an emerging growth company, we may elect not to provide you with certain information, including certain financial information and certain information regarding compensation of our executive officers, that we would otherwise have been required to provide in filings we make with the SEC, which may make it more difficult for investors and securities analysts to evaluate our company. As a result, investor confidence in our company and the market price of our common stock may be materially and adversely affected.
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Overview
Incorporated in 1999, Hancock Jaffe Laboratories (HJL) develop and manufacture innovative biologic based solutions for patients with cardiovascular disease, peripheral arterial and venous disease, and end stage renal disease. Hancock Jaffe has manufactured and developed the following medical devices that have or are in the process of getting Class III FDA approval:
● | ProCol® Vascular Bioprosthesis, |
● | Bioprosthetic Heart Valve, |
● | Coronary Artery Bypass Graft, Coreograft, and |
● | Bioprosthetic Venous Valve, the VenoValve. |
There is an ongoing revenue stream through sub-contract manufacturing and royalty revenues from sales of the ProCol® Vascular Bioprosthesis for hemodialysis patients with end stage renal disease, which has been approved by the U.S. Food and Drug Administration. In March 2014, a supply and distribution agreement for ProCol® Vascular Bioprosthesis with Cryolife, Inc. was signed. Operations are focused on development and manufacturing of implantable cardiovascular bioprosthetic devices indicated for the treatment of medical conditions with severe and/or life-threatening disabilities. HJL is in the process of obtaining necessary FDA approvals to have these devices classified as Class III devices.
HJL has a strong record of regulatory and compliance conduct and operates in strict adherence to a “Quality System” motto to “develop and provide life-enhancing products and technologies in an environment where quality is the goal at every step of the process.” HJL maintains and preserves a strong proprietary estate of processes, validation procedures and related intellectual property.
HJL develops and fosters professional relationships with respected opinion leaders. These associations have helped in formulating routes for FDA approval for our medical devices.
Market and Market Opportunity
Hemodialysis Market
Hemodialysis is the main treatment for patients with end stage renal disease (most commonly known as kidney failure and sometimes referred to as ESRD). During a hemodialysis treatment, a machine pumps and cleans a patient’s blood by way of a flexible, plastic tube. In order to perform hemodialysis, an access must be created. This maybe a direct connection between the patient’s own artery and vein or if the vein is not of adequate size, then a connection between the artery and vein is created using a prosthetic device or conduit The most commonly used hemodialysis access grafts consist of various conduit designs fabricated from expanded polytetrafluoroethylene (or ePTFE). Despite historically mediocre performance, ePTFE grafts have continued to play a significant part in the hemodialysis market
Several studies have shown that the Procol Graft has better patency rate than ePTFE grafts. Also in case of infection of an ePTFE graft, a Procol graft may be used at the same place without getting infected. Studies have shown that the overall patency and infection rate of Procol is superior to ePTFE in the leg position.
In 2009, investment analysts estimated that the U.S. market for hemodialysis vascular access grafts amounted to around $77 million and projected this market to grow by 5% per annum through the middle of this decade. Hemodialysis access is rapidly becoming one of the largest market segments for vascular grafts and with the average unit selling price rapidly approaching over $1,000. The market is expected to be about $110 million by 2015. Although vascular access is one of the most vital components of the treatment paradigm for ESRD, the yearly total access graft cost represents less than one half of one percent of the total annual ESRD treatment expenditures.
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New Bioprosthetic Heart Valve Device Need
Bioprosthetic heart valves are used for diseases relating to the aortic and mitral valves. Aortic valve or mitral valve stenosis occurs when the heart’s valves narrow, preventing the valve from opening fully. This obstructs blood flow from the heart and to the rest of the body. When the valves are obstructed, the heart needs to work harder to pump blood to the body, eventually limiting the amount of blood it can pump and may weaken the heart muscle. Valve stenosis, if left untreated, can lead to serious heart problems.
Mitral valve stenosis and prolapse, leakage or regurgitation related to inadequate or faulty closing, concerns a defective mitral valve, which is located between the left chambers of the heart. This valve works to keep blood flowing properly and allows blood to pass from the left atrium to the left ventricle but prevents it from flowing backward. When the mitral valve does not work properly, a person can experience symptoms such as fatigue and shortness of breath because the defective valve is allowing blood to flow backwards into the left atrium. Consequently, the heart will not pump enough blood out of the left ventricular chamber to supply the body with oxygen-filled blood. In certain cases, mitral valve disease, may, if left untreated, lead to heart failure or irregular heartbeats (“arrhythmias”), which may be life threatening.
Historically, heart valve manufacturers have fabricated replacement heart valve types (mechanical, biological, pericardial, pig-origin) and sizes to accommodate a spectrum of patient age, body mass or special pathologic conditions. Typically, this consists of aortic valve sizes with outside diameters ranging from 19 millimeters (“mm”) to 27 mm in 2 mm increments and mitral valves sizes in 2 mm increments from 27 mm to 31 mm. Hospitals and surgeons generally used one biologic and/or one mechanical valve from a single manufacturer and until about the end of the last century hospitals tended to inventory a complete size range of valves typically from a single manufacturer. As the practice of heart valve replacement surgery developed, it became apparent that the recipient population demanded a more prospective view in terms of the various implant modalities, geometrical configuration and a patient’s comorbidities. Depending on age (patients under age 20 receive a mechanical valve due to their calcium metabolism) surgeons use either mechanical, pericardial or porcine biological valves. Porcine valves have shown better longevity than pericardial valves.
Distinctive features of one particular valve may facilitate implantation or meet the particular demands of a patient’s unique pathology. This stimulated the development of various valve configurations, but in the end did not significantly improve hemodynamic performance or advance quality of life concerns. There is no disagreement and considerable evidence that for most cardiac valve related disorders presently available devices will improve graft recipients presenting conditions.
However, HJL believes there is one patient cohort for whom the present devices fall short: very young children and adolescents requiring the smallest valve sizes, typically 19-21 mm in diameter. The primary challenge for these patients is to provide adequate blood flow during growth and development. Typically, this requires more complex procedures or multiple interventions to provide a larger valve replacement. Additionally, biological valves in younger patients will deteriorate as a consequence of what is known as dystrophic mineralization, a phenomenon most likely associated with skeletal growth. Children and adolescent receive historically mechanical valves, which show lower performance. The patient outgrows the valve size several times between age two and twenty, requiring three to five surgeries before adulthood (also referred to as patient prosthetic mismatch).
Pediatric patients suffering from mitral valve prolapse, stenosis or rheumatic fever typically face complex issues such as alterations of the morphology and geometrical shape of the left heart chambers, which may compromise the chords that tether the mitral valve and the surrounding annular tissues that maintain the leaflet in a proper position (juxtaposition) leading to leakage or regurgitation. The common course for mitral valve disease in children is repair rather than replacement of the valve due to the potential complexity of pediatric mitral valve disease. However, when the mitral valve is not amenable to repair either as a consequence of surgeon skill and/or experience or the complexity of the pathology, a valve replacement procedure is necessary. Mitral valve stenosis and prolapse, leakage or regurgitation also results in significant changes in the morphology of the wall of the left ventricle, typically manifested as considerable thinning, and/or ventricle enlargement or thickening. For a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. This leads to a restricted passage of the blood through the aortic valve (aortic insufficiency). A too large aortic valve replacement may restrict the function of the mitral valve. It is therefore very important to match the respective valve with the size of the patients heart.
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HJL believes that the effective orifice size of most, if not all, of the present commercially available small diameter bioprosthetic heart valves suited for pediatric aortic and mitral valve replacement are inadequate to provide the necessary hemodynamic result for up to 80% of the potential valve recipients suffering from congenital or acquired valvular disease. HJLs believe that this shortcoming is a result of the reduced effective diameter of currently available bioprosthetic heart valves that uses conventional supporting structures and/or the resistance of the valve leaflets during the forward flow opening phase of the cardiac cycle. Most commonly, for developing children, the increasing body mass or body surface area as a child grows is frequently incongruent with the valve size that the patient’s heart can accommodate. Consequently, these recipients almost universally develop a condition designated as “patient prosthetic mismatch.” For valve replacement in both younger and older pediatric patients, patient prosthetic mismatch has been shown to be associated with longer recovery periods and diminished improvements in symptoms. This is reflected in decreased exercise capacity, decreased recovery of the thickened left ventricle, as a result of the ventricular adaptation to the flow resistance of the narrowed aortic valve outflow tract, and an increased number of adverse postoperative cardiac events. Older pediatric patients are especially susceptible to patient prosthetic mismatch with a marked persistence of symptoms. This is most likely related to the younger patient’s higher cardiac output requirements in association with a longer exposure to the consequences of patient prosthetic mismatch.
The American Heart Association reports that in each year, approximately 10 of every 1,000 children (approximately 1.3 million children) worldwide including 8 of every 1,000 in the U.S. are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 mm sized prostheses. The 2015 Global Data Report reported the global heart valve market to be approximately $2 billion based on an average selling price for standard valve prostheses of $5,000-$9,000. These patients above all would benefit from the HJL bioprosthetic heart valve, being safer, cost effective and reducing reoperations in the patient population
Bioprosthetic Coronary Artery Bypass Graft Device Need
The present standard procedure for coronary bypass surgery employs the use of the patient’s saphenous vein and/or internal mammary artery as conduits to re-establish blood flow, otherwise known as coronary artery bypass grafts (or CABG). While balloon angioplasty with or without stent placement is another option and has been effective for many patients, this procedure is not always appropriate for multiple vessel disease. Balloon angioplasty also has not produced conclusive and consistent results and, in a large number of instances, may only provide short term relief necessitating subsequent and consequently more difficult surgical intervention. Coronary artery bypass remains the most effective procedure to re-vascularize cardiac muscle subsequent to a heart attack. By the end of the last decade, more than 500,000 coronary artery bypass procedures requiring almost one million harvested autologous grafts were performed annually in the U.S. In 2014, 150,000 coronary artery bypass procedures were performed, which accounts for 425,000 bypass grafts.
HJL believes that the recent trend toward off pump coronary graft surgery (surgical intervention on a beating heart as opposed to surgery on a stopped heart with extra-corporal circulation; decreases the surgery time by one hour), minimally invasive coronary artery bypass surgery has had considerable bearing on both perioperative and procedural safety and efficacy and has had a significant impact on the future of the procedure and attendant utility of prosthetic bypass grafts. Bypass graft harvest remains the most invasive and complication prone aspect of the minimally invasive bypass procedure. Present standard-of-care complications are described in recent published reports in major medical journals. The percentage of complications Can be as high as 43 percent. Fortunately, less than 50 percent of these wounds require operative intervention, but the ones that do can be major.
Also recent articles substantiate that saphenous vein graft obstruction is progressive, with failure as high as 50% at 10 years. Acute thrombosis, neointimal hyperplasia, and accelerated atherosclerosis are the 3 mechanisms that lead to venous graft failure. (Saphenous vein graft failure after coronary artery bypass surgery: pathophysiology, management, and future directions. Harskamp RE, Lopes RD, Baisden CE, de Winter RJ, Alexander JH. Ann Surg. 2013 May;257(5):824-33. Off-pump CABG with vein grafts show an increased rate of obstruction versus mammary artery graft CABG. (Ref. Comparison of graft patency between off-pump and on-pump coronary artery bypass grafting: an updated meta-analysis. Zhang B, Zhou J, Li H, Liu Z, Chen A, Zhao Q. Ann Thorac Surg. 2014 Apr;97(4):1335-41. Epub 2014 Jan 7). Also, a significant cost of CABG procedures is associated with graft harvest and the extended recovery and complications related to the harvest procedure.
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The increased incidence of chronic venous diseases of the lower limbs also reduce the possibility of harvesting good quality veins as well as the increase incidence of redo CABG bypasses.. An “off the shelf” bypass conduit would do away with the attendant complications and chronic postoperative discomfort frequently reported for autologous graft harvest and consistently afford sufficient material for more complete cardiac revascularization. The American Heart Association stated in 2015 that “complete revascularization was key to ensure long term survival and quality of life in patients with coronary disease” (Eagle, KA; Guyton RA; Davidoff R; et al. (October 5, 2004). “ACC/AHA 2004 guideline update for coronary artery bypass graft surgery: a report of the American College of Cardiology/American Heart Association Task Force on Practice Guidelines. An efficacious prosthetic bypass graft in concert with off pump and/or minimally invasive surgery would comprise an almost wholly “noninvasive procedure.” HJL believes the availability and appeal of such a modality would have considerable impact on the therapeutic balance between bypass revascularization and interventional cardiology regimens like stents, balloon catheterization, which only provide temporary relief.
Coronary artery bypass surgery departs from the usual one procedure–one device paradigm. When revascularization requires more than an internal mammary graft, a conservative average of 2.5 additional grafts is required. The economics and surgeon reimbursement amounts for bypass procedures presently discourage multiple graft procedures as the time to harvest additional grafts is not economically justified in terms of the reimbursement amounts. Reimbursement codes for a single bypass graft versus five grafts on the same patient only differ by a few hundred dollars but the multiple grafts require up to thre times the amount of time and operating costs of a single procedure. HJL believes that this discourages taking the time and incurring the operating room costs in harvesting additional bypass grafts resulting in suboptimal cardiac revascularization. Moreover patients requiring multiple bypasses for a complete revascularization often show comorbidities like chronic venous insufficiency of the lower limbs as well as redo patients.
If only half of the annually performed procedures required multiple graft revascularization, the requisite number for the U.S. alone would be in excess of 110,000. On the basis that - consequent to an approved device - utilization was only 50% of the prospective market potential, market value for the U.S. alone would be approximately $660 million to $770 million for unit pricing of $6,000 to $7,000; the European and Pacific Asia markets combined would have a similar value for a worldwide market of $1-$2.0 billion. (CDC)
Bioprosthetic Venous Valve Device Need
Lower Limb Chronic Venous Insufficiency (CVI)) is a disease presently affecting tens of millions of patients worldwide with approximately 1.5 million new cases annually. In the U.S., based upon data from the Vascular Disease Foundation, approximately 20% of the population suffers from varicose veins and 5% (15 million) of the U.S. population are expected to develop DVT and approximately 65% (10 million) of the U.S. DVT population are expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the U.S., the present population of individuals suffering varying degrees of CVI is approximately 5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. In Western Europe, the incident rate of CVI is estimated at one million hospitalizations per year, the prevalent CVI population is estimated at 17.5 million, and the mean prevalence of CVI of the legs in the general population in Western Europe is 30%. Patients with CVI are plaqued with marked disability, either from leg swelling or development of non healing leg ulcers.
The hallmark of the disease is the failure of damaged venous valves to allow for lower limb venous blood to return to the heart. It is a mechanical reflux problem. Presently no medical or nonsurgical treatment is available other than compression “garments” for early stage disease or leg elevation for more severe cases, which are, at best, only palliative. When the disease is isolated to the superficial veins, ablation or surgical excision of the affected vein is an option. However, for the deep system, valve transplants has been used but with very poor results or creation of valves using fibrous tissue which is only performed in few centers world wide. Reestablishment of proper direction of venous flow to the heart is the only reasonable remedy to the problem of CVI.
Our Products
Developed Products
ProCol® Vascular Bioprosthesis
In March 2016, LeMaitre Vascular, Inc., or LMAT, (Nasdaq: LMAT), a provider of peripheral vascular devices and implants, acquired our ProCol® Vascular Bioprosthesis for dialysis access line of products for $2,805,297 plus a three-year royalty up to a maximum of $5 million. HJL will provide manufacturing transition services to LMAT from its facility for up to three years.
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The ProCol® Vascular Bioprosthesis is a Class III vascular bioprosthesis for hemodialysis vascular access concomitant with end stage renal disease, or ESRD. The ProCol® Vascular Bioprosthesis is a natural biological graft derived from a bovine mesenteric vein. The patented tissue processing technology and sterilization process ensures a product that is flexible, easy to suture and one which exhibits physiologic pulsatile flow characteristics similar to a native fistula. The ProCol® Vascular Bioprosthesis may be implanted in a straight or loop configuration, according to the specific surgical need and has demonstrated clinical efficacy in the upper arm, forearm, and thigh.
The ProCol® Vascular Bioprosthesis has received FDA PMA Approval for commercial sale in the United States for use as a vascular access bridge graft in patients who require graft placement or repair subsequent to at least one failed prosthetic graft or consequent to failure of a prosthetic graft in terms of intent to treat.
The outcomes of the FDA trials and subsequent studies demonstrate that the cumulative patency for the ProCol® Vascular Bioprosthesis implanted as a first access or after multiple failed prosthetic grafts is fundamentally that usually reported for AVFs as the first access or employed consequent to failed ePTFE grafts. As compared with the present standard of care ePTFE graft, the ProCol® Vascular Bioprosthesis has shown 3.7 times lower relative risk of infection, 1.4 times lower relative risk of interventions, and 1.7 times lower relative risk of thrombosis. We believe this is exemplified by the quantitative and qualitative similarities of the cumulative patency of the ProCol® Vascular Bioprosthesis to that reported for native arteriovenous fistulae in the Dialysis Outcome and Practice Patterns Study. We believe the results of these and other studies consistently demonstrate that as a vascular access bridge graft the ProCol® Vascular Bioprosthesis provides dramatically better cumulative patency compared to ePTFE grafts and exhibits a lower complication rate. Most importantly is the continued patient satisfaction associated with the paucity of complications and uninterrupted dialysis therapy.
The PBV is stored in sterile saline, so preparation in the operating room is easily accomplished via a simple, quick rinsing process. The PBV is also highly biocompatible and elicits no antibody reactions in patients. Handling and suturing characteristics of the PBV are similar to a patient’s native tissue making it easy to work with during the implant procedure. The natural tissue of the PBV is easily punctured in the hemodialysis setting affording the ease of access associated with a native fistula and the highly elastic and compliant nature of the PBV enables it to handle high flow rates. Hemostasis is also readily achieved with minimal pressure following the removal of the hemodialysis needles. The PBV graft may be accessed for hemodialysis as soon as two weeks following implant, based upon the physician’s decision and patient tolerance.
Products Under Development
Over the past eight years we have been developing the following three implantable biomedical devices for heart and cardiovascular disease:
● | Bioprosthetic Heart Valve: a bioprosthetic heart valve designed to function mimetic of a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients. | |
● | Bioprosthetic Coronary Artery Bypass Graft (CoreoGraftTM): a bioprosthetic heart bypass graft for coronary artery bypass procedures, designed to eliminate the need for harvesting a patient’s saphenous vein and/or radial artery to facilitate a more complete revascularization of the heart muscle. | |
● | Bioprosthetic Venous Valve, the VenoValve: a bioprosthetic venous valve for replacement of dysfunctional valves in the veins of individuals suffering with chronic deep venous insufficiency of the lower limb, a disease with no presently durable medical or surgical treatment available. The device is designed to restore venous flow back to the heart. |
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Bioprosthetic Heart Valve
The Bioprosthetic Heart Valve, or BHV, is a next generation bio-prosthetic heart valve designed to mimic and function like a native heart valve providing the recipient over twice the functional performance of presently available devices. The hemodynamics and durability of BHV have been especially enhanced for the presently unresolved complications attendant to pediatric and adolescent recipients and we are aiming to have the BHV become the standard of care for pediatric heart valve replacement.
Following an eight-year research and development effort, we completed the designing, prototyping and testing in accordance with the requisite International Organization for Standardization, or ISO, 5840 Part 1 (Cardiovascular Implants, Cardiac Valve Prostheses General Requirements) and Part 2 (Surgically Implanted Heart Valve Substitutes) of what we believe is an innovative ground-breaking heart valve bio-prosthesis for pediatric cardiac heart valve replacement. We believe that we have completed the necessary ISO 5840 pre-clinical data requirements in order to prepare a submission to the FDA to begin First-in-Human clinical trials in the United States in 2017. To that end, we have obtained a patent (U.S. Patent No. 7,815,677 “Reinforcement device for a biological valve and reinforced biological valve”) for the BHV. See “Intellectual Property.” We intend to produce 19 mm, 21 mm and 23 mm diameter bio-prosthetic heart valves to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease.
The BHV has been designed to address the specific needs of the pediatric patient cohort undergoing valve replacement for congenital and/or acquired aortic and mitral valve disease. Based upon our patented technology, the BHV eliminates the need for external support structures technically referred to as a “stent” to maintain valve geometry and function. This is accomplished through a use of titanium wires embedded within the wall of the bioprosthetic valve. This greatly increases the size of the bioprosthesis that can be placed in the pediatric patient’s small annulus, the site of the inflow of the patient’s original valve. Thus, the BHV allows for effective functional results equal to a valve size two to three sizes larger than would be possible when implanting with an external stent. In addition, the internalized titanium supports are robust enough so as not to require additional suturing as is the case for weakly supported or stentless valves. This allows for the utilization of a single suture line for attachment of the valve to the recipient’s annulus and for an uninterrupted flow plane, which greatly increases the volume of blood with each heart beat. Conversely, conventional valve design requires that the valve tissue be sewn or mounted inside the external stent diminishing the effective diameter and resulting in poor performance, stress on the leaflets and ultimately to a decreased longevity. When a conventional bioprosthetic heart valve is placed in a small annulus, not only will the valve react adversely to increasing cardiac output but it will require a valve three sizes larger than the annulus to achieve a similar hemodynamic or functional result to the native valve; a feat not advisable or in any event accomplishable even with conventional root enlargement procedures. A patient prosthesis mismatch (the prosthesis is too small with regards to the patient’s size and weight) results in poor quality of life and in impairment of physical development and social integration.
Similar flow advantages have been verified for our 23 mm BHV, the most common size implanted for mitral disease. Our 23 mm BHV has proven to provide an effective orifice area that mimics flow conditions of a younger active child. This is approximately 85% greater blood flow than presently available bioprosthetic heart valves with expected decreased recovery time from procedure of up to 75%.
Additionally, for a normal heart, the outflow of the mitral valve is immediately adjacent to the outflow tract of the aortic valve. In disease related left ventricular chamber anatomy, this anatomic relationship is extremely susceptible to obstruction of the outflow tract and/or injury to the compromised left ventricular wall by the degree of protrusion of the mitral valve replacement into the left ventricle. The protrusion of our 23 mm BHV is up to 2 mm less when compared to other bioprosthetic valves. Our flatter more planar geometry comes closer to mimicking the native anatomy allowing for physiological, more efficient left ventricular and aortic outflow tract flow patterns.
Bioprosthetic Coronary Artery Bypass Graft - CoreoGraftTM
The CoreoGraft® CABG is a device for use as an alternate or supplemental coronary vascular conduit in coronary bypass surgery. The Coreograft® CABG is designed to eliminate the need for harvesting the patient’s saphenous vein and/or radial artery and facilitate a more complete revascularization of the injured heart muscle. The device will allow for effective coronary bypass procedures for a significant number of patients who have no adequate vessels for grafting, especially patients undergoing redo procedures and patients suffering from chronic venous insufficiency. This device is fashioned from 3 mm diameter bovine mesenteric veins. The “feel” and suturing quality of the graft are mimetic of mammary arteries and requires no special suture considerations beyond those commonly used for autologous grafts. The Coreograft® CABG graft length is appropriate for all bypass requirements allowing exact trimming to the individually required length.
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The Coreograft® CABG is both anatomically and functionally similar to a natural artery and has been demonstrated in preliminary studies to sustain effective “coronary” hemodynamics and cardiac function. Outcomes of 25 procedures performed by Dr. Wade Dimitri and colleagues at Walsgrave Hospital, U.K., exemplify the utility of the ProCol® CAGB as an alternate or supplemental coronary vascular conduit in off-pump CABG. This preliminary clinical study was limited to patients without sufficient available autologous grafts or patients who could not be weaned from bypass perfusion because of incomplete cardiac revascularization. Twenty-six grafts were implanted in 24 patients requiring a complete myocardial revascularization subsequent to hospital admission for coronary artery bypass grafting. In all cases, the Coreograftl® CABG was used when it was determined that adequate or suitable autologous conduits were not available as a consequence of prior use, vascular pathology or contraindication associated with a comorbid condition.
During December 2016, we had a CE Mark pre-submission meeting with a European Notifying Body in order to receive feedback on the CE Mark submission for the CABG graft currently anticipated to be filed during the first quarter of 2017. Additionally, HJL believes that we have completed the necessary pre-clinical requirements to prepare an FDA IDE submission to begin human clinical trials in the United States for our bioprosthetic heart bypass graft, which we currently plan to begin in 2017.
There are no presently approved biological vascular grafts for coronary artery bypass procedures. HJL believe that the availability of the readily available “off the shelf” Coreograft® CABG will encourage multiple graft placement without the surgeon forgoing additional procedures that are not cost-effective.
Bioprosthetic Venous Valve, The VenoValve
HJL has developed a bioprosthetic Venous Valve, the VenoValve, for use in treatment of lower limb chronic venous insufficiency. The VenoValve is a replacement of dysfunctional valves in the deep venous system in individuals suffering from lower limb chronic venous insufficiency. Restoration of valvular function in the deep system is the “Holy Grail” for treatment of CVI. The VenoValve comprises a biologic leaflet mounted in a supporting frame or “stent” that will allow for surgical insertion of VenoValve into the femoral vein, thereby re-establishing competence and anterograde venous flow back to the heart.
Preclinical prototype testing, including in vivo animal studies and in vitro hemodynamic studies have demonstrated that the VenoValve is similar in function to a normal functioning venous valve. Ascending and descending venography of the VenoValve in sheep, demonstrated competency of the valve as well as patency in appropriate flow patterns.
During November, 2016, we made an FDA submission through the FDA Expedited Access Program (EAP) in order to obtain expedited approval for commercialization of the HJL Venous Valve in the United States and possible early feasibility study in man.
As there are no currently available medical or non-surgical treatment of lower limb chronic venous insufficiency, HJL believes the VenoValve will provide for a paradigm shift in the treatment of both primary and secondary causes of chronic venous insufficiency disease.
Competition
HJL believes that each of the devices either under development or currently manufactured is characterized by a unique competitive setting.
BHV
Although the BHV market is mature with multiple established competing products, HJL believes that our approach (mimic natural physiology with a unique tissue processing technology and with a unique design and geometry) will greatly facilitate market entry and acceptance. Our competitors in this market include St. Jude Medical, Inc., Johnson and Johnson and Medtronic Inc., all of which have previously acquired heart valves developed by our management.
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Coreograft® CABG
No company presently develops adjunct devices to be applied to a patient’s harvested grafts. Others have made attempts to “tissue engineer” small diameter grafts; however, we believe there will not be an approved competitive device for possibly a decade as a consequence of the complexities of present FDA regulations for tissue engineered devices and the historically poor outcomes of grafts fabricated from synthetics.
The VenoValve
The VenoValve is unique from a competitive viewpoint in that it provides for an entirely new paradigm for the treatment of the disease for which it is intended. While the etiology of deep vein chronic insufficiency may vary, the condition is wholly attributable to significant reflux in the deep system caused by dysfunctional venous valves. For some time, it has been recognized that the only durable treatment must include either reconstruction or replacement of the affected valve .There are no FDA approved effective drugs, practical effective surgical or nonsurgical treatments, or a single treatment strategy for CVI, we believe there will be no direct competition for the foreseeable future.
Our Strategy
Our business strategy is focused primarily on research, development and manufacturing of biomedical device technologies for use in surgical procedures. We are also focused on the relatively large device markets where our technological advances and achievements provide an opportunity to offer our devices in an environment conducive and advantageous to their utilization and clinical benefit. Developing pathways to obtain FDA approval in the most expedient fashion is our main strategy for our products.
Research and Development
Our present strategy for the VenoValve is to obtain approval from the FDA for a first in man study that will quickly evolve into a study coordinated to demonstrate improvement in the quality of life for patients with CVI. HJL believes that the VenoValve will provide significant improvement in the quality of life measures for patients living with the disability of CVI.
Marketing and Sales
HJL will develop an internal marketing and sales group to manage a combination of direct sales representatives and an independent distribution network.
BHV
Cardiac surgeons generally develop a preference for one particular company’s device, whether based on an impression of superior performance or on developed relationships with the providers. HJL believes that by focusing on the pediatric segment we are not subject to this issue as the prospective user can focus on the best ethical approach to the patients need without “abandoning” prior affiliations. We believe the present “commodity” nature of the heart valve industry that the benefits of the BHV will position the device as a standard of care without a competitive “peer.”
In addition, according to the American Heart Association – Heart Org Congenital Heart Defects, each year worldwide approximately 10 of every 1,000 children (approximately 1.3 million children) including 8 of every 1,000 in the United States are born with a congenital heart defect requiring immediate or eventual surgical intervention. Of this patient cohort, 30-40% will undergo either aortic or mitral valve replacement surgery during the first two decades of life. This results in approximately 50,000 procedures with the vast majority requiring 19, 21 or 23 millimeter sized prostheses. The 2015 Global Data Report reported the global heart valve market to be approximately $2 billion, being based on an average selling price for standard valve prostheses of $5,000-$9,000. Based on these statistics, HJL believes that at the proposed average selling price of $$17,500.00 per unit for all sizes, the estimated market of the BHV is approximately $300 million in the U.S. and $500-600 million in Western Europe and Pacific Asia. On an equivalent cost basis, HJL believes the market value of its bioprosthetic valve would represent approximately 25% of the total market on a unit basis.
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Coreograft® CABG
The CABG market is, to a more complex market to estimate on a procedural basis. This is largely due to the evolving attitude toward more complete vascularization of the infarcted heart and the varying number of placed grafts accompanying the cardiopulmonary bypass and off pump or beating heart procedures. In lieu of a multifaceted trend analysis, it is reasonable to approach the potential market on a conservative basis by assigning an average of 2.5 grafts per procedure which for the U.S. would be an equivalent of approximately 375,000 units annually representing a market value of approximately $3.25 billion; an even more conservative estimate based on graduated market penetration has a market potential of over $1 billion. As is the case for devices utilized as part of well- established surgical procedures, the “rest-of-world” market has been consistently equivalent to that of the U.S.
When the total costs of coronary artery bypass procedures are estimated in terms of alternate treatments and especially for those patients for whom surgery is strongly indicated it appears that a cost for a device that substitutes for graft harvest, alleviates the inevitable cost of treatment subsequent to incomplete revascularization and limits the adjunct use of high ASP’s for stents would allow for reimbursement equivalent to less than 20% of the total procedure and hospital costs. In consideration of the above the anticipated price to the hospital will be $6,000.00 per unit.
HJL Venous Valve, The VenoValve
In the U.S., based upon data from the Vascular Disease Foundation, approximately 5% (15 million) of the U.S. population are expected to develop DVT and approximately 65% (10 million) of the U.S. DVT population are expected to develop CVI. Extrapolation of the Data from the Vascular Disease Foundation reveals that in the U.S., the present prevalent population of individuals suffering varying degrees of CVI is approximately 5 million, the incidence of CVI as a consequence of congenital and inflammatory etiology resulted in 70,000 hospitalizations per year, and the incidence of CVI as a consequence of DVT is approximately 400,000 cases per year. For Western Europe, the incident rate of CVI disease is estimated at one million hospitalizations per year, the prevalent CVI disease population is estimated at 17.5 million, and the mean prevalence of CVI disease of the legs in the general population in Western Europe is 30%.
Based upon the foregoing, we estimate that for the U.S., the candidate patient population for the VenoValve is at present approximately 5.5 million and at the time of commercialization of the product, the prevalent candidate population is expected to be 6.5-7 million with the candidate incidence rate at over half a million annually. With standardized average selling price across currencies, we estimate that the monetary value of the U.S. and Western European market for the VenoValve is on an incidence basis approximately $10 billion annually with the prevalent market value is in excess of $100 billion.
There is no comparable device for purposes of price comparisons and/or reimbursement codes. Therefore, after consulting with industry analysts and vascular surgeons, examining the actual selling price sensitivity in terms of clinical benefit, and analyzing trends in reimbursement for similarly existing devices, we have developed a potential clinical value for the VenoValve. We have estimated a reimbursement of $6,500 - $11,000 per valve.
A measure to estimate the cost effectiveness of an intervention is quality-adjusted life-years (or QALY). Presently for CVI, the cost per patient to maintain the status quo of CVI or no substantial improvement in QALY is approximately $50,000.00 annually. The VenoValve would improve the QALY over a 5-year period by at least 2.5 QALYs and would reduce the annual cost to maintain the improved longevity and life style by 60%. For device recipients, with a return to normal activity without pain, the QALY improvement would be 4; equivalent to reducing annual costs by 75%. Over a 5-year period the health care cost savings associated with use of the venous valve would be $150,000.00 - $200,000.00, equivalent to a 5 year savings of hundreds of billions of dollars for the present prevalent and anticipated incident patient population. In consideration of the above the anticipated price to the buyer these factors will be associated with the cost of the device.
Strong Proprietary Estate of Processes, Validation Procedures and Related Intellectual Property
HJL believes that we possess an extensive assemblage of proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our devices. Additionally, we believe our patents pertaining to unique design advantages and processing methods of valvular tissue as a bioprosthetic device provides intellectual advantage over potential competitors. See “—Intellectual Property.”
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Development of Facilities
HJL operates a 16,500 square foot manufacturing facility in Irvine, California. Our facility is designed expressly for the manufacture of biologic vascular grafts and is equipped for research and development, prototype fabrication, CGMP manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices. When fully staffed and utilized, we believe production capacity will be approximately 24,000 devices annually.
Intellectual Property
HJL possess an extensive proprietary processing and manufacturing methodology specifically applicable to the design, processing, manufacturing and sterilization of our biologic devices. This includes FDA compliant quality control and assurance programs, proprietary tissue processing technologies demonstrated to eliminate recipient immune responses, decades long and trusted relationship with abattoir suppliers, and a combination of tissue preservation and gamma irradiation that extends device longevity, provides device functions and guarantees sterility. The FDA is familiar with the most essential aspects of our methodologies as they have been part of our process development. Our patents pertaining to the unique design advantages and processing methods of valvular tissue as a bioprosthetic device provides further intellectual advantage over potential competitors.
We have also developed a unique Class III device cGMP documentation process central to bringing all of the various elements together during the fabrication processes affording a significant “barrier” to potential competitive efforts. Our cGMP documentation cannot be infringed on from a proprietary standpoint because of the specificity of each listed section and the associated validations and permissions.
In addition, there are various specific intellectual property items related to each of our devices as described below.
Bioprosthetic Heart Valve (BHV)
The critical design components and function relationships unique to the BHV are protected by U.S. Patent No. 7,815,677, issued on October 19, 2010, and expires on July 9, 2027.
Coreograft® CABG
A unique use patent will be filed to protect the specific indication based on the mimetic biomechanical properties of the wall of the Coreograft® CABG as it relates to pulsatile propagation of forward flow characteristic of coronary arteries.
The VenoValve
The VenoValve encompasses a unique intellectual estate comprising of dozens of proprietary processes and methodology from its initial development and manufacturing, through the finished device. Patents are pending for the unique design of the frame for this device.
Government Regulation
Class III medical devices are generally the highest risk devices and are therefore subject to the highest level of regulatory control. Class III devices must typically be approved by the FDA before they are marketed. With respect to the Class III medical device industry, there are three particular regulatory related events:
● | FDA Investigational Device Exemption (or FDA IDE) approval which allows a company to begin a U.S. clinical investigation. | |
● | CE Mark (or CE Mark) permitting a company to either commence European sales or initiate early clinical trials outside the U.S.; and | |
● | FDA Premarket Approval (or FDA PMA) granting commencement of U.S. sales. |
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We have completed a significant number of the requisite studies, validations and documentation necessary to obtain an FDA IDE, FDA PMA and/or CE Mark for each of the subject devices, which we believe we will receive within twenty four months.
Definitive Regulatory Pathway; FDA, FDA IDE, FDA PMA, CE MARK
BHV
We have developed a prototype specification for each of the BHV sizes, device history records and other required documentation including device and manufacturing risk analyses to support the prototype specification. The initial phase of operations will encompass the necessary quality and manufacturing procedures to convert the prototype specification to those consistent with the FDA’s cGMP documentation. During this initial phase, we expect to complete specific quality documentation to achieve a CE Mark. We have completed the processes to bring the BHV [in compliance with] ISO 5840 Standards, including animal and tissue fatigue studies for heart valve development and submission. Subsequent to the completion of the protocol, we will submit an application for an FDA IDE to begin U.S. clinical trials.
In October 2002, under the Medical Device User Fee and Modernization Act of 2002 (or MDUFMA), the FDA developed guidelines, which were enacted into law in 2007, to stimulate and facilitate the development of devices for pediatric medicine. Among other things, the MDUFMA amended provisions of the Federal, Food, Drug, and Cosmetic Act (or FFDCA) to promote the development of safe and effective pediatric devices and promote protection of such patient population during the course of clinical trials involving such products. The 21st Century Cures Act, implemented in Sept 2016, adds significantly to our ability to perform trials in the least burdensome regulatory path. We believe that the adoption of these guidelines will greatly facilitate the regulatory tasks and FDA PMA for the BHV clinical trial protocol.
Coreograft/ CABG
There are no regulatory guidelines for the development and preclinical testing of conduits for CABG and we have taken the initiative in developing a proposal for preclinical testing and the clinical investigation protocol. All of the required documentation, cGMP operating procedures, validation studies, prototype specification and quality system coordination for the cGMP are complete and available as part of the FDA PMA approved Coreograft® vascular access graft]. The remaining preclinical study will consist of a short term implantation in an approved animal model. The study will require approximately 6 months to complete and will be combined with presently completed documentation including the “first in human” studies reviewed in the device information studies as part of the FDA IDE application.
VenoValve
HJL anticipates may shorten the time to receive a FDA PMA for commercialization from thirty-six months to approximately eighteen months for this Class III device due to medical needs in the community . Due to low hazard analysis and high need for such a device, HJL feels that this device is on a pathway for expedited approval.
Employees
As of February 2, 2017, we have 9 full-time and 3 subcontracted employees for tissue procurement. None of our employees are represented by a collective bargaining agreement, and we have never experienced any work stoppage. We believe we have good relations with our employees.
Properties and Facilities
We lease a 16,500 square foot manufacturing facility in Irvine, California, which is certified under the ISO 13485 medical device manufacturing standard for medical devices and operates under the FDA’s quality systems regulations, or QSRs. The lease for this facility expires on July 14, 2017. Our facility is designed expressly for the manufacture of biologic vascular grafts and is equipped for research and development, prototype fabrication, CGMP manufacturing and shipping for Class III medical devices, including biologic cardiovascular devices.
Legal Proceedings
From time to time we may be involved in various disputes and litigation matters that arise in the ordinary course of business. We are currently not a party to any material legal proceedings.
Changes in and Disagreements with Accountants
None.
Corporation Information
We were organized as a corporation under the laws of the State of Delaware in December 1999. Our principal executive office is located at 70 Doppler, Irvine, California 92618 and our phone number is (949) 261-2900.
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Executive Officers and Directors
The following table provides information regarding our executive officers and directors as of February 2, 2017:
Name | Age | Position(s) | ||
Executive Officers | ||||
Benedict Broennimann, M.D. | 58 | Chief Executive Officer | ||
William R. Abbott | 60 | Interim President, Chief Financial Officer, Senior Vice President, Treasurer and Secretary | ||
Marc Glickman, M.D. | 67 | Senior Vice President, Chief Medical Officer and Director | ||
Susan Montoya. | 64 | Senior Vice President of Operations, Regulatory Affairs and Quality Assurance | ||
Non-Employee Director | ||||
Yuri Zhivilo | 57 | Chairman of the Board of Directors | ||
Robert Anderson | 76 | Director | ||
Robert Doyle | 74 | Director | ||
Gennady Alferenko | 67 | Director |
(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee
Executive Officers
Benedict Broennimann, M.D. has served as our Chief Executive Officer since September 2016. From 2006 to 2008, Dr. Broennimann served as our Chairman and CEO, and from 2009 to 2015 he was engaged by us as a consultant to facilitate our efforts to gain various regulatory approvals in Europe. Dr. Broennimann is a seasoned cardiovascular device executive with over 20 years experience delivering strong market, financial, and operational results for medical device companies in Europe, the United States, and Asia. From 2012 to 2016, he served as Chief Executive Officer and Chief Medical Officer of OstomyCure AS, where he was responsible for achieving CE marking of a Class IIb medical implant and leading strategic alliances and negotiations. From 2004 to 2008, he was also Chief Executive Officer of Leman Cardiovascular, where he spearheaded fundraising and cardiovascular device developments. Dr. Broennimann served as Principal at Heidrick & Struggles from 2000 to 2002 and Highland Partners from 2003 to 2004. He also served as a Senior Partner at Rosewall Ventures, Ltd. from 2008 to 2011. Dr. Broennimann attended the University of Bern in Switzerland, where he received his Doctor of Medicine, and was Chief Resident in the Department of General Surgery and Transplantation at the Centre Hospitalier Universitaire Vaudois in Lausanne, Switzerland. Dr. Broennimann is also board certified in general surgery and pharmaceutical medicine.
William R. Abbott has served as our Chief Financial Officer since March 2016. In July 2016 he was appointed as our interim President, and our Senior Vice President, Treasurer and Secretary. Mr. Abbott has more than thirty years of experience in multi-industry international companies. From December 2014 to March 2016, Mr. Abbott served as Vice President of Finance and Corporate Controller and later as Interim Chief Financial Officer of Apollo Medical Holdings, Inc. From 2011 to 2014, he was an independent consultant providing accounting and advisory services. From 2006 to 2011, Mr. Abbott served as Senior Vice President, Chief Financial Officer, Secretary and Treasurer for Cardiogenesis Corporation. From 1997 to 2005, Mr. Abbott served in financial management positions at Newport Corporation, including as Vice President of Finance and Treasurer from 2001 to 2005 and Vice President and Corporate Controller from 1997 to 2001. Prior to that, Mr. Abbott served as Vice President and Corporate Controller of Amcor Sunclipse North America, Director of Financial Planning at Coca-Cola Enterprises, Inc. and Controller of McKesson Water Products Company. Mr. Abbott also spent six years in management positions at PepsiCo, Inc. after beginning his career with PricewaterhouseCoopers, LLP. Mr. Abbott has a Bachelor of Science degree in accounting from Fairfield University and a Masters in Business Administration degree from Pepperdine University.
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Marc H. Glickman, MD has served as our Senior Vice President and Chief Medical Officer since May 2016 and served as member of our board of directors since July, 2016. In 1981, Dr. Glickman started a vascular practice in Norfolk, Virginia which has since developed into the largest vascular practice in the United States, covering all Southeastern Virginia. He created the first Vein Center in Virginia and created one of the most successful dialysis access centers in the United States. He has written over 45 articles in peer review journals, 8 book chapters and has delivered over 400 lectures worldwide. In addition to participating in over 100 clinical trials, frequently as Principal investigator, he has been instrumental in obtaining approval of numerous medical devices by the FDA. Dr. Glickman received his medical degree from Case Western Reserve, in Cleveland, Ohio and completed his residency at the University of Washington, Seattle. He board certified in Vascular Surgery and was past president of the Vascular Society of the Americas. He has served on the advisory boards of Possis Medical, Cohesion Technologies, GraftCath, Inc.
We believe Dr. Glickman is qualified to serve as a member of the board of directors because of his strong regulatory, clinical experience and expertise.
Sue Montoya has served as our Vice President Operations, Quality Assurance/Regulatory Affairs since 1999. In this role, she is responsible for manufacturing operations, quality procedures and regulatory affairs. Ms. Montoya has directed and furthered our clinical trials, PMA Approvals, 510K and Humanitarian Use Approvals. Ms. Montoya has over 30 years of leadership experience in medical device industry, and has been with our company since inception in 1999. Ms. Montoya was employed by Xenotech Laboratories from 1980 to 1986, where she developed one of the first Quality System and Good Manufacturing Practices for Cardiovascular and Orthopedic bioprosthetic devices and at a precursor company of Hancock Jaffe Laboratories beginning in 1988. Previous history also includes management positions at several large Orange County Medical Device firms including Shiley, Medtronic, and St. Jude Medical. Ms. Montoya holds both a Bachelor’s and a Master’s degree in Biology from California State University Fullerton.
Non-Employee Directors
Yury Zhivilo has served as Chairman of our board of directors since September 2007. He has extensive experience in international finance and trade, and the global cardiovascular market. In 2004, he co-founded Leman Cardiovascular SA, a private company that develops, manufactures and markets innovative bioprosthetic products used in cardiovascular surgery, as well as nephrology indications. Mr. Zhivilo currently holds executive positions at several medical device companies. Since 2010, he has been serving as President of Leman Cardiovascular S.A, CEO and President of Dante-Lido Financial Limited, and as Managing Director of Biodyne Holding SA, all of which are based in Morge, Switzerland. Mr. Zhivilo is also currently serving as a director of Dante-Lido Financial Limited and Biodyne Holding SA. From 2004 to present, Mr. Zhiyilo served as Chairman of the board of director of Leman Cardiovascular S.A. Prior to that, he served as Chairman and Chief Executive Officer of Base Metal Trading Limited from 1992 to 2004. Mr. Zhivilo received a Senior Specialist degree in economics in 1985 from Moscow State Institute of International Affairs.
We believe Mr. Zhivilo is qualified to serve as a member of our board of directors because of his extensive experience in the medical device industry as both an operating executive and as a board member.
Robert Anderson has served as a member of our board of directors since August, 2016. From 1983 to 1988, Mr. Anderson served as Group Product Director at Parke-Davis, where he was responsible for the cardiovascular products and pipeline. From 1988 to 1990, Mr. Anderson served as Vice-President of Marketing for the Key Pharmaceuticals division of Schering-Plough Corporation, and was responsible for the marketing of Schering-Plough Corporation’s cardiovascular portfolio. Following his tenure at Schering-Plough Corporation, Mr. Anderson was brought on board at Centocor Biotech, Inc. (now known as Janssen Biotech, Inc.) to build the business infrastructure, including developing marketing plans, budgets and the U.S. pre-launch product strategies. On a global basis his responsibilities included the cardiovascular imaging business. In 1992, Mr. Anderson joined Physicians World Communications Group (PWCG) (which was later acquired by Thomson Corp.) as Vice President, was later appointed to the Executive Committee and made a Partner and was appointed Chief Operating Officer in 1997. Mr. Anderson received a Bachelor of Arts degree in Political Science from Rutgers University.
We believe Mr. Anderson is qualified to serve as a member of our board of directors because of his experience providing marketing leadership and successfully launching products in the cardiovascular, biotech and pharmaceutical industries.
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Robert Doyle has served as a member of our board of directors since August 2016. From 1994 to 2000, Mr. Doyle headed Marketing Operations for Parke-Davis where he had overall responsibility for launch meetings. Mr. Doyle continued his operations responsibilities during the Pfizer acquisition in 2000, helping to manage a $400 million annual advertising and promotion budget. From 2001 to 2005, Mr. Doyle served at Novartis Pharmaceuticals, US as Vice-President of Marketing Operations and also chaired the Committees on PhRMA (Pharmaceutical Research & Manufacturers of America) Code guidelines and OIG (Office of Inspector General – HHS) guidelines, and was a permanent member of the senior management group overseeing the Core Team (Medical, Legal, Regulatory Compliance). From 1978 to 1984, Mr. Doyle served at E.R. Squibb & Sons as Hospital Advertising Manager, then Cardiovascular Product Manager. From 1984 to 1990 Mr. Doyle was a product manager, Director of New Products and then Director of Product Licensing at Warner-Lambert. From 1990 to 1992 he was Worldwide Director of Marketing for Imaging Products at Centocor. Mr. Doyle also served on the Board of Directors of the HMC (Healthcare Marketing & Communications) Council and in 1999 he was presented with the President’s Award. He is also a past member of the Editorial Advisory Board, of Pharmaceutical Executive magazine and received their Publisher’s Award in 1999. Mr. Doyle also served as a member of the Hilton Advisory Board from 1997 to 2004. Mr. Doyle holds a Bachelor of Business Administration degree from Upsala College and a Master in Business Administration from Fairleigh Dickinson University.
We believe Mr. Doyle is qualified to serve as a member of our board of directors because of his experience leading and successfully managing highly regulated and complex pharmaceutical businesses.
Gennady Alferenko has served as a member of our board of directors since August 2016. Mr. Alferenko is presently a strategic advisor to PriceWaterhouseCoopers. His previous experience also includes serving as a Board Member of Standard Bank, JSC, a Standard Bank Group subsidiary, from 2005 to 2008, and as Senior Advisor and Director for Strategic Development for Ernst & Young from 2002 to 2007. From 1973 to 1985, Mr. Alferenko headed the Novosibirsk State University oil and gas research team in Eastern Siberia. In 1970, Mr. Alferenko founded Terpsichore, a ballet club that was the first community organization registered as a legal entity in the Soviet Union. He also established a network of 450 foundations that provided support to a variety of youth programs throughout that country. Since 1985 Mr. Alferenko has played important roles in advancing innovation in the USSR, Russia, and the United States. This includes establishing the Foundation for Social Inventions, an organization to facilitate the creation of open civil society in the USSR, and the U.S. Foundation for Social Inventions which, in collaboration with its sister organization, launched the first exchange program for 100,000 United States and USSR students. In 1989, he helped to coordinate Boris Yeltsin’s first visit to the United States and in 2000 he organized an initiative to establish a national “idea bank” for Russia. Mr. Alferenko studied Geology and Geophysics at Novosibirsk University.
We believe Mr. Alferenko is qualified to serve as a member of our board of directors because of his experience providing [_____________].
Family Relationships
There are no family relationships between or among any of the current directors, executive officers or persons nominated or charged to become directors or executive officers. There are no family relationships among our officers and directors and those of our subsidiaries and affiliated companies.
Board Composition
Our business and affairs are organized under the direction of our board of directors, which currently consists of five members. Our directors hold office until the earlier of their death, resignation, removal or disqualification, or until their successors have been elected and qualified. Our board of directors does not have a formal policy on whether the roles of Chief Executive Officer and Chairman of our board of directors should be separate. The primary responsibilities of our board of directors are to provide oversight, strategic guidance, counseling and direction to our management. Our board of directors meets on a regular basis. Upon completion of this offering, our bylaws will be amended and restated to provide that the authorized number of directors may be changed only by resolution of the board of directors.
We have no formal policy regarding board diversity. Our priority in selection of board members is identification of members who will further the interests of our stockholders through his or her established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business and understanding of the competitive landscape.
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Director Independence
Rule 5605 of the Nasdaq Listing Rules requires a majority of a listed company’s board of directors to be comprised of independent directors within one year of listing. In addition, the Nasdaq Listing Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and corporate governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended (or the Exchange Act).
Under Rule 5605(a)(2) of the Nasdaq Listing Rules, a director will only qualify as an “independent director” if, in the opinion of our board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of Rule 10A-3 of the Exchange Act, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company or any of its subsidiaries.
Our board of directors has reviewed the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our board of directors has determined that each of our directors, with the exceptions of Yuri Zhivilo and Marc Glickman, M.D., is an “independent director” as defined under Rule 5605(a)(2) of the Nasdaq Listing Rules. Our board of directors also determined that , who will comprise our audit committee following this offering, , who will comprise our compensation committee following this offering, and , who will be members of our nominating and corporate governance committee following this offering, satisfy the independence standards for such committees established by the SEC and the Nasdaq Listing Rules, as applicable. In making such determinations, our board of directors considered the relationships that each such non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining independence, including the beneficial ownership of our capital stock by each non-employee director.
Controlled Company
Upon completion of this offering, Biodyne Holding, SA will continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” under the Nasdaq corporate governance standards. As a controlled company, exemptions under the standards will free us from the obligation to comply with certain corporate governance requirements, including the requirements:
● | that a majority of the board of directors consists of independent directors; | |
● | that we have a nominating and corporate governance committee that is composed entirely of independent directors; and | |
● | that we have a compensation committee that is comprised entirely of independent directors. |
We do not currently intend to utilize these exemptions. However, we may use these exemptions in the future, and as a result, we could choose not to have a majority of independent directors on our board of directors, or on our audit, nominating and corporate governance, and compensation committees. If that were the case, you would not have the same protections afforded to stockholders of companies that are subject to all of the Nasdaq corporate governance requirements. In any case, these exemptions do not modify the independence requirements for our audit committee, and we intend to comply with the requirements of Rule 10A-3 of the Exchange Act and Nasdaq listing rules within the applicable time frame.
Board Committees
Our board of directors has established three standing committees—audit, compensation and nominating and corporate governance—each of which operates under a charter that has been approved by our board of directors. Prior to the completion of this offering, copies of each committee’s charter will be posted on the Investor Relations section of our website, which is located at www.hancockjaffe.com. Each committee has the composition and responsibilities described below. Our board of directors may from time to time establish other committees.
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Audit Committee
Our audit committee consists of , who is the chair of the committee, and . Our board of directors has determined that each of the members of our audit committee satisfies the Nasdaq Listing Rules and SEC independence requirements. The functions of this committee include, among other things:
● | evaluating the performance, independence and qualifications of our independent auditors and determining whether to retain our existing independent auditors or engage new independent auditors; | |
● | reviewing and approving the engagement of our independent auditors to perform audit services and any permissible non-audit services; | |
● | reviewing our annual and quarterly financial statements and reports, including the disclosures contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and discussing the statements and reports with our independent auditors and management; | |
● | reviewing with our independent auditors and management significant issues that arise regarding accounting principles and financial statement presentation and matters concerning the scope, adequacy and effectiveness of our financial controls; | |
● | reviewing our major financial risk exposures, including the guidelines and policies to govern the process by which risk assessment and risk management is implemented; and | |
● | reviewing and evaluating on an annual basis the performance of the audit committee, including compliance of the audit committee with its charter. |
Our board of directors has determined that qualifies as an “audit committee financial expert” within the meaning of applicable SEC regulations and meets the financial sophistication requirements of the Nasdaq Listing Rules. In making this determination, our board has considered extensive financial experience and business background. Both our independent registered public accounting firm and management periodically meet privately with our audit committee.
Compensation Committee
Our compensation committee consists of , who is the chair of the committee, and . Our board of directors has determined that each of the members of our compensation committee is an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and satisfies the Nasdaq Listing Rules independence requirements. The functions of this committee include, among other things:
● | reviewing, modifying and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) our overall compensation strategy and policies; | |
● | reviewing and approving the compensation, the performance goals and objectives relevant to the compensation, and other terms of employment of our executive officers; | |
● | reviewing and approving (or if it deems appropriate, making recommendations to the full board of directors regarding) the equity incentive plans, compensation plans and similar programs advisable for us, as well as modifying, amending or terminating existing plans and programs; | |
● | reviewing and approving the terms of any employment agreements, severance arrangements, change in control protections and any other compensatory arrangements for our executive officers; | |
● | reviewing with management and approving our disclosures under the caption “Compensation Discussion and Analysis” in our periodic reports or proxy statements to be filed with the SEC; and | |
● | preparing the report that the SEC requires in our annual proxy statement. |
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Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of , who is the chair of the committee, and . Our board of directors has determined that each of the members of this committee satisfies the Nasdaq Listing Rules independence requirements. The functions of this committee include, among other things:
● | identifying, reviewing and evaluating candidates to serve on our board of directors consistent with criteria approved by our board of directors; | |
● | evaluating director performance on the board and applicable committees of the board and determining whether continued service on our board is appropriate; | |
● | evaluating, nominating and recommending individuals for membership on our board of directors; and | |
● | evaluating nominations by stockholders of candidates for election to our board of directors. |
Code of Business Conduct and Ethics
Prior to the consummation of this offering, our board of directors will adopt a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We intend to post on our website a current copy of the code and all disclosures that are required by law or Nasdaq stock market listing standards concerning any amendments to, or waivers from, any provision of the code.
Board Leadership Structure
Under the Corporate Governance Guidelines, our board of directors is free to select the Chairman of the board of directors and the Chief Executive Officer in a manner that it considers to be in the best interests of the Company at the time of selection. Currently, Benedict Broennimann, M.D. serves as Chief Executive Officer, and Yury Zhivilo serves as Chairman of the board of directors. We currently believe that this leadership structure is in the best interests of the Company and strikes an appropriate balance between our Chief Executive Officer’s responsibility for the day-to-day management of the Company and the Chairman of the board of directors’ responsibility to provide oversight, including setting the board of directors’ meeting agendas and presiding at executive sessions of the independent directors. Mr. Zhivilo provides a strong link between management and our board of directors, which we believe promotes clear communication and enhances strategic planning and implementation of corporate strategies. Additionally, in addition to having a non-executive Chairman of the board of directors, three of our five members of our board of directors have been deemed to be “independent” by the board of directors, which we believe provides sufficient independent oversight of our management. Because the Company has a non-executive Chairman of the board of directors, our board of directors has not designated a lead independent director.
Our board of directors, as a whole and also at the committee level, plays an active role overseeing the overall management of our risks. Our Audit Committee reviews risks related to financial and operational items with our management and the Company’s independent registered public accounting firm. Our board of directors is in regular contact with our Chief Executive Officer and Chief Financial Officer, who report directly to the board of directors and who supervise day-to-day risk management.
Role of Board in Risk Oversight Process
We face a number of risks, including those described under the caption “Risk Factors” contained elsewhere in this prospectus. Our board of directors believes that risk management is an important part of establishing, updating and executing on our business strategy. Our board of directors has oversight responsibility relating to risks that could affect the corporate strategy, business objectives, compliance, operations, and the financial condition and performance of the company. Our board of directors focuses its oversight on the most significant risks facing us and on our processes to identify, prioritize, assess, manage and mitigate those risks. Our board of directors receives regular reports from members of the company’s senior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While our board of directors has an oversight role, management is principally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on us.
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EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The following table sets forth total compensation paid to our named executive officers for the fiscal years ended December 31, 2016 and 2015. Individuals we refer to as our “named executive officers” include our Chief Executive Officer and our two other most highly compensated executive officers whose salary and bonus for services rendered in all capacities exceeded $100,000 during the fiscal year ended December 31, 2016.
Name and Principal Position | Year | Salary ($) | Bonus ($) | Option Awards ($) | Non- Equity Incentive Plan Compensation ($) | Nonqualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | ||||||||||||||||||||||
Benedict Broennimann, M.D. | 2016 | - | - | 155,290 | (4) | - | - | - | 155,290 | |||||||||||||||||||||
Chief Executive Officer | 2015 | - | - | - | - | - | - | - | ||||||||||||||||||||||
Marc Glickman, M.D. | 2016 | 196,154 | - | 195,570 | (5) | - | - | 24,241 | (2) | 416,145 | ||||||||||||||||||||
Chief Medical Officer and Senior Vice President | 2015 | - | - | - | - | - | - | - | ||||||||||||||||||||||
Susan Montoya | 2016 | 301,187 | - | 867,610 | (5) | - | - | 43,000 | (1) | 1,211,797 | ||||||||||||||||||||
Vice President Operations, | 2015 | 245,077 | - | - | - | - | 39,828 | (3) | 284,905 | |||||||||||||||||||||
Quality Assurance/Regulatory Affairs, Director |
(1) | Includes company paid healthcare of $29,750 and 401(k) match of $13,250. |
(2) | Includes company paid healthcare of $16,344 and 401(k) match of $8,077. |
(3) | Includes company paid healthcare of $27,574 and 401(k) match of $12,254. |
(4) | Represents grant date fair value of non-qualified stock option granted on October 1, 2016, using the Black-Scholes option pricing model. The options vested 20% at the grant date and the remaining 80% vest ratably on a monthly basis for 24 months. |
(5) | Represents grant date fair value of incentive stock options granted on October 1, 2016, using the Black-Scholes option pricing model. The options vested 20% at the grant date and the remaining 80% vest ratably on a monthly basis for 24 months. |
Employment Agreements
We have entered into various employment agreements with certain of our executive officers. Set forth below is a summary of many of the material provisions of such agreements, which summaries do not purport to contain all of the material terms and conditions of each such agreement. For purposes of the following employment agreements:
● | “Cause” generally means the executive’s (i) willful misconduct or gross negligence in the performance of his or her duties to us; (ii) willful failure to perform his or her duties to us or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or disability); (iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude: (iv) repeated failure to cooperate in any audit or investigation of our business or financial practices; (v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of our property; or (vi) material breach of his or her employment agreement or any other material agreement with us or a material violation of our code of conduct or other written policy. | |
● | “Good reason” generally means, subject to certain notice requirements and cure rights, without Dr. Glickman’s consent, (i) material diminution in his or her base salary or annual bonus opportunity; (ii) material diminution in his or her authority or duties (although a change in title will not constitute “good reason”), other than temporarily while physically or mentally incapacitated, as required by applicable law; (iii) relocation of his or her primary work location by more than 25 miles from its then current location; or (iv) a material breach by us of a material term of the employment agreement |
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● | “Change of control” generally means (i) the acquisition, other than from us, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than us or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act) or employee benefit plan of ours, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of our then outstanding voting securities entitled to vote generally in the election of directors; (ii) a reorganization, merger, consolidation or recapitalization of us, other than a transaction in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following such transaction is held by the persons who. immediately prior to the transaction, were the holders of our voting securities; or (iii ) a complete liquidation or dissolution of us, or a sale of all or substantially all of our assets. |
Benedict Broennimann, M.D.
On August 30, 2016, we entered into an employment agreement with Benedict Broennimann, M.D., our Chief Executive Officer. Pursuant to the terms of his employment agreement, Dr. Broennimann’s initial base salary is $360,000, subject to annual review and adjustment at the discretion of our board of directors. In connection with his employment, Dr. Broennimann received an initial equity grant of an option to purchase up to 293,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. Dr. Broennimann is an at-will employee and has a full-time commitment. Further, Dr. Broennimann’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.
William R. Abbott
On July 22, 2016, we entered into an employment agreement with William R. Abbott, our interim President, Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Pursuant to the terms of his employment agreement, Mr. Abbott’s initial base salary is $225,000, subject to annual review and adjustment at the discretion of our board of directors, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with his employment, Mr. Abbott received an initial equity grant of an option to purchase up to 293,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Mr. Abbott’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Mr. Abbott’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.
Mr. Abbott is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Mr. Abbott’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.
Pursuant to the terms of his employment agreement, Mr. Abbott is entitled to severance in the event of certain terminations of employment. In the event Mr. Abbott’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).
Susan Montoya
On July 22, 2016, we entered into an employment agreement with Susan Montoya, our Senior Vice President of Operations and Quality Assurance/Regulatory Affairs. Pursuant to the terms of her employment agreement, Ms. Montoya’s initial base salary is $295,000, subject to annual review and adjustment at the discretion of our board of directors, and she will be eligible for an annual year-end discretionary bonus of up to 50% of her base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with her employment, Ms. Montoya received an initial equity grant of an option to purchase up to 1,637,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Ms. Montoya’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Ms. Montoya’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.
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Ms. Montoya is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on her behalf. Ms. Montoya’s employment agreement prohibits her from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.
Pursuant to the terms of her employment agreement, Ms. Montoya is entitled to severance in the event of certain terminations of employment. In the event Ms. Montoya’s employment is terminated by us without cause and other than by reason of disability or she resigns for good reason, subject to her timely executing a release of claims in our favor and in addition to certain other accrued benefits, she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).
Marc Glickman, M.D.
On July 22, 2016, we entered into an employment agreement with Marc Glickman, M.D., our Senior Vice President and Chief Medical Officer. Pursuant to the terms of his employment agreement, Dr. Glickman’s initial base salary is $300,000, subject to annual review and adjustment at the discretion of our board of directors, and he will be eligible for an annual year-end discretionary bonus of up to 50% of his base salary, subject to the achievement of key performance indicators, as determined by our board of directors. In connection with his employment, Dr. Glickman received an initial equity grant of an option to purchase up to 369,000 shares of our common stock with 20% of the shares vesting immediately and 80% vesting on a monthly basis over 24 months thereafter. The initial term of Dr. Glickman’s employment agreement ends on December 31, 2018 and will be automatically extended for additional three-year terms, unless either party gives written notice to the other to terminate the agreement or unless sooner terminated under its terms. If we elect not to renew Dr. Glickman’s employment agreement, our non-renewal will be deemed a termination without cause or for good reason thereunder.
Dr. Glickman is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Dr. Glickman’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.
Pursuant to the terms of his employment agreement, Dr. Glickman is entitled to severance in the event of certain terminations of employment. In the event Dr. Glickman’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).
Steven Cantor
On July 1, 2016, we entered into an employment agreement with Mr. Cantor, which was amended on December 1, 2016, who prior to December 1, 2016, was our business development manager and commencing on December 1, 2016 became our Chief Business Development Officer. Pursuant to the terms of his amended employment agreement, Mr. Cantor’s base salary is subject to annual review and adjustment at the discretion of our board of directors, and in no event shall Mr. Cantor’s annual salary be reduced from the preceding year, is $300,000. Mr. Cantor will be entitled to receive a bonus of $250,000 upon the earlier of (i) a commercial sale of one of our devices, or (ii) the entry into a definitive agreement for the distribution or license of one of our products. We, in our sole discretion, may advance all or any portion of such bonus as certain milestones are advanced. In connection with his employment, Mr. Cantor received 598,800 shares of our common stock, which we issued to replace shares of our common stock previously earned under Mr. Cantor’s prior employment agreement, and we ratified the issuance to Mr. Cantor of a warrant to purchase 833,333 shares of our common stock at an exercise price of $6.00 per share. Mr. Cantor’s amended employment agreement, which terminates on December 31, 2018, will be automatically extended for additional three (3) year terms unless either party gives written notice to the other to terminate such amended employment agreement or unless sooner terminated under its terms.
Mr. Cantor is entitled to participate in our employee benefit, pension and/or profit sharing plans, and we will pay certain health and dental premiums on his behalf. Mr. Cantor’s employment agreement prohibits him from inducing, soliciting or entertaining any of our employees to leave our employ during the term of the agreement and for 12 months thereafter.
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Pursuant to the terms of his employment agreement, Mr. Cantor is entitled to severance in the event of certain terminations of employment. In the event Mr. Cantor’s employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his timely executing a release of claims in our favor and in addition to certain other accrued benefits, he is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).
Potential Payments on Termination or Change of Control
Pursuant to the terms of the employment agreements discussed above, we are entitled to issue severance in the event of certain terminations of employment. In the event employment is terminated by us without cause and other than by reason of disability or he resigns for good reason, subject to his or her timely executing a release of claims in our favor and in addition to certain other accrued benefits, he or she is entitled to receive 12 months of continued base salary (or 24 months if such termination occurs within 24 months following a change of control).
Employee Benefit Plans
2016 Omnibus Incentive Plan
On October 1, 2016, our board of directors adopted the Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan, or 2016 Plan, and on October 1, 2016, our stockholders voted to approve of the 2016 Plan. The principal features of the 2016 Plan are summarized below. This summary is qualified in its entirety by reference to the text of the 2016 Plan, which is filed as an exhibit to the registration statement of which this prospectus is a part.
Share Reserve
We have reserved [3,300,000] shares of our common stock for issuance under the 2016 Plan, all of which may be granted as incentive stock options under Code Section 422. The shares of common stock issuable under the 2016 Plan will consist of authorized and unissued shares, treasury shares or shares purchased on the open market or otherwise.
If any award is canceled, terminates, expires or lapses for any reason prior to the issuance of shares or if shares are issued under the 2016 Plan and thereafter are forfeited to the Company, the shares subject to such awards and the forfeited shares will not count against the aggregate number of shares of common stock available for grant under the 2016 Plan. In addition, the following items will not count against the aggregate number of shares of common stock available for grant under the 2016 Plan: (1) the payment in cash of dividends or dividend equivalents under any outstanding award, (2) any award that is settled in cash rather than by issuance of shares of common stock, (3) shares surrendered or tendered in payment of the option price or purchase price of an award or any taxes required to be withheld in respect of an award or (4) awards granted in assumption of or in substitution for awards previously granted by an acquired company.
Administration
The 2016 Plan may be administered by our board of directors or our compensation committee. Our compensation committee, in its discretion, selects the individuals to whom awards may be granted, the time or times at which such awards are granted and the terms and conditions of such awards.
Eligibility
Awards may be granted under the 2016 Plan to officers, employees, directors, consultants and advisors of us and our affiliates. Incentive stock options may be granted only to employees of us or our subsidiaries.
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Awards
The 2016 Plan permits the granting of any or all of the following types of awards:
● | Stock Options. Stock options entitle the holder to purchase a specified number of shares of common stock at a specified price (the exercise price), subject to the terms and conditions of the stock option grant. Our compensation committee may grant either incentive stock options, which must comply with Code Section 422, or nonqualified stock options. Our compensation committee sets exercise prices and terms and conditions, except that stock options must be granted with an exercise price not less than 100% of the fair market value of our common stock on the date of grant (excluding stock options granted in connection with assuming or substituting stock options in acquisition transactions). Unless our compensation committee determines otherwise, fair market value means, as of a given date, the closing price of our common stock. At the time of grant, our compensation committee determines the terms and conditions of stock options, including the quantity, exercise price, vesting periods, term (which cannot exceed 10 years) and other conditions on exercise. | |
● | Stock Appreciation Rights. Our compensation committee may grant SARs, as a right in tandem with the number of shares underlying stock options granted under the 2016 Plan or as a freestanding award. Upon exercise, SARs entitle the holder to receive payment per share in stock or cash, or in a combination of stock and cash, equal to the excess of the share’s fair market value on the date of exercise over the grant price of the SAR. The grant price of a tandem SAR is equal to the exercise price of the related stock option and the grant price for a freestanding SAR is determined by our compensation committee in accordance with the procedures described above for stock options. Exercise of a SAR issued in tandem with a stock option will reduce the number of shares underlying the related stock option to the extent of the SAR exercised. The term of a freestanding SAR cannot exceed 10 years, and the term of a tandem SAR cannot exceed the term of the related stock option. | |
● | Restricted Stock, Restricted Stock Units and Other Stock-Based Awards. Our compensation committee may grant awards of restricted stock, which are shares of common stock subject to specified restrictions, and restricted stock units, or RSUs, which represent the right to receive shares of our common stock in the future. These awards may be made subject to repurchase, forfeiture or vesting restrictions at our compensation committee’s discretion. The restrictions may be based on continuous service with us or the attainment of specified performance goals, as determined by our compensation committee. Stock units may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Our compensation committee may also grant other types of equity or equity-based awards subject to the terms and conditions of the 2016 Plan and any other terms and conditions determined by our compensation committee. | |
● | Performance Awards. Our compensation committee may grant performance awards, which entitle participants to receive a payment from us, the amount of which is based on the attainment of performance goals established by our compensation committee over a specified award period. Performance awards may be denominated in shares of common stock or in cash, and may be paid in stock or cash or a combination of stock and cash, as determined by our compensation committee. Cash-based performance awards include annual incentive awards. |
Awards to Non-employee Directors
No more than $250,000 may be granted in equity-based awards during any one year to a non-employee member of our board of directors, based on the grant date fair value for accounting purposes in the case of stock options or SARs and based on the fair market value of our common stock underlying the award on the grant date for other equity-based awards. This limit does not apply to shares received by a non-employee director at his or her election in lieu of all or a portion of the director’s retainer for board service.
No Repricing
Without stockholder approval, our compensation committee is not authorized to (1) lower the exercise or grant price of a stock option or SAR after it is granted, except in connection with certain adjustments to our corporate or capital structure permitted by the 2016 Plan, such as stock splits, (2) take any other action that is treated as a repricing under generally accepted accounting principles or (3) cancel a stock option or SAR at a time when its exercise or grant price exceeds the fair market value of the underlying stock, in exchange for cash, another stock option or SAR, restricted stock, RSUs or other equity award, unless the cancellation and exchange occur in connection with a change in capitalization or other similar change.
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Clawback
All cash and equity awards granted under the 2016 Plan will be subject to all applicable laws regarding the recovery of erroneously awarded compensation, any implementing rules and regulations under such laws, any policies we adopted to implement such requirements, and any other compensation recovery policies as we may adopt from time to time.
Change in Control
Under the 2016 Plan, in the event of a change in control (as defined in the 2016 Plan), outstanding awards will be treated in accordance with the applicable transaction agreement. If no treatment is provided for in the transaction agreement, each award holder will be entitled to receive the same consideration that stockholders receive in the change in control for each share of stock subject to the award holder’s awards, upon the exercise, payment or transfer of the awards, but the awards will remain subject to the same terms, conditions and performance criteria applicable to the awards before the change in control, unless otherwise determined by our compensation committee. In connection with a change in control, outstanding stock options and SARs can be cancelled in exchange for the excess of the per share consideration paid to stockholders in the transaction, minus the option or SARs exercise price.
Subject to the terms and conditions of the applicable award agreements, awards granted to non-employee directors will fully vest on an accelerated basis, and any performance goals will be deemed to be satisfied at target. For awards granted to all other service providers, vesting of awards will depend on whether the awards are assumed, converted or replaced by the resulting entity.
● | For awards that are not assumed, converted or replaced, the awards will vest upon the change in control. For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the change in control. | |
● | For awards that are assumed, converted or replaced by the resulting entity, no automatic vesting will occur upon the change in control. Instead, the awards, as adjusted in connection with the transaction, will continue to vest in accordance with their terms and conditions. In addition, the awards will vest if the award recipient has a separation from service within two years after a change in control by us other than for “cause” or by the award recipient for “good reason” (each as defined in the applicable award agreement). For performance awards, the amount vesting will be based on the greater of (1) achievement of all performance goals at the “target” level or (2) the actual level of achievement of performance goals as of our fiscal quarter end preceding the change in control, and will be prorated based on the portion of the performance period that had been completed through the date of the separation from service. |
Amendment and Termination of the 2016 Plan
Unless earlier terminated by our board of directors, the 2016 Plan will terminate, and no further awards may be granted, 10 years after the date on which it was approved by our stockholders. Our board of directors may amend, suspend or terminate the 2016 Plan at any time, except that, if required by applicable law, regulation or stock exchange rule, stockholder approval will be required for any amendment. The amendment, suspension or termination of the 2016 Plan or the amendment of an outstanding award generally may not, without a participant’s consent, materially impair the participant’s rights under an outstanding award.
Limitation of Liability and Indemnification Matters
Our amended and restated certificate of incorporation, which will become effective upon the completion of this offering, will limit the liability of our directors for monetary damages for breach of their fiduciary duties, except for liability that cannot be eliminated under the Delaware General Corporation Law. Consequently, our directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for any of the following:
● | any breach of their duty of loyalty to us or our stockholders; | |
● | acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; | |
● | unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or | |
● | any transaction from which the director derived an improper personal benefit. |
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Our amended and restated bylaws will also provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in this capacity, regardless of whether our amended and restated bylaws would permit indemnification. We have obtained directors’ and officers’ liability insurance.
We intend to enter into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our amended and restated bylaws. These agreements, among other things, provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by this person in any action or proceeding arising out of this person’s services as a director or executive officer or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.
The above description of the indemnification provisions of our amended and restated bylaws and our indemnification agreements is not complete and is qualified in its entirety by reference to these documents, each of which is incorporated by reference as an exhibit to the registration statement to which this prospectus forms a part.
The limitation of liability and indemnification provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and our stockholders. A stockholder’s investment may be harmed to the extent we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.
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The following table sets forth certain information concerning the ownership of our common stock as of February 2, 2017, with respect to: (i) each person, or group of affiliated persons, known to us to be the beneficial owner of more than five percent of our common stock; (ii) each of our directors; (iii) each of our named executive officers; and (iv) all of our current directors and executive officers as a group.
Applicable percentage ownership is based on 13,253,058 shares of common stock outstanding as of February 2, 2017 and assumes the issuance of 1,005,700 shares of common stock issuable upon the conversion of all shares of our outstanding Series A preferred stock. The percentage of beneficial ownership after this offering assumes the sale and issuance of shares of common stock in this offering and no exercise by the underwriters of their option to purchase additional shares of common stock.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting or investment power with respect to such securities. In addition, pursuant to such rules, we deemed outstanding shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of February 2, 2017. We did not deem such shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the beneficial owners named in the table below have sole voting and investment power with respect to all shares of our common stock that they beneficially own, subject to applicable community property laws.
Beneficial Ownership Prior to Offering | Beneficial Ownership After the Offering | |||||||||||||||
Name and Address of Beneficial Owner(1) | Number of Shares | Percentage | Number of Shares | Percentage | ||||||||||||
5% Stockholders | ||||||||||||||||
Biodyne Holdings, S.A.(2) | 10,520,098 | 85.9 | % | |||||||||||||
Executive Officers and Directors | ||||||||||||||||
Yuri Zhivolo(2).. | 10,520,098 | 85.9 | % | |||||||||||||
William R. Abbott | 117,200 | 0.9 | % | |||||||||||||
Susan Montoya | 654,800 | 5.1 | % | |||||||||||||
Marc Glickman, M.D. | 147,600 | 1.2 | % | |||||||||||||
Benedict Broennimann, M.D. . | 117,200 | 0.9 | % | |||||||||||||
Steven Cantor(3) . | 1,431,333 | 10.9 | % | |||||||||||||
Robert Anderson | - | - | ||||||||||||||
Robert Doyle. | - | - | ||||||||||||||
Gennady Alferenko | - | - | ||||||||||||||
All directors and executive officers as a group (9 persons) | 12,988,231 | 92.0 | % |
* Represents beneficial ownership of less than 1%.
(1) | Unless otherwise noted, the business address for each holder is 70 Doppler, Irvine, California 92618.
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(2) | Mr. Zhivilo is the controlling shareholder, President and director of Biodyne Holdings, S.A., or Biodyne, and may be deemed to be the beneficial owner of the shares of common stock owned by Biodyne. He has voting and investment power over the shares held by Biodyne. The principal business address of Biodyne is 13 Rue de la Gare, 1100 Morges, Switzerland.
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(3) | Consists of 598,800 shares of common stock owned by Mr. Cantor and 833,333 shares of common stock issuable upon exercise of a $6.00 warrant issued by us to Mr. Cantor. |
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a description of transactions since January 1, 2015 to which we were a party in which (i) the amount involved exceeded or will exceed the lesser of $120,000 of one percent (1%) of our average total assets at year end for the last two completed fiscal years and (ii) any of our directors, executive officers or holders of more than 5% of our capital stock, or any member of the immediate family of, or person sharing the household with, any of the foregoing persons, who had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other similar arrangements, which are described under “Executive and Director Compensation.”
Biodyne Holding, S.A.
On June 30, 2015, we entered into a loan agreement with Biodyne Holding, S.A., or Biodyne. The loan agreement has a maximum borrowing capacity of $2,200,000, available in advances in several installments over a period of 8 months. All advances bore interest at a rate of 3% per annum. The interest was due and payable on an annual basis, the first payment of which was due November 1, 2016. The highest principal balance owed under the loan agreement was approximately $1,200,000 as of August 31, 2016. On August 31, 2016, the entire principal advanced and $36,789 of related interest were exchanged for 247,358 shares of our common stock at a per share exchange price of $5.00.
As of the date of this prospectus, Biodyne owns 10,518,500 shares of our common stock, representing an ownership interest of approximately 86%. In addition, Yury Zhivilo, the chairman of our board of directors, is the majority shareholder of of Biodyne.
Steven Cantor
On May 5, 2016, pursuant to his employment agreement, we issued a warrant to Steven Cantor, our Chief Business Development Officer, to purchase 833,333 shares of our common stock at an initial exercise price of $6.00 per share. The warrant is immediately vested and exercisable until May 5, 2023. Steven Cantor also owns 598,800 shares of our common stock.
Hancock Jaffe Laboratories Aesthetics, Inc.
On April 1, 2016 we entered into a common stock purchase agreement with Hancock Jaffe Laboratories Aesthetics, Inc., or HJLA, pursuant to which HJLA granted us the option to purchase 484,358 shares of its common stock for a per share purchase price of $8.66 and for an aggregate purchase price of $4,194,540.28, in monthly installments of 20,785 shares, through and until January 15, 2017 (such last months’ installment is equal to 297,293 shares). Should we choose not to purchase all of the shares, we have the opportunity to extend this last installment date upon our mutual agreement. In addition and in exchange for $445,200, HJLA granted to us an exclusive right for a period through December 31, 2025, to provide development and manufacturing services for any and all product candidates developed by HJLA during that period. To date, we have not elected to purchase shares of HJLA’s common stock.
During the last two fiscal years, we paid HJLA $487,900 as short term advances.
We own 300,000 shares of HJLA’s common stock, representing an ownership interest of approximately 30%.
Indemnification of Officers and Directors
Our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective in connection with the completion of this offering, will provide that we will indemnify each of our directors and officers to the fullest extent permitted by Delaware law. Further, we intend to enter into indemnification agreements with each of our directors and officers, and we have purchased a policy of directors’ and officers’ liability insurance that insures our directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances. For further information, see “Executive and Director Compensation—Limitations of Liability and Indemnification Matters.”
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Policies and Procedures for Related Party Transactions
All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.
To the best of our knowledge, during the past two fiscal years, other than as set forth above, there were no material transactions, or series of similar transactions, or any currently proposed transactions, or series of similar transactions, to which we were or are to be a party, in which the amount involved exceeds $120,000, and in which any director or executive officer, or any security holder who is known by us to own of record or beneficially more than 5% of any class of our common stock, or any member of the immediate family of any of the foregoing persons, has an interest (other than compensation to our officers and directors in the ordinary course of business).
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The following is a summary of the rights of our common stock and preferred stock, certain provisions of our amended and restated certificate of incorporation and our amended and restated bylaws as they will be in effect upon completion of this offering and applicable law. This summary does not purport to be complete and is qualified in its entirety by the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed as exhibits to the registration statement and are incorporated by reference to our registration statement, of which this prospectus forms a part.
Authorized Capital Stock
Immediately prior to the completion of this offering and upon the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 30,000,000 shares of common stock, par value $0.00001 per share, and 2,000,000 shares of undesignated preferred stock, par value $0.00001 per share.
Common Stock
As of February 2, 2017, and after giving effect to the automatic conversion of all of our outstanding preferred stock into common stock in connection with this offering, there were 13,251,458 shares of common stock issued and outstanding, and 2,592,000 shares of common stock issuable upon exercise of outstanding stock options.
Under the terms of our amended and restated certificate of incorporation, holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders, including the election of directors, and do not have cumulative voting rights. The holders of outstanding shares of Common Stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends of such times and in such amounts as the board from time to time may determine. Our common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption. Upon liquidation, dissolution or winding up of our company, the assets legally available for distribution to stockholders are distributable ratably among the holders of our common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors.
An election of directors by our stockholders is determined by majority of the votes cast by the stockholders entitled to vote on the election, other than any directors the holders of any preferred stock we may issue may be entitled to elect. Any director may be removed without cause by and only by the affirmative vote of the stockholders entitled to vote. Any director elected by a majority vote of the stockholders entitled to vote may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. A vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series.
Under the Delaware General Corporation Law and our amended and restated bylaws, our board of directors may declare and pay dividends upon shares of our capital stock out of legally available funds, subject to any restrictions in our amended and restated certificate of incorporation. In the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription or conversion rights and there are no redemption or sinking funds provisions applicable to our common stock. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
As of February 2, 2017, there were 1,005,700 outstanding shares of Series A preferred stock, which are currently expected to be converted into 1,005,700 shares of common stock immediately prior to the closing of this offering, and no outstanding shares of Series B convertible preferred stock. Upon the closing of this offering, we will have no shares of our preferred stock outstanding, but our board of directors will be authorized, without further action by the stockholders, to create and issue one or more series of preferred stock and to fix the rights, preferences and privileges thereof. Among other rights, our board of directors may determine, without further vote or action by our stockholders:
● | the number of shares constituting the series and the distinctive designation of the series; |
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● | the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; | |
● | whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights; | |
● | whether the series will have conversion privileges and, if so, the terms and conditions of conversion; | |
● | whether or not the shares of the series will be redeemable or exchangeable, and, if so, the dates, terms and conditions of redemption or exchange, as the case may be; | |
● | whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and | |
● | the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. |
Although we presently have no plans to issue any shares of preferred stock upon completion of the offering, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, could, among other things, decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock.
Options
As of February 2, 2017 we had outstanding options to purchase an aggregate 2,592,000 shares of our common stock, with a weighted-average exercise price of $5.00 per share.
Warrants
Legend Securities, Inc., or Legend, acted as our placement agent for the offering of 1,300,000 shares of Series A preferred stock on October 26, 2015 and in connection therewith, we issued Legend warrants to purchase an aggregate of 1,005,700 shares of Series A preferred stock with an exercise price of $5.00 per share. The shares of Series A preferred stock issuable upon exercise of such warrants shall have the same rights as shares sold to investors in the Series A preferred stock financing.
On May 5, 2016, pursuant to his employment agreement, we issued a warrant to Steven Cantor, our Chief Business Development Officer, to purchase 833,333 shares of our common stock at an initial exercise price of $6.00 per share. The warrant is immediately vested and exercisable until May 5, 2023.
Registration Rights
Form S-3 Demand Registration Rights
Pursuant to the Investors’ Rights Agreement, dated as of October 26, 2015, or the Series A Investors’ Rights Agreement, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the registrable (i) shares of our common stock issued or issuable upon conversion of our Series A preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), have the right to demand that we file a shelf registration statement for such holders on Form S-3. Under specified circumstances, we also have the right to defer filing of a requested registration statement for a period of not more than 120 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.
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Pursuant to the proposed Investors’ Rights Agreement, dated as of January 9, 2016, or the Series B Investors’ Rights Agreement, if we are eligible to file a registration statement on Form S-3, the holders of at least 30% of the registrable (i) shares of our common stock issued or issuable upon conversion of our Series B convertible preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), have the right to demand that we file a shelf registration statement for such holders on Form S-3. Under specified circumstances, we also have the right to defer filing of a requested registration statement for a period of not more than 120 days, which right may not be exercised more than once during any period of 12 consecutive months. These registration rights are subject to additional conditions and limitations, including the right of the underwriters to limit the number of shares included in any such registration under certain circumstances.
Piggyback Registration Rights
Pursuant to the Series A Investors’ Rights Agreement, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit or similar plans, or corporate reorganizations or other transactions under Rule 145 under the Securities Act, the holders of registrable (i) shares of our common stock issued or issuable upon conversion of our Series A preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), are entitled to notice of the registration and have the right to include their registrable securities in such registration. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, including the right to exclude all such stockholder shares from this offering.
Pursuant to the Series B Investors’ Rights Agreement, whenever we propose to file a registration statement under the Securities Act, other than with respect to a registration related to employee benefit or similar plans, or corporate reorganizations or other transactions under Rule 145 under the Securities Act, the holders of registrable (i) shares of our common stock issued or issuable upon conversion of our Series B convertible preferred stock, (ii) shares of our common stock issued or issuable upon conversion of any of our securities by the parties to such agreement, and (iii) common stock issued as a dividend or other distribution with respect to the shares in (i) and (ii), are entitled to notice of the registration and have the right to include their registrable securities in such registration. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration statement, including the right to exclude all such stockholder shares from this offering.
Expenses of Registration
Pursuant to the Series A and Series B Investors’ Rights Agreements, we are required to pay certain expenses in an amount not to exceed $25,000, relating to any Form S-3 or piggyback registration by the holders of registerable securities thereunder, subject to certain limitations.
Expiration of Registration Rights
The registration rights described under the Series A Investors’ Rights Agreement will expire for each holder immediately prior to the consummation of this offering, or upon a sale transaction, whichever occurs first.
The registration rights described under the Series B Investors’ Rights Agreement will expire for each holder at such time (i) the closing of a deemed liquidation event, (ii) Rule 144 or another similar exemption under the Securities Act is available for the sale of such investors’ shares without limitation during a three-month period without registration and (iii) the fourth anniversary of the Series B Investors’ Rights Agreement.
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Delaware Anti-Takeover Law and Provisions of Our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
Some provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could make the following transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means of a proxy contest or otherwise; or the removal of our incumbent officers and directors. It is possible that these provisions could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their best interest or in our best interests, including transactions which provide for payment of a premium over the market price for our shares.
These provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these proposals could result in an improvement of their terms.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
● | prior to the date of the transaction, the Board of Directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; | |
● | upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding specified shares; or | |
● | at or subsequent to the date of the transaction, the business combination is approved by the Board of Directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3 % of the outstanding voting stock which is not owned by the interested stockholder. |
Section 203 defines a “business combination” to include:
● | any merger or consolidation involving the corporation and the interested stockholder; | |
● | any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the corporation to or with the interested stockholder; | |
● | subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; | |
● | subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or | |
● | the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. |
In general, Section 203 defines an “interested stockholder” as any person that is:
● | the owner of 15% or more of the outstanding voting stock of the corporation; |
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● | an affiliate or associate of the corporation who was the owner of 15% or more of the outstanding voting stock of the corporation at any time within three years immediately prior to the relevant date; or | |
● | the affiliates and associates of the above. |
Under specific circumstances, Section 203 makes it more difficult for an “interested stockholder” to effect various business combinations with a corporation for a three-year period, although the stockholders may, by adopting an amendment to the corporation’s certificate of incorporation or bylaws, elect not to be governed by this section, effective 12 months after adoption.
Our amended and restated certificate of incorporation and amended and restated bylaws do not exclude us from the restrictions of Section 203. We anticipate that the provisions of Section 203 might encourage companies interested in acquiring us to negotiate in advance with our Board of Directors since the stockholder approval requirement would be avoided if a majority of the directors then in office approve either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder.
Undesignated Preferred Stock
The ability of our board of directors, without action by the stockholders, to issue up to [______] shares of undesignated preferred stock with voting or other rights or preferences as designated by our board of directors could impede the success of any attempt to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of our company.
Stockholder Meetings
Our amended and restated bylaws provide that a special meeting of stockholders may be called only by our chairman of the board, chief executive officer or president, or by a resolution adopted by a majority of our board of directors.
Requirements for Advance Notification of Stockholder Nominations and Proposals
Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals to be brought before a stockholder meeting and the nomination of candidates for election as directors, other than nominations made by or at the direction of the board of directors or a committee of the board of directors.
Elimination of Stockholder Action by Written Consent
Our amended and restated certificate of incorporation and amended and restated bylaws eliminate the right of stockholders to act by written consent without a meeting.
Removal of Directors
Our amended and restated certificate of incorporation provides that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than [two-thirds] of the total voting power of all of our outstanding voting stock then entitled to vote in the election of directors.
Stockholders Not Entitled to Cumulative Voting
Our amended and restated certificate of incorporation does not permit stockholders to cumulate their votes in the election of directors. Accordingly, the holders of a majority of the outstanding shares of our common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they choose, other than any directors that holders of our preferred stock may be entitled to elect.
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Choice of Forum
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative form, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for: (1) any derivative action or proceeding brought on our behalf; (2) any action asserting a claim of breach of a fiduciary duty or other wrongdoing by any of our directors, officers, employees or agents to us or our stockholders; (3) any action asserting a claim against us arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or amended and restated bylaws; (4) any action to interpret, apply, enforce or determine the validity of our amended and restated certificate of incorporation or amended and restated bylaws; or (5) any action asserting a claim governed by the internal affairs doctrine. Our amended and restated certificate of incorporation also provides that any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and to have consented to this choice of forum provision. It is possible that a court of law could rule that the choice of forum provision contained in our amended and restated certificate of incorporation is inapplicable or unenforceable if it is challenged in a proceeding or otherwise. This choice of forum provision has important consequences to our stockholders. See “Risk Factors— Provisions of our charter documents or Delaware law could delay or prevent an acquisition of us, even if the acquisition would be beneficial to our stockholders, which could make it more difficult for you to change management.”
Amendment Provisions
The amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred stock, would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.
The provisions of Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing changes in the composition of our board and management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Elimination of Monetary Liability for Officers and Directors
Our amended and restated certificate of incorporation incorporates certain provisions permitted under the Delaware General Corporation Law relating to the liability of directors. The provisions eliminate a director’s liability for monetary damages for a breach of fiduciary duty. Our amended and restated certificate of incorporation also contains provisions to indemnify the directors, officers, employees or other agents to the fullest extent permitted by the Delaware General Corporation Law. We believe that these provisions will assist us in attracting and retaining qualified individual to serve as directors.
Exchange Listing
We intend to apply to list our common shares on the Nasdaq Capital Market under the trading symbol “ .”
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Vstock Transfer, LLC. The transfer agent and registrar’s address is 18 Lafayette Pl, Woodmere, New York 11598.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, no public market existed for our common stock. Future sales of substantial amounts of our common stock in the public market following this offering, or the possibility of such sales occurring, could adversely affect prevailing market prices and could impair our ability to raise capital through the offering of equity securities.
Based on the number of shares of common stock outstanding as of February 2, 2017, upon the completion of this offering, we will have a total of [______] shares of common stock outstanding, assuming an initial public offering price of $[______] per share and assuming no exercise by the underwriters of their option to purchase additional shares of common stock and no exercise of outstanding options or warrants to purchase shares of common stock. All of the shares sold in this offering will be freely tradable unless held by our “affiliates”, as defined in Rule 144 under the Securities Act. The remaining [______] shares of common stock held by existing stockholders, including [______] shares of common stock issued upon conversion of outstanding shares of our Series A preferred stock, are restricted securities, as such term is defined in Rule 144 under the Securities Act. These restricted shares may generally be sold in the public market only if registered under the Securities Act or if such resale qualifies for an available exemption from registration described below under Rule 144 promulgated under the Securities Act.
As a result of contractual restrictions described below and the provisions of Rules 144 and 701 promulgated under the Securities Act, the shares of common stock sold in this offering and the restricted securities will be available for sale in the public market as follows:
● | all the shares of common stock sold in this offering will be eligible for immediate sale upon the closing of this offering; and | |
● | [______] common shares will be eligible for sale in the public market upon expiration of lock-up agreements 180 days after the date of this prospectus, subject, in certain circumstances to the volume, manner of sale and other limitations under Rule 144 and Rule 701. |
Rule 144
In general, persons (or persons whose shares are required to be aggregated) who have beneficially owned shares of our common stock for at least six months, and any affiliate of ours who owns shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144 under the Securities Act.
Non-Affiliates
Any person (or persons whose shares are required to be aggregated) who is not deemed to have been an affiliate of ours at any time during the three months preceding a sale, and who has beneficially owned restricted securities for at least six months, including the holding period of any prior owner other than one of our affiliates, is entitled to sell those shares, subject only to the availability of current public information about us and provided that we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. If such person has held our shares for at least one year, such person can resell such shares under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company and current public information requirements.
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Affiliates
Any person (or persons whose shares are required to be aggregated) who is deemed to be an affiliate of ours and who has beneficially owned restricted securities within the meaning of Rule 144 for at least six months would be subject to the restrictions described above. Additionally, such person would be subject to additional restrictions, pursuant to which such person would be required to comply with the manner of sale and notice provisions of Rule 144 and would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
● | 1% of the number of shares of common stock then outstanding, which will equal approximately [______] immediately after this offering, based on the number of shares outstanding as of [December 31, 2016] and assuming no exercise by the underwriters of their option to purchase additional shares of common stock and no outstanding options or warrants; or | |
● | the average weekly trading volume of our shares of common stock on the Nasdaq Capital Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Additionally, persons who are our affiliates at the time of, or any time during the three months preceding, a sale may sell unrestricted securities under the requirements of Rule 144 described above, without regard to the six-month holding period of Rule 144, which does not apply to sales of unrestricted securities.
Notwithstanding the availability of Rule 144, the holders of [______] of our restricted shares of common stock have entered into lock-up agreements, as described below, and their restricted shares of stock will become eligible for sale at the expiration of the restrictions set forth in those agreements. Such sales both by affiliates and non-affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.
Rule 701
Under Rule 701 under the Securities Act, shares of our common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our stock plans may be resold, by:
● | persons other than affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject only to the manner-of-sale provisions of Rule 144; and | |
● | our affiliates, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, subject to the manner-of-sale and volume limitations, current public information and filing requirements of Rule 144, in each case, without compliance with the six-month holding period requirement of Rule 144. |
Notwithstanding the foregoing, all our Rule 701 shares are subject to lock-up agreements as described below and in the section titled “Underwriting” and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.
Lock-Up Agreements
We and all our executive officers, directors and other certain holders of an aggregate of [______] shares of our capital stock and securities convertible into or exchangeable for our capital stock have agreed that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of the underwriters, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale, or otherwise dispose of or hedge any of our shares of common stock, any options or warrants to purchase our shares of common stock, or any securities convertible into, or exchangeable for or that represent the right to receive our shares of common stock. The underwriters may, in their discretion, release any of the securities subject to these lock-up agreements at any time. Upon the expiration of the lock-up period, all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.
Form S-8 Registration Statement
We intend to file registration statements on Form S-8 under the Securities Act after the closing of this offering to register the shares of our common stock that are issuable pursuant to our 2016 Omnibus Incentive Plan. The registration statements are expected to be filed and become effective as soon as practicable after the completion of this offering. Accordingly, shares registered under the registration statements will be available for sale in the open market following their effective dates, subject to Rule 144 volume limitations and the lock-up arrangement described above, if applicable.
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are acting as representatives of each of the underwriters named below. Subject to the terms and conditions of the underwriting agreement, the underwriters named below have severally agreed to purchase from us the following respective number of shares of our common stock:
Underwriter | Number of Shares | |||
Total |
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares at the initial public offering price less the underwriting discounts and commissions. The option may be exercised only to cover any over-allotments of common stock.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel including the validity of the shares, and subject to other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The offering of the shares by the underwriters is also subject to the underwriters’ right to reject any order in whole or in part.
The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of $ per share. The underwriters and selling group members may allow a discount of $ per share on sales to other broker/dealers. After the initial public offering the representatives may change the public offering price and concession and discount to broker/dealers.
The following table summarizes the compensation we will pay:
Per Share | Total | |||||||||||||||
Without Over- allotment | Full Exercise | Without Over- allotment | Full Exercise | |||||||||||||
Underwriting discounts and commissions |
● | We estimate that our out of pocket expenses for this offering (not including any underwriting discounts and commissions) will be approximately $ million. | |
● | We have agreed to reimburse the underwriters for expenses of up to $ related to clearance of this offering with the Financial Industry Regulatory Authority, Inc., or FINRA. | |
● | The representative has informed us that it does not expect sales to accounts over which the underwriters have discretionary authority to exceed 5% of the shares of common stock being offered. The underwriters will not confirm sales to any accounts over which they exercise discretionary authority without first receiving a written consent from those accounts. |
We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the SEC a registration statement under the Securities Act relating to, any shares of our common stock, or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of the representative for a period of days after the date of this prospectus , except (a) issuances pursuant to the conversion or exchange of convertible or exchangeable securities (including cashless or “net” exercises, other than broker-assisted cashless exercises) or the exercise of warrants or options, in each case outstanding on the date of this prospectus and described in this prospectus, (b) grants of employee stock options pursuant to the terms of a plan described in this prospectus, (c) issuances pursuant to the exercise of such options, or (d) satisfaction of certain existing contractual obligations, such as .
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Our officers, directors and all of our existing security holders have agreed that they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercise for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock, or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of the representative for a period of days after the date of this prospectus.
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be negotiated between us and the representatives. In determining the initial public offering price of our common stock, the representatives will consider:
● | The prospects for the industry in which we compete; | |
● | our financial information; | |
● | the ability of our management and our business potential and earning prospects; | |
● | the prevailing securities markets at the time of this offering; and | |
● | the recent market prices of, and the demand for, publicly traded shares of generally comparable companies. |
We will apply to list the shares of common stock on the Nasdaq Capital Market under the symbol “ “.
We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act, liabilities arising from breaches of the representations and warranties contained in the underwriting agreement and to contribute to payments that the underwriters may be required to make for these liabilities.
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.
● | Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. | |
● | Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market. | |
● | Syndicate covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. | |
● | Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions. |
These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the Nasdaq Capital Market or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representative may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.
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Certain legal matters with respect to the shares of common stock offered hereby will be passed upon by [______]. Certain other legal matters will be passed upon for the underwriters by [______].
The consolidated financial statements of Hancock Jaffe Laboratories, Inc. as of December 31, 2015 and 2014 and for each of the years then ended have been audited by Marcum LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements are included in this prospectus and registration statement in reliance upon the report (which report includes an explanatory paragraph relating to our ability to continue as a going concern) of Marcum LLP, appearing elsewhere herein, and upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and our common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement, with each such statement being qualified in all respects by reference to the document to which it refers. Anyone may inspect and copy the registration statement and its exhibits and schedules at the Public Reference Room the SEC maintains at 100 F Street, NE, Washington, D.C. 20549. You may obtain further information about the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also inspect the registration statement and its exhibits and schedules and other information without charge at the website maintained by the SEC. The address of this site is www.sec.gov.
We also file periodic reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We also maintain a website at www.ener-core.com, by which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information that is contained on, or that may be accessed through, our website is not a part of this prospectus. We have included our website in this prospectus solely as an inactive textual reference.
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HANCOCK JAFFE LABORATORIES, INC. CONSOLIDATED FINANCIAL STATEMENTS
F-1 |
HANCOCK JAFFE LABORATORIES, INC.
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 78,048 | $ | 1,585,205 | ||||
Accounts receivable, net | 32,672 | - | ||||||
Receivables from sale of assets | 166,250 | - | ||||||
Inventory | 97,083 | - | ||||||
Related party deposits | - | 75,000 | ||||||
Prepaid expenses and other current assets | 113,206 | 15,431 | ||||||
Current assets of discontinued operations | - | 183,973 | ||||||
Total Current Assets | 487,259 | 1,859,609 | ||||||
Property and equipment, net | 38,719 | 64,658 | ||||||
Intangible asset, net | 1,263,545 | 899,411 | ||||||
Deferred offering costs | 87,275 | 25,000 | ||||||
Security deposit and other assets | 30,343 | 26,113 | ||||||
Total Assets | $ | 1,907,141 | $ | 2,874,791 | ||||
Liabilities and Stockholders’ Deficiency | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 355,652 | $ | 618,279 | ||||
Accrued expenses | 316,298 | 128,935 | ||||||
Accrued expenses - related party | 8,598 | 9,749 | ||||||
Note payable | - | 111,000 | ||||||
Notes payable - related party | 444,772 | 1,719,908 | ||||||
Derivative liabilities | 142,519 | 74,089 | ||||||
Current liabilities of discontinued operations | - | 1,993,251 | ||||||
Total Liabilities | 1,267,839 | 4,655,211 | ||||||
Redeemable Convertible Series A Preferred Stock, par value $0.00001, 1,300,000 shares authorized, 935,700 and 436,000 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 3,684,743 | 1,796,484 | ||||||
Commitments and Contingencies | ||||||||
Stockholders’ Deficiency: | ||||||||
Preferred stock, par value $0.00001, 2,000,000 shares are authorized; 700,000 shares available for designation as of September 30, 2016 and December 31, 2015 | ||||||||
Common stock, par value $0.00001, 30,000,000 shares authorized, 12,247,358 and 12,000,000 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively | 122 | 120 | ||||||
Additional paid-in capital | 23,142,533 | 20,763,836 | ||||||
Accumulated deficit | (26,188,096 | ) | (24,340,860 | ) | ||||
Total Stockholders’ Deficiency | (3,045,441 | ) | (3,576,904 | ) | ||||
Total Liabilities and Stockholders’ Deficiency | $ | 1,907,141 | $ | 2,874,791 |
See Notes to these Unaudited Condensed Financial Statements
F-2 |
HANCOCK JAFFE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
For
The Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Revenues: | ||||||||
Product sales | $ | 412,400 | $ | - | ||||
Royalty income | 68,653 | - | ||||||
481,053 | - | |||||||
Cost of goods sold | 598,295 | - | ||||||
Gross Loss | (117,242 | ) | - | |||||
Selling, general and administrative expenses | 3,406,367 | 706,342 | ||||||
Loss from Operations | (3,523,609 | ) | (706,342 | ) | ||||
Other Expense (Income): | ||||||||
Equity loss in unconsolidated affiliate | 487,900 | - | ||||||
Interest expense, net | 50,471 | 47,843 | ||||||
Change in fair value of derivative liabilities | (13,976 | ) | - | |||||
Total Other Expense | 524,395 | 47,843 | ||||||
Loss from Continuing Operations | (4,048,004 | ) | (754,185 | ) | ||||
Discontinued Operations: | ||||||||
Loss from discontinued operations, net of tax | (298,286 | ) | (291,881 | ) | ||||
Gain on sale of discontinued operations, net of tax | 2,499,054 | - | ||||||
Income (Loss) from Discontinued Operations, net of tax | 2,200,768 | (291,881 | ) | |||||
Net Loss | (1,847,236 | ) | (1,046,066 | ) | ||||
Cumulative dividend to Series A preferred stockholders | (243,938 | ) | - | |||||
Net Loss Attributable to Common Stockholders | $ | (2,091,174 | ) | $ | (1,046,066 | ) | ||
Net Loss Per Basic and Diluted Common Share: | ||||||||
Loss from continuing operations attributable to common stockholders | $ | (0.35 | ) | $ | (0.06 | ) | ||
Income (loss) from discontinued operations, net of tax | 0.18 | (0.03 | ) | |||||
Net Loss Per Basic and Diluted Common Share: | (0.17 | ) | (0.09 | ) | ||||
Weighted Average Number of Common Shares Outstanding: | ||||||||
Basic and Diluted | 12,027,040 | 12,000,000 |
See Notes to these Unaudited Condensed Financial Statements
F-3 |
HANCOCK JAFFE LABORATORIES, INC.
CONDENSED STATEMENT OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(unaudited)
Series A Redeemable | Additional | Total | ||||||||||||||||||||||||||
Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||
Balance at December 31, 2015 | 436,000 | $ | 1,796,484 | 12,000,000 | $ | 120 | $ | 20,763,836 | $ | (24,340,860 | ) | $ | (3,576,904 | ) | ||||||||||||||
Series A redeemable convertible preferred stock issued | 499,700 | 1,888,259 | ||||||||||||||||||||||||||
Exchange of note payable and accrued interest into common stock | 247,358 | 2 | 1,234,814 | 1,234,816 | ||||||||||||||||||||||||
Stock-based compensation | - | - | - | - | 1,143,883 | - | 1,143,883 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (1,847,236 | ) | (1,847,236 | ) | |||||||||||||||||||
Balance at September 30, 2016 | 935,700 | $ | 3,684,743 | 12,247,358 | $ | 122 | $ | 23,142,533 | $ | (26,188,096 | ) | $ | (3,045,441 | ) |
See Notes to these Unaudited Condensed Financial Statements
F-4 |
HANCOCK JAFFE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
For The Nine Months Ended | ||||||||
September 30, | ||||||||
2016 | 2015 | |||||||
Cash Flows from Operating Activities | ||||||||
Net Loss | $ | (1,847,236 | ) | $ | (1,046,066 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Stock-based compensation | 1,143,883 | - | ||||||
Depreciation and amortization | 110,421 | 96,274 | ||||||
Gain on sale of discontinued operations | (2,499,054 | ) | - | |||||
Equity loss in unconsolidated affiliate | 487,900 | - | ||||||
Change in fair market value of derivatives | (13,976 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | 299,828 | 22,254 | ||||||
Receivables from sale of assets | 166,250 | - | ||||||
Inventory | (219,353 | ) | 181,219 | |||||
Prepaid expenses and other current assets | (102,005 | ) | (22,135 | ) | ||||
Accounts payable | (262,627 | ) | 17,808 | |||||
Accrued expenses | 221,761 | 68,440 | ||||||
Advances from distributor | 100,000 | 735,000 | ||||||
Deferred revenues | 46,801 | (250,215 | ) | |||||
Total adjustments | (520,171 | ) | 848,645 | |||||
Net cash used in operating activities | (2,367,407 | ) | (197,421 | ) | ||||
Cash Flows from Investing Activities | ||||||||
Purchase of intangible assets | (370,200 | ) | - | |||||
Advances - related party | (487,900 | ) | (44,689 | ) | ||||
Purchase of property and equipment | (3,416 | ) | (1,980 | ) | ||||
Net cash used in investing activities | (861,516 | ) | (46,669 | ) | ||||
Cash Flows from Financing Activities | ||||||||
Payments of deferred offering costs associated with initial public offering | (62,275 | ) | - | |||||
Proceeds from issuance of redeemable Series A preferred stock and warrant, net of offering costs of $527,835 | 1,970,665 | |||||||
Proceeds from issuance of note payable | - | 626,696 | ||||||
Repayments of notes payable | (111,000 | ) | - | |||||
Repayments of notes payable - related party | (75,624 | ) | (390,000 | ) | ||||
Net cash provided by financing activities | 1,721,766 | 236,696 | ||||||
Net Decrease in Cash | (1,507,157 | ) | (7,394 | ) | ||||
Cash - Beginning of Period | 1,585,205 | 58,026 | ||||||
Cash - End of Period | $ | 78,048 | $ | 50,632 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash Paid During the Period For: | ||||||||
Interest | $ | 37,667 | $ | - | ||||
Supplemental disclosures of non-cash investing and financing activities | ||||||||
Issuance of placement agent warrants in connection with preferred stock offering included in derivative liabilities | $ | 82,406 | $ | - | ||||
Forgiveness of debt in connection with the sale of discontinued operations | $ | 2,805,297 | $ | - | ||||
Exchange of note payable and accrued interest into common stock | $ | 1,234,816 | $ | - |
See Notes to these Unaudited Condensed Financial Statements
F-5 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Business Organization and Nature of Operations
Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe” or the “Company”) develops and sells biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.
On September 1, 2015, our board of directors approved a 2.1144 for 1.00 forward stock split of the Company’s common stock, which became effective on July 22, 2016. Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the 2.1144 for 1.00 stock split. See Note 9 – Temporary Equity and Stockholders’ Deficiency for additional details regarding the Company’s authorized capital.
Note 2 - Going Concern and Management’s Liquidity Plans
The accompanying condensed financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company incurred losses from continuing operations of $4,048,004 and $754,185 during the nine months ended September 30, 2016 and 2015, respectively, and has an accumulated deficit of $26,188,096 at September 30, 2016. Cash used in operating activities was $2,367,407 and $197,421 for the nine months ended September 30, 2016 and 2015, respectively. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern.
During the nine months ended September 30, 2016, the Company received net cash proceeds of $1,970,665 from the sale of Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) and warrants (see Note 9 – Temporary Equity and Stockholders’ Deficiency). As of September 30, 2016, Hancock Jaffe had a cash balance of $78,048 and working capital deficiency of $780,580.
The Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms.
F-6 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 3 - Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for completed financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited condensed financial statements of the Company as of September 30, 2016, and for the nine months ended September 30, 2016 and 2015. The results of operations for the nine months ended September 30, 2016 are not necessarily indicative of the operating results for the full year. It is suggested that these unaudited condensed financial statements be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015. The balance sheet as of December 31, 2015 has been derived from the Company’s audited financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance related to the Company’s deferred tax assets, and the valuation of common stock warrants and derivative liabilities – preferred stock warrants.
Inventory
Inventory is stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Inventory balances at September 30, 2016 consist primarily of finished goods of $47,244 and work in progress of $49,839. Inventory balances at December 31, 2015 were sold pursuant to an Asset Purchase Agreement (see Note 4 – Discontinued Operations), and are presented as current assets of discontinued operations on the accompanying condensed balance sheet. There is no inventory reserve at September 30, 2016 or December 31, 2015.
Deferred Offering Costs
Deferred offering costs, which primarily consist of direct, incremental professional fees relating to debt and equity offerings are capitalized within non-current assets. The deferred offering costs will be offset against the proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. As of September 30, 2016 and December 31, 2015, the Company has recognized deferred offering costs consisting primarily of legal costs related to a potential initial public offering totaling $87,275 and $25,000, respectively, in the accompanying condensed balance sheets.
F-7 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 3 - Summary of Significant Accounting Policies, continued
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities.
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable.
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions).
Financial instruments, including accounts receivable, accounts payable and short term advances are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company’s other financial instruments include notes payable, the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations with similar terms and maturities, as well as derivative liabilities – preferred stock warrants, that are accounted for at fair value on a recurring basis. The fair value of derivative liabilities – preferred stock warrants as of September 30, 2016 and December 31, 2015, by level within the fair value hierarchy appears below:
Description: | Quoted
Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
Derivative liabilities - Preferred Stock Warrants | ||||||||||||
September 30, 2016 | $ | - | $ | - | $ | 142,519 | ||||||
December 31, 2015 | $ | - | $ | - | $ | 74,089 |
The following table sets forth a summary of the changes in the fair value of Level 3 warrant liabilities that are measured at fair value on a recurring basis:
Derivative
Liabilities - Preferred Stock Warrants | ||||
Balance - December 31, 2015 | $ | 74,089 | ||
Issuance of derivative liabilities - preferred stock warrants | 82,406 | |||
Change
in fair value of derivative liabilities - preferred stock warrants | (13,976 | ) | ||
Balance - September 30, 2016 | $ | 142,519 |
F-8 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 3 - Summary of Significant Accounting Policies, continued
Intangible Asset, Net
The Company’s recorded intangible assets consist of a purchased patent related to heart valve bioprosthesis technology and an exclusive worldwide right to provide development and manufacturing services to a related party. The patent is stated at cost, and is amortized on a straight-line basis over its remaining useful life of approximately 14 years. The right is stated at cost, and is amortized on a straight-line basis over its remaining useful life of approximately 10 years (see Note 5 – Intangible Assets).
Series A Preferred Stock
The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its Series A Preferred Stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity. The Company’s preferred shares feature certain redemption rights that are considered by the Company to be outside the Company’s control. Accordingly, the Series A Preferred Stock is presented as temporary equity in the Company’s balance sheets.
As of the issuance date, the carrying amount of the Series A Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.
Derivative Liabilities
During the nine months ended September 30, 2016, the Company issued additional warrants for a fixed number of Series A Preferred Stock at an adjustable price. The Company determined that these preferred stock warrants are derivative instruments pursuant to ASC 815 “Derivatives and Hedging.”
The accounting treatment of derivative financial instruments requires that the Company record the warrants as a liability at fair value and mark-to-market the instruments to their fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
F-9 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 3 - Summary of Significant Accounting Policies, continued
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale of product or rendering of services is recorded as deferred revenue and is included in current liabilities of discontinued operations on the accompanying condensed balance sheets.
Net Loss per Share
The Company computes basic and diluted loss per share by dividing net loss by the weighted average number of common shares outstanding during the period. Basic and diluted net loss per common share were the same since the inclusion of common shares issuable pursuant to the exercise of warrants and the conversion of Series A Preferred Stock in the calculation of diluted net loss per common shares would have been anti-dilutive.
The following table summarizes net loss attributable to common stockholders used in the calculation of basic and diluted loss per common share:
For the Nine
Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
Loss from continuing operations | $ | (4,048,004 | ) | $ | (754,185 | ) | ||
Income (loss) from discontinued operations, net of tax | 2,200,768 | (291,881 | ) | |||||
Net loss | (1,847,236 | ) | (1,046,066 | ) | ||||
Less: Deemed dividend to Series A preferred stockholders | (243,938 | ) | - | |||||
Net loss attributable to common stock holders | $ | (2,091,174 | ) | $ | (1,046,066 | ) |
The following table summarizes the number of potentially dilutive common share equivalents excluded from the calculation of diluted net loss per common share for the nine months ended September 30, 2016. There were no potentially dilutive securities at September 30, 2015.
Shares of common stock issuable upon conversion of preferred stock | 935,700 | |||
Shares of common stock issuable upon exercise of preferred stock warrants and the subsequent conversion of the preferred stock issued therewith | 93,570 | |||
Shares of common stock issuable upon exercise of warrants | 833,333 | |||
Potentially dilutive common share equivalents excluded from diluted net loss per share | 1,862,603 |
Major Customers
During the nine months ended September 30, 2016, 100% of the Company’s revenues from continuing operations were from the sub-contract manufacture of product to for LeMaitre Vascular, Inc. (“LeMaitre”) and royalties earned from the sale of product by LeMaitre, with whom the Company entered a Post-Acquisition Supply Agreement effective March 18, 2016. During the nine months ended September 30, 2015, 100% of the Company’s revenues (presented within discontinued operations) were from the sale of its products to the Company’s sole distributor (the “Distributor’), with whom the Company entered an Exclusive Supply and Distribution Agreement effective March 26, 2014 (see Note 4 – Discontinued Operations.).
Major Supplier
During the nine months ended September 30, 2016 and 2015, 100% of the raw material used for the manufacture of vascular bioprostheses was purchased from a single vendor. Purchases made during the nine months ended September 30, 2015 have been included in discontinued operations (see Note 4 – Discontinued Operations.)
F-10 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 3 - Summary of Significant Accounting Policies, continued
Subsequent Events
The Company evaluated events that have occurred after the balance sheet date through February 10, 2017, the date the financial statements are available to be issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the condensed financial statements, except as disclosed in Note 10.
Note 4 - Discontinued Operations
Asset Sale
On March 18, 2016, Hancock Jaffe, LeMaitre Vascular, Inc. (“LeMaitre”) and CryoLife, Inc. (“CryoLife”) entered into a tripartite agreement whereby: (i) pursuant to the Exclusive Supply and Distribution Agreement, as amended, (the “Current Supply Agreement”), CryoLife transferred to LeMaitre its exclusive, freely assignable right and option to acquire certain assets of Hancock Jaffe in exchange for $2,035,000; (ii) CryoLife released Hancock Jaffe from all remaining indebtedness and released its security interest in the acquired assets pursuant to the security agreement dated March 26, 2014 between Hancock Jaffe and CryoLife (the “Security Agreement”); and (iii) the Current Supply Agreement and the Security Agreement were terminated without recourse.
On March 18, 2016, Hancock Jaffe entered into an asset purchase agreement with LeMaitre (the “Asset Purchase Agreement”) whereby Hancock Jaffe sold all of its assets (including intellectual property) related to the manufacture, sale and distribution of vascular bioprostheses to LeMaitre (the “Asset Sale”) for consideration of $665,000 in cash and the forgiveness of certain liabilities, totaling, in the aggregate, $2,140,297, including a penalty of $938,300 incurred by the Company for delivery delays under the Exclusive Supply and Distribution Agreement. Of the total cash proceeds, $332,500 was paid on March 18, 2016, $166,250 was paid on September 19, 2016 and $166,250 is payable upon the earlier of (a) confirmation by LeMaitre of the commercial sale of a Product manufactured by LeMaitre at its plant and (b) March 18, 2017. In addition, Hancock Jaffe is entitled to a royalty equal to 10% of LeMaitre’s net sales, as defined, of vascular bioprostheses during the three-year period ending March 18, 2019. The royalty is to be paid quarterly in arrears and cannot exceed $2 million in any twelve month period or $5 million in the aggregate during the three year period. During the nine months ended September 30, 2016, the Company recorded a gain of $2,499,054 (net of tax of $0) related to the Asset Sale, as follows:
Cash proceeds from sale (consisting of cash received and receivables) | $ | 665,000 | ||
Liabilities forgiven: | ||||
Short term advances | 1,180,000 | |||
Accrued interest | 21,997 | |||
Accrued penalty payable - CryoLife | 938,300 | |||
Total consideration from sale | 2,805,297 | |||
Less: net book value of assets sold to buyer Inventory | (306,243 | ) | ||
Gain on sale of discontinued operations | $ | 2,499,054 |
F-11 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 4 - Discontinued Operations, continued
Asset Sale, continued
Results of Discontinued Operations
Summarized operating results of discontinued operations are presented in the following table:
For
The Nine Months Ended September 30, | ||||||||
2016 | 2015 | |||||||
(unaudited) | ||||||||
Revenues | $ | 385,219 | $ | 826,575 | ||||
Gross profit (loss) | $ | 133,734 | $ | (291,881 | ) | |||
General and administrative expenses | $ | (432,020 | ) | $ | - | |||
Loss from discontinued operations | $ | (298,286 | ) | $ | (291,881 | ) |
Summarized assets and liabilities of discontinued operations are presented in the following table:
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
Inventory | $ | - | $ | 183,973 | ||||
Total current assets of discontinued operations | $ | - | $ | 183,973 | ||||
Short term advances | $ | - | $ | 1,080,000 | ||||
Accrued expenses | - | 21,752 | ||||||
Deferred revenues | - | 891,499 | ||||||
Total current liabilities of discontinued operations | $ | - | $ | 1,993,251 |
The Company did not recognize any depreciation or amortization expense related to discontinued operations during the nine months ended September 30, 2016 or 2015. There were no significant capital expenditures or non-cash operating or investing activities of discontinued operations during the periods presented.
F-12 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 5 - Intangible Assets
On April 1, 2016, the Company purchased the exclusive and worldwide right to provide development and manufacturing services to a related entity, in which the Company holds a 30% ownership investment and of which the Company’s Former President and Vice President of Operations were/are officers, (the “Related Party”), in exchange for consideration of $445,200 (see Note 8 – Commitments and Contingencies). The right to provide development and manufacturing services to the Related Party expires on December 31, 2025. As of September 30, 2016 and December 31, 2015, the Company’s intangible assets consisted of the following:
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
Patent | $ | 1,100,000 | $ | 1,100,000 | ||||
Right to develop and manufacture | 445,200 | - | ||||||
1,545,200 | 1,100,000 | |||||||
Less: accumulated amortization | (281,655 | ) | (200,589 | ) | ||||
Intangible assets, net - related parties | $ | 1,263,545 | $ | 899,411 |
Amortization expense charged to operations for the nine months ended September 30, 2016 and 2015 was $81,066 and $58,236, respectively, and is reflected in general and administrative expense in the accompanying condensed statements of operations.
Note 6 - Investment in Affiliate
During 2015, the Company paid a deposit of $75,000 to an affiliate (in which the Company has a 30% ownership interest) in anticipation of entering into an agreement to acquire the exclusive rights to provide development and manufacturing services to further the development of technology. On April 1, 2016 the Company paid $370,200 upon the execution of this agreement (see Note 5 —Intangible Assets).
During April 2016 through September 2016, the Company also provided short term advances totaling $487,900 to this affiliate. In accordance with ASC 323 - Investments — Equity Method and Joint Ventures, the Company has recorded an equity loss of $487,900 representing its allocable share of operating losses of the affiliate up to its investment amount (inclusive of loans). This loss has been included in the statement of operations for the nine months ended September 30, 2016.
F-13 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 7 - Accrued Expenses and Accrued Expenses – Related Party
As of September 30, 2016 and December 31, 2015, accrued expenses consisted of the following:
September 30, 2016 | December 31, 2015 | |||||||
(unaudited) | ||||||||
Accrued compensation costs | $ | 245,396 | $ | 69,196 | ||||
Accrued interest | - | 786 | ||||||
Accrued professional fees | 38,211 | 30,425 | ||||||
Deferred rent | 17,926 | 21,911 | ||||||
Other accrued expenses | 14,765 | 6,617 | ||||||
Accrued Expenses | $ | 316,298 | $ | 128,935 |
Accrued expenses, related parties consisted of accrued interest on notes payable to a major common stock holder and to the Related Party totaling, in the aggregate, $8,598 and $9,749 at September 30, 2016 and December 31, 2015, respectively.
Note 8 - Commitments and Contingencies
Property Lease Obligation
The Company leases a 14,507 square foot industrial building located in Orange County, California through September 30, 2017. Rent expense for this property was $266,928 and $272,490 for the nine months ended September 30, 2016 and 2015, respectively.
On May 1, 2016, the Company entered into a one year lease of an apartment located in Irvine, California, for the use by a member of the board of directors. The lease required a $3,720 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $1,860. Rent expense for this property was $8,062 for the nine months ended September 30, 2016.
Development and Manufacturing Agreement
On April 1, 2016, the Company entered into a development and manufacturing agreement with the Related Party, pursuant to which: (i) the Company paid $445,200 for the exclusive right to provide development and manufacturing services to the Related Party for a period of ten years (see Note 5 – Intangible Assets), and (ii) the Company has the right to purchase up to 484,358 shares of Common Stock of the Related Party at $8.66 per share for an aggregate purchase price of $4,194,540 through April 1, 2021. Through the date these condensed financial statements were available to be issued, no shares were purchased pursuant to the Common Stock Purchase Agreement.
F-14 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 8 - Commitments and Contingencies, continued
Employment Agreements
On July 1, 2016, the Company entered into an employment agreement with the Company’s Business Development Manager (the “BDM Agreement”). The BDM Agreement ends on December 31, 2016, after which is it automatically extended for additional one year renewal terms, unless either party gives written notice to the other to terminate the BDM Agreement at least thirty days prior to the end of each calendar year. The BDM Agreement provides for a base salary of $24,000 per year, subject to annual review and adjustments by the board of directors, and automatically increases to $180,000 per year, starting from the date of an initial public offering. Further, the BDM Agreement provides for the payment of a bonus of $250,000 upon the completion of a strategic transaction, of which $100,000 was paid and $77,500 was accrued through September 30, 2016. The BDM Agreement may be terminated by the Business Development Manager with 30 days written notice, or immediately upon written notice by the Company for cause. (See Note 10 – Subsequent Event – Employee Agreement.)
The Company hired its CFO on March 21, 2016. On July 22, 2016, the Company entered into an employment agreement with the CFO which provides for annual base salary of $225,000, as well as standard employee insurance and other benefits (the “CFO Agreement”). Pursuant to the CFO Agreement the CFO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CFO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CFO Agreement, the CFO received an option for the purchase of 293,000 shares of the Company’s common stock (see Note 10 – Subsequent Events – Stock-Based Compensation). The CFO Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CFO Agreement. The CFO Agreement may be terminated by the CFO with 30 days written notice, or immediately upon written notice by the Company for cause.
On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President of Operations, Regulatory Affairs and Quality Assurance (the “SVP”) which provides for an annual base salary of $295,000, as well as standard employee insurance and other benefits (the “SVP Agreement”). Pursuant to this agreement the SVP is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The SVP Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the SVP Agreement, the SVP received an option for the purchase of 1,637,000 shares of the Company’s common stock (see Note 10 – Subsequent Events – Stock-Based Compensation). The SVP Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the SVP Agreement. The SVP Agreement may be terminated by the SVP with 30 days written notice, or immediately upon written notice by the Company for cause.
F-15 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 8 - Commitments and Contingencies, continued
Employment Agreements, continued
The Company hired its Senior Vice President and Chief Medical Officer (the “CMO”) on May 1, 2016. On July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President and Chief Medical Officer (the “CMO”) which provides for an annual base salary of $300,000, as well as standard employee insurance and other benefits (the “CMO Agreement”). Pursuant to this agreement the CMO is eligible for annual salary increases at the discretion of the board of directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the board of directors. The CMO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CMO Agreement, the CMO received an option for the purchase of 369,000 shares of the Company’s common stock (see Note 10 – Subsequent Events – Stock-Based Compensation). The CMO Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CMO Agreement. The CMO Agreement may be terminated by the CMO with 30 days written notice, or immediately upon written notice by the Company for cause.
On August 30, 2016, the Company entered into an employment agreement with the Company’s Chief Executive Officer (the “CEO”) which provides for an annual base salary of $360,000, as well as standard employee insurance and other benefits (the “CEO Agreement”). Pursuant to the CEO Agreement, the CEO is eligible for annual salary increases at the discretion of the board of directors. In addition, in connection with the CEO Agreement, the CEO received an option for the purchase of 293,000 shares of the Company’s common stock (see Note 10 – Subsequent Events – Stock-Based Compensation). The CEO Agreement may be terminated by the CEO or the Company with 30 days written notice.
Note 9 - Temporary Equity and Stockholders’ Deficiency
Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”)
During the nine months ended September 30, 2016, the Company issued 499,700 additional shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the additional shares were $2,498,500 and the Company incurred cash offering costs of $527,835 (including $312,313 of placement agent fees) and non-cash offering costs valued at $82,406 (see Placement Agent Warrants, below) resulting in an original carrying value of the additional Series A Preferred Stock of $1,888,259.
F-16 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 9 - Temporary Equity and Stockholders’ Deficiency, continued
Employee Warrant
On May 5, 2016, the Company granted a warrant for the purchase of 833,333 shares of common stock to its Business Development Manager. The warrant is immediately vested and is exercisable for 7 years at an exercise price of $6.00 per share (subject to adjustment in the event of certain stock dividends and distributions, stock splits, reclassifications or similar events affecting the Company’s common stock). The warrants had an aggregate fair value of $1,143,883 on the date of grant, which was charged to stock-based compensation expense in the condensed statement of operations. Further, upon certain subsequent issuances of common stock or common stock equivalents at a price per share less than the exercise price in effect at the time of issuance, the exercise price of the warrant is to be reduced to a price equal to the consideration per share received by the Company with respect to those issuances. In accordance with ASC 815, derivative accounting is scoped out for instruments issued to employees for compensation.
The Company utilized a third-party valuation company to determine the grant date value of the warrant. The valuation company used a Monte Carlo simulation model which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard error.
The significant assumptions used in the valuation model were as follows:
For
The Nine Months Ended September 30, 2016 | ||||
Risk free interest rate | 1.20 | % | ||
Expected term (years) | 7.0 | |||
Expected volatility | 32.4 | % | ||
Expected dividends | 0.00 | % |
Placement Agent Warrants
During the nine months ended September 30, 2016, the Series A Preferred Stock placement agent received a cash fee in the aggregate of $312,312 and five-year warrants to purchase an additional 49,970 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing. The warrants had an aggregate fair value of $82,406 on the date of grant, which was charged against the proceeds received from the sale of the shares. Due to the variable exercise price, the warrants were determined to be a derivative liability and the value of the warrants is recorded as such on the accompanying condensed balance sheet.
F-17 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 9 - Temporary Equity and Stockholders’ Deficiency, continued
Placement Agent Warrants - continued
The value of the derivative liability was determined by using the Monte Carlo simulation method. This valuation is revised on a quarterly basis until the warrants are reclassified to equity, exercised or expired, with the changes in fair value recorded in other income (expense) on the condensed statements of operations. The value of the derivative liabilities as of September 30, 2016 and December 31, 2015 was $142,519 and $74,089, respectively. During the nine months ended September 30, 2016, the Company recorded a gain on the change in the value of the derivative liabilities of $13,976. The assumptions used in applying the Monte Carlo simulation method to value the derivative liabilities during the nine months ended September 30, 2016 were as follows:
For
The Nine Months Ended September 30, 2016 | ||||
Risk free interest rate | 1.01% - 1.40 | % | ||
Expected term (years) | 4.18 - 5.00 | |||
Expected volatility | 32.4 | % |
Exchange of Debt for Equity
On August 31, 2016 principal and interest of $1,200,000 and $34,816, respectively, owed to a majority (78%) common stock holder in connection with a note payable were exchanged for 246,963 shares of the Company’s common stock at a price of $5.00 per share.
Note 10 - Subsequent Events
Series A Preferred Stock
In October 2016, the Company sold 37,000 shares of Series A Preferred Stock at a purchase price of $5.00 per share to accredited investors pursuant to a private offering. The gross proceeds from the sale of these shares were $185,000 and the Company incurred cash offering costs consisting of placement agent fees of $29,773, resulting in net cash proceeds to the Company of $155,227. In connection with the sale of the Series A Preferred Stock, the placement agent also received 5-year warrants for the purchase of 3,700 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing.
In November 2016, the Company sold 33,000 shares of Series A Preferred Stock at a purchase price of $5.00 per share to accredited investors pursuant to a private offering. The gross proceeds from the sale of these shares were $165,000 and the Company incurred cash offering costs consisting of placement agent fees of $24,125, resulting in net cash proceeds to the Company of $140,875. In connection with the sale of the Series A Preferred Stock, the placement agent also received 5-year warrants for the purchase of 3,300 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing.
F-18 |
HANCOCK JAFFE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Note 10 - Subsequent Events, continued
Omnibus Incentive Plan
On November 21, 2016, the board of directors approved the Company’s 2016 Omnibus Incentive Plan (the “2016 Plan”), which enables the Company to grant stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share based awards and cash awards to associates, directors, consultants, and advisors of the Company and its affiliates, and to improve the ability of the Company to attract, retain, and motivate individuals upon whom the Company’s sustained growth and financial success depend, by providing such persons with an opportunity to acquire or increase their proprietary interest in the Company. Stock options granted under the 2016 Plan may be non-qualified stock options or incentive stock options, within the meaning of Section 422(b) of the Internal Revenue Code of 1986, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an affiliate shall in all cases be non-qualified stock options. The option price must be at least 100% of the fair market value on the date of grant and if issued to a 10% or greater shareholder must be 110% of the fair market value on the date of the grant. The 2015 Plan is to be administered by the board of directors, which shall have discretion over the awards and grants thereunder. The aggregate maximum number of shares of common stock for which stock options or awards may be granted pursuant to the 2016 Plan is 3,300,000, adjusted as provided in Section 14 of the 2016 Plan. No awards may be issued after November 21, 2026.
Stock-Based Compensation
On October 1, 2016, the Company issued an incentive stock option to purchase 293,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $5.00 per share, pursuant to the CFO Agreement, to the CFO of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The option expires ten years from the date of issuance.
On October 1, 2016, the Company issued an incentive stock option to purchase 1,637,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $5.00 per share, pursuant to the SVP Agreement, to the SVP of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The option expires ten years from the date of issuance.
On October 1, 2016, the Company issued an incentive stock option to purchase 369,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $5.00 per share, pursuant to the CMO Agreement, to the CMO of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The option expires ten years from the date of issuance.
On October 1, 2016, the Company issued a non-qualified stock option to purchase 293,000 shares of the Company’s common stock under the 2016 Plan at an exercise price of $5.00 per share, pursuant to the CEO Agreement, to the CEO of which 20% vest immediately and the remainder vests monthly over the next twenty-four months. The option expires ten years from the date of issuance.
Notes payable – Related Party
On December 9, 2016, the Company amended the loan agreement with the majority (78%) common stockholders, (‘the 2015 Note”). The 2015 Note has a maximum borrowing capacity of $2,200,000 and bears interest at 3% per annum. The amended changed the due date of the 2015 Note’s principal and accrued interest from November 1, 2016 to March 31, 2017.
Note 10 - Subsequent Events, continued
Employee Agreement
On December 2, 2016, the Company entered into an amendment of the BDM Agreement whereby the BDM (See Note 8 – Commitments and Contingencies – Employment Agreements) became the Company’s Chief Business Development Officer (the ‘CBDO Agreement”). The CBDO Agreement ends on December 31, 2018, after which is it automatically extended for additional three year renewal terms, unless either party gives written notice to the other to terminate the amended BDM Agreement at least thirty days prior to the end of each calendar year. The CBDO Agreement provides for a base salary of $300,000 per year. Further, the CBDO Agreement amended the performance requirements in order to receive the remaining payment of the bonus which is payable upon the earlier of (a) a commercial sale of one of the Company’s devices, or (b) upon the entry into a definitive agreement for the distribution or license of one of the Company’s devices.
F-19 |
To the Board of Directors and Stockholders of Hancock Jaffe Laboratories, Inc.,
We have audited the accompanying balance sheets of Hancock Jaffe Laboratories, Inc. (the “Company”) as of December 31, 2015, and 2014, and the related statements of operations, changes in temporary equity and stockholders’ deficiency and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hancock Jaffe Laboratories, Inc., as of December 31, 2015, and 2014, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Marcum LLP | |
Marcum LLP | |
New York, New York | |
August 5, 2016 except for Note 4 which is February 13, 2017 |
F-20 |
HANCOCK JAFFE LABORATORIES, INC.
As of December 31, | ||||||||
2015 | 2014 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash | $ | 1,585,205 | $ | 58,026 | ||||
Related party deposit | 75,000 | - | ||||||
Deferred offering costs | 25,000 | - | ||||||
Prepaid expenses - related party | - | 35,042 | ||||||
Prepaid expenses and other current assets | 15,431 | 10,405 | ||||||
Current assets of discontinued operations | 183,973 | 381,117 | ||||||
Total Current Assets | 1,884,609 | 484,590 | ||||||
Property and equipment, net | 64,658 | 109,814 | ||||||
Intangible asset, net | 899,411 | 977,058 | ||||||
Security deposits and other assets | 26,113 | 26,113 | ||||||
Total Assets | $ | 2,874,791 | $ | 1,597,575 | ||||
Liabilities, Temporary Equity and Stockholders’ Deficiency | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 618,279 | $ | 701,818 | ||||
Accrued expenses | 128,935 | 197,718 | ||||||
Accrued expenses - related parties | 9,749 | 319,272 | ||||||
Note payable | 111,000 | - | ||||||
Notes payable - related party | 1,719,908 | 1,068,011 | ||||||
Derivative liabilities | 74,089 | - | ||||||
Current liabilities of discontinued operations | 1,993,251 | 1,322,201 | ||||||
Total Current Liabilities | 4,655,211 | 3,609,020 | ||||||
Redeemable Convertible Series A Preferred Stock, par value $0.00001, 1,300,000 shares authorized, 436,000 and 0 shares issued and outstanding as of December 31, 2015 and 2014, respectively. Liquidation preference of $4,364,350 and $0 at December 31, 2015 and 2014, respectively. | 1,796,484 | |||||||
Commitments and Contingencies | ||||||||
Stockholders’ Deficiency: | ||||||||
Preferred stock, par value $0.00001, 2,000,000 shares are authorized; 700,000 and 2,000,000 shares available for designation as of December 31, 2015 and 2014, respectively | ||||||||
Common stock, par value $0.00001, 30,000,000 shares authorized, 12,000,000 shares issued and outstanding as of December 31, 2015 and 2014 | 120 | 120 | ||||||
Additional paid-in capital | 20,763,836 | 20,725,282 | ||||||
Accumulated deficit | (24,340,860 | ) | (22,736,847 | ) | ||||
Total Stockholders’ Deficiency | (3,576,904 | ) | (2,011,445 | ) | ||||
Total Liabilities, Temporary Equity and Stockholders’ Deficiency | $ | 2,874,791 | $ | 1,597,575 |
See Notes to these Financial Statements
F-21 |
HANCOCK JAFFE LABORATORIES, INC.
For
The Years Ended December 31, | ||||||||
2015 | 2014 | |||||||
Revenues: | ||||||||
Research and development services - related party | $ | - | $ | 236,500 | ||||
Cost of goods sold | - | 132,315 | ||||||
Gross Profit | - | 104,185 | ||||||
Selling, general and administrative expenses | 1,289,851 | 1,056,844 | ||||||
Loss from Operations | (1,289,851 | ) | (952,659 | ) | ||||
Other Expense (Income): | ||||||||
Interest expense, net | 88,524 | 65,493 | ||||||
Change in fair value of derivative liabilities | (177 | ) | - | |||||
Total Other Expense | 88,347 | 65,493 | ||||||
Loss from Continuing Operations | (1,378,198 | ) | (1,018,152 | ) | ||||
Discontinued Operations: | ||||||||
Loss from discontinued operations, net of tax | (225,815 | ) | (379,841 | ) | ||||
Net Loss | (1,604,013 | ) | (1,397,993 | ) | ||||
Cumulative dividend to Series A preferred stockholders | (4,352 | ) | - | |||||
Net Loss Attributable to Common Stockholders | $ | (1,608,365 | ) | $ | (1,397,993 | ) | ||
Net Loss Per Share Attributable to Common Stockholders: | ||||||||
Loss from continuing operations | $ | (0.12 | ) | $ | (0.08 | ) | ||
Loss from discontinued operations, net of tax | (0.01 | ) | (0.04 | ) | ||||
Net Loss Per Basic and Diluted Common Share: | (0.13 | ) | (0.12 | ) | ||||
Weighted Average Number of Common Shares Outstanding: | ||||||||
Basic and Diluted | 12,000,000 | 12,000,000 |
See Notes to these Financial Statements
F-22 |
HANCOCK JAFFE LABORATORIES, INC.
STATEMENTS OF CHANGES IN TEMPORARY EQUITY AND STOCKHOLDERS’ DEFICIENCY
Series
A Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||
Balance at December 31, 2013 | - | $ | - | 12,000,000 | $ | 120 | $ | 20,110,282 | $ | (21,338,854 | ) | $ | (1,228,452 | ) | ||||||||||||||
Capital contribution - related party | 615,000 | 615,000 | ||||||||||||||||||||||||||
Net loss | - | - | - | - | - | (1,397,993 | ) | (1,397,993 | ) | |||||||||||||||||||
Balance at December 31, 2014 | - | - | 12,000,000 | 120 | 20,725,282 | (22,736,847 | ) | (2,011,445 | ) | |||||||||||||||||||
Series A redeemable preferred stock issued | 436,000 | 1,796,484 | ||||||||||||||||||||||||||
Capital contributions | - | - | - | - | 38,554 | - | 38,554 | |||||||||||||||||||||
Net loss | - | - | - | - | - | (1,604,013 | ) | (1,604,013 | ) | |||||||||||||||||||
Balance at December 31, 2015 | 436,000 | $ | 1,796,484 | 12,000,000 | $ | 120 | $ | 20,763,836 | $ | (24,340,860 | ) | $ | (3,576,904 | ) |
See Notes to these Financial Statements
F-23 |
HANCOCK JAFFE LABORATORIES, INC.
For
The Years Ended December 31, | ||||||||
2015 | 2014 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net Loss | $ | (1,604,013 | ) | $ | (1,397,993 | ) | ||
Adjustments to reconcile net loss to cash (used in) provided by operating activities: | ||||||||
Depreciation and amortization | 125,423 | 134,127 | ||||||
Change in fair market value of derivatives | (177 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 25,240 | (6,245 | ) | |||||
Inventory | 171,904 | (152,684 | ) | |||||
Prepaid expenses and other current assets | 30,016 | (17,778 | ) | |||||
Accounts payable | (83,539 | ) | 63,354 | |||||
Accrued expenses and other current liabilities | (253,615 | ) | 176,760 | |||||
Deferred revenues | (430,702 | ) | 1,322,201 | |||||
Total Adjustments | (415,450 | ) | 1,519,735 | |||||
Net Cash (Used In) Provided By Operating Activities | (2,019,463 | ) | 121,742 | |||||
Cash Flows Used In Investing Activities: | ||||||||
Related party deposit | (75,000 | ) | - | |||||
Purchase of property and equipment | (2,620 | ) | (30,882 | ) | ||||
Net Cash Used In Investing Activitivies | (77,620 | ) | (30,882 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Payment of deferred offering costs associated with initial public offering | (25,000 | ) | - | |||||
Proceeds from issuance of redeemable convertible Series A preferred stocks and warrants, net of issuance costs of $309,250 | 1,870,750 | - | ||||||
Proceeds from issuance of notes payable | 1,310,512 | - | ||||||
Advances from distributor | 1,080,000 | - | ||||||
Repayments of notes payable | (612,000 | ) | (60,000 | ) | ||||
Net Cash Provided By (Used In) Financing Activitivies | 3,624,262 | (60,000 | ) | |||||
Net Increase in Cash | 1,527,179 | 30,860 | ||||||
Cash - Beginning of Year | 58,026 | 27,166 | ||||||
Cash - End of Year | $ | 1,585,205 | $ | 58,026 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash Paid During the Years For: | ||||||||
Interest | $ | 109,696 | $ | 66,011 | ||||
Supplemental disclosures of non-cash investing and financing activities | ||||||||
Accrued expenses contributed to capital | $ | 38,554 | $ | 615,000 |
See Notes to these Financial Statements
F-24 |
HANCOCK JAFFE LABORATORIES, INC.
Note 1 – Business Organization, Nature of Operations and Basis of Operations
Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe” or the “Company”) develops and sells biological tissue solutions to treat patients with coronary, vascular, end stage renal and peripheral arterial diseases in the United States and Europe. The Company was founded in 1987 and is headquartered in Irvine, California. Hancock Jaffe was incorporated in the State of Delaware on December 22, 1999.
On September 1, 2015, our Board of Directors approved a 2.1144 for 1.00 forward stock split of the Company’s common stock, which became effective on July 22, 2016 (See Note 14 – Subsequent Events). Per share and share amounts presented herein have been adjusted for all periods presented to give retroactive effect to the 2.1144 for 1.00 stock split. See Note 12 – Temporary Equity and Stockholders’ Deficiency for additional details regarding the Company’s authorized capital.
Note 2 – Going Concern and Management’s Liquidity Plan
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company incurred a net loss of $1,604,013 and $1,397,993 during the years ended December 31, 2015 and 2014, respectively, and has an accumulated deficit of $24,340,860 at December 31, 2015. Cash used in operating activities was $2,094,463 for the year ended December 31, 2015. The aforementioned factors raise substantial doubt about the Company’s ability to continue as a going concern.
During the year ended December 31, 2015, the Company received net cash proceeds of $1,310,512 from the issuance of notes payable (see Note 8 – Note Payable and Note 15– Related Party Transactions), $1,080,000 in advances from a Distributor (See Note14 – Subsequent Events – Asset Sale) and during December 2015 the Company received net cash of $1,870,750 from the sale of Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) and warrants (see Note 12 – Temporary Equity and Stockholders’ Deficiency). As of December 31, 2015, Hancock Jaffe had a cash balance of $1,585,205 and a working capital deficit of $2,770,602.
Subsequent to December 31, 2015, the Company received net cash proceeds of $2,250,631 from additional sales of Series A Preferred Stock and warrants (see Note 14 – Subsequent Events – Series A Preferred Stock).
The Company expects to continue incurring losses for the foreseeable future and will need to raise additional capital to sustain its operations, pursue its product development initiatives and penetrate markets for the sale of its products. Management believes that the Company has access to capital resources through possible public or private equity offerings, debt financings, corporate collaborations or other means; however, the Company cannot provide any assurance that it will be able to raise additional capital or obtain new financing on commercially acceptable terms.
F-1 |
Note 3 – Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Significant estimates and assumptions include the valuation allowance related to the Company’s deferred tax assets, and the valuation of warrants and derivative liabilities.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of December 31, 2015 and 2014, the Company had no cash equivalents.
Inventory
Inventory is stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company reduces the carrying value of inventory for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors. Upon completion, finished goods are shipped directly to a distributor. There is no inventory reserve at December 31, 2015 or 2014.
Deferred Offering Costs
Deferred offering costs, which primarily consist of direct, incremental professional fees relating to a potential initial public offering (“IPO”), are capitalized within current assets. The deferred offering costs will be offset against IPO proceeds upon the consummation of the offering. In the event the offering is terminated, deferred offering costs will be expensed. As of December 31, 2015, the Company has recognized deferred offering costs for legal, accounting and consulting services totaling $25,000 in the accompanying balance sheets.
F-2 |
Note 3 – Significant Accounting Policies, continued
Investments
Equity investments in which the Company exercises significant influence but does not control, and is not the primary beneficiary, are accounted for using the equity method, whereby investment accounts are increased (decreased) for the Company’s proportionate share of income (losses), but investment accounts are not reduced below zero.
The Company holds a 30% ownership investment, consisting of founders’ shares acquired at nominal cost, in Hancock Jaffe Laboratory Aesthetics, Inc. (“HJLA”) of which the Company’s Former President and Vice President of Operations were/are officers. To date, HJLA has recorded cumulative losses. Since the Company’s investment is recorded at $0, the Company has not recorded its proportionate share of HJLA’s losses. If HJLA reports net income in future years, the Company will apply the equity only after its share of HJLA’s net income equals its share of net losses previously incurred. (See Note 14 - Subsequent Events.)
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation using the straight-line method at rates sufficient to charge the cost of depreciable assets to operations over their estimated useful lives, which range from 5 to 7 years. Leasehold improvements are amortized over the lesser of (a) the useful life of the asset; or (b) the remaining lease term. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred, and expenditures, which extend the economic life, are capitalized. When assets are retired, or otherwise disposed of, the costs and related accumulated depreciation or amortization are removed from the accounts and any gain or loss on disposal is recognized.
Intangible Asset, Net
The Company’s recorded intangible asset is a purchased patent related to heart valve bioprosthesis technology. The patent is stated at cost, and is amortized on a straight-line basis over its remaining useful life of approximately 14 years.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
F-3 |
Note 3 – Significant Accounting Policies - continued
Fair Value of Financial Instruments, continued
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices available in active markets for identical assets or liabilities trading in active markets. | |
Level 2 | Observable inputs other than quoted prices included in Level 1, such as quotable prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. | |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar valuation techniques that use significant unobservable inputs. |
Financial instruments, including accounts receivable, accounts payable, accrued liabilities, short term advances and deferred revenues are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. The Company’s other financial instruments include notes payable, the carrying value of which approximates fair value, as the notes bear terms and conditions comparable to market for obligations with similar terms and maturities, as well as warrant liabilities that are accounted for at fair value on a recurring basis as of December 31, 2015, by level within the fair value hierarchy:
Description: | Quoted
Prices in Active Markets for Identical Assets or Liabilities (Level 1) | Significant
Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
Warrant Liability: | ||||||||||||
December 31, 2015 | $ | - | $ | - | $ | 74,089 |
F-4 |
Note 3 – Significant Accounting Policies - continued
Fair Value of Financial Instruments, continued
The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value during the year ended December 31, 2015:
Balance - January 1, 2015 | $ | - | ||
Warrants issued | 74,266 | |||
Unrealized gain | (177 | ) | ||
Balance - December 31, 2015 | $ | 74,089 |
Preferred Stock
The Company applies the accounting standards for distinguishing liabilities from equity under U.S. GAAP when determining the classification and measurement of its convertible preferred stock. Preferred shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. Conditionally redeemable preferred shares (including preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other times, preferred shares are classified as permanent equity. The Company’s preferred shares feature certain redemption rights that are considered by the Company to be outside the Company’s control. Accordingly, the Series A Preferred Stock is presented as temporary equity in the Company’s balance sheets.
As of the issuance date, the carrying amount of the Series A Preferred Stock was less than the redemption value. If the Company were to determine that redemption was probable, the carrying value would be increased by periodic accretions so that the carrying value would equal the redemption amount at the earliest redemption date. Such accretion would be recorded as a preferred stock dividend.
Derivative Liabilities
During December 2015, the Company issued warrants for a fixed number of Series A Preferred Stock at an adjustable price. The Company determined that these warrants are derivative instruments pursuant to FASB ASC 815 “Derivatives and Hedging.”
The accounting treatment of derivative financial instruments requires that the Company record the warrants as a liability at fair value and mark-to-market the instruments at fair values as of each subsequent balance sheet date. Any change in fair value is recorded as a change in the fair value of derivative liabilities for each reporting period at each balance sheet date. The fair value of the warrants was determined using a Monte Carlo simulation, incorporating observable market data and requiring judgment and estimates. The Company reassesses the classification at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.
F-5 |
Note 3 – Significant Accounting Policies - continued
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. Revenue is considered realized or realizable and earned upon delivery of the product or services, provided that an agreement of sale exists, the sales price is fixed or determinable, and collection is reasonably assured. Cash received in advance of the sale or rendering of services is recorded as deferred revenue on the accompanying balance sheets.
Net Loss per Share
Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding, plus the impact of potential common shares, if dilutive, resulting from the exercise of outstanding warrants and the conversion of its Series A Preferred Stock.
Potentially common shares at December 31, 2015 consist of 43,600 Series A Preferred Stock issuable upon the exercise of placement agent warrants and 436,000 shares of common stock issuable upon the conversion of Series A Preferred Stock. There were no common share equivalents outstanding as of December 31, 2014. Shares issuable upon the exercise of warrants and the conversion of its Series A Preferred Stock were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive.
Major Customers
During the year ended December 31, 2015, 100% of the Company’s revenues were from sale of its products to the Company’s sole distributor (the “Distributor’), with whom the Company entered an Exclusive Supply and Distribution Agreement effective March 26, 2014. During the year ended December 31, 2014, $359,509, representing 55% of the Company’s revenues, were from the sale of its products to the Distributor, and $236,500, representing 36% of the Company’s revenues, were earned for research and development services performed on behalf of HJLA, pursuant to a Development and Manufacturing agreement which was effective on February 1, 2013, and which was terminated on September 30, 2014.
Major Supplier
During the years ended December 31, 2015 and 2014, 100% of the raw material used for the manufacture of the vascular bioprostheses was purchased from a single vendor.
Credit Risk
The Company maintains its cash balances in financial institutions located in the United States. At times, the Company’s cash balances may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. As of December 31, 2015, a substantial portion of the Company’s cash balances was uninsured.
F-6 |
Note 3 – Significant Accounting Policies - continued
Income Taxes
The Company accounts for income taxes under Accounting Standards Codification (“ASC”) 740 Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.
ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
Tax benefits claimed or expected to be claimed on a tax return are recorded in the Company’s financial statements. A tax benefit from an uncertain tax position is only recognized if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution. Uncertain tax positions have had no impact on the Company’s financial condition, results of operations or cash flows.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (“ASU 2014-09”). ASU 2014-09 supersedes the revenue recognition requirements in ASC 605 - Revenue Recognition and most industry-specific guidance throughout the ASC. The standard requires that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. To allow entities additional time to implement systems, gather data and resolve implementation questions, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, in August 2015, to defer the effective date of ASU No. 2014-09 for one year, which is fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its financial statements or disclosures. In addition, the FASB issued ASU 2016-08 in March 2016, to help provide interpretive clarifications on the new guidance in ASC Topic 606. The Company is currently evaluating the accounting, transition, and disclosure requirements of the standard to determine the impact, if any, on its financial statements.
F-7 |
Note 3 – Significant Accounting Policies - continued
Recent Accounting Pronouncements - continued
In August 2014, the FASB issued 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” (“ASU 2014-15”). ASU 2014-15 explicitly requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exist which raise substantial doubt about an entity’s ability to continue as a going concern and to provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and annual and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the impact that the adoption of ASU 2014-15 will have on its financial statement disclosures.
In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs, (“ASU 2015-03”). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company does not anticipate that the adoption of ASU 2015-03 will have a material impact on its financial statements.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory,” (“ASU 2015-11”). ASU 2015-11 amends the existing guidance to require that inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out or the retail inventory method. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2015–11 on its financial statements.
F-8 |
Note 3 – Significant Accounting Policies - continued
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”). The FASB issued ASU 2015-17 as part of its ongoing Simplification Initiative, with the objective of reducing complexity in accounting standards. The amendments in ASU 2015-17 require entities that present a classified balance sheet to classify all deferred tax liabilities and assets as a noncurrent amount. This guidance does not change the offsetting requirements for deferred tax liabilities and assets, which results in the presentation of one amount on the balance sheet. Additionally, the amendments in ASU 2015-17 align the deferred income tax presentation with the requirements in International Accounting Standards (IAS) 1, Presentation of Financial Statements. The amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate that the adoption of ASU 2015-17 will have a material impact on its financial statements. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. ASU 2016-02 will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating ASU 2016-02 and its impact on its financial statements.
In March 2016, the FASB issued ASU 2016-07 “Investments - Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting” (“ASU 2016-07”). ASU 2016-07 which simplifies the accounting for equity method investments by eliminating the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted. The adoption of ASU 2016-07, is not expected to have a material impact on our financial statements
In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations.” This update provides clarifying guidance regarding the application of ASU No. 2014-09 - Revenue From Contracts with Customers when another party, along with the reporting entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). The amendments in the Update clarify the implementation guidance on principal versus agent considerations. The update is effective, along with ASU 2014-09, for annual and interim periods beginning after December 15, 2017. The adoption of ASU 2016-08 is not expected to have a material impact on our financial statement or disclosures.
F-9 |
Note 3 – Significant Accounting Policies - continued
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”). ASU 2016-09 requires an entity to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating ASU 2016-09 and its impact on its condensed financial statements or disclosures.
On May 9, 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). ASU 2016-12 provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. The effective date and transition requirements for this ASU are the same as the effective date and transition requirements for ASU 2014-09. The Company is evaluating the effect of ASU 2014-09, if any, on its financial statements.
Subsequent Events
The Company evaluated events that have occurred after the balance sheet date through August 5, 2016, the date the financial statements are available to be issued. Based upon the evaluation and transactions, the Company did not identify any other subsequent events that would have required adjustment or disclosure in the financial statements, except as disclosed in Note 16.
Note 4 - Discontinued Operations
On March 18, 2016, the Company sold assets related to the manufacturing, sale and distribution of vascular bioprostheses. Accordingly, we have retroactively classified the operations effected by the assets as discontinued operations in all periods presented. (See Note 14 – Subsequent Events – Asset Sale.)
Results of Discontinued Operations
For
the Years Ended December 31, | ||||||||
2016 | 2015 | |||||||
Revenues | $ | 1,004,825 | $ | 418,982 | ||||
Gross profit (loss) | $ | (225,815 | ) | $ | (379,841 | ) | ||
Loss from discontinued operations | $ | (225,815 | ) | $ | (379,841 | ) |
Summarized operating results of discontinued operations are presented in the following table:
F-10 |
Note 4 - Discontinued Operations, continued
Results of Discontinued Operations, continued
December 31, | ||||||||
2016 | 2015 | |||||||
Accounts receivables, net | $ | - | $ | 25,240 | ||||
Inventory | 183,973 | 355,877 | ||||||
Total current assets of discontinued operations | $ | 183,973 | $ | 381,117 | ||||
Short term advances | $ | 1,080,000 | $ | - | ||||
Accrued expenses | 21,752 | - | ||||||
Deferred revenues | 891,499 | 1,322,201 | ||||||
Total current liabilities of discontinued operations | $ | 1,993,251 | $ | 1,322,201 |
Summarized assets and liabilities of discontinued operations are presented in the following table:
The Company did not recognize any depreciation or amortization expense related to discontinued operations during the years ended December 31, 2015 or 2014. There were no significant capital expenditures or non-cash operating or investing activities of discontinued operations during the periods presented.
Note 5 – Property and Equipment
As of December 31, 2015 and 2014, property and equipment consists of the following:
2015 | 2014 | |||||||
Lab equipment | $ | 172,773 | $ | 170,153 | ||||
Furniture and fixtures | 84,744 | 84,744 | ||||||
Computer software and equipment | 8,728 | 8,728 | ||||||
Leasehold improvements | 158,092 | 158,092 | ||||||
424,337 | 421,717 | |||||||
Less: accumulated depreciation | (359,679 | ) | (311,903 | ) | ||||
Property and equipment, net | $ | 64,658 | $ | 109,814 |
Depreciation and amortization expense amounted to $47,776 and $56,480 for the years ended December 31, 2015 and 2014, respectively. Depreciation and amortization expense is reflected in general and administrative expenses in the accompanying statements of operations.
F-11 |
Note 6 – Intangible Asset
The Company’s recorded intangible asset is a purchased patent related to certain heart valve bioprosthesis technology and the carrying value is as follows:
December 31, | ||||||||
2015 | 2014 | |||||||
Patent | $ | 1,100,000 | $ | 1,100,000 | ||||
Less: accumulated amortization | (200,589 | ) | (122,942 | ) | ||||
Total | $ | 899,411 | $ | 977,058 |
Amortization expense charged to operations for the years ended December 31, 2015 and 2014 was $77,647 each year, and is reflected in general and administrative expense in the accompanying statements of operations.
The estimated future amortization the patent cost is as follows:
For
the Years Ending December 31, | Amount | |||
2016 | $ | 77,647 | ||
2017 | 77,647 | |||
2018 | 77,647 | |||
2019 | 77,647 | |||
2020 | 77,647 | |||
Thereafter | 511,176 | |||
$ | 899,411 |
The remaining amortization period of the intangible asset as of December 31, 2015 is 11.5 years and it has no residual value.
F-12 |
Note 7 – Accrued Expenses
As of December 31, 2015 and 2014, accrued expenses consist of the following:
December 31, | ||||||||
2015 | 2014 | |||||||
Accrued compensation costs | $ | 69,196 | $ | 145,595 | ||||
Accrued interest | 786 | - | ||||||
Accrued professional fees | 30,425 | 16,925 | ||||||
Deferred rent | 21,911 | 32,618 | ||||||
Other accrued expenses | 6,617 | 2,580 | ||||||
Accrued Expenses | $ | 128,935 | $ | 197,718 |
Accrued expenses, related parties consist of the following at December 31, 2015 and 2014:
December 31, | ||||||||
2015 | 2014 | |||||||
Due to related parties | $ | - | $ | 266,000 | ||||
Accrued interest, related parties | 9,749 | 53,272 | ||||||
Total accrued expenses | $ | 9,749 | $ | 319,272 |
Note 8 - Note Payable
During October 2015, the Company borrowed $111,000 which was formalized under a promissory note dated March 15, 2015. The note bears interest at 3% per annum and matures on April 30, 2016. The note was repaid in full during 2016, prior to the maturity date.
See Note 13 – Related Party Transactions, below, regarding notes payable to related parties.
F-13 |
Note 9 – Deferred Revenues
Deferred revenues consist of payments for product sold to the Distributor which were received by the Company prior to shipment of the product. The Company recognizes revenue when products are shipped to the Distributor.
Note 10 – Income Taxes
The following summarizes the Company’ income tax provision (benefit):
For
the years ended December 31, | ||||||||
2015 | 2014 | |||||||
Federal: | ||||||||
Current | $ | - | $ | - | ||||
Deferred | (532,249 | ) | (273,064 | ) | ||||
State and local: | ||||||||
Current | ||||||||
Deferred | (93,926 | ) | (48,188 | ) | ||||
(626,175 | ) | (321,252 | ) | |||||
Change in valuation allowance | 626,175 | 321,252 | ||||||
Income tax provision (benefit) | $ | - | $ | - |
The reconciliation between the U.S. statutory federal income tax rate and the Company’s effective tax rate for the year’s ended December 31, 2015 and 2014 is as follows:
For
the Years Ended December 31, | ||||||||
2015 | 2014 | |||||||
Tax benefit at federal statutory rate | (34.0 | )% | (34.0 | )% | ||||
State taxes, net of federal benefit | (6.0 | )% | (6.0 | )% | ||||
Permanent differences | 1.0 | % | 17.5 | % | ||||
Research and development tax credit | 0.0 | % | (0.5 | )% | ||||
Change in valuation allowance | 39.0 | % | 23.0 | % | ||||
Effective income tax rate | 0.0 | % | 0.0 | % |
F-14 |
Note 10 – Income Taxes, continued
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2015 and 2014 are as follows:
December 31, | ||||||||
2015 | 2014 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carryforwards | $ | 1,985,651 | $ | 1,335,580 | ||||
Research and development credit carryforwards | 185,680 | 185,680 | ||||||
Intangible assets | 145,675 | 154,563 | ||||||
Property and equipment | 37,158 | 21,558 | ||||||
Accrued salaries | 26,023 | 56,631 | ||||||
Total gross deferred tax assets | 2,380,187 | 1,754,012 | ||||||
Less: valuation allowance | (2,380,187 | ) | (1,754,012 | ) | ||||
Total | $ | - | $ | - |
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period), the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes to offset its post-change income taxes may be limited.
As a result of the Section 382 limitation, deferred tax assets related to approximately $5.0 million of the Company’s NOLs were written off in connection with a change in ownership of the Company during 2006.
At December 31, 2015 and 2014, the Company had post-ownership change net operating loss carryforwards for federal and state income tax purposes of approximately $5.0 million and $3.3 million, respectively. The federal and state net operating loss (“NOL”) carryovers may be carried forward for twenty years and begin to expire in 2026. The Company also has federal research and development tax credit carryforwards of approximately $0.2 million which begin to expire in 2027.
The Company files income tax returns in the U.S. federal jurisdiction as well as California and local jurisdictions and is subject to examination by those taxing authorities. The Company’s federal, state and local income taxes for the years beginning in 2012 remain subject to examination.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s financial statements as of December 31, 2015 and 2014. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company has federal tax returns subject to examination by tax authorities beginning with those filed for the year ended December 31, 2012. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of operations
F-15 |
Note 11 – Commitments and Contingencies
Property Lease Obligation
On or about July 1, 2010, the Company’s seven year lease for 14,507 square foot industrial building located in Orange County, California became effective. The lease required a $26,113 security deposit and the prepayment of the first month’s rent at the inception of the lease. Monthly rent payments under the lease at the inception of the lease were $21,761 and payments increase by 5% every 24 months. Payments under the lease also include real estate taxes not to exceed $7,254 per month. Rent expense is straight lined over the term of the lease and the expense incurred under the lease for the years ended December 31, 2015 and 2014 was $366,801 and $369,463, respectively. The lease expires on or about June 30, 2017 and the remaining future minimum lease payments are $151,143 and $295,089 for the years ending December 31, 2017 and 2016, respectively.
Current Supply Agreement
On March 26, 2014, as amended, Hancock Jaffe and CryoLife, Inc. (“CryoLife”) entered into an exclusive supply and distribution agreement (the “Current Supply Agreement”) whereby Hancock Jaffe granted to CryoLife certain rights relating to certain vascular bioprosthesis technology (the “Products”), including, but not limited to (i) the exclusive right to market, sell and distribute the Products and (ii) the exclusive, freely assignable right and option to acquire the vascular bioprosthesis assets of Hancock Jaffe relating to the Products (the “Purchase Option”). CryoLife may elect to exercise the Purchase Option at any time during the thirty-six (36) month period beginning on January 1, 2016 and ending on December 31, 2018 by paying the option acquisition prices which is defined as 2.5 times CryoLife trailing twelve month net sales. See Note 14 – Subsequent Events – Asset Sale for further details.
Note 12 – Temporary Equity and Stockholders’ Deficiency
Preferred Stock
Pursuant to the Amended and Restated Articles of Incorporation filed on December 2, 2015, the Company is authorized to issue shares of preferred stock with such designations, rights and preferences as may be determined from time to time by its board of directors (the “Board”). Accordingly, the Board is authorized, without stockholder approval, to issue preferred stock with dividend, liquidation conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control. The Company is authorized to issue a total of 2,000,000 shares of preferred stock of which 1,300,000 preferred shares have been designated as the Company’s Series A Preferred Stock and 700,000 preferred shares remain undesignated.
F-16 |
Note 12 – Temporary Equity and Stockholders’ Deficiency, continued
Redeemable Convertible Series A Preferred Stock
The holders of the Company’s Series A Preferred Stock have voting rights equal to common stockholders on an as-converted basis, and are entitled to receive 8% non-compounding cumulative dividends, payable when, as and if declared by the Board of Directors. The Series A Preferred Stock ranks senior to the common stock as to dividends and the distribution of assets upon a Deemed Liquidation Event, as defined. Upon the occurrence of a Deemed Liquidation Event, the holders of Series A Preferred Stock are entitled to receive an amount per share equal to the greater of (i) two times the Series A Preferred Stock’s original issue price, plus any accrued and unpaid dividends, or (ii) the amount per share that would have been payable had all shares of Series A Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding up or other Deemed Liquidation Event, as defined. As of December 31, 2015, the holders of Series A Preferred Stock are entitled to receive a liquidation preference payment of $10.00 per share, plus accrued and unpaid dividends totaling, in the aggregate, $4,350. The liquidation preference of The Series A Preferred Stock is subordinate and ranks junior to all indebtedness of the Company.
Each share of Series A Preferred Stock is convertible at the option of the holder at any time into one share of the Company’s common stock, subject to certain typical anti-dilution provisions, such as stock dividend or stock splits. Each share of Series A Preferred Stock is mandatorily converted into the Company’s common stock (a) at a 25% discount (not to exceed the original issue price) upon the closing of an underwritten initial public offering of the Company’s common stock; (b) the consent of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, or (c) FDA approval for either the Company’s venous vale, pediatric heart valve or coronary artery bypass graft product candidates. Because the conversion option associated with the Series A Preferred Stock is clearly and closely related to the host instrument, the conversion option does not require bifurcation and classification as a derivative liability. At any time after the third anniversary of the original issuance of the Series A Preferred Stock, the Series A Preferred Stock may be redeemed as a result of the written request of the holder of the Series A Preferred Stock, at a price equal to two times the original issue price, plus all accrued and unpaid dividends, whether or not declared. Redemption payments are to be paid in three equal monthly installments, commencing not more than thirty days after the Company’s receipt of the written redemption request. Accordingly, the Series A Preferred Stock is classified as temporary equity.
During December 2015, the Company issued 436,000 shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to the terms of a Confidential Private Offering memorandum dated October 26, 2015. The gross proceeds from the private placement were $2,180,000 and the Company incurred cash offering costs of $309,250 (including $272,500 of placement agent fees) and non-cash offering costs valued at $74,266 (see Preferred Stock Warrants, below) resulting in an original carrying value of the Series A Preferred Stock of $1,796,484.
F-17 |
Note 12 – Temporary Equity and Stockholders’ Deficiency, continued
Preferred Stock Warrants
The Series A Preferred Stock placement agent received a cash fee in the aggregate of $272,500, and five-year warrants to purchase an additional 43,600 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing. Due to the variable exercise price, the warrants were deemed to be a derivative liability. The warrants had a grant date fair value of $74,266, which was charged against the proceeds received from the sale of the shares.
The Company utilized a third-party valuation report to determine the value of the warrant liability. The valuation company used a Monte Carlo simulation model which is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of the Company’s future expected stock prices and minimizes standard error. This valuation is revised on a quarterly basis until the warrants are reclassified, exercised or they expire, with the changes in fair value recorded in other income (expense) on the statement of operations. The value of the warrant liability as of December 31, 2015 was $74,089. During the year ended December 31, 2015, the Company recorded a $177 gain on the change in the value of the derivative liabilities.
The significant assumptions used in the valuation model were as follows:
For
The Year Ended December 31, 2015 | ||||
Risk free interest rate | 1.711% - 1.745 | % | ||
Expected term (years) | 4.96 - 5.00 | |||
Expected volatility | 32.4 | % |
Contributions to Capital
During the year ended December 31, 2015, the Company received a contribution to capital from certain employees of the Company, totaling, in the aggregate, $38,554, resulting from their forgiveness of certain compensation payable amounts.
See Note 13 – Related Party Transactions related to capital contributions from a related party.
Common Stock
The Company is authorized to issue up to 30,000,000 shares of common stock with a par value of $0.00001 per share. The holders of common stock are entitled to dividends after the preferred stock holders, when funds are legally available and when declared by the Board of Directors.
F-18 |
Note 13 – Related Party Transactions
Deposit
During 2015, the Company paid $75,000 to HJLA in anticipation of an agreement to acquire an exclusive right to provide development and manufacturing services to HJLA. The Company entered into such agreement on April 1, 2016 (see Note 14 – Subsequent Events).
Prepaid Expenses
During 2014 and 2015, the Company engaged a consulting company (the “Consultant”), of which the Company’s Former President was the sole owner, to provide consulting services related to device design, clinical trials and patents, at a cost or $13,500 per month, pursuant to a Consulting Agreement dated March 1, 2006 as amended on January 1, 2013. The Company recognized consulting expense of $162,000 related to the Consulting Agreement during each of the years ending December 31, 2014 and 2015. During November and December 2014, the Company paid $35,042 in advance of services to be provided under the agreement, which is recorded as prepaid expenses – related party on the accompanying balance sheet.
Accrued Expenses
During 2013 and 2014, HJLA paid $266,000 of certain accounts payable owed to the Consultant on behalf of the Company, which is included in accrued expenses – related parties as of December 31, 2014, on the accompanying balance sheet. The Company repaid HJLA in full during the year ended December 31, 2015.
Accrued interest expense on notes payable to related parties was $9,749 and $53,272 as of December 31, 2015 and 2014, respectively. See Notes Payable below.
On February 15, 2013, the Company issued to HJLA a one-year note payable in the principal amount of $300,000 (the” February 2013 Note”) which bore interest at 6% per annum. The note was payable in quarterly installments of principal and interest beginning on the date of issuance through February 14, 2014, at which point the remaining unpaid principal and interest became due. Accrued interest of $34,200 related to the February 2013 Note is included in accrued expenses - related party as of December 31, 2014 (see Accrued Expenses, above). The outstanding principal of $300,000 on the February 2013 Note and the related accrued interest of $45,311 were repaid in full by the Company during the year ended December 31, 2015.
F-19 |
Note 13 – Related Party Transactions, continued
Notes Payable
On May 10, 2013, the Company issued a note payable (“the Asset Purchase Note”) with a principal balance amount of $1,070,000 in connection with the purchase of certain assets from a related entity, of which the Company’s Former President and Vice President of Operations are officers, and of which a member of the Company’s Board of Directors is a shareholder. The Asset Purchase Note bore interest at 6%, and matured on May 10, 2014. During 2013, the Company repaid an aggregate $308,000 of the principal balance of this Asset Purchase Note. During the years ended December 31, 2015 and 2014, the Company repaid an aggregate principal balance of $312,000 and $60,000, respectively, related to the Asset Purchase Note. As of December 31, 2015 and 2014, the principal balance due on the Asset Purchase Note was $390,000 and $702,000, respectively, and the related accrued interest was $954 and $19,072, respectively, which is included in accrued expenses-related party (see Accrued Expenses, above).
On June 30, 2015, the Company entered into a loan agreement with the majority (78%) common stock shareholder, (“the 2015 Note”). The 2015 note has a maximum borrowing capacity of $2,200,000 and bears interest at 3% per annum. The 2015 Note’s principal and accrued interest are due on November 1, 2016. During the year ended December 31, 2015, the Company borrowed $1,199,512 under the 2015 Note and none has been repaid through December 31, 2015. As of December 31, 2015, there is $8,795 of accrued interest related to the 2015 Note, which is included in accrued expenses – related party (See Accrued Expenses above).
Capital Contributions
During the year ended December 31, 2014, the Company received a $615,000 contribution to capital from its Consultant, of which the Company’s Former President was the sole owner, resulting from the forgiveness of certain accounts payable amounts.
Revenues
During 2014, the Company recorded $236,500 of revenues from HJLA for research and development services provided pursuant to a Development and Manufacturing Agreement dated February 1, 2013.
F-20 |
Note 14 - Subsequent Events
Series A Preferred Stock
Subsequent to December 31, 2015, the Company sold 499,700 shares of Series A Preferred Stock at a purchase price of $5 per share to accredited investors pursuant to a private offering. The gross proceeds from the sale of these shares were $2,498,500 and the Company incurred cash offering costs of $376,898 (including $366,211 of placement agent fees), resulting in net cash proceeds to the Company of $2,250,631. In connection with the sale of the Series A Preferred Stock, the placement agent also received 5-year warrants for the purchase of 56,970 shares of the Company’s Series A Preferred Stock at an exercise price equal to the lesser of $5.00 per share or the price of securities issued in a future round of financing.
Entry Into a Common Stock Purchase Agreement
On April 1, 2016, the Company entered into a Common Stock Purchase Agreement with HJLA, pursuant to which: (i) the Company paid $445,200 for the exclusive right to provide development and manufacturing services to HJLA for a period of five years, and (ii) the Company has the right to purchase up to 484,358 shares of Common Stock of HJLA at $8.66 per share for an aggregate purchase price of $4,194,540 through April 1, 2021.
Related Party Receivable
During February through July 2016, the Company paid $587,900 as short term advances to HJLA, net of repayments of $109,500.
Warrant
On May 5, 2016 the Company granted a warrant for the purchase of 833,333 shares of common stock to its Business Development Manager. The warrant is immediately vested, contains cashless exercise provisions and is exercisable for 7 years at an exercise price of $6.00 (subject to adjustment in the event of certain stock dividends and distributions, stock splits, reclassifications or similar events affecting the Company’s common stock). Further, upon certain issuances of common stock or common stock equivalents at a price per share less than the exercise price in effect at the time of issuance, the exercise price of the warrant shall be reduced to a price equal to the consideration per share received by the Company with respect to those issuances.
Death of President and Appointment of Interim President
On June 19, 2016, the Company’s President and Chief Executive Officer (the “Former President”) passed away. On July 22, 2016, the Company’s Chief Financial Officer (the “CFO”) was appointed the Company’s Secretary and Interim President.
F-21 |
Note 14 - Subsequent Events, continued
Employment Agreements
On July 1, 2016 the Company entered into an employment agreement with the Company’s Business Development Manager (the “BDM Agreement”). The BDM Agreement ends on December 31, 2016, after which is it automatically extended for additional one year renewal terms, unless either party gives written notice to the other to terminate the BDM Agreement at least thirty days prior to the end of each calendar year. The BDM Agreement provides for a base salary of $24,000 per year, subject to annual review and adjustments by the Board of Directors, and automatically increases to $180,000 per year, starting from the date of an initial public offering. Further, the BDM agreement provides for the payment of a bonus of $250,000 upon the completion of a strategic transaction. The BDM Agreement may be terminated by the Business Development Manager with 30 days written notice, or immediately upon written notice by the Company for cause.
The Company hired its CFO on March 21, 2016. On July 22, 2016, the Company entered into an employment agreement with the CFO which provides for annual base salary of $225,000, as well as standard employee insurance and other benefits (the “CFO Agreement”). Pursuant to the CFO agreement the CFO is eligible for annual salary increases at the discretion of the Board of Directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the Board of Directors. The CFO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CFO Agreement, the CFO will receive an option for the purchase of 293,000 shares of the Company’s common stock. The terms of the option have not yet been determined. The CFO Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CFO Agreement. The CFO Agreement may be terminated by the CFO with 30 days written notice, or immediately upon written notice by the Company for cause.
As of July 22, 2016, the Company entered into an employment agreement with the Company’s Senior Vice President of Operations, Regulatory Affairs and Quality Assurance (the “SVP”) which provides for an annual base salary of $295,000, as well as standard employee insurance and other benefits (the “SVP Agreement”). Pursuant to this agreement the SVP is eligible for annual salary increases at the discretion of the Board of Directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the Board of Directors. The SVP Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the SVP Agreement, the SVP will receive an option for the purchase of 1,637,000 shares of the Company’s common stock. The terms of the option have not yet been determined. The SVP Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the SVP Agreement. The SVP Agreement may be terminated by the SVP with 30 days written notice, or immediately upon written notice by the Company for cause.
F-22 |
Note 14 - Subsequent Events, continued
Employment Agreements, continued
The Company hired its Senior Vice President and Chief Medical Officer (the “CMO”) on May 1, 2016. On July 22, 2016, the Company entered into an employment agreement with the CMO which provides for an annual base salary of $300,000, as well as standard employee insurance and other benefits (the “CMO Agreement”). Pursuant to this agreement the CMO is eligible for annual salary increases at the discretion of the Board of Directors as well as annual bonus payments of up to 50% of base salary, based upon the achievement of key performance indicators for the Company, as determined by the Board of Directors. The CMO Agreement provides for one year of severance payments equal to base salary in the event of termination without cause, and two years of severance payments if such termination occur within 24 months of a change in control of the Company. In addition, in connection with the CMO Agreement, the CMO will receive option for the purchase of 369,000 shares of the Company’s common stock. The terms of the option have not yet been determined. The CMO Agreement ends on December 31, 2018, after which it is automatically extended for additional three year terms, unless either party gives written notice to the other, at least 30 days prior to the end of the term, to terminate the CMO Agreement. The CMO Agreement may be terminated by the CMO with 30 days written notice, or immediately upon written notice by the Company for cause.
Board of Directors
The death of the Former President on June 19, 2016 and the resignation of a member of the Board of Directors on July 22, 2016 resulted in two vacancies on the Board of Directors. On July 22, 2016, the CMO was appointed to the Board of Directors and the number of authorized members of the Board of Directors was decreased from three to two.
Amendment to Certificate of Incorporation
On July 22, 2016, the Company adopted an amendment to the existing Certificate of Incorporation, in order to effectuate the aforementioned 2.1144 for 1.00 forward stock split which had been approved by the Board of Directors on September 1, 2015 (See Note 1 – Business Organization, Nature of Operations and Basis of Operations, above).
F-23 |
Shares
Common Stock
_________________________
PROSPECTUS
_________________________
, 2017
Through and including , 2017 (25 days after the date of this prospectus), all dealers that buy, sell or trade shares of our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our securities, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our units means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these units in any circumstances under which the offer or solicitation is unlawful.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the SEC registration fee, the Nasdaq Capital Market listing fee and the Financial Industry Regulatory Authority, or FINRA, filing fee.
Amount
to be Paid | ||||
SEC registration fee | $ | * | ||
FINRA filing fee | $ | * | ||
The Nasdaq Capital Market initial listing fee | $ | [ ] | ||
Printing and engraving expenses | $ | * | ||
Accounting fees and expenses | $ | * | ||
Legal fees and expenses | $ | * | ||
Transfer agent and registrar fees | $ | * | ||
Miscellaneous fees and expenses | $ | * | ||
Total | $ | * |
Item 14. Indemnification of Directors and Officers
Section 102 of the General Corporation Law of the State of Delaware permits a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for breaches of the director’s duty of loyalty to the corporation or its stockholders, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of a law, authorizations of the payments of a dividend or approval of a stock repurchase or redemption in violation of Delaware corporate law or for any transactions from which the director derived an improper personal benefit. Our certificate of incorporation will provide that no director will be liable to us or our stockholders for monetary damages for breach of fiduciary duties as a director, subject to the same exceptions as described above. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors which may, in some cases, be broader than the specific indemnification provisions contained under Delaware law. We also expect to maintain standard insurance policies that provide coverage (1) to our directors and officers against loss arising from claims made by reason of breach of duty or other wrongful act and (2) to us with respect to indemnification payments we may make to such officers and directors.
Section 145 of the General Corporation Law of the State of Delaware provides that a corporation has the power to indemnify a director, officer, employee, or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlements actually and reasonably incurred by the person in connection with a threatened, pending, or completed action, suit or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, indemnification is limited to expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with defense or settlement of such action or suit and no indemnification shall be made with respect to any claim, issue, or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or other adjudicating court determines that, despite the adjudication of liability but in view of all of the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. In addition, to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit, or proceeding described above (or claim, issue, or matter therein), such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith. Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit, or proceeding may be advanced by the corporation upon receipt of an undertaking by such person to repay such amount if it is ultimately determined that such person is not entitled to indemnification by the corporation under Section 145 of the General Corporation Law of the State of Delaware.
Our amended and restated certificate of incorporation will provide that we will, to the fullest extent permitted by law, indemnify any person made or threatened to be made a party to an action or proceeding by reason of the fact that he or she (or his or her testators or intestate) is or was our director or officer or serves or served at any other corporation, partnership, joint venture, trust or other enterprise in a similar capacity or as an employee or agent at our request, including service with respect to employee benefit plans maintained or sponsored by us, against expenses (including attorneys’), judgments, fines, penalties and amounts paid in settlement incurred in connection with the investigation, preparation to defend, or defense of such action, suit, proceeding, or claim. However, we are not required to indemnify or advance expenses in connection with any action, suit, proceeding, claim, or counterclaim initiated by us or on behalf of us. Our amended and restated bylaws will provide that we will indemnify and hold harmless each person who was or is a party or threatened to be made a party to any action, suit, or proceeding by reason of the fact that he or she is or was our director or officer, or is or was serving at our request in a similar capacity of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans (whether the basis of such action, suit, or proceeding is an action in an official capacity as a director or officer or in any other capacity while serving as a director of officer) to the fullest extent authorized by the Delaware General Corporation Law against all expense, liability and loss (including attorneys fees, judgments, fines, ERISA excise taxes, or penalties and amounts paid in settlement) reasonably incurred or suffered by such person in connection with such action, suit or proceeding, and this indemnification continues after such person has ceased to be an officer or director and inures to the benefit of such person’s heirs, executors and administrators. The indemnification rights also include the right generally to be advanced expenses, subject to any undertaking required under Delaware General Corporation Law, and the right generally to recover expenses to enforce an indemnification claim or to defend specified suits with respect to advances of indemnification expenses.
Item 15. Recent Sales of Unregistered Securities
Set forth below is information regarding securities sold and issued by us since January 1, 2014 that were not registered under the Securities Act, as well as the consideration received by us for such securities and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.
(1) | On July 25, 2016, we issued 598,800 shares of common stock to Steven Cantor, our Chief Business Development Officer, pursuant to his Employment Agreement, dated September 4, 2013. |
(2) | On July 25, 2016, we issued 598,800 shares of common stock to Corbiz, LLC pursuant to a unanimous written consent of the Board of Directors, dated September 4, 2013. |
(3) | On May 5, 2016 and pursuant to his employment agreement, we issued a five year warrant to purchase 833,333 shares of our common stock to Steven Cantor, our Chief Business Development Officer, at a per share exercise price of $6.00. |
(4) | On November 28, 2016, we completed a private placement of our Series A preferred stock, or the Series A Offering. We issued an aggregate of 1,005,700 shares of Series A preferred stock at a purchase price of $5.00 per share. We received aggregate gross proceeds of $5,028,500. |
(5) | From December 4, 2015 to December 1, 2016, we issued five year warrants to 3 placement agents in the Series A Offering, to purchase an aggregate of 1,005,700 shares of our Series A preferred stock at an initial exercise price of $5.00 per share. |
(6) | On August 31, 2016, we issued 247,358 shares of our common stock to Biodyne Holding, S.A., pursuant to an amendment to the Loan Agreement, dated as of June 30, 2015. |
(7) | From September 2016 to date, we granted stock options under our 2016 Omnibus Incentive Plan to purchase an aggregate of 2,592,000 shares of common stock at an exercise price of $5.00 per share to certain directors, officers, employees and service providers. |
The offers, sales and issuances of securities listed in items (1) through (6), above, were deemed exempt from registration under Section 4(a)(2) of the Securities Act or Regulation D promulgated thereunder in that the issuance of securities did not involve a public offering. The recipients of such securities in each of these transactions represented their intention to acquire the securities for investment purposes only and not with a view to or for sale in connection with any distribution thereof. The offers, sales and issuances of securities listed in item (7) above, were deemed exempt from registration in reliance on Section 4(a)(2) of the Securities Act or Rule 701 promulgated thereunder as transactions pursuant to benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or bona fide consultants and received the securities under our stock option plans. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act and appropriate legends were affixed to the securities issued in such transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
The exhibits to the registration statement are listed in the Exhibit Index attached hereto and are incorporated by reference herein.
(b) Financial Statement Schedules.
All other schedules are omitted because they are not required, are not applicable, or the information is included in the consolidated financial statements or the related notes to consolidated financial statements thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue
The undersigned registrant hereby undertakes that:
(1) | For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. | |
(2) | For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, State of California, on this 13th day of, February 2017.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | /s/ Benedict Broennimann | |
Benedict Broennimann, M.D. | ||
Chief Executive Officer |
POWER OF ATTORNEY
We, the undersigned directors and officers of Hancock Jaffe Laboratories, Inc., hereby severally constitute and appoint Yury Zhivilo and Benedict Broennimann, M.D., and each of them, our true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution for him or her and in his or her name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933, as amended and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as we might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ Benedict Broennimann | Chief Executive Officer | February 13, 2017 | ||
Benedict Broennimann, M.D. | (Principal Executive Officer) | |||
/s/ William R. Abbott | Chief Financial Officer | |||
William R. Abbott | (Principal Financial Officer and Principal Accounting Officer) | February 13, 2017 | ||
/s/ Yuzi Zhivilo | Chairman and Director | February 13, 2017 | ||
Yuzi Zhivilo | ||||
/s/ Marc H. Glickman | Director | February 13, 2017 | ||
Marc H. Glickman, M.D. | ||||
/s/ Robert Anderson | Director | February 13, 2017 | ||
Robert Anderson | ||||
/s/ Robert Doyle | Director | February 13, 2017 | ||
Robert Doyle | ||||
/s/ Gennady Alferenko | Director | February 13, 2017 | ||
Gennady Alferenko |
INDEX TO EXHIBITS
Exhibit
Number |
Description of Exhibits | |
1.1* | Form of Underwriting Agreement | |
3.1 | Certificate of Incorporation, as currently in effect | |
3.2 | Bylaws, as currently in effect | |
3.3* | Form of Amended and Restated Certificate of Incorporation, to be in effect upon the completion of this offering | |
3.4* | Form of Amended and Restated Bylaws, to be in effect upon the completion of this offering | |
4.1 | Specimen common stock certificate | |
5.1* | Opinion of Counsel to Registrant | |
10.1+ | 2016 Omnibus Incentive Plan | |
10.2+ | Employment Agreement, dated as of August 30, 2016, by and between the Registrant and Benedict Broennimann, M.D. | |
10.3+ | Employment Agreement, dated as of July 22, 2016, by and between the Registrant and William R. Abbott | |
10.4+ | Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Marc Glickman, M.D. | |
10.5+ | Employment Agreement, dated as of July 22, 2016, by and between the Registrant and Susan Montoya | |
10.6+ | Employment Agreement, dated as of July 1, 2016, by and between the Registrant and Steven Cantor | |
10.7 | Asset Purchase Agreement, dated as of March 18, 2016, by and between LeMaitre Vascular, Inc. and the Registrant | |
10.8 | Post-Acquisition Supply Agreement, dated as of March 18, 2016, by and between the Registrant and LeMaitre Vascular, Inc. | |
10.9 | Development and Manufacturing Agreement, dated as of February 1, 2013, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc. | |
10.10 | Air Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease - Net, dated as of March 12, 2008, by and between Corbiz, LLC and the Registrant | |
10.11 | First Amendment to Air Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease - Net, dated as of August 7, 2015, by and between Corbiz, LLC and the Registrant | |
10.12 | Second Amendment to Air Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease - Net, dated as of January 18, 2016, by and between Corbiz, LLC and the Registrant | |
10.13 | Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Steve Elias, M.D. | |
10.14 | Medical Advisory Board Agreement, dated as of May 1, 2016, by and between the Registrant and Antonius Gasparis | |
10.15 | Medical Advisory Board Agreement, dated as of September 1, 2016, by and between the Registrant and Wade Dimitri, M.D. | |
10.16 | Medical Advisory Board Agreement, dated as of October 1, 2016, by and between the Registrant and Afksendyios Kalangos, M.D. | |
10.17 | Medical Advisory Board Agreement, dated as of October 1, 2016, by and between the Registrant and Mark Meissner, M.D. | |
10.18 | Loan Agreement, dated as of June 30, 2015, by and between Byodine Holding S.A. and the Registrant | |
10.19 | First Amendment to Loan Agreement, dated as of April 1, 2016, by and between Byodine Holding S.A. and the Registrant | |
10.20 | Second Amendment to Loan Agreement, dated as of October 18, 2016, by and between Byodine Holding S.A. and the Registrant | |
10.21 | Third Amendment to Loan Agreement, dated as of December 9, 2016, by and between Byodine Holding S.A. and the Registrant | |
10.22 | Common Stock Purchase Agreement, dated as of April 1, 2016, by and between the Registrant and Hancock Jaffe Laboratories Aesthetics, Inc. | |
10.23 | Services and Material Supply Agreement, dated as of March 4, 2016, by and between the Registrant and ATSCO, Inc. | |
21.1 | Subsidiaries of the Registrant | |
23.1 | Consent of Marcum LLP, independent registered public accounting firm | |
23.2* | Consent of Counsel to the Registrant (included in Exhibit 5.1) | |
24.1 | Power of Attorney (included on signature page to this registration statement) |
* | To be filed by amendment. | |
† | Confidential treatment requested as to portions of the exhibit. Confidential materials omitted and filed separately with the SEC. | |
+ | Indicates a management contract or compensatory plan. |
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Number _______ | __** Shares |
HANCOCK JAFFE LABORATORIES, INC.
COMMON STOCK
Authorized Capital Stock: 32,000,000 Shares
Common Stock: 30,000,000 Shares, $0.00001 par value | Preferred Stock: 2,000,000 Shares, $0.00001 par value |
This Certifies That * * IS THE REGISTERED HOLDER OF (**) SHARES OF THE COMMON STOCK OF
hancock jaffe laboratories, inc.
HEREINAFTER DESIGNATED “THE CORPORATION,” TRANSFERABLE ON THE SHARE REGISTER OF THE CORPORATION UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR ASSIGNED.
A STATEMENT OF THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS GRANTED TO OR IMPOSED UPON THE RESPECTIVE CLASSES OF SHARES OF STOCK OF THE CORPORATION AND UPON THE HOLDERS THEREOF MAY BE OBTAINED BY ANY STOCKHOLDER UPON REQUEST AND WITHOUT CHARGE, AT THE PRINCIPAL OFFICE OF THE CORPORATION.
THE SHARES REPRESENTED HEREBY ARE RESTRICTED TO THE TRANSFER AS DESCRIBED OR SET FORTH ON THE REVERSE SIDE HEREOF.
WITNESS The Seal of the Corporation and the Signatures of its duly authorized officers this day of .
WILLIAM ABBOTT, PRESIDENT | WILLIAM ABBOTT, SECRETARY |
FOR VALUE RECEIVED, _______________________ HEREBY SELL, ASSIGN AND TRANSFER UNTO ___________________________________________________________________________ SHARES REPRESENTED BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT _____________________________________________ ATTORNEY TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN NAMED CORPORATION, WITH FULL POWER OF SUBSTITUTION ON THE PREMISES.
DATED _____________________, ________
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”) AND ARE “RESTRICTED SECURITIES” AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES ARE REGISTERED UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION IS OBTAINED TO THE EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED OR UNLESS SOLD IN COMPLIANCE WITH RULE 144 OF THE ACT.
HANCOCK JAFFE LABORATORIES, INC.
2016 OMNIBUS INCENTIVE PLAN
Hancock Jaffe Laboratories, Inc. sets forth herein the terms of its 2016 Omnibus Incentive Plan, as follows:
1. PURPOSE
The Plan is intended to enhance the ability of the Company and its Affiliates to attract and retain highly qualified officers, Non-employee Directors, employees, consultants and advisors, and to motivate such individuals to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, other share-based awards and cash awards. Any of these awards may, but need not, be made as performance incentives to reward attainment of performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein.
2. DEFINITIONS
For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:
2.1. “Acquiror” shall have the meaning set forth in Section 15.2.1.
2.2. “Affiliate” means any company or other trade or business that “controls,” is “controlled by” or is “under common control with” the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including any Subsidiary.
2.3. “Award” means a grant under the Plan of an Option, SAR, Restricted Stock, RSU, Other Share-based Award or cash award.
2.4. “Award Agreement” means a written agreement between the Company and a Grantee, or notice from the Company or an Affiliate to a Grantee that evidences and sets out the terms and conditions of an Award.
2.5. “Board” means the Board of Directors of the Company.
2.6. “Business Combination” shall have the meaning set forth in Section 15.2.2.
2.7. “Cause” shall be defined as that term is defined in the Grantee’s offer letter or other applicable employment agreement; or, if there is no such definition, “Cause” means, unless otherwise provided in the applicable Award Agreement: (i) the commission of any act by a Grantee constituting financial dishonesty against the Company or its Affiliates (which act would be chargeable as a crime under applicable law); (ii) a Grantee’s engaging in any other act of dishonesty, fraud, intentional misrepresentation, moral turpitude, illegality or harassment that would: (a) materially adversely affect the business or the reputation of the Company or any of its Affiliates with their respective current or prospective customers, suppliers, lenders or other third parties with whom such entity does or might do business or (b) expose the Company or any of its Affiliates to a risk of civil or criminal legal damages, liabilities or penalties; (iii) the repeated failure by a Grantee to follow the directives of the chief executive officer of the Company or any of its Affiliates or the Board; or (iv) any material misconduct, violation of the Company’s or Affiliates’ policies, or willful and deliberate non-performance of duty by the Grantee in connection with the business affairs of the Company or its Affiliates.
2.8. “Change in Control” shall have the meaning set forth in Section 15.2.2.
2.9. “Code” means the Internal Revenue Code of 1986.
2.10. “Committee” means the Compensation Committee of the Board, or such other committee as determined by the Board. The Compensation Committee of the Board may designate a subcommittee of its members to serve as the Committee (to the extent the Board has not designated another person, committee or entity as the Committee). Following the Initial Public Offering: (i) the Board shall cause the Committee to satisfy the applicable requirements of any securities exchange on which the Common Stock may then be listed; (ii) for purposes of Awards to Covered Employees intended to constitute Performance Awards, to the extent required by Section 162(m), Committee means all of the members of the Compensation Committee who are “outside directors” within the meaning of Section 162(m); and (iii) for purposes of Awards to Grantees who are subject to Section 16 of the Exchange Act, Committee means all of the members of the Compensation Committee who are “non-employee directors” within the meaning of Rule 16b-3 adopted under the Exchange Act.
2.11. “Company” means Hancock Jaffe Laboratories, Inc., a Delaware corporation.
2.12. “Common Stock” means the common stock of the Company.
2.13. “Consultant” means a consultant or advisor that provides bona fide services to the Company or any Affiliate and who qualifies as a consultant or advisor under Rule 701 of the Securities Act (during any period in which the Company is not a public company subject to the reporting requirements of the Exchange Act) or Form S-8 (during any period in which the Company is a public company subject to the reporting requirements of the Exchange Act).
2.14. “Covered Employee” means a Grantee who is a “covered employee” within the meaning of Section 162(m) as qualified by Section 12.4.
2.15. “Disability” shall be defined as that term is defined in the Grantee’s offer letter or other applicable employment agreement; or, if there is no such definition, “Disability” means, unless otherwise provided in the applicable Award Agreement, the Grantee is unable to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantee’s Service, “Disability” means “permanent and total disability” as set forth in Code Section 22(e)(3).
2.16. “Effective Date” means [Date], the date the Plan was approved by the Stockholders.
2.17. “Exchange Act” means the Securities Exchange Act of 1934.
2.18. “Fair Market Value” of a Share as of a particular date means (i) if the Common Stock is listed on a national securities exchange, the closing or last price of the Common Stock on the composite tape or other comparable reporting system for the applicable date, or if the applicable date is not a trading day, the trading day immediately preceding the applicable date, or (ii) if the Common Stock is not then listed on a national securities exchange, or the value of the Common Stock is not otherwise determinable, such value as determined by the Board.
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2.19. “Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law or sister-in-law, including adoptive relationships, of the applicable individual, any person sharing the applicable individual’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than 50% of the beneficial interest, a foundation in which any one or more of these persons (or the applicable individual) control the management of assets and any other entity in which one or more of these persons (or the applicable individual) own more than 50% of the voting interests.
2.20. “Grant Date” means the latest to occur of (i) the date as of which the Board approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 or (iii) such other date as may be specified by the Board in the Award Agreement.
2.21. “Grantee” means a person who receives or holds an Award.
2.22. “Holder” means, with respect to any Issued Shares, the person holding such Issued Shares, including the initial Grantee or any Permitted Transferee.
2.23. “Incentive Stock Option” means an “incentive stock option” within the meaning of Code Section 422.
2.24. “Incumbent Directors” shall have the meaning set forth in Section 15.2.2.
2.25. “Initial Public Offering” means the initial public offering of Shares pursuant to a registration statement (other than a Form S-8 or successor forms) filed with, and declared effective by, the SEC.
2.26. “Issued Shares” means, collectively, all outstanding Shares issued pursuant to Awards (including outstanding Shares of Restricted Stock prior to or after vesting and Shares issued in connection with the exercise of an Option or SAR).
2.27. “New Shares” shall have the meaning set forth in Section 15.1.
2.28. “Non-employee Director” means a member of the Board or the board of directors of an Affiliate, in each case who is not an officer or employee of the Company or any Affiliate.
2.29. “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.
2.30. “Offered Shares” shall have the meaning set forth in Section 17.4.1.
2.31. “Offering” shall have the meaning set forth in Section 17.5.
2.32. “Option” means an option to purchase one or more Shares pursuant to the Plan.
2.33. “Option Price” means the exercise price for each Share subject to an Option.
2.34. “Other Share-based Awards” means Awards consisting of Share units, or other Awards, valued in whole or in part by reference to, or otherwise based on, Shares.
2.35. “Performance Award” means an Award made subject to the attainment of performance goals (as described in Section 12) over a performance period of at least one year.
2.36. “Permitted Transferee” means any of the following to whom a Holder may transfer Issued Shares hereunder (as set forth in Section 17.11.3): the Holder’s spouse, children (natural or adopted), stepchildren or a trust for their sole benefit of which the Holder is the settlor; provided, however, that any such trust does not require or permit distribution of any Issued Shares during the term of the Plan unless subject to its terms. Upon the death of the Holder, the term Permitted Transferees shall also include such deceased Holder’s estate, executors, administrators, personal representatives, heirs, legatees and distributees, as the case may be.
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2.37. “Plan” means this Hancock Jaffe Laboratories, Inc. 2016 Omnibus Incentive Plan.
2.38. “Purchase Price” means the purchase price for each Share pursuant to a grant of Restricted Stock.
2.39. “Restricted Period” shall have the meaning set forth in Section 10.1.
2.40. “Restricted Stock” means restricted Shares, awarded to a Grantee pursuant to Section 10.
2.41. “Restricted Stock Unit” or “RSU” means a bookkeeping entry representing the equivalent of Shares, awarded to a Grantee pursuant to Section 10.
2.42. “SAR Exercise Price” means the per Share exercise price of a SAR granted to a Grantee under Section 9.
2.43. “SEC” means the United States Securities and Exchange Commission.
2.44. “Section 162(m)” means Code Section 162(m).
2.45. “Section 409A” means Code Section 409A.
2.46. “Securities Act” means the Securities Act of 1933.
2.47. “Separation from Service” means the termination of a Service Provider’s Service, whether initiated by the Service Provider or the Company or an Affiliate; provided, however, that if any Award governed by Section 409A is to be distributed on a Separation from Service, then the definition of Separation from Service for such purposes shall comply with the definition provided in Section 409A.
2.48. “Service” means service as a Service Provider to the Company or an Affiliate. Unless otherwise provided in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate.
2.49. “Service Provider” means an employee, officer, non-employee member of the Board or Consultant of the Company or an Affiliate.
2.50. “Share” means a share of Common Stock.
2.51. “Stock Appreciation Right” or “SAR” means a right granted to a Grantee pursuant to Section 9.
2.52. “Stockholders” means the stockholders of the Company.
2.53. “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Code Section 424(f).
2.54. “Substitute Award” means any Award granted in assumption of or in substitution for an award of a company or business acquired by the Company or an Affiliate or with which the Company or an Affiliate combines.
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2.55. “Ten Percent Stockholder” means an individual who owns more than 10% of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Code Section 424(d) shall be applied.
2.56. “Termination Date” means the date that is 10 years after the Effective Date, unless the Plan is earlier terminated by the Board under Section 5.2.
2.57. “Transition Period” means the period beginning with the consummation of an Initial Public Offering and ending as of the earlier of (i) the date of the first annual meeting of Stockholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which the Initial Public Offering occurs and (ii) the expiration of the “reliance period” under Treasury Regulation Section 1.162-27(f)(2).
2.58. “Voting Securities” shall have the meaning set forth in Section 15.2.2.
3. ADMINISTRATION OF THE PLAN
3.1 General.The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s certificate of incorporation and bylaws and applicable law. The Board shall have the power and authority to delegate its responsibilities hereunder to the Committee, which shall have full authority to act in accordance with its charter (as in effect from time to time), and with respect to the power and authority of the Board to act hereunder, all references to the Board shall be deemed to include a reference to the Committee, unless such power or authority is specifically reserved by the Board. Except as specifically provided in Section 14 or as otherwise may be required by applicable law, regulatory requirement or the certificate of incorporation or the bylaws of the Company, the Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan. Following the Initial Public Offering, the Committee shall administer the Plan; provided, however, the Board shall retain the right to exercise the authority of the Committee to the extent consistent with applicable law and the applicable requirements of any securities exchange on which the Common Stock may then be listed. All actions, determinations and decisions by the Board or the Committee under the Plan or any Award Agreement, or with respect to any Award, shall be in the sole discretion of the Board and shall be final, binding and conclusive on all persons. Without limitation, the Board shall have full and final power and authority, subject to the other terms and conditions of the Plan, to:
(i) designate Grantees;
(ii) determine the type or types of Awards to be made to Grantees;
(iii) determine the number of Shares to be subject to an Award;
(iv) establish the terms and conditions of each Award (including the Option Price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the Shares subject thereto and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options);
(v) prescribe the form of each Award Agreement; and
(vi) amend, modify or supplement the terms of any outstanding Award, including the authority, in order to effectuate the purposes of the Plan, to modify Awards to foreign nationals or individuals who are employed outside the United States to recognize differences in local law, tax policy or custom.
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3.2. Award Agreements; Clawbacks.
The grant of any Award may be contingent upon the Grantee executing the appropriate Award Agreement. The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof, or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is terminated for Cause.
All awards, amounts or benefits received or outstanding under the Plan shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any Company clawback or similar policy or any applicable law related to such actions, as may be in effect from time to time. A Grantee’s acceptance of an Award shall be deemed to constitute the Grantee’s acknowledgement of and consent to the Company’s application, implementation and enforcement of any applicable Company clawback or similar policy that may apply to the Grantee, whether adopted prior to or following the Effective Date, and any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, and the Grantee’s agreement that the Company may take such actions as may be necessary to effectuate any such policy or applicable law, without further consideration or action.
3.3. Deferral Arrangement.
The Board may permit or require the deferral of any Award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish and in accordance with Section 409A, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Share units.
3.4. No Liability.
No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any Award or Award Agreement.
3.5. Book Entry.
Notwithstanding any other provision of the Plan to the contrary, the Company may elect to satisfy any requirement under the Plan for the delivery of stock certificates through the use of book entry.
3.6. Director Awards.
The maximum value of Awards granted during any calendar year to any Non-employee Director, taken together with any cash fees paid to such Non-employee Director during the calendar year and the value of awards granted to the Non-employee Director under any other equity compensation plan of the Company or an Affiliate during the calendar year, shall not exceed the following in total value (calculating the value of any Awards or other equity compensation plan awards based on the grant date fair value for financial reporting purposes): (i) $500,000 for the Chair of the Board and (ii) $250,000 for each Non-employee Director other than the Chair of the Board; provided, however, that awards granted to Non-employee Directors upon their initial election to the Board or the board of directors of an Affiliate shall not be counted towards the limit under this Section 3.6. Any Awards or other equity compensation plan awards that are scheduled to vest over a period of more than one calendar year shall be applied pro rata (based on grant date fair value as provided above) for purposes of the limit under this Section 3.6 based on the number of years over which such awards are scheduled to vest.
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4. STOCK SUBJECT TO THE PLAN
4.1. Authorized Number of Shares.
Subject to adjustment under Section 15, the aggregate number of Shares that may be initially issued pursuant to the Plan is 3,300,000. The total number of Shares described in the preceding sentence shall be available for issuance under Incentive Stock Options. Shares issued under the Plan may consist in whole or in part of authorized but unissued Shares, treasury Shares or Shares purchased on the open market or otherwise. No later than the end of the Transition Period, the maximum number of Shares for each type of Other Share-based Award, and the maximum amount of cash for any cash-based Award, intended to qualify as “performance-based compensation” under Section 162(m) granted to any Grantee in any specified period shall be established by the Company and approved by the Stockholders.
4.2. Share Counting.
Any Award settled in cash shall not be counted as issued Shares for any purpose under the Plan. If any Award expires, or is terminated, surrendered or forfeited, in whole or in part, the unissued Shares covered by such Award shall again be available for the grant of Awards. If Shares issued pursuant to the Plan are repurchased by, or are surrendered or forfeited to the Company at no more than cost, such Shares shall again be available for the grant of Awards. If Shares issuable upon exercise, vesting or settlement of an Award, or Shares owned by a Grantee (which are not subject to any pledge or other security interest), are surrendered or tendered to the Company in payment of the Option Price or Purchase Price of an Award or any taxes required to be withheld in respect of an Award, in each case, in accordance with the terms and conditions of the Plan and any applicable Award Agreement, such surrendered or tendered Shares shall again be available for the grant of Awards. Substitute Awards shall not be counted against the number of Shares available for the grant of Awards.
5. EFFECTIVE DATE, DURATION AND AMENDMENTS
5.1. Term.
The Plan shall be effective as of the Effective Date, provided that it has been approved by the Stockholders. The Plan shall terminate automatically on the 10-year anniversary of the Effective Date and may be terminated on any earlier date as provided in Section 5.2.
5.2. Amendment and Termination of the Plan.
The Board may, at any time and from time to time, amend, suspend or terminate the Plan as to any Awards which have not been made. An amendment shall be contingent on approval of the Stockholders to the extent stated by the Board, required by applicable law or required by applicable securities exchange listing requirements. No Awards shall be made after the Termination Date. The applicable terms of the Plan, and any terms and conditions applicable to Awards granted prior to the Termination Date, shall survive the termination of the Plan and continue to apply to such Awards. No amendment, suspension or termination of the Plan shall, without the consent of the Grantee, materially impair rights or obligations under any Award theretofore awarded.
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6. AWARD ELIGIBILITY AND LIMITATIONS
6.1. Service Providers.
Subject to this Section 6, Awards may be made to any Service Provider as the Board may determine and designate from time to time.
6.2. Successive Awards.
An eligible person may receive more than one Award, subject to such restrictions as are provided herein.
6.3. Stand-Alone, Additional, Tandem, and Substitute Awards.
Awards may be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any Affiliate or any business entity to be acquired by the Company or an Affiliate, or any other right of a Grantee to receive payment from the Company or any Affiliate. Such additional, tandem or substitute or exchange Awards may be granted at any time. If an Award is granted in substitution or exchange for another award, the Board shall have the right to require the surrender of such other award in consideration for the grant of the new Award. Subject to the requirements of applicable law, the Board may make Awards in substitution or exchange for any other award under another plan of the Company, any Affiliate or any business entity to be acquired by the Company or an Affiliate. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any Affiliate, in which the value of Shares subject to the Award is equivalent in value to the cash compensation (for example, RSUs or Restricted Stock).
7. AWARD AGREEMENT
The grant of any Award may be contingent upon the Grantee executing an appropriate Award Agreement, in such form or forms as the Board shall from time to time determine. Without limiting the foregoing, an Award Agreement may be provided in the form of a notice which provides that acceptance of the Award constitutes acceptance of all terms of the Plan and the notice. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.
8. TERMS AND CONDITIONS OF OPTIONS
8.1. Option Price.
The Option Price of each Option shall be fixed by the Board and stated in the related Award Agreement. The Option Price of each Option intended to be an Incentive Stock Option (except those that constitute Substitute Awards) shall be at least the Fair Market Value on the Grant Date; provided, however, that in the event that a Grantee is a Ten Percent Stockholder as of the Grant Date, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market Value on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a Share.
8.2. Vesting.
Subject to Section 8.3, each Option shall become exercisable at such times and under such conditions (including performance requirements) as stated in the Award Agreement.
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8.3. Term.
Each Option shall terminate, and all rights to purchase Shares thereunder shall cease, upon the expiration of the Option term stated in the Award Agreement not to exceed 10 years from the Grant Date, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Board and stated in the related Award Agreement; provided, however, that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option at the Grant Date shall not be exercisable after the expiration of five years from its Grant Date.
8.4. Limitations on Exercise of Option.
Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, (i) prior to the date the Plan is approved by the Stockholders as provided herein or (ii) after the occurrence of an event which results in termination of the Option.
8.5. Method of Exercise.
An Option that is exercisable may be exercised by the Grantee’s delivery of a notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. To be effective, notice of exercise must be made in accordance with procedures established by the Company from time to time.
8.6. Rights of Holders of Options.
Unless otherwise provided in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a Stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject Shares or to direct the voting of the subject Shares) until the Shares covered thereby are fully paid and issued to him. Except as provided in Section 15 or the related Award Agreement, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.
8.7. Delivery of Stock Certificates.
Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the Shares subject to the Option.
8.8. Limitations on Incentive Stock Options.
An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the Shares with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.
8.9. Early Exercise.
An Option may, but need not, include a provision whereby the Grantee may elect at any time before the Grantee’s Separation from Service to exercise the Option as to any part or all of the Shares subject to the Option prior to the full vesting of the Option. Any unvested Shares so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate.
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9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS
9.1. Right to Payment.
A SAR shall confer on the Grantee a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value on the date of exercise over (ii) the SAR Exercise Price. The Award Agreement for a SAR shall specify the SAR Exercise Price. SARs may be granted alone or in conjunction with all or part of an Option or at any subsequent time during the term of such Option or in conjunction with all or part of any other Award.
9.2. Other Terms.
The Board shall determine at the Grant Date or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following Separation from Service or upon other conditions, the method of exercise, whether or not a SAR shall be in tandem or in combination with any other Award and any other terms and conditions of any SAR.
9.3. Term of SARs.
The term of a SAR granted under the Plan shall be determined by the Board; provided, however, that such term shall not exceed 10 years.
9.4. Payment of SAR Amount.
Upon exercise of a SAR, a Grantee shall be entitled to receive payment from the Company (in cash or Shares, as set forth in the Award Agreement) in an amount determined by multiplying:
(i) the difference between the Fair Market Value on the date of exercise over the SAR Exercise Price; by
(ii) the number of Shares with respect to which the SAR is exercised.
10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND RESTRICTED STOCK UNITS
10.1. Restrictions.
At the time of grant, the Board may establish a period of time (a “Restricted Period”) and any additional restrictions including the satisfaction of corporate or individual performance objectives applicable to an Award of Restricted Stock or RSUs. Each Award of Restricted Stock or RSUs may be subject to a different Restricted Period and additional restrictions. Neither Restricted Stock nor RSUs may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the Restricted Period or prior to the satisfaction of any other applicable restrictions.
10.2. Restricted Stock Certificates.
The Company shall issue Shares, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates or other evidence of ownership representing the total number of Shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Board may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse or (ii) such certificates shall be delivered to the Grantee; provided, however, that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and make appropriate reference to the restrictions imposed under the Plan and the Award Agreement.
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10.3. Rights of Holders of Restricted Stock.
Unless otherwise provided in the applicable Award Agreement, holders of Restricted Stock shall have rights as Stockholders, including voting and dividend rights.
10.4. Rights of Holders of RSUs.
10.4.1. Settlement of RSUs.
RSUs may be settled in cash or Shares, as set forth in the Award Agreement. The Award Agreement shall also set forth whether the RSUs shall be settled (i) within the time period specified in Section 17.9 for short term deferrals or (ii) otherwise within the requirements of Section 409A, in which case the Award Agreement shall specify upon which events such RSUs shall be settled.
10.4.2. Voting and Dividend Rights.
Unless otherwise provided in the applicable Award Agreement, holders of RSUs shall not have rights as Stockholders, including voting or dividend or dividend equivalents rights.
10.4.3. Creditor’s Rights.
A holder of RSUs shall have no rights other than those of a general creditor of the Company. RSUs represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.
10.5. Purchase of Restricted Stock.
The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the Shares represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the related Award Agreement. If specified in the Award Agreement, the Purchase Price may be deemed paid by Services already rendered. The Purchase Price shall be payable in a form described in Section 11 or, if so determined by the Board, in consideration for past Services rendered.
10.6. Delivery of Shares.
Upon the expiration or termination of any Restricted Period and the satisfaction of any other conditions prescribed by the Board, the restrictions applicable to Shares of Restricted Stock or RSUs settled in Shares shall lapse, and, unless otherwise provided in the applicable Award Agreement, a stock certificate for such Shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee’s beneficiary or estate, as the case may be.
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11. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK
11.1. General Rule.
Payment of the Option Price for the Shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company, except as provided in this Section 11.
11.2. Surrender of Shares.
To the extent the Award Agreement so provides, payment of the Option Price for Shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock may be made all or in part through the tender to the Company of Shares, which Shares shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price for Restricted Stock has been paid thereby, at their Fair Market Value on the date of exercise or surrender. Notwithstanding the foregoing, in the case of an Incentive Stock Option, the right to make payment in the form of already-owned Shares may be authorized only at the time of grant.
11.3. Cashless Exercise.
With respect to an Option only (and not with respect to Restricted Stock) following the Initial Public Offering, to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price may be made all or in part by delivery (on a form acceptable to the Company) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell Shares and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 17.3.
11.4. Other Forms of Payment.
To the extent the Award Agreement so provides, payment of the Option Price or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules, including the Company’s withholding of Shares otherwise due to the exercising Grantee.
12. TERMS AND CONDITIONS OF PERFORMANCE AWARDS
12.1. Performance Conditions.
The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Board. The Board may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may reduce the amounts payable under any Award subject to performance conditions, except as limited under Section 12.2 in the case of a Performance Award intended to qualify under Section 162(m).
12.2. Performance Awards Granted to Designated Covered Employees.
If and to the extent that the Board determines that a Performance Award to be granted to a Grantee who is designated by the Board as likely to be a Covered Employee should qualify as “performance-based compensation” for purposes of Section 162(m), the grant, exercise and/or settlement of such Performance Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 12.2. Notwithstanding anything herein to the contrary, the Board may provide for Performance Awards to Covered Employees that are not intended qualify as “performance-based compensation” for purposes of Section 162(m).
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12.2.1. Performance Goals Generally.
The performance goals for Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Board consistent with this Section 12.2. Following the end of the Transition Period, performance goals shall be objective and shall otherwise meet the requirements of Section 162(m), including the requirement that the level or levels of performance targeted by the Board result in the achievement of performance goals being “substantially uncertain.” The Board may determine that Performance Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of the Performance Awards. Performance goals may be established on a Company-wide basis, or with respect to one or more business units, divisions, Affiliates or business segments, as applicable. Performance goals may be absolute or relative (to the performance of one or more comparable companies or indices). Measurement of performance goals may exclude the impact of charges for restructuring, discontinued operations and other extraordinary, unusual or non-recurring items, and the cumulative effects of tax or accounting changes (each as defined by generally accepted accounting principles and as identified in the Company’s financial statements or other SEC filings). Performance goals may differ for Performance Awards granted to any one Grantee or to different Grantees.
12.2.2. Business Criteria.
One or more of the following business criteria for the Company, on a consolidated basis, and/or specified Affiliates or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used exclusively by the Board in establishing performance goals for Performance Awards: (i) cash flow; (ii) earnings per share, as adjusted for any stock split, stock dividend or other recapitalization; (iii) earnings measures; (iv) return on equity; (v) total stockholder return; (vi) share price performance, as adjusted for any stock split, stock dividend or other recapitalization; (vii) return on capital; (viii) revenue; (ix) income; (x) profit margin; (xi) return on operating revenue; (xii) brand recognition or acceptance; (xiii) customer satisfaction; (xiv) productivity; (xv) expense targets; (xvi) market share; (xvii) cost control measures; (xviii) balance sheet metrics; (xix) strategic initiatives; (xx) implementation, completion or attainment of measurable objectives with respect to recruitment or retention of personnel or employee satisfaction; or (xxi) any other business criteria established by the Board; provided, however, that such business criteria shall include any derivations of business criteria listed above (e.g., income shall include pre-tax income, net income and operating income).
12.2.3. Timing for Establishing Performance Goals.
Following the Transition Period, performance goals shall be established not later than 90 days after the beginning of any performance period applicable to Performance Awards, or at such other date as may be required or permitted for “performance-based compensation” under Section 162(m).
12.2.4. Settlement of Performance Awards; Other Terms.
Settlement of Performance Awards may be in cash, Shares, other Awards or other property. The Board may reduce the amount of a settlement otherwise to be made in connection with such Performance Awards.
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12.3. Written Determinations.
All determinations by the Board as to the establishment of performance goals, the amount of any Performance Award pool or potential individual Performance Awards and the achievement of performance goals relating to Performance Awards, shall be made in writing in the case of any Award intended to qualify as “performance-based compensation” under Section 162(m) to the extent required by Section 162(m). To the extent permitted by Section 162(m), the Board may delegate any responsibility relating to Performance Awards.
12.4. Status of Section 12.2 Awards under Section 162(m).
The provisions of this Section 12.4 are applicable following the Transition Period. It is the intent of the Company that Performance Awards under Section 12.2 granted to persons who are designated by the Board as likely to be Covered Employees within the meaning of Section 162(m) shall, if so designated by the Board, qualify as “performance-based compensation” within the meaning of Section 162(m). Accordingly, the terms of Section 12.2, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Section 162(m). The foregoing notwithstanding, because the Board cannot determine with certainty whether a given Grantee will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Board, at the time of grant of Performance Awards, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards does not comply or is inconsistent with the requirements of Section 162(m), such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.
13. other SHARE-based awards
13.1. Grant of Other Share-based Awards.
Other Share-based Awards may be granted either alone or in addition to or in conjunction with other Awards. Other Share-based Awards may be granted in lieu of other cash or other compensation to which a Service Provider is entitled from the Company or may be used in the settlement of amounts payable in Shares under any other compensation plan or arrangement of the Company, including any other Company incentive compensation plan. The Board shall determine the persons to whom and the time or times at which such Awards will be made, the number of Shares to be granted pursuant to such Awards, and all other terms and conditions of such Awards. Unless the Board determines otherwise, any such Award shall be confirmed by an Award Agreement, which shall contain such provisions as the Board determines to be necessary or appropriate to carry out the intent of the Plan with respect to such Award.
13.2. Terms of Other Share-based Awards.
Any Common Stock subject to Awards made under this Section 13 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the Shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.
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14. REQUIREMENTS OF LAW
14.1. General.
The Company shall not be required to sell or issue any Shares under any Award if the sale or issuance of such Shares would constitute a violation by the Grantee, any other individual exercising an Option or the Company of any provision of any law or regulation of any governmental authority, including any federal or state securities laws or regulations. If at any time the Board determines that the listing, registration or qualification of any Shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of Shares hereunder, no Shares may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Specifically, in connection with the Securities Act, upon the exercise of any Option or the delivery of any Shares underlying an Award, unless a registration statement under such Act is in effect with respect to the Shares covered by such Award, the Company shall not be required to sell or issue such Shares unless the Board has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such Shares pursuant to an exemption from registration under the Securities Act. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or the issuance of Shares pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option shall not be exercisable until the Shares covered by such Option are registered or are exempt from registration, the exercise of such Option (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.
14.2. Section 25102(o) of the California Corporations Code.
The Plan is intended to comply with Section 25102(o) of the California Corporations Code. In that regard, to the extent required by Section 25102(o), (i) the terms of any Options or SARs, to the extent vested and exercisable upon a Grantee’s Separation from Service, shall include any minimum exercise periods following Separation from Service specified by Section 25102(o), and (ii) any repurchase right of the Company with respect to Shares issued under the Plan shall include a minimum 90-day notice requirement. Any provision of the Plan which is inconsistent with Section 25102(o) shall, without further act or amendment by the Company or the Board, be reformed to comply with the requirements of Section 25102(o).
14.3. Rule 16b-3.
During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards and the exercise of Options will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Board or Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Board, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Board may modify the Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.
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15. EFFECT OF CHANGES IN CAPITALIZATION
15.1. Adjustments for Changes in Capital Structure.
Subject to any required action by the Stockholders, in the event of any change in the Common Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the Stockholders in a form other than Shares (excepting normal cash dividends) that has a material effect on the Fair Market Value, appropriate and proportionate adjustments shall be made in the number and class of shares subject to the Plan and to any outstanding Awards, and in the Option Price, SAR Exercise Price or Purchase Price per Share of any outstanding Awards in order to prevent dilution or enlargement of Grantees’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” If a majority of the Shares which are of the same class as the Shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to a Change in Control) shares of another corporation (the “New Shares”), the Board may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of Shares subject to, and the Option Price, SAR Exercise Price or Purchase Price per Share of, the outstanding Awards shall be adjusted in a fair and equitable manner. Any fractional share resulting from an adjustment pursuant to this Section 15.1 shall be rounded down to the nearest whole number and the Option Price, SAR Exercise Price or Purchase Price per share shall be rounded up to the nearest whole cent. In no event may the exercise price of any Award be decreased to an amount less than the par value, if any, of the stock subject to the Award. The Board may also make such adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate. Adjustments determined by the Board pursuant to this Section 15.1 shall be made in accordance with Section 409A to the extent applicable.
15.2. Change in Control.
15.2.1. Consequences of a Change in Control.
Subject to the requirements and limitations of Section 409A if applicable, the Board may provide for any one or more of the following in connection with a Change in Control, which such actions need not be the same for all Grantees:
(a) Accelerated Vesting. The Board may provide in any Award Agreement, or in the event of a Change in Control may take such actions as it deems appropriate to provide, for the acceleration of the exercisability, vesting and/or settlement in connection with such Change in Control of each or any outstanding Award or portion thereof and Shares acquired pursuant thereto upon such terms and conditions, including termination of the Grantee’s Service prior to, upon, or following such Change in Control, to such extent as determined by the Board.
(b) Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing, successor or purchasing corporation or other business entity or parent thereof, as the case may be (the “Acquiror”), may, without the consent of any Grantee, either assume or continue the Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable. For purposes of this Section 15.2.1, an Award denominated in Shares shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for each Share subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a Stockholder on the effective date of the Change in Control was entitled; provided, however, that if such consideration is not solely common stock of the Acquiror, the Board may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each Share subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per Share consideration received by Stockholders pursuant to the Change in Control. If any portion of such consideration may be received by Stockholders pursuant to the Change in Control on a contingent or delayed basis, the Board may determine such Fair Market Value as of the time of the Change in Control on the basis of the Board’s estimate of the present value of the probable future payment of such consideration. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.
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(c) Cash-Out of Awards. The Board may, without the consent of any Grantee, determine that, upon the occurrence of a Change in Control, each or any Award or a portion thereof outstanding immediately prior to the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested Share (and each unvested Share, if so determined by the Board) subject to such canceled Award in (i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control or (iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair Market Value of the consideration to be paid per Share in the Change in Control, reduced by the exercise or purchase price per Share, if any, under such Award. If any portion of such consideration may be received by Stockholders pursuant to the Change in Control on a contingent or delayed basis, the Board may determine such Fair Market Value as of the time of the Change in Control on the basis of the Board’s estimate of the present value of the probable future payment of such consideration. In the event such determination is made by the Board, the amount of such payment (reduced by applicable withholding taxes, if any) shall be paid to Grantees in respect of the vested portions of their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards. For avoidance of doubt, if the amount determined pursuant to this Section 15.2.1(c) for an Option or SAR is zero or less, the affected Option or SAR may be cancelled without any payment therefore.
15.2.2. Change in Control Defined.
Unless other provided in the applicable Award Agreement, a “Change in Control” means the consummation of any of the following events:
(a) the acquisition, other than from the Company, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), other than the Company or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act) or employee benefit plan of the Company, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Voting Securities”); or
(b) a reorganization, merger, consolidation or recapitalization of the Company (a “Business Combination”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities; or
(c) a complete liquidation or dissolution of the Company, or a sale of all or substantially all of the assets of the Company; or
(d) during any period of 24 consecutive months, the Incumbent Directors cease to constitute a majority of the Board ; “Incumbent Directors” means individuals who were members of the Board at the beginning of such period or individuals whose election or nomination for election to the Board by the Stockholders was approved by a vote of at least a majority of the then Incumbent Directors (but excluding any individual whose initial election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors).
Notwithstanding the foregoing, if it is determined that an Award is subject to the requirements of Section 409A and payable upon a Change in Control, the Company will not be deemed to have undergone a Change in Control for purposes of the Plan unless the Company is deemed to have undergone a “change in control event” pursuant to the definition of such term in Section 409A.
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15.3. Adjustments.
Adjustments under this Section 15 related to Shares or other securities of the Company shall be made by the Board. No fractional Shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole Share.
16. No Limitations on Company
The making of Awards shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate, dissolve or liquidate, or to sell or transfer all or any part of its business or assets.
17. TERMS APPLICABLE GENERALLY TO AWARDS GRANTED UNDER THE PLAN
17.1. Disclaimer of Rights.
No provision in the Plan or in any Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company or any Affiliate either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company or any Affiliate. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise provided in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a Service Provider. The obligation of the Company to pay any benefits pursuant to the Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.
17.2. Nonexclusivity of the Plan.
Neither the adoption of the Plan nor the submission of the Plan to the Stockholders for approval shall be construed as creating any limitations upon the right or authority of the Board or its delegate to adopt such other compensation arrangements as the Board or its delegate determines desirable.
17.3. Withholding Taxes.
The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state or local taxes of any kind required by law to be withheld (i) with respect to the vesting of or other lapse of restrictions applicable to an Award, (ii) upon the issuance of any Shares upon the exercise of an Option or SAR or (iii) otherwise due in connection with an Award. At the time of such vesting, lapse or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Board, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to withhold the minimum required number of Shares otherwise issuable to the Grantee as may be necessary to satisfy such withholding obligation or (ii) by delivering to the Company or the Affiliate Shares already owned by the Grantee. The Shares so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the Shares used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 17.3 may satisfy his or her withholding obligation only with Shares that are not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements.
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17.4. Right of First Refusal; Right to Repurchase.
17.4.1. Right of First Refusal.
Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Holder is a party, at any time prior to registration by the Company of its Common Stock under Section 12 of the Exchange Act, in the event that the Holder desires at any time to sell or otherwise transfer all or any part of such Holder’s Issued Shares (to the extent vested), the Holder first shall give written notice to the Company of the Holder’s intention to make such transfer. Such notice shall state the number of Issued Shares which the Holder proposes to sell (the “Offered Shares”), the price and the terms at which the proposed sale is to be made and the name and address of the proposed transferee. At any time within 30 days after the receipt of such notice by the Company, the Company or its assigns may elect to purchase all or any portion of the Offered Shares at the price and on the terms offered by the proposed transferee and specified in the notice. The Company or its assigns shall exercise this right by mailing or delivering written notice to the Holder within the foregoing 30-day period. If the Company or its assigns elect to exercise its purchase rights under this Section 17.4.1, the closing for such purchase shall, in any event, take place within 45 days after the receipt by the Company of the initial notice from the Holder. In the event that the Company or its assigns do not elect to exercise such purchase right, or in the event that the Company or its assigns do not pay the full purchase price within such 45-day period, the Holder may, within 60 days thereafter, sell the Offered Shares to the proposed transferee at the same price and on the same terms as specified in the Holder’s notice. Any Issued Shares purchased by such proposed transferee shall continue to be subject to the terms of the Plan. Any Issued Shares not sold to the proposed transferee shall remain subject to the Plan.
17.4.2. Right of Repurchase.
Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Grantee is a party, at any time prior to registration by the Company of its Common Stock under Section 12 of the Exchange Act, in the case of any Grantee whose Separation from Service is for Cause, or where the Grantee has, in the Board’s reasonable determination, taken any action prior to or following his Separation of Service which would have constituted grounds for Cause, the Company shall have the right, exercisable at any time and from time to time thereafter, to repurchase from the Grantee (or any successor in interest by purchase, gift or other mode of transfer) any Shares issued to such Grantee under the Plan for the purchase price paid by the Grantee for such Shares (or the Fair Market Value of such Common Stock at the time of repurchase, if lower).
17.5. Market Standoff Requirement.
Unless otherwise provided in the applicable Award Agreement, stockholders’ agreement or other agreement to which a Grantee is a party, in connection with any underwritten public offering of its Common Stock (“Offering”) and upon request of the Company or the underwriters managing the Offering, Grantees shall not be permitted to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise directly or indirectly dispose of any Shares delivered under the Plan (other than those Shares included in the Offering) without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) from the effective date of the registration statement with respect to such Offering as may be requested by the Company or such managing underwriters and to execute an agreement reflecting the foregoing as may be requested by the underwriters in connection with such Offering.
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17.6. Other Provisions.
Each Award Agreement may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Board. In the event of any conflict between the terms of an employment agreement and the Plan, the terms of the employment agreement shall govern.
17.7. Severability.
If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.
17.8. Governing Law.
The Plan shall be governed by and construed in accordance with the laws of the State of Delaware without giving effect to the principles of conflicts of law.
17.9. Section 409A.
The Plan is intended to comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Plan shall be interpreted and administered to be in compliance therewith. Any payments described in the Plan that are due within the “short-term deferral period” as defined in Section 409A shall not be treated as deferred compensation unless applicable laws require otherwise. Notwithstanding anything to the contrary in the Plan, to the extent required to avoid accelerated taxation and tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six-month period immediately following the Grantee’s Separation from Service shall instead be paid on the first payroll date after the six-month anniversary of the Grantee’s Separation from Service (or the Grantee’s death, if earlier). Notwithstanding the foregoing, neither the Company nor the Committee shall have any obligation to take any action to prevent the assessment of any excise tax or penalty on any Grantee under Section 409A and neither the Company nor the Board shall have any liability to any Grantee for such tax or penalty.
17.10. Separation from Service.
The Board shall determine the effect of a Separation from Service upon Awards, and such effect shall be set forth in the applicable Award Agreement. Without limiting the foregoing, the Board may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, the actions that will be taken upon the occurrence of a Separation from Service, including accelerated vesting or termination, depending upon the circumstances surrounding the Separation from Service.
17.11. Transferability of Awards and Issued Shares.
17.11.1. Transfers in General.
Except as provided in Section 17.11.2, no Award shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution, and, during the lifetime of the Grantee, only the Grantee personally (or the Grantee’s personal representative) may exercise rights under the Plan.
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17.11.2. Family Transfers.
If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Award (other than Incentive Stock Options) to any Family Member. For the purpose of this Section 17.11.2, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights or (iii) a transfer to an entity in which more than 50% of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 17.11.2, any such Award shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Awards are prohibited except to Family Members of the original Grantee in accordance with this Section 17.11.2 or by will or the laws of descent and distribution.
17.11.3. Issued Shares.
No Issued Shares shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of or encumbered, whether voluntarily or by operation of law, unless (i) such transfer is in compliance with the terms of the applicable Award, all applicable securities laws, and with the terms and conditions of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3), (ii) such transfer does not cause the Company to become subject to the reporting requirements of the Exchange Act, and (iii) the transferee consents in writing to be bound by the terms and conditions of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3). In connection with any proposed transfer, the Board may require the transferor to provide at the transferor’s own expense an opinion of counsel to the transferor, satisfactory to the Board, that such transfer is in compliance with all foreign, federal and state securities laws. Any attempted disposition of Issued Shares not in accordance with the terms and conditions of this Section 17.11.3 shall be null and void, and the Company shall not reflect on its records any change in record ownership of any Issued Shares as a result of any such disposition, shall otherwise refuse to recognize any such disposition and shall not in any way give effect to any such disposition of Issued Shares. Subject to the foregoing general provisions, and unless otherwise provided in the applicable Award Agreement, Issued Shares may be transferred pursuant to the following specific terms and conditions:
(a) Transfers to Permitted Transferees. The Holder may sell, assign, transfer or give away any or all of the Issued Shares to Permitted Transferees; provided, however, that following such sale, assignment or other transfer, such Issued Shares shall continue to be subject to the terms of the Plan (including Sections 17.4 and 17.5 and this Section 17.11.3) and such Permitted Transferee(s) shall, as a condition to any such transfer, deliver a written acknowledgment to that effect to the Company.
(b) Transfers upon Death. Upon the death of the Holder, any Issued Shares then held by the Holder at the time of such death and any Issued Shares acquired thereafter by the Holder’s legal representative shall be subject to the terms and conditions of the Plan, and the Holder’s estate, executors, administrators, personal representatives, heirs, legatees and distributees shall be obligated to convey such Issued Shares to the Company or its assigns under the terms contemplated hereby.
17.12. Dividends and Dividend Equivalent Rights.
If specified in the Award Agreement, the recipient of an Award may be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the Common Stock or other securities covered by an Award. The terms and conditions of a dividend equivalent right may be set forth in the Award Agreement. Dividend equivalents credited to a Grantee may be paid currently or may be deemed to be reinvested in additional Shares or other securities of the Company at a price per unit equal to the Fair Market Value on the date that such dividend was paid to Stockholders.
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17.13. Plan Construction.
In the Plan, unless otherwise stated, the following uses apply: (i) references to a statute or law refer to the statute or law and any amendments and any successor statutes or laws, and to all valid and binding governmental regulations, court decisions and other regulatory and judicial authority issued or rendered thereunder, as amended, or their successors, as in effect at the relevant time; (ii) in computing periods from a specified date to a later specified date, the words “from” and “commencing on” (and the like) mean “from and including,” and the words “to,” “until” and “ending on” (and the like) mean “to and including”; (iii) indications of time of day shall be based upon the time applicable to the location of the principal headquarters of the Company; (iv) the words “include,” “includes” and “including” (and the like) mean “include, without limitation,” “includes, without limitation” and “including, without limitation” (and the like), respectively; (v) all references to articles and sections are to articles and sections in the Plan; (vi) all words used shall be construed to be of such gender or number as the circumstances and context require; (vii) the captions and headings of articles and sections have been inserted solely for convenience of reference and shall not be considered a part of the Plan, nor shall any of them affect the meaning or interpretation of the Plan or any of its provisions; (viii) any reference to an agreement, plan, policy, form, document or set of documents, and the rights and obligations of the parties under any such agreement, plan, policy, form, document or set of documents, shall mean such agreement, plan, policy, form, document or set of documents as amended from time to time, and any and all modifications, extensions, renewals, substitutions or replacements thereof; and (ix) all accounting terms not specifically defined shall be construed in accordance with GAAP.
Adopted by the Board: October 1, 2016
Approved by the Stockholders: October 1, 2016
Scheduled Termination Date: October 1, 2026
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HANCOCK JAFFE LABORATORIES, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”), dated as of August 30, 2016 (the “Effective Date”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“Hancock Jaffe”) and Benedict Broennimann, M.D. (“Executive,” and together with Hancock Jaffe, the “Parties”).
WHEREAS, Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. POSITION AND DUTIES.
(a) Hancock Jaffe shall employ Executive as its Chief Executive Officer. Executive shall be responsible for all financial and administrative activities of the company. Executive shall perform the duties set forth in this Section 1, in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chairman of the Board of Directors of Hancock Jaffe (the “Board”) from time to time.
(b) Executive shall report directly to the Chairman of the Board.
(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.
2. TERM. This Agreement may be terminated by Hancock Jaffe or Executive at any time with thirty (30) days written notice.
3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (the “Base Salary”) at an annual rate of $360,000, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall the Base Salary be reduced from the preceding year without the consent of Executive.
4. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 293,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Section 409A (as defined below).
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5. EMPLOYEE BENEFITS.
(a) VACATIONS. Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided, however, that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.
(b) HOLIDAYS AND PERSONAL DAYS. Executive shall be entitled to Holidays and Personal Days, as defined in, and in accordance with, Hancock Jaffe’s then existing employment policy (currently 12 paid Holidays and 10 Personal Days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.
(c) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive and in connection with the performance of Executive’s duties hereunder.
6. RESTRICTIVE COVENANTS.
(a) Confidentiality.
(i) Company Information. At all times during Executive’s employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “Confidential Information” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which have become publicly known and made generally available through no wrongful act of Executive.
(ii) Executive-Restricted Information. Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.
(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during Executive’s employment and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.
(b) Nonsolicitation of Employees. During Executive’s employment and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates (as defined below), solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.
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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“Affiliates”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.
(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “Claims”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 6(d), and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance rendered hereunder.
(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.
(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, while employed by Hancock Jaffe and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.
(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. While employed by Hancock Jaffe and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.
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(iii) Moreover, if while employed by Hancock Jaffe, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both while employed by Hancock Jaffe and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided, however, that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance rendered hereunder.
(iv) Notwithstanding the foregoing provisions of this Section 6(e), pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 6(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.
(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).
7. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 6 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.
8. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 8, neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.
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9. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.
10. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.
11. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.
12. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
13. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.
(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.
(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.
(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.
14. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.
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15. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.
By signing this Agreement Below, Executive acknowledges that Executive:
(1) | has read and understood the entire Agreement; |
(2) | has had the opportunity to task questions and consult counsel or other advisors about its terms; and |
(3) | agrees to be bound by it. |
In witness whereof, Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.
HANCOCK JAFFE LABORATORIES, INC. | EXECUTIVE | |
Yury Zhivilo |
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Chairman of the Board |
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HANCOCK JAFFE LABORATORIES, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”), dated as of July 22, 2016 (the “Effective Date”), is made by and between Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”) and William R. Abbott (“Executive,” and together with Hancock Jaffe, the “Parties”).
A. The Parties previously entered into an employment agreement, dated March 21, 2016 (the “Prior Employment Agreement”).
B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.
C. This Agreement will supersede the Prior Employment Agreement in its entirety.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. POSITION AND DUTIES.
(a) Hancock Jaffe shall employ Executive as its Senior Vice President, Chief Financial Officer, Secretary and Treasurer. Executive shall be responsible for all financial and administrative activities of the company. Executive shall perform the duties set forth in this Section 1, in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.
(b) Executive shall report directly to the Chief Executive Officer.
(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.
2. TERM. Subject to the severance provisions of Section 7, this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “Initial Term”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term, a “Renewal Term,” and each Renewal Term together with the Initial Term, the “Term”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.
3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“Base Salary”) at an annual rate of $225,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.
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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “Annual Bonus”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.
5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”) “), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 293,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.
6. EMPLOYEE BENEFITS.
(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.
(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided, however, that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.
(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.
(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.
(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.
6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:
(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “Disability” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.
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(b) DEATH. Automatically upon the death of Executive.
(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “Cause” shall mean Executive’s:
(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;
(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);
(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;
(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;
(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or
(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.
Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.
(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “Good Reason” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:
(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;
(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;
(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or
(iv) a material breach by Hancock Jaffe of a material term of this Agreement.
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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.
(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).
(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).
7. CONSEQUENCES OF TERMINATION.
(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):
(i) any unpaid Base Salary through the date of termination;
(ii) any Annual Bonus earned but unpaid prior to the date of termination;
(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;
(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and
(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “Accrued Benefits”).
(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).
(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:
(i) the Accrued Benefits; and
(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “Severance Amount”).
Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.
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(d) CHANGE IN CONTROL. A “Change in Control” shall mean the consummation of any of the following events:
(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “Voting Securities”);
(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “Business Combination”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;
(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or
Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.
(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.
(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a), (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.
(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7, and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.
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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.
(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.
8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).
9. RESTRICTIVE COVENANTS.
(a) Confidentiality.
(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “Confidential Information” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.
(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.
(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.
(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.
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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“Affiliates”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.
(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “Claims”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d), and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.
(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.
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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.
(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided, however, that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(iv) Notwithstanding the foregoing provisions of this Section 9(e), pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.
(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).
(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “Bad Leaver.” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.
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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.
11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11, neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.
12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.
13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.
14. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.
15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.
(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.
(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.
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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.
17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.
18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.
19. TAX MATTERS.
(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.
(b) SECTION 409A COMPLIANCE.
(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“Section 409A”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “Code”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.
(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.
(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.
(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.
(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “Payment”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “Parachute Threshold”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.
By signing this Agreement Below, Executive acknowledges that Executive:
(1) has read and understood the entire Agreement;
(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and
(3) agrees to be bound by it.
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In witness whereof, Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.
HANCOCK JAFFE LABORATORIES, INC. | WILLIAM R. ABBOTT | |
Yury Zhivilo | ||
Chairman of the Board |
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HANCOCK JAFFE LABORATORIES, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”), dated as of July 22, 2016 (the “Effective Date”), is made by and between Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”) and Marc Glickman, M.D. (“Executive,” and together with Hancock Jaffe, the “Parties”).
A. The Parties previously entered into an employment agreement, dated May 1, 2016 (the “Prior Employment Agreement”).
B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.
C. This Agreement will supersede the Prior Employment Agreement in its entirety.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. POSITION AND DUTIES.
(a) Hancock Jaffe shall employ Executive as its Senior Vice President and Chief Medical Officer. Executive shall be responsible for advancing the science and development of new products and acting as chief liaison with the medical community. Executive shall perform the duties set forth in this Section 1, in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.
(b) Executive shall report directly to the Chief Executive Officer.
(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.
2. TERM. Subject to the severance provisions of Section 7, this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “Initial Term”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term, a “Renewal Term,” and each Renewal Term together with the Initial Term, the “Term”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.
3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“Base Salary”) at an annual rate of $300,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.
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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “Annual Bonus”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.
5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”) “), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 369,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.
6. EMPLOYEE BENEFITS.
(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.
(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided, however, that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.
(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.
(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.
(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.
6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:
(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “Disability” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.
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(b) DEATH. Automatically upon the death of Executive.
(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “Cause” shall mean Executive’s:
(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;
(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);
(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;
(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;
(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or
(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.
Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.
(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “Good Reason” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:
(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;
(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;
(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or
(iv) a material breach by Hancock Jaffe of a material term of this Agreement.
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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.
(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).
(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).
7. CONSEQUENCES OF TERMINATION.
(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):
(i) any unpaid Base Salary through the date of termination;
(ii) any Annual Bonus earned but unpaid prior to the date of termination;
(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;
(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and
(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “Accrued Benefits”).
(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).
(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:
(i) the Accrued Benefits; and
(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “Severance Amount”).
Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.
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(d) CHANGE IN CONTROL. A “Change in Control” shall mean the consummation of any of the following events:
(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “Voting Securities”);
(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “Business Combination”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;
(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or
Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.
(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.
(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a), (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.
(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7, and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.
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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.
(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.
8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).
9. RESTRICTIVE COVENANTS.
(a) Confidentiality.
(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “Confidential Information” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.
(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.
(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.
(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.
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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“Affiliates”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.
(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “Claims”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d), and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.
(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.
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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.
(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided, however, that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(iv) Notwithstanding the foregoing provisions of this Section 9(e), pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.
(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).
(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “Bad Leaver.” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.
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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.
11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11, neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.
12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.
13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.
14. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.
15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.
(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.
(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.
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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.
17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.
18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.
19. TAX MATTERS.
(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.
(b) SECTION 409A COMPLIANCE.
(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“Section 409A”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “Code”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.
(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.
(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.
(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.
(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “Payment”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “Parachute Threshold”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.
By signing this Agreement Below, Executive acknowledges that Executive:
(1) has read and understood the entire Agreement;
(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and
(3) agrees to be bound by it.
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In witness whereof, Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.
HANCOCK JAFFE LABORATORIES, INC. | MARC GLICKMAN, M.D. | |
William R. Abbott | ||
Chief Financial Officer |
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HANCOCK JAFFE LABORATORIES, INC.
EMPLOYMENT AGREEMENT
This Employment Agreement (“Agreement”), dated as of July 22, 2016 (the “Effective Date”), is made by and between Hancock Jaffe Laboratories, Inc. (“Hancock Jaffe”) and Susan Montoya (“Executive,” and together with Hancock Jaffe, the “Parties”).
A. The Parties previously entered into an employment agreement, dated March 1, 2016 (the “Prior Employment Agreement”).
B. Hancock Jaffe desires to employ Executive, and Executive desires to be so employed, pursuant to the terms of this Agreement.
C. This Agreement will supersede the Prior Employment Agreement in its entirety.
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. POSITION AND DUTIES.
(a) Hancock Jaffe shall employ Executive as its Senior Vice President of Operations and RA/QA. Executive shall be responsible for Operations, Regulatory Affairs and Quality Assurance. Executive shall perform the duties set forth in this Section 1, in addition to those employment duties that are usual and customary for Executive’s position and those employment duties that may be assigned to Executive by the Chief Executive Officer of Hancock Jaffe from time to time.
(b) Executive shall report directly to the Chief Executive Officer.
(c) Executive shall devote all of Executive’s business time, energy, judgment, knowledge and skill and Executive’s best efforts to the performance of Executive’s duties with Hancock Jaffe, provided that the foregoing shall not prevent Executive from (i) participating in charitable, civic, educational, professional, community or industry affairs or (ii) managing Executive’s passive personal investments, so long as such activities in the aggregate do not interfere or conflict with Executive’s duties hereunder or create a potential business or fiduciary conflict.
2. TERM. Subject to the severance provisions of Section 7, this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “Initial Term”).This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of the each term , (each term, a “Renewal Term,” and each Renewal Term together with the Initial Term, the “Term”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement.
3. BASE SALARY. Hancock Jaffe shall pay Executive a base salary (“Base Salary”) at an annual rate of $295,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall Salary be reduced from the preceding year without the consent of Executive.
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4. ANNUAL BONUS. Each year during the Term, Executive shall be eligible to receive an annual incentive bonus (the “Annual Bonus”) of up to 50% of the Base Salary, subject to achievement of key performance indicators for Hancock Jaffe, as determined by the Board in its sole discretion. The terms of the Annual Bonus developed by the Board shall govern any Annual Bonus that may be paid. Any Annual Bonus shall be paid in all events within two and one-half months after the end of the year in which such Annual Bonus becomes earned, provided that no Annual Bonus shall be considered earned until the Board makes all necessary determinations with respect to the Annual Bonus.
5. EQUITY INCENTIVE. Executive shall be granted an Incentive Stock Option (“ISO”), subject to any limitations under the Hancock Jaffe 2016 Omnibus Incentive Plan, for the right to purchase 1,637,000 shares of Hancock Jaffe Common Stock at a price to be determined by a valuation analysis as required under Internal Revenue Code Section 409A.
6. EMPLOYEE BENEFITS.
(a) BENEFIT PLANS. During the Term, Executive shall be entitled to participate in any employee benefit plans that Hancock Jaffe has adopted or may adopt, maintains or contributes to for the benefit of its employees generally, subject to satisfying the applicable eligibility requirements, except to the extent such plans are duplicative of the benefits otherwise provided to Executive hereunder. Executive’s participation shall be subject to the terms of the applicable plan documents and generally applicable Hancock Jaffe policies. Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse will be 100% paid by Hancock Jaffe. Notwithstanding the foregoing, with the exception of Healthcare and Dental Benefit Premiums for Executive and Executive’s spouse, Hancock Jaffe may modify or terminate any employee benefit plan at any time.
(b) VACATIONS. During the Term, Executive shall be entitled to paid vacation time in accordance with Hancock Jaffe’s policy applicable to senior management employees as in effect from time to time; provided, however, that Executive shall be entitled to no less than 25 days of paid vacation per calendar year, prorated for any partial years of employment. A maximum of 10 days of unused vacation time may be carried forward from one calendar year to any subsequent calendar year.
(c) HOLIDAYS AND PERSONAL DAYS. During the Term, Executive shall be entitled to Holidays and Personal Days in accordance with Hancock Jaffe policy (currently12 paid Holidays and 10 Personal days per calendar year). Unused Holidays and Personal Days may not be carried forward from one calendar year to any subsequent calendar year.
(d) PENSION AND PROFIT SHARING PLANS. During the Term, Executive shall be entitled to participate in any Pension or Profit Sharing Plan or other type of plan adopted by Hancock Jaffe for the benefit of its Executives and/or employees generally.
(e) BUSINESS EXPENSES. Upon presentation of reasonable substantiation and documentation as Hancock Jaffe may require from time to time, Executive shall be reimbursed in accordance with Hancock Jaffe’s expense reimbursement policy, for all reasonable out-of-pocket business expenses incurred and paid by Executive during the Term and in connection with the performance of Executive’s duties hereunder.
6. TERMINATION. Executive’s employment under this Agreement shall terminate on the first to occur of the following:
(a) DISABILITY. Upon 10 days’ prior written notice by Hancock Jaffe to Executive of termination due to Disability. “Disability” shall mean Executive is unable to perform each of the essential duties of Executive’s position by reason of a medically determinable physical or mental impairment that is potentially permanent in character or that can be expected to last for a continuous period of not less than 12 months.
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(b) DEATH. Automatically upon the death of Executive.
(c) CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of a termination for Cause. “Cause” shall mean Executive’s:
(i) willful misconduct or gross negligence in the performance of Executive’s duties to Hancock Jaffe;
(ii) willful failure to perform Executive’s duties to Hancock Jaffe or to follow the lawful directives of the Chief Executive Officer (other than as a result of death or Disability);
(iii) indictment for, conviction of or pleading of guilty or nolo contendere to, a felony or any crime involving moral turpitude;
(iv) repeated failure to cooperate in any audit or investigation of the business or financial practices of Hancock Jaffe;
(v) performance of any material act of theft, embezzlement, fraud, malfeasance, dishonesty or misappropriation of Hancock Jaffe’s property; or
(vi) material breach of this Agreement or any other material agreement with Hancock Jaffe or a material violation of Hancock Jaffe’s code of conduct or other written policy.
Executive shall be given written notice detailing the specific Cause event and a period of 10 days following Executive’s receipt of such notice to cure such event (if susceptible to cure) to the reasonable satisfaction of the Board. Notwithstanding anything to the contrary contained herein, Executive’s right to cure as set forth in the preceding sentence shall not apply if there are habitual or repeated breaches by Executive. A termination for Cause shall be deemed to include a determination by the Board or its designee following Executive’s termination of service that circumstances existing prior to such termination would have entitled Hancock Jaffe to have terminated Executive for Cause. All rights Executive has or may have under this Agreement shall be suspended automatically during the pendency of any investigation by the Board or its designee, or during any negotiations between the Board or its designee and Executive, regarding any actual or alleged act or omission by Executive of the type described in this definition of Cause.
(d) GOOD REASON. Upon written notice by Executive to Hancock Jaffe of a termination for Good Reason. “Good Reason” shall mean the occurrence of any of the following events, without the consent of Executive, unless such events are fully corrected in all material respects by Hancock Jaffe within 30 days following written notification by Executive to Hancock Jaffe of the occurrence of one of the events:
(i) material diminution in Executive’s Base Salary or Annual Bonus opportunity;
(ii) material diminution in Executive’s authority or duties set forth in Section 1 above (for sake of clarity, a change in title shall not constitute Good Reason), other than temporarily while physically or mentally incapacitated, as required by applicable law;
(iii) relocation of Executive’s primary work location by more than 25 miles from its then current location; or
(iv) a material breach by Hancock Jaffe of a material term of this Agreement.
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Executive shall provide Hancock Jaffe with a written notice detailing the specific circumstances alleged to constitute Good Reason within 30 days after the first occurrence of such circumstances, and actually terminate employment within 30 days following the expiration of Hancock Jaffe’s 30-day cure period described above. Otherwise, any claim of such circumstances as Good Reason shall be deemed irrevocably waived by Executive.
(e) WITHOUT CAUSE. Immediately upon written notice by Hancock Jaffe to Executive of an involuntary termination without Cause (other than for death or Disability).
(f) VOLUNTARY TERMINATION. Upon 60 days’ prior written notice by Executive to Hancock Jaffe of Executive’s voluntary termination of employment without Good Reason (which Hancock Jaffe may, in its sole discretion, make effective earlier than any notice date).
7. CONSEQUENCES OF TERMINATION.
(a) DEATH/DISABILITY. In the event that Executive’s employment ends on account of Executive’s death or Disability, Executive or Executive’s estate, as the case may be, shall be entitled to the following (with the amounts due under Sections 7(a)(i) through 7(a)(iv) below to be paid within 60 days following termination of employment, or such earlier date as may be required by applicable law):
(i) any unpaid Base Salary through the date of termination;
(ii) any Annual Bonus earned but unpaid prior to the date of termination;
(iii) reimbursement for any unreimbursed business expenses incurred through the date of termination;
(iv) any accrued but unused vacation time in accordance with Hancock Jaffe policy, which shall be prorated for any year in which Executive’s employment with Hancock Jaffe is terminated; and
(v) all other payments, benefits or fringe benefits to which Executive shall be entitled under the terms of any applicable compensation arrangement or benefit, equity or fringe benefit plan or program or grant (collectively, Sections 7(a)(i) through 7(a)(v) hereof shall be hereafter referred to as the “Accrued Benefits”).
(b) TERMINATION FOR CAUSE OR WITHOUT GOOD REASON. If Executive’s employment is terminated (i) by Hancock Jaffe for Cause or (ii) by Executive without Good Reason, Hancock Jaffe shall pay to Executive the Accrued Benefits (other than the Annual Bonus described in Section 7(a)(ii) above).
(c) TERMINATION WITHOUT CAUSE OR FOR GOOD REASON. If Executive’s employment by Hancock Jaffe is terminated by Hancock Jaffe other than for Cause or Disability or by Executive for Good Reason, Hancock Jaffe shall pay or provide Executive the following:
(i) the Accrued Benefits; and
(ii) subject to Executive’s continued compliance with his obligations under this Agreement, continued payment of the Base Salary for 12 months (or 24 months if such termination occurs within 24 months following a Change in Control) following the date of termination, paid in accordance with Hancock Jaffe’s ordinary payroll practices (collectively, the “Severance Amount”).
Payments and benefits provided under this Section 7(c) shall be in lieu of any termination or severance payments or benefits to which Executive may be eligible under any of the plans, policies or programs of Hancock Jaffe or under the Worker Adjustment Retraining Notification Act of 1988, as amended, or any similar state statute or regulation. Should Executive die prior to the payment of the Severance Amount, the Severance Amount shall be paid to the heirs or estate of Executive in accordance with the schedule set forth herein.
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(d) CHANGE IN CONTROL. A “Change in Control” shall mean the consummation of any of the following events:
(i) the acquisition, other than from Hancock Jaffe, by any individual, entity or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than Hancock Jaffe or any subsidiary, affiliate (within the meaning of Rule 144 promulgated under the Securities Act of 1933, as amended) or employee benefit plan of Hancock Jaffe, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of the combined voting power of the then outstanding voting securities of Hancock Jaffe entitled to vote generally in the election of directors (the “Voting Securities”);
(ii) a reorganization, merger, consolidation or recapitalization of Hancock Jaffe (a “Business Combination”), other than a Business Combination in which more than 50% of the combined voting power of the outstanding voting securities of the surviving or resulting entity immediately following the Business Combination is held by the persons who, immediately prior to the Business Combination, were the holders of the Voting Securities;
(iii) a complete liquidation or dissolution of Hancock Jaffe, or a sale of all or substantially all of the assets of Hancock Jaffe; or
Notwithstanding any provision of this definition to the contrary, in the event that any amount or benefit under this Agreement constitutes deferred compensation under Section 409A (as defined below) and the settlement of or distribution of such amount or benefit is to be triggered by a Change in Control, then such settlement or distribution shall be subject to the event constituting the Change in Control also constituting a “change in control event” under Section 409A.
(e) OTHER OBLIGATIONS. Upon any termination of Executive’s employment with Hancock Jaffe, Executive shall automatically be deemed to have resigned from any and all other positions he then holds as an officer, director or fiduciary of Hancock Jaffe and any other entity that is part of the same consolidated group as Hancock Jaffe or in which capacity Executive serves at the direction of or as a result of his position with Hancock Jaffe; and Executive shall, within 10 days of such termination, take all actions as may be necessary under applicable law or requested by Hancock Jaffe to effect any such resignations.
(f) EXCLUSIVE REMEDY. The amounts payable to Executive following termination of employment hereunder pursuant to Sections 7(a), (b) and (c) above shall be in full and complete satisfaction of Executive’s rights under this Agreement and any other claims that Executive may have in respect of Executive’s employment with Hancock Jaffe or any of its Affiliates (as defined below), and Executive acknowledges that such amounts are fair and reasonable, and are Executive’s sole and exclusive remedy, in lieu of all other remedies at law or in equity, with respect to the termination of Executive’s employment hereunder or any breach of this Agreement.
(g) NO MITIGATION OR OFFSET. Executive shall not be required to seek or accept other employment or otherwise to mitigate damages as a condition to the receipt of benefits pursuant to this Section 7, and amounts payable pursuant to this Section 7 shall not be offset or reduced by any amounts received by Executive from other sources.
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(h) NO WAIVER OF ERISA-RELATED RIGHTS. Nothing in this Agreement shall be construed to be a waiver by Executive of any benefits accrued for or due to Executive under any employee benefit plan (as such term is defined in the Employee Retirement Income Security Act of 1974, as amended) maintained by Hancock Jaffe, if any, except that Executive shall not be entitled to any severance benefits pursuant to any severance plan or program of Hancock Jaffe other than as provided herein.
(i) CLAWBACK. All awards, amounts or benefits received or outstanding under this Agreement shall be subject to clawback, cancellation, recoupment, rescission, payback, reduction or other similar action in accordance with the terms of any applicable law related to such actions, as may be in effect from time to time. Hancock Jaffe may take such actions as may be necessary to effectuate any provision of applicable law relating to clawback, cancellation, recoupment, rescission, payback or reduction of compensation, whether adopted before or after the Effective Date, without further consideration or action.
8. RELEASE. Any and all amounts payable and benefits or additional rights provided pursuant to this Agreement upon termination beyond the Accrued Benefits shall only be payable if Executive delivers to Hancock Jaffe and does not revoke a general release of claims in favor of Hancock Jaffe in a form satisfactory to Hancock Jaffe. Such release shall be furnished to Executive within two business days after Executive’s date of termination, and must be executed and delivered (and no longer subject to revocation, if applicable) within 30 days following termination (or such longer period to the extent required by law).
9. RESTRICTIVE COVENANTS.
(a) Confidentiality.
(i) Company Information. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, any Confidential Information of Hancock Jaffe. “Confidential Information” means any Hancock Jaffe proprietary or confidential information, technical data, trade secrets or know-how, including research, product plans, products, services, customer lists and customers, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, marketing, distribution and sales methods and systems, sales and profit figures, finances and other business information disclosed to Executive by Hancock Jaffe, either directly or indirectly in writing, orally or by drawings or inspection of documents or other tangible property. However, Confidential Information does not include any of the foregoing items which has become publicly known and made generally available through no wrongful act of Executive.
(ii) Executive-Restricted Information. During the Term, Executive shall not improperly use or disclose any proprietary or confidential information or trade secrets of any person or entity with whom Executive has an agreement or duty to keep such information or secrets confidential.
(iii) Third Party Information. Executive recognizes that Hancock Jaffe has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Hancock Jaffe’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. At all times during the Term and thereafter, Executive shall hold in strictest confidence, and shall not use, except in connection with the performance of Executive’s duties, and shall not disclose to any person or entity, such third party confidential or proprietary information, and shall not use it except as necessary in performing Executive’s duties, consistent with Hancock Jaffe’s agreement with such third party.
(b) Nonsolicitation of Employees. During the Term and for a period of 12 months thereafter, Executive shall not, acting alone or in conjunction with others, directly or indirectly, other than on behalf of Hancock Jaffe and its Affiliates, solicit employment for or of employees of Hancock Jaffe or its Affiliates or induce, solicit or entertain any employee to leave the employ of Hancock Jaffe or its Affiliates.
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(c) NONDISPARAGEMENT. Executive shall not make negative comments or otherwise disparage Hancock Jaffe or any person or entity or business unit controlled by, controlling or under common control with Hancock Jaffe (“Affiliates”) or any of their officers, directors, managers, employees, consultants, equityholders, agents or products. The foregoing shall not be violated by truthful statements (i) in response to legal process, required governmental testimony or filings or administrative or arbitral proceedings (including depositions in connection with such proceedings) or (ii) made in the course of Executive discharging his duties for Hancock Jaffe.
(d) COOPERATION. Upon the receipt of reasonable notice from Hancock Jaffe, while employed by Hancock Jaffe and thereafter, Executive shall respond and provide information with regard to matters in which Executive has knowledge as a result of Executive’s employment with Hancock Jaffe, and shall provide reasonable assistance to Hancock Jaffe, its Affiliates and their respective representatives in defense of any claims that may be made against Hancock Jaffe or its Affiliates, and shall assist Hancock Jaffe and its Affiliates in the prosecution of any claims that may be made by Hancock Jaffe or its Affiliates, to the extent that such claims may relate to the period of Executive’s employment with Hancock Jaffe (collectively, the “Claims”). Executive shall promptly inform Hancock Jaffe if Executive becomes aware of any lawsuits involving Claims that may be filed or threatened against Hancock Jaffe or its Affiliates. Executive also shall promptly inform Hancock Jaffe (to the extent that Executive is legally permitted to do so) if Executive is asked to assist in any investigation of Hancock Jaffe or its Affiliates (or their actions) or another party attempts to obtain information or documents from Executive (other than in connection with any litigation or other proceeding in which Executive is a party-in-opposition) with respect to matters Executive believes in good faith to relate to any investigation of Hancock Jaffe or its Affiliates, in each case, regardless of whether a lawsuit or other proceeding has then been filed against Hancock Jaffe or its Affiliates with respect to such investigation, and shall not do so unless legally required. During the pendency of any litigation or other proceeding involving Claims, Executive shall not communicate with anyone (other than Executive’s attorneys and tax and/or financial advisors and except to the extent that Executive determines in good faith is necessary in connection with the performance of Executive’s duties hereunder) with respect to the facts or subject matter of any pending or potential litigation or regulatory or administrative proceeding involving Hancock Jaffe or any of its Affiliates without getting the prior written consent of Hancock Jaffe. Upon presentation of appropriate documentation, Hancock Jaffe shall pay or reimburse Executive for all reasonable out-of-pocket travel, duplicating or telephonic expenses incurred by Executive in accordance with Hancock Jaffe’s applicable policies in complying with this Section 9(d), and Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(e) Ownership of Information, Ideas, Concepts, Improvements, Discoveries and Inventions, and all Original Works of Authorship.
(i) As between the Parties, all information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Executive or which are disclosed or made known to Executive, individually or in conjunction with others, during the Term and which relate to Hancock Jaffe’s business, products or services (including all such information relating to corporate opportunities, research, financial and sales data, pricing and trading terms, evaluations, opinions, interpretations, acquisition prospects, the identity of clients or customers or their requirements, the identity of key contacts within the client or customers’ organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names and marks) are and shall be the sole and exclusive property of Hancock Jaffe. Moreover, all drawings, memoranda, notes, records, files, correspondence, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Hancock Jaffe.
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(ii) In particular, Executive hereby specifically assigns and transfers to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor’s certificates or other industrial rights that may be filed thereon, and applications for registration of such names and marks. During the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee at all times in the protection of such information, ideas, concepts, improvements, discoveries or inventions, both in the United States and all foreign countries, including the execution of all lawful oaths and all assignment documents requested by Hancock Jaffe or its nominee in connection with the preparation, prosecution, issuance or enforcement of any applications for United States or foreign letters patent, and any application for the registration of such names and marks.
(iii) Moreover, if during the Term, Executive creates any original work of authorship fixed in any tangible medium of expression which is the subject matter of copyright (such as reports, videotapes, written presentations, computer programs, drawings, maps, architectural renditions, models, manuals, brochures or the like) relating to Hancock Jaffe’s business, products or services, whether such work is created solely by Executive or jointly with others, Hancock Jaffe shall be deemed the author of such work if the work is prepared by Executive in the scope of Executive’s employment; or, if the work is not prepared by Executive within the scope of Executive’s employment but is specially ordered by Hancock Jaffe as a contribution to a collective work, as a part of any written or audiovisual work, as a translation, as a supplementary work, as a compilation or as an instructional text, then the work shall be considered to be work made for hire and Hancock Jaffe shall be the author of the work. In the event such work is neither prepared by the Executive within the scope of Executive’s employment or is not a work specially ordered and deemed to be a work made for hire, then Executive shall assign, and by these presents, does assign, to Hancock Jaffe all of Executive’s worldwide right, title and interest in and to such work and all rights of copyright therein. Both during the Term and thereafter, Executive shall assist Hancock Jaffe and its nominee, at any time, in the protection of Hancock Jaffe’s worldwide right, title and interest in and to the work and all rights of copyright therein, including the execution of all formal assignment documents requested by Hancock Jaffe or its nominee and the execution of all lawful oaths and applications for registration of copyright in the United States and foreign countries; provided, however, that Executive shall be compensated by Hancock Jaffe at a reasonable hourly rate for assistance given after the end of the Term.
(iv) Notwithstanding the foregoing provisions of this Section 9(e), pursuant to the California Labor Code, Hancock Jaffe hereby notifies Executive that the provisions of this Section 9(e) shall not apply to any inventions for which no equipment, supplies, facility or trade secret information of Hancock Jaffe was used and which were developed entirely on Executive’s own time, unless (A) the invention relates (1) to the business of Hancock Jaffe, or (2) to actual or demonstrably anticipated research or development of Hancock Jaffe, or (B) the invention results from any work performed by Executive for Hancock Jaffe. A copy of the applicable provisions of the California Labor Code shall be made available to Executive upon Executive’s request.
(f) RETURN OF COMPANY PROPERTY. On the date of Executive’s termination of employment with Hancock Jaffe for any reason (or at any time prior thereto at Hancock Jaffe’s request), Executive shall return all property belonging to Hancock Jaffe or its Affiliates (including any Hancock Jaffe or Affiliate-provided laptops, computers, cell phones, wireless electronic mail devices or other equipment, or documents or property belonging to Hancock Jaffe or an Affiliate).
(g) EFFECT OF EXECUTIVE BECOMING A BAD LEAVER. Notwithstanding any provision of this Agreement to the contrary, if (i) Executive breaches any of the covenants set forth in this Agreement at any time during the period commencing on the Effective Date and ending 24 months after Executive’s termination of employment with Hancock Jaffe for any reason and (ii) Executive fails to cure such breach within 10 days of the effective date of written notice of such breach given by Hancock Jaffe, then Executive shall be deemed a “Bad Leaver.” If Executive is or becomes a Bad Leaver, then (i) any severance being paid to Executive pursuant to this Agreement or otherwise shall immediately cease upon commencement of such action and (ii) Executive shall be liable to repay to Hancock Jaffe any severance previously paid to him by Hancock Jaffe, less $100 to serve as consideration for the release described in Section 8 above.
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10. EQUITABLE RELIEF AND OTHER REMEDIES. Executive acknowledges that Hancock Jaffe’s remedies at law for a breach or threatened breach of any of the provisions of Section 9 above would be inadequate and in the event of such a breach or threatened breach, in addition to any remedies at law, Hancock Jaffe, without posting any bond, shall be entitled to seek to obtain equitable relief in the form of specific performance, a temporary restraining order, a temporary or permanent injunction or any other equitable remedy that may then be available, without the necessity of showing actual monetary damages or the posting of a bond or other security.
11. NO ASSIGNMENTS. This Agreement is personal to each of the Parties. Except as provided in this Section 11, neither Party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other Party. Hancock Jaffe may assign this Agreement to any of its Affiliates or to any successor to all or substantially all of the business and/or assets of Hancock Jaffe, provided that Hancock Jaffe shall require such Affiliate or successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Hancock Jaffe would be required to perform it if no such succession had taken place. As used in this Agreement, “Hancock Jaffe” shall mean Hancock Jaffe and any Affiliate or successor to its business and/or assets that assumes and agrees to perform the duties and obligations of Hancock Jaffe under this Agreement by operation of law or otherwise.
12. NOTICE. Any notice that either Party may be required or permitted to give to the other shall be in writing and may be delivered personally, by electronic mail or via a postal service, postage prepaid, to such electronic mail or postal address and directed to such person as Hancock Jaffe may notify Executive from time to time; and to Executive at his electronic mail or postal address as shown on the records of Hancock Jaffe from time to time, or at such other electronic mail or postal address as Executive, by notice to Hancock Jaffe, may designate in writing from time to time.
13. SECTION HEADINGS; INCONSISTENCY. The section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. In the event of any inconsistency between the terms of this Agreement and any form, award, plan or policy of Hancock Jaffe, the terms of this Agreement shall govern and control.
14. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement or any action in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction.
15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument.
16. Applicable Law; Choice of Venue and Consent to Jurisdiction; Service of Process.
(a) All questions concerning the construction, validity and interpretation of this Agreement and the performance of the obligations imposed by this Agreement shall be governed by the internal laws of the State of California applicable to agreements made and wholly to be performed in such state without regard to conflicts of law provisions of any jurisdiction.
(b) For purposes of resolving any dispute that arises directly or indirectly from the relationship of the Parties evidenced by this Agreement, the Parties hereby submit to and consent to the exclusive jurisdiction of the State of California and further agree that any related litigation shall be conducted solely in the courts of Orange County, California or the federal courts for the United States for the Central District of California, where this Agreement is made and/or to be performed, and no other courts.
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(c) Each Party may be served with process in any manner permitted under State of California law, or by United States registered or certified mail, return receipt requested.
17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by Executive and such officer or director as may be designated by Hancock Jaffe. No waiver by either Party at any time of any breach by the other Party of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement together with all exhibits hereto sets forth the entire agreement of the Parties in respect of the subject matter contained herein and supersedes any and all prior agreements or understandings between Executive and Hancock Jaffe or its Affiliates with respect to the subject matter hereof, including the Prior Employment Agreement. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof, have been made by either Party that are not expressly set forth in this Agreement.
18. REPRESENTATIONS. Executive represents and warrants to Hancock Jaffe that (a) Executive has the legal right to enter into this Agreement and to perform all of the obligations on Executive’s part to be performed hereunder in accordance with its terms, and (b) Executive is not a party to any agreement or understanding, written or oral, and is not subject to any restriction, which, in either case, could prevent Executive from entering into this Agreement or performing all of Executive’s duties and obligations hereunder.
19. TAX MATTERS.
(a) WITHHOLDING. Any and all amounts payable under this Agreement or otherwise shall be subject to, and Hancock Jaffe may withhold from such amounts, any federal, state, local or other taxes as may be required to be withheld pursuant to any applicable law or regulation.
(b) SECTION 409A COMPLIANCE.
(i) The intent of the Parties is that payments and benefits under this Agreement be exempt from (to the extent possible) Section 409A (“Section 409A”) of the Internal Revenue Code of 1986 and the regulations and guidance promulgated thereunder, as amended (collectively, the “Code”) and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the Parties of the applicable provision without violating the provisions of Section 409A. In no event shall Hancock Jaffe be liable for any additional tax, interest or penalty that may be imposed on Executive by Section 409A or damages for failing to comply with Section 409A.
(ii) A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits that constitute “nonqualified deferred compensation” under Section 409A upon or following a termination of employment unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding anything to the contrary in this Agreement, if Executive is deemed on the date of termination to be a “specified employee” under Section 409A, then with regard to any payment or the provision of any benefit that is considered “nonqualified deferred compensation” under Section 409A payable on account of a “separation from service,” such payment or benefit shall not be made or provided until the earlier of (A) the expiration of the six-month period measured from the date of such “separation from service” of Executive, and (B) the date of Executive’s death, to the extent required under Section 409A. Upon the expiration of the foregoing delay period, all payments and benefits delayed pursuant to this Section 19(b)(ii) (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to Executive in a lump sum on the first business day following the six-month period, and any remaining payments and benefits due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.
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(iii) To the extent that reimbursements or other in-kind benefits under this Agreement constitute “nonqualified deferred compensation” for purposes of Section 409A, (A) all expenses or other reimbursements hereunder shall be made on or prior to the last day of the taxable year following the taxable year in which such expenses were incurred by Executive, (B) any right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit and (C) no such reimbursement, expenses eligible for reimbursement or in-kind benefits provided in any taxable year shall in any way affect the expenses eligible for reimbursement, or in-kind benefits to be provided, in any other taxable year.
(iv) For purposes of Section 409A, Executive’s right to receive any installment payments pursuant to this Agreement shall be treated as a right to receive a series of separate and distinct payments. Whenever a payment under this Agreement specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be at the sole discretion of the Board.
(v) Notwithstanding any other provision of this Agreement to the contrary, in no event shall any payment under this Agreement that constitutes “nonqualified deferred compensation” for purposes of Section 409A be subject to offset by any other amount unless otherwise permitted by Section 409A.
(c) Modification of Payments. In the event it shall be determined that any payment, right or distribution by Hancock Jaffe or any other person or entity to or for the benefit of Executive pursuant to the terms of this Agreement or otherwise, in connection with, or arising out of, Executive’s employment with Hancock Jaffe or a change in ownership or effective control of Hancock Jaffe or a substantial portion of its assets (a “Payment”) is a “parachute payment” within the meaning of Code Section 280G on account of the aggregate value of the Payments due to Executive being equal to or greater than three times the “base amount,” as defined in Code Section 280G (the “Parachute Threshold”), so that Executive would be subject to the excise tax imposed by Code Section 4999 (the “Excise Tax”) and the net after-tax benefit that Executive would receive by reducing the Payments to the Parachute Threshold is greater than the net after-tax benefit Executive would receive if the full amount of the Payments were paid to Executive, then the Payments payable to Executive shall be reduced (but not below zero) so that the Payments due to Executive do not exceed the amount of the Parachute Threshold, reducing first any Payments under Section 7 above.
By signing this Agreement Below, Executive acknowledges that Executive:
(1) has read and understood the entire Agreement;
(2) has had the opportunity to ask questions and consult counsel or other advisors about its terms; and
(3) agrees to be bound by it.
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In witness whereof, Hancock Jaffe has caused this Agreement to be executed in its name and on its behalf, and Executive acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.
HANCOCK JAFFE LABORATORIES, INC. | SUSAN MONTOYA | |
William R. Abbott | ||
Chief Financial Officer |
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FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (this “Amendment”), dated as of December 1, 2016 (the “Effective Date”), is made by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“Hancock Jaffe”) and Steven Cantor (“Employee,” and together with Hancock Jaffe, the “Parties”), and amends that certain Employment Agreement, dated as of July 1, 2016, by and between Hancock Jaffe and Employee (the “Employment Agreement”).
RECITALS
WHEREAS, Hancock Jaffe and Employee previously entered into the Employment Agreement, pursuant to which Employee serves as Hancock Jaffe’s Business Development Manager;
WHEREAS, pursuant to Section 17 of the Employment Agreement, no provision of the Employment Agreement may be modified unless such modification is agreed to in writing and signed by Employee and such officer as may be designated by Hancock Jaffe; and
WHEREAS, the Parties desire to amend the Employment Agreement to, among other things, promote Employee to Chief Business Development Officer, increase Employee’s base salary, and adjust the bonus structure to incorporate more relevant milestones, all as set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, of the mutual promises contained herein and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. | Amendment to Section 1(a). Section 1(a) of the Employment Agreement is hereby amended and restated in its entirety as set forth below: |
“(a) Hancock Jaffe shall employ Employee as its Chief Business Development Officer. Employee shall be responsible for assisting in advancing the exit strategy and/or development routes of Hancock Jaffe’s products. Employee shall perform the duties set forth in this Section 1, in addition to those employment duties that are usual and customary for Employee’s position and those employment duties that may be assigned to Employee by the Chief Executive Officer of Hancock Jaffe from time to time.” | |
2. | Amendment to Section 2. Section 2 of the Employment Agreement is hereby amended and restated in its entirety as set forth below: |
“TERM”. Subject to the severance provisions of Section 7, this Agreement shall be for an initial term that begins on the Effective Date and continues in effect through December 31, 2018 (the “Initial Term”) This Agreement shall automatically be extended for additional three (3) year Renewal Terms (unless sooner terminated pursuant to the terms and provisions herein) unless either party gives written notice to the other to terminate this Agreement at least thirty (30) days prior to the end of each term, (each term a “Renewal Term,” and each Renewal Term together with the Initial Term, the “Term”). Non-Renewal of this Agreement by Hancock Jaffe will be deemed a TERMINATION WITHOUT CAUSE OR FOR GOOD REASON and subject to the provisions of Section 7 of this agreement. |
3. | Amendment to Section 3. Section 3 of the Employment Agreement is hereby amended and restated in its entirety as set forth below: |
“BASE SALARY. Hancock Jaffe shall pay Employee a base salary (“Base Salary”) at an annual rate of $300,000 during the Term, paid in accordance with the regular payroll practices of Hancock Jaffe. The Base Salary shall be subject to annual review and adjustment at the sole discretion of the Board. In no event shall the Base Salary be reduced from the preceding year without the consent of Employee. Notwithstanding the above in this Section 3, upon IPO, the Base Salary shall automatically increase to an annual rate of $300,000 per year for two (2) years starting from date of IPO.” | |
4. | Amendment to Section 4. Section 4 of the Employment Agreement is hereby amended and restated in its entirety as set forth below: |
“BONUS. Employee shall receive a Bonus of $250,000 upon completion of the earlier of (1) a commercial sale of one of Hancock Jaffe’s devices, or (3) the entry into a definitive agreement for the distribution or license of one of Hancock Jaffe’s devices. Hancock Jaffe, at its sole discretion, may advance all or portions of the Bonus as certain milestones are met.” | |
5. | Effect on the Employment Agreement; Reaffirmation. The Employment Agreement is not modified or amended other than as expressly indicated herein, and all other terms and conditions of the Employment Agreement shall remain in full force and effect. Hancock Jaffe and Employee hereby reaffirm every term, condition, covenant, representation and warranty set forth in the Employment Agreement not amended herein as originally made and given. |
6. | Governing Law. This Amendment, for all purposes, shall be construed in accordance with the laws of the State of California without regard to conflicts of law principles. |
7. | Counterparts. This Amendment may be executed (a) in one or more partially or fully executed counterparts, each of which will be deemed an original and will bind the signatory, but all of which together will constitute the same instrument, and (b) by facsimile or other electronic transmission of signatures. |
[Signature page follows]
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In witness whereof, Hancock Jaffe has caused this Amendment to be executed in its name and on its behalf, and Employee acknowledges understanding and acceptance of, and agrees to, the terms of this Agreement, all as of the Effective Date.
HANCOCK JAFFE LABORATORIES, INC. | STEVEN CANTOR | |
Yury Zhivilo | ||
Chairman |
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EXHIBIT 10.13
HANCOCK JAFFE LABORATORIES, INC.
MEDICAL ADVISORY BOARD AGREEMENT
THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1st day of May, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Steve Elias, M.D. having an address at 350 Engle Street, Englewood, New Jersey 07631.
WHEREAS, the Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;
WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;
WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.
IT IS HEREBY AGREED:
1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.
2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:
(a) Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;
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(b) Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;
(c) When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.
(d) When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.
The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.
3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.
4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.
5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15th day of each month.
6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.
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7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.
8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)
9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.
10. Miscellaneous.
(a) | Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given. |
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(b) | Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member. | |
(c) | Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. | |
(d) | Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. | |
(e) | Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below: |
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(i) if to HJL: Hancock Jaffe Laboratories Aesthetics, Inc.
70 Doppler
Irvine, California 92618
(ii) if to MAB Member:
(f) | Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine. | |
(g) | Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. | |
(h) | Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered. |
THIS SPACE LEFT INTENTIONALLY BLANK
SIGNATURE PAGE FOLLOWS
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | Norman Jaffe | |
Its: | President | |
MEDICAL ADVISORY BOARD MEMBER | ||
By: | ||
Name: | Steve Elias, M.D. |
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EXHIBIT 10.14
HANCOCK JAFFE LABORATORIES, INC.
MEDICAL ADVISORY BOARD AGREEMENT
THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1st day of May, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Antonius Gasparis, M.D. as a principal of APG Investor Group having an address at 1703 Court North Drive, Melville, New York 11747.
WHEREAS, the Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;
WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;
WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.
IT IS HEREBY AGREED:
1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.
2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:
(a) Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;
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(b) Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;
(c) When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.
(d) When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.
The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.
3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.
4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.
5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15th day of each month.
6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.
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7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.
8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)
9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.
10. Miscellaneous.
(a) | Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given. |
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(b) | Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member. | |
(c) | Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. | |
(d) | Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. | |
(e) | Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below: |
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(i) if to HJL: Hancock Jaffe Laboratories Aesthetics, Inc.
70 Doppler
Irvine, California 92618
(ii) if to MAB Member:
(f) | Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine. | |
(g) | Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. | |
(h) | Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered. |
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | Norman Jaffe | |
Its: | President | |
MEDICAL ADVISORY BOARD MEMBER | ||
By: | ||
Name: | Antonius Gasparis, M.D. |
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EXHIBIT 10.15
HANCOCK JAFFE LABORATORIES, INC.
MEDICAL ADVISORY BOARD AGREEMENT
THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of this 1st day of September 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Wade Dimitri, M.D.
WHEREAS, the Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;
WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;
WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.
IT IS HEREBY AGREED:
1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.
2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:
(a) Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;
(b) Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;
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(c) When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.
(d) When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.
The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.
3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.
4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.
5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15th day of each month.
6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.
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7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.
8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)
9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.
10. Miscellaneous.
(a) | Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given. |
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(b) | Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member. | |
(c) | Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. | |
(d) | Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. | |
(e) | Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below: |
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(i) | if to HJL: | Hancock Jaffe Laboratories, Inc. | |
70 Doppler | |||
Irvine, California 92618 | |||
(ii) | if to MAB Member: |
Street: | |||
City, State, Zip: |
(f) | Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine. | |
(g) | Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. | |
(h) | Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered. |
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | Yury Zhivilo | |
Its: | Chairman | |
MEDICAL ADVISORY BOARD MEMBER | ||
By: | ||
Name: |
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EXHIBIT 10.16
HANCOCK JAFFE LABORATORIES, INC.
MEDICAL ADVISORY BOARD AGREEMENT
THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of October 1, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Afksendyios Kalangos, M.D.
WHEREAS, the Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;
WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;
WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.
IT IS HEREBY AGREED:
1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.
2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:
(a) Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;
(b) Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;
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(c) When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.
(d) When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.
The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.
3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.
4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.
5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15th day of each month.
6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.
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7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.
8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)
9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.
10. Miscellaneous.
(a) | Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given. |
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(b) | Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member. | |
(c) | Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. | |
(d) | Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. | |
(e) | Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below: |
(i) | if to HJL: | Hancock Jaffe Laboratories, Inc | |
70 Doppler | |||
Irvine, California 92618 |
Page 4 of 6 |
(ii) | if to MAB Member: |
Street: | |||
City, State, Zip: |
(f) | Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine. | |
(g) | Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. | |
(h) | Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered. |
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | Yury Zhivilo | |
Its: Chairman | ||
MEDICAL ADVISORY BOARD MEMBER | ||
By: | ||
Name: | Afksendyios Kalangos, M.D. |
Page 6 of 6 |
EXHIBIT 10.17
HANCOCK JAFFE LABORATORIES, INC.
MEDICAL ADVISORY BOARD AGREEMENT
THIS MEDICAL ADVISORY BOARD AGREEMENT (the “Agreement”) is made as of October 1, 2016 by and between Hancock Jaffe Laboratories Inc., a Delaware corporation (“HJL”), located at 70 Doppler, Irvine, California, 92618 and Mark Meissner, M.D.
WHEREAS, the Medical Advisory Board (“MAB”) of HJL is intended to act as a distinguished panel of medical professionals, organized to provide outstanding expertise and leadership in cardiac valve disease and disorders with especial focus on pediatric valve replacement and;
WHEREAS, HJL desires that the MAB provide HJL with certain services in support of HJL’s venous valve (the “Device”) business, especially as it relates to chronic venous insufficiency;
WHEREAS, the MAB member desires to provide such services in accordance with the terms set forth herein.
IT IS HEREBY AGREED:
1. Appointment and Term. HJL hereby appoints the MAB Member to render the advisory services described in Section 2 hereof and the MAB Member hereby agrees to serve as a member of the MAB of HJL for a period of 12 months commencing on the date hereof. Unless terminated by either party within sixty days of the first anniversary of the date hereof and every anniversary thereafter, this agreement shall automatically extend for an additional twelve months. In the event that the MAB Member as an employee must obtain written consent from the MAB Member’s employer to render services on behalf of the MAB, subject to the MAB Member’s obtaining the prior written consent of the MAB Member’s Employer to this Agreement, the MAB Member represents and warrants to HJL that he is permitted to enter into this Agreement and perform the obligations contemplated hereby and that this Agreement and the terms and obligations hereof are not inconsistent with any other obligation he may have.
2. Services. HJL and the MAB member mutually agree that all of the services contemplated or provided for herein are primarily limited to preclinical issues and to matters related to the design of clinical trials and/or investigations. The Services of the MAB member are to:
(a) Comment upon, identify and/or assist in the preparation of specific recommendations related to the use and/or technical guidelines for the Device;
(b) Comment upon, identify and/or assist in the preparation of specific recommendations related to the design of clinical trials and/or clinical investigation;
Page 1 of 6 |
(c) When appropriate and in accordance with regulatory guidelines discuss with regulatory agencies certain matters or issues related to regulatory approval procedures.
(d) When appropriate and in accordance with regulatory guidelines discuss with physicians or other involved parties certain aspects of the safety and efficacy of the Device.
The MAB Member agrees to devote his best efforts to performing the Services. The MAB Member agrees to make himself available to render the Services, at such time or times and location or locations as may be mutually agreed, from time to time as requested by HJL. It is assumed that the time commitment and activity related to the above services will be reasonable and conducted mainly by telephone or in private meetings between the MAB Member and HJL. Under certain conditions it is contemplated that the above Services may necessitate travel, related accommodations and associated expenses; in such an event HJL will at its sole expense provide for and make arrangements to accomplish such matters with the prior approval of the MAB member.
3. Accuracy of Information. HJL shall furnish or caused to be furnished to the MAB Member such information as the MAB Member believes appropriate to render the Services under section 2 herein.
4. Publicity. HJL shall have the right to publicize the MAB Member’s affiliation with HJL subject to (a) the prior review and approval of the MAB Member, which approval will not be unreasonably withheld or delayed, and (b) if the proposed publicity references any relationship between the MAB Member and the MAB Member’s Employer, the prior written consent of the MAB Member’s Employer.
5. Fees. For the full, prompt and faithful performance of the Services, HJL shall pay the MAB Member a fee of $4,500 (four thousand and five hundred dollars) per month payable within five business days of the 15th day of each month.
6. Reimbursements. In addition to the fees payable pursuant to Section 5, HJL shall pay directly or reimburse the MAB Member for Out-of-Pocket Expenses. For the purposes of this Agreement, the term “Out-of-Pocket Expenses” shall mean any and all reasonable costs and expenses incurred by the MAB Member in connection with the services rendered hereunder, provided that any and all such costs and expenses in excess of $500.00 (five hundred dollars) shall be pre-approved by HJL either in writing or by oral agreement.
Page 2 of 6 |
7. Indemnification. HJL shall indemnify and hold harmless the MAB Member from and against any and all liabilities and expenses including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, whether joint or several, related to, arising out of or in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which the MAB Member may be involved or with which the MAB Member may be threatened, while performing the Services or thereafter, by reason of the MAB Member being or having been a member of the MAB, except with respect to any matter as to which the MAB Member shall not have acted in good faith in the reasonable belief that his action was in the best interests of HJL. HJL will reimburse the MAB Member for all reasonable costs and expenses (including reasonable attorney’s fees and expenses) as they are incurred in connection with investigating, preparing, pursuing, defending or assisting in the defense of any action, claim, suit, investigation or proceeding for which the MAB Member would be entitled to indemnification under the terms of the previous sentence, or any action arising therefrom, whether or not the MAB Member is a party thereto.
8. Confidential Information. The MAB Member agrees that he will not at any time publish or disclose to others or use for his own benefit or the benefit of others any Confidential Information (as hereafter defined), except to such extent as may be necessary in the ordinary course of performing in good faith his particular duties as a member of the MAB and with the prior written consent of HJL. The term “Confidential Information” shall mean research, development, engineering or manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that belongs to HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates and is identified or treated as confidential by HJL or any of its clients, customers, consultants, licensors, licensees, or affiliates; provided, however, that “Confidential Information” shall not include any of such information that is already in the possession of the MAB Member from a source not under an obligation or duty of non-disclosure to HJL, any of such information that is hereafter obtained by the MAB Member from a source other than HJL who is not under an obligation or duty of non-disclosure to HJL, or any of such information that is in the public domain or is otherwise generally known to HJL’s competitors (in either case other than because of a disclosure by the MAB Member in violation of this Section 8.)
9. Termination. This Agreement may be terminated by either party upon 30 days prior written notice. Such termination shall not relieve the MAB Member or HJL of any obligations hereunder which by their terms are intended to survive the termination of the MAB Member’s association with HJL, including but not limited to the obligations of Sections 7, 8 and 9.
10. Miscellaneous.
(a) | Entire Agreement. This Agreement constitutes the entire agreement between the parties as to the subject matter hereof. No provision of this Agreement shall be waived, altered or canceled except in writing signed by the party against whom such waiver, alteration or cancellation is asserted. Any such waiver shall be limited to the particular instance and the particular time when and for which it is given. |
Page 3 of 6 |
(b) | Nature of Agreement. It is understood and agreed that neither this Agreement nor the Services to be rendered hereunder shall for any purpose whatsoever or in any way or manner create any employer-employee relationship between the MAB Member and HJL and that the MAB Member shall not be entitled to any fringe benefits generally provided to employees of HJL and HJL shall not be required to maintain workers’ compensation coverage for the MAB Member. | |
(c) | Successors and Assigns. Services to be rendered by the MAB Member are personal in nature. Neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned by any of the parties hereto, in whole or in part (whether by operation of law or otherwise), without the prior written consent of the other parties, and any attempt to make any such assignment without such consent shall be null and void. | |
(d) | Severability. The invalidity or unenforceability of any provision hereof as to an obligation of a party shall in no way affect the validity or enforceability of any other provision of this Agreement, provided that if such invalidity or unenforceability materially adversely affects the benefits the other party reasonably expected to receive hereunder, that party shall have the right to terminate this Agreement. Moreover, if one or more of the provisions contained in this Agreement shall for any reason be held to be excessively broad as to scope, activity or subject so as to be unenforceable at law, such provision or provisions shall be construed by limiting or reducing it or them, so as to be enforceable to the extent compatible with the applicable law as it shall then appear. Notwithstanding, upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the greatest extent possible. | |
(e) | Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified; (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day; (c) five calendar days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications are to be sent to the addresses set forth below: |
(i) | if to HJL: | Hancock Jaffe Laboratories, Inc. | |
70 Doppler | |||
Irvine, California 92618 |
Page 4 of 6 |
(ii) | if to MAB Member: | |||
Street: | ||||
City, State, Zip: |
(f) | Interpretation. When a reference is made in this Agreement to Sections, such reference shall be to a Section of this Agreement unless otherwise indicated. The titles and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words “include,” “includes” or “including” are used in this Agreement, they shall be deemed to be followed by the words “without limitation. Any use of the masculine gender herein shall apply equally to the feminine. | |
(g) | Governing Law; Jurisdiction; Waiver of Jury Trial. THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED BY THE LAWS OF THE STATE OF CALIFORNIA. No suit, action or proceeding with respect to this Agreement may be brought in any court or before any similar authority other than in a court of competent jurisdiction in the State of California, and the parties hereto submit to the exclusive jurisdiction of these courts for the purpose of such suit, proceeding or judgment. The parties hereto irrevocably waive any right which they may have to bring such an action in any other court, domestic or foreign, or before any similar domestic or foreign authority. EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING IN RELATION TO THIS AGREEMENT AND FOR ANY COUNTERCLAIM THEREIN. | |
(h) | Counterparts. This Agreement may be executed in one or more counterparts (including by facsimile), all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered. |
THIS SPACE LEFT INTENTIONALLY BLANK
SIGNATURE PAGE FOLLOWS
Page 5 of 6 |
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a sealed instrument as of the day written herein above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | Yury Zhivilo | |
Its: | Chairman | |
MEDICAL ADVISORY BOARD MEMBER | ||
By: | ||
Name: | Mark Meissner, M.D |
Page 6 of 6 |
EXHIBIT 10.19
AMENDMENT 1
TO LOAN AGREEMENT
This Amendment to Loan Agreement (the “Amendment”) is made and entered into as of April 1, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “Lender”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “Borrower”).
RECITALS
WHEREAS, the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.
WHEREAS, the Lender and the Borrower desire to amend the Loan Agreement to provide for repayment of the Note and any unpaid accrued interest thereon through the issuance of common shares of the Borrower, at the sole discretion of the Lender, but not later than August 31, 2016.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
1. | Section 5.5 of the Loan Agreement is hereby added: | |
At the sole discretion of the Lender, the Loan, plus any unpaid accrued interest, may be paid by the Borrower through the issuance of common shares of the Borrower. Lender and Borrower agree that the price per share shall be based on the valuation of the Borrower as established for the Borrower’s current Series A Preferred Stock Offering. Such valuation is set at $5.00 per share. |
2. Except as herein amended, all provisions of the Loan Agreement shall remain in full force and effect.
3. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original and all of which shall constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.
“LENDER” | ||
Biodyne Holding SA | ||
By: | ||
Yury Zhivilo, Managing Director | ||
“BORROWER” | ||
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
William Abbott, Chief Financial Officer |
2 |
EXHIBIT 10.20
AMENDMENT No. 2
TO LOAN AGREEMENT
This Amendment to Loan Agreement (the “Amendment”) is made and entered into as of October 18, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “Lender”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “Borrower”).
RECITALS
WHEREAS, the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.
WHEREAS, the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
Section 1.1 of the Loan Agreement is hereby amended to read as follows:
Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200,000 (two million two hundred thousand US Dollars) in several installments through December 29, 2016.
Section 5 of the loan agreement is hereby amended to read as follows:
Section 5: REPAYMENT | ||
5.1. | The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower | |
5.2. | Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on December 29, 2016. | |
5.3. | The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by December 29, 2016. The Borrower is entitled to repay the loan and the accrued interests at any time before December 29, 2016 without penalty. |
1 |
IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.
“LENDER” | ||
Biodyne Holding SA | ||
By: | ||
Yury Zhivilo, Managing Director | ||
“BORROWER” | ||
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
William Abbott, Chief Financial Officer |
2 |
EXHIBIT 10.21
AMENDMENT No. 3
TO LOAN AGREEMENT
This Amendment to Loan Agreement DRICBDH0615 (the “Amendment”) is made and entered into as of December 9, 2016, by and between Biodyne Holding SA, a Swiss corporation (the “Lender”) and Hancock Jaffe Laboratories, Inc., a Delaware corporation, (the “Borrower”).
RECITALS
WHEREAS, the Lender and the Borrower are party to a Loan Agreement, dated as of June 30, 2015 (the “Loan Agreement”) and Convertible Promissory Notes with the right of transfer as determined by the Lender in accordance with Section 4 of the Loan Agreement.
WHEREAS, the Lender and the Borrower desire to amend the Loan Agreement to provide for an extension of funding and repayment periods.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:
Section 1.1 of the Loan Agreement is hereby amended to read as follows:
Section 1.1.: This Agreement sets out the terms and conditions upon which the Lender will make available to the Borrower a loan of up to USD 2,200,000 (two million two hundred thousand US Dollars) in several installments through March 31, 2017.
Section 5 of the loan agreement is hereby amended to read as follows:
Section 5: REPAYMENT | ||
5.1. | The Loan shall bear interest at the rate of three per cent (3%) per annum. The interest shall be calculated from the date the Lender remits funds to Borrower | |
5.2. | Interest shall be due and payable by the Borrower to the Lender on an annual basis, the first payment to occur on March 31, 2017. | |
5.3. | The Borrower undertakes to repay to the Lender the Loan plus any unpaid interest accruing thereon by March 31, 2017. The Borrower is entitled to repay the loan and the accrued interests at any time before March 31, 2017 without penalty. |
1 |
IN WITNESS WHEREOF, the parties have executed this Amendment to the Loan Agreement as of the date first written above.
“LENDER” | ||
Biodyne Holding SA | ||
By: | ||
Yury Zhivilo, Managing Director | ||
“BORROWER” | ||
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
William Abbott, Chief Financial Officer |
2 |
EXHIBIT 10.22
COMMON STOCK PURCHASE AGREEMENT
THIS COMMON STOCK PURCHASE AGREEMENT (this “Agreement”) is made as of April 1, 2016 by and between Hancock Jaffe Laboratories, Inc., a Delaware corporation (“HJL”) and Hancock Jaffe Laboratories Aesthetics, Inc., a Delaware corporation (“HJL Aesthetics”).
RECITALS
WHEREAS, HJL desires to provide certain development and related services to HJL Aesthetics for the development of HJL Aesthetic’s dermal filler product candidate;
WHEREAS, HJL has previously paid HJL Aesthetics $445,200.00 in exchange for the exclusive and worldwide right to provide the development and manufacturing services to HJL Aesthetics through December 31, 2025 and for the right to buy 484,358 shares of Common Stock, $0.001 par value per share (the “Common Stock”) for an aggregate of $4,194,540.28 which purchase price shall be payable in accordance with the terms set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises of the parties, the parties agree as follows:
1. Purchase of Shares. Subject to the terms and conditions of this Agreement, HJL has the right, but not the obligation, to purchase an aggregate of 484,358 shares of Common Stock (the “Shares”) in accordance with Schedule A. The purchase price for each of the Shares is $8.66. In the event that HJL elects not to purchase any Shares on a date indicated on Schedule A, it may purchase such Shares on another date upon the mutual agreement of HJL and HJL Aesthetics but not later than January 15, 2017.
2. Closing; Delivery of Shares. The closing of the purchase and sale of the Shares shall take place at the offices of HJL Aesthetics (the “Closing”) at such other time or place as the parties mutually agree. At the Closing, HJL Aesthetics shall deliver to HJL a certificate representing the Shares that HJL is purchasing at the Closing against payment of the purchase price therefor by check or wire transfer.
3. Exclusive Right to Provide Services. HJL Aesthetics hereby grants to HJL an exclusive right for a period through December 31, 2025, to provide development and manufacturing services for any and all product candidates developed by HJL Aesthetics during that period. If HJL agrees to provide such services, HJL and HJL Aesthetics shall enter into a separate development and/or manufacturing services agreement for such services, on or before January 15, 2017.
4. Investment Representations of HJL. HJL acknowledges that it is aware that the Shares to be sold to it by HJL Aesthetics pursuant to this Agreement have not been registered under the Securities Act of 1933, as amended (the “Act”). In connection therewith, HJL warrants and represents to HJL Aesthetics as follows:
1 |
(a) HJL is receiving the Shares solely for HJL’s own account for investment and not with a view to or for sale or distribution of the Shares or any portion thereof and not with any present intention of selling, offering to sell or otherwise disposing of or distributing the Shares or any portion thereof. HJL also represents that the entire legal and beneficial interest of the Shares is being transferred for, and will be held for the account of, HJL only and neither in whole nor in part for any other person. HJL is receiving the Shares in a private transaction and not pursuant to a distribution or through a general solicitation or advertisement.
(b) HJL is an “accredited investor” for purposes of Regulation D promulgated by the Securities and Exchange Commission under the Act.
(c) HJL hereby acknowledges that:
(i) The Shares have not been registered under the Act, and such Shares must be held indefinitely unless a transfer of them is subsequently registered under the Act or an exemption from such registration is available; and
(ii) It is understood that the certificates representing the Shares may bear one or more legends including, but not limited to, a legend in substantially the following form:
(A) “THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.”
(B) Any legend required by the Blue Sky laws of any state to the extent such laws are applicable to the Shares represented by the certificate so legended.
5. Representations and Warranties of HJL Aesthetics. HJL Aesthetics hereby represents and warrants and covenants to HJL as follows:
(a) Organization, Good Standing and Qualification. HJL Aesthetics is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now being conducted and proposed to be conducted in the future. HJL Aesthetics is duly qualified to transact business and is in good standing in each jurisdiction where failure to so qualify would have a material adverse effect on its business or properties.
2 |
(b) Authorization. All corporate actions on the part of HJL Aesthetics, its officers, directors, and stockholders necessary for the authorization, execution, and delivery of this Agreement, the performance of all obligations of HJL Aesthetics hereunder and thereunder, and the authorization, issuance (or reservation for issuance), and delivery of the Shares have been taken or will be taken prior to the Closing. This Agreement constitutes a valid and legally binding obligation of HJL Aesthetics, enforceable in accordance with its terms, except as limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors’ rights generally, (b) laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (c) state and federal securities laws with respect to rights to indemnification or contribution.
(c) Valid Issuance of Shares. The Shares when authorized, issued, sold and delivered in accordance with the terms hereof for the consideration expressed herein, will be duly and validly issued, fully paid and nonassessable and, based in part upon the representations of HJL in this Agreement, will be issued in compliance with all applicable federal and state securities laws.
(d) No Conflict. The execution and delivery by HJL Aesthetics of this Agreement and the performance by HJL Aesthetics of its obligations hereunder (including the issuance and sale of the Shares) do not require HJL Aesthetics to obtain any consent, approval or action of, or make any filing with or give any notice to, any corporation, person or firm or any public, governmental or judicial authority that has not already been obtained prior to the date hereof or not required to be obtained until after the date hereof.
(e) Capitalization. The authorized capital stock of HJL Aesthetics, as of the date of this Agreement, consists of 2,000,000 shares of Common Stock, of which 1,054,000 shares are issued and outstanding. There are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), or agreements of any kind for the purchase or acquisition from HJL Aesthetics of any of its securities.
(f) Absence of Defaults. The execution and delivery of this Agreement and the performance of its obligations hereunder (including the issuance and sale of the Shares) will not result in a breach of any of the terms, conditions or provisions of, or constitute a default under, or permit the acceleration of rights under or termination of, any material indenture, mortgage, deed of trust, credit agreement, note or other evidence of indebtedness, or other material agreement of HJL Aesthetics or the Certificate of Incorporation or Bylaws of HJL Aesthetics. No event has occurred and no condition exists which, upon notice or the passage of time (or both), would constitute a default under any such key agreements and instruments or in any license, permit or authorization to which HJL Aesthetics is a party or by which it may be bound.
(g) Litigation. There is no action, suit, proceeding or investigation pending or, to HJL Aesthetics’s knowledge, currently threatened against HJL Aesthetics that questions the validity of this Agreement or the right of HJL Aesthetics to enter into it, or to consummate the transactions contemplated hereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition or affairs of HJL Aesthetics, financially or otherwise, nor is HJL Aesthetics aware that there is any basis for the foregoing. HJL Aesthetics is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by HJL Aesthetics currently pending or which HJL Aesthetics intends to initiate.
3 |
(h) Compliance with Laws. HJL Aesthetics has conducted its business in compliance with all applicable (i) laws, statutes, ordinances, regulations, rules, notice requirements, common law, agency guidelines and orders of any foreign, federal, state or local courts or governmental agencies, departments or authorities (“Authorities”) (together, “Regulations”) and (ii) judgments, decisions, consent decrees, injunctions, rulings or orders of any Authorities that are binding on HJL Aesthetics or its property under applicable law (together, “Court Orders”), except as would not reasonably be expected to cause a material adverse effect on HJL Aesthetics’s business.
6.Miscellaneous.
(a) Entire Agreement; Amendment. This Agreement embodies all of the agreements and understandings of the parties hereto with respect to the subject matter hereof and supersedes all prior agreements or understandings, written or oral, with respect thereto. The parties agree to execute such further instruments and to take such further instruments and to take such further action as may be reasonably necessary to carry out the intent of this Agreement. This Agreement may not be amended or modified, except by a written instrument signed by all of the parties affected thereby. No waiver of any right hereunder shall be effective unless it is given in a written document or instrument signed by the party waiving such right.
(b) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
(c) Headings. The paragraph headings included herein are for convenience of reference only and shall not be considered in, and shall not affect, the interpretation or application of any of the provisions hereof.
(d) Counterparts. This Agreement may be executed in separate counterparts, each of which shall constitute one and the same agreement and, provided that each of the parties hereto has executed and delivered at least one such counterpart, this Agreement shall be effective even if all of the parties have not executed the same counterpart of this Agreement.
(e) Successors and Assigns. The provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
(f) Severability. Any provision of this Agreement that is declared by a court of competent jurisdiction to be illegal, unenforceable or invalid, shall be ineffective to the extent of such illegality, unenforceability or invalidity, but any such provision shall be enforced to the fullest extent possible to avoid such illegality, unenforceability or invalidity, and each other provision of this Agreement shall continue in full force and effect.
4 |
IN WITNESS WHEREOF, the undersigned have executed this Common Stock Purchase Agreement as of the date first written above.
HANCOCK JAFFE LABORATORIES, INC. | ||
By: | ||
Name: | William Abbott | |
Its: | Chief Financial Officer | |
HANCOCK JAFFE LABORATORIES AESTHETICS, INC. | ||
By: | ||
Name: | Norman Jaffe | |
Its: | President |
5 |
Schedule A
Payment | Date | Number of Shares | ||||||||
$ | 179,998.10 | April 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | May 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | June 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | July 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | August 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | September 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | October 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | November 18, 2016 | 20,785 | |||||||
$ | 179,998.10 | January 1, 2017 | 20,785 | |||||||
$ | 2,574,557.38 | January 15, 2017 | 297,293 |
6 |
EXHIBIT 21.1
Subsidiaries of Hancock Jaffe Laboratories, Inc.
Name | Jurisdiction of Operations | |
Hancock Jaffe Laboratories Vascular, Inc. | Delaware |
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