0001193125-21-049126.txt : 20210219 0001193125-21-049126.hdr.sgml : 20210219 20210219172550 ACCESSION NUMBER: 0001193125-21-049126 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 31 FILED AS OF DATE: 20210219 DATE AS OF CHANGE: 20210219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Prometheus Biosciences, Inc. CENTRAL INDEX KEY: 0001718852 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 814282653 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-253323 FILM NUMBER: 21657297 BUSINESS ADDRESS: STREET 1: 9410 CARROLL PARK DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: (858) 200-7888 MAIL ADDRESS: STREET 1: 9410 CARROLL PARK DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: Precision IBD, Inc. DATE OF NAME CHANGE: 20171004 S-1 1 d14529ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on February 19, 2021

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

PROMETHEUS BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   2834   81-4282653

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

9410 Carroll Park Drive

San Diego, California 92121

858-824-0895

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

 

 

Mark C. McKenna

President and Chief Executive Officer

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, California 92121

858-824-0895

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

 

 

Copies to:

 

Cheston J. Larson

Matthew T. Bush

Michael E. Sullivan

Latham & Watkins LLP

12670 High Bluff Drive

San Diego, California 92130

(858) 523-5400

 

Timothy K. Andrews

General Counsel

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, California 92121

858-824-0895

 

Deanna Kirkpatrick

Yasin Keshvargar

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities To Be Registered

 

Proposed

Maximum
Aggregate

Offering Price(1)

  Amount of
Registration Fee(2)

Common Stock, $0.0001 par value per share

  $125,000,000   $13,637.50

 

 

(1)

Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. Includes shares of common stock that the underwriters have the option to purchase.

(2)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

 

 

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

 

 

 


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

 

Subject to Completion. Dated February 19, 2021.

                Shares

 

LOGO

Common Stock

 

 

This is the initial public offering of Prometheus Biosciences, Inc. We are offering                shares of our common stock. The initial public offering price is expected to be between $        and $        per share.

Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the Nasdaq Global Market under the symbol “RXDX.”

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12.

Neither the Securities and Exchange Commission nor any other state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us.

   $        $    

 

  (1)

See the section titled “Underwriting” for additional information regarding compensation payable to the underwriters.

 

 

We have granted the underwriters an option for a period of 30 days to purchase up to                additional shares of common stock from us at the public offering price, less the underwriting discounts and commissions.

The underwriters expect to deliver the shares of common stock to purchasers on                , 2021 through the book-entry facilities of The Depository Trust Company.

 

 

 

SVB Leerink           Credit Suisse   Stifel   Guggenheim Securities

 

 

Prospectus dated                , 2021.


Table of Contents

TABLE OF CONTENTS

 

     Page  

PROSPECTUS SUMMARY

     1  

RISK FACTORS

     12  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     72  

MARKET AND INDUSTRY DATA

     73  

USE OF PROCEEDS

     74  

DIVIDEND POLICY

     75  

CAPITALIZATION

     76  

DILUTION

     78  

SELECTED FINANCIAL DATA

     80  

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

     82  

BUSINESS

     97  

MANAGEMENT

     138  

EXECUTIVE AND DIRECTOR COMPENSATION

     147  

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     168  

PRINCIPAL STOCKHOLDERS

     172  

DESCRIPTION OF CAPITAL STOCK

     175  

SHARES ELIGIBLE FOR FUTURE SALE

     181  

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

     184  

UNDERWRITING

     188  

LEGAL MATTERS

     196  

EXPERTS

     196  

WHERE YOU CAN FIND MORE INFORMATION

     196  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

Neither we nor the underwriters have authorized anyone to provide you with information other than that contained in this prospectus or 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. We and the underwriters are offering to sell, and seeking offers to buy, common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus or any free writing prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of shares of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Through and including                    , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside of 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 in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the section titled “Risk Factors” and our consolidated financial statements and related notes included elsewhere in this prospectus, before making an investment decision. As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “the Company,” “Prometheus Biosciences” and “Prometheus” refer to Prometheus Biosciences, Inc.

Overview

We are a biotechnology company pioneering a precision medicine approach to the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment of inflammatory bowel disease (IBD). We leverage our proprietary precision medicine platform, Prometheus360, which includes one of the world’s largest gastrointestinal (GI) bioinformatics databases, to identify novel therapeutic targets and develop therapeutic candidates to engage those targets. In parallel, we are developing companion diagnostic tests designed to identify patients more likely to respond to our therapeutic candidates. We have generated a robust initial pipeline of therapeutic development programs for the treatment of IBD. Our lead product candidate, PRA023, is an IgG1 humanized monoclonal antibody (mAb) that has been shown to block the tumor necrosis factor (TNF)-like ligand 1A (TL1A), a target associated with both intestinal inflammation and fibrosis that was clinically validated in a third-party Phase 2a clinical trial in ulcerative colitis (UC). PRA023 has the potential to substantially improve outcomes for moderate-to-severe IBD patients who are predisposed to increased TL1A expression. We are developing PRA023 for the treatment of UC and Crohn’s disease (CD), and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Our goal is to revolutionize the treatment of IBD with a precision medicine approach for patients with significant unmet medical needs.

Inflammatory Bowel Disease

IBD is a complex disease with many contributing factors, including genetic, environmental and immunologic. UC and CD are two of the most common forms of IBD. Both UC and CD are chronic, relapsing, remitting, inflammatory conditions of the GI tract that begin most commonly during adolescence and young adulthood. UC involves the innermost lining of the large intestine, and symptoms include abdominal pain and diarrhea, frequently with blood and mucus. CD can affect the entire thickness of the bowel wall and all parts of the GI tract from mouth to anus. CD symptoms include abdominal pain, diarrhea, and other more systemic symptoms such as weight loss, nutritional deficiencies, and fever.

The current standard of care for the treatment of patients with moderate-to-severe IBD is typically anti-inflammatory agents; however, none of these therapies address fibrosis, or scarring, in IBD. The majority of IBD patients do not respond to first-line anti-TNF agents. Since the approval of the first anti-TNF agent for the treatment of CD in 1998, the availability of JAK inhibitors and newer biological agents, including anti-integrin and anti-IL12/23, has improved the care of moderate-to-severe IBD (JAK inhibitors in UC only). However, these subsequently approved therapies have generally failed to demonstrate a clinical remission effect size of more than 15% relative to placebo. Moreover, among those patients who do respond to therapy, up to 45% will lose response over time. Likewise, therapies under development have not, to date, demonstrated improved remission rates over previously approved therapies. Current therapies used for the treatment of UC and CD apply a one-size-fits-all approach without regard to biologic variations amongst patients, and substantial unmet need remains.

IBD is estimated to affect over 2,000,000 people in the United States and over 5,000,000 people globally. The IBD market was approximately $12.5 billion in the United States and $18.4 billion globally in 2019 and is



 

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expected to grow to approximately $14.2 billion in the United States and $21.4 billion globally by 2024. Based in part on patient cohort data for our companion diagnostic product candidate, we estimate this product candidate will identify an increased level of TLIA expression in over 30% of IBD patients. The IBD market is highly concentrated, with four therapeutic products accounting for 75% of global revenues.

Our Precision Medicine Approach

Precision medicine involves the discovery and development of therapies that integrate clinical and molecular information based on the biological basis of disease to improve clinical decision-making and patient outcomes. We are pioneering the application of precision medicine in IBD because we believe that by leveraging Prometheus360 we can identify novel therapeutic targets impacting the underlying pathways involved in IBD and the patient subgroups that will be responsive to a particular therapy.

We believe we have the potential to transform the entire IBD pharmaceutical value chain from discovery to commercialization with our precision medicine approach. Our Prometheus360 platform includes our extensive clinical database and associated biobank, which is one of the world’s largest collections of biospecimens from patients suffering from IBD and other GI disorders. This database and biobank, which we exclusively license from Cedars-Sinai Medical Center (Cedars-Sinai), includes more than 200,000 samples linked to extensive clinical data from over 20,000 patients collected over more than 20 years. This, in combination with our state-of-the-art machine-learning methodologies, makes Prometheus360 a discovery engine for novel precision therapeutics and companion diagnostics. IBD clinical development programs can take up to seven to ten years to complete and physicians are often challenged with the task of enrolling patients from a limited pool of qualified candidates into a large number of trials with undifferentiated mechanisms of action. By using companion diagnostics to target a specific subset of the IBD population, we expect to reduce overall development time and cost through smaller trials and faster enrollment rates. We believe our precision medicine approach will result in a greater likelihood of identifying and developing the right drug for the right patient, help to maximize patient and trial outcomes, improve label claims, accelerate adoption of targeted therapeutics for addressable patients and provide attractive treatment options from a cost-benefit perspective for payors.

Our Portfolio

We have a robust pipeline of therapeutic development programs to address several clinical IBD patient subpopulations, and plan to develop a companion diagnostic for each program. The following table summarizes our key current internal and partnered programs.

 

 

LOGO

 

  (1)

We retain all commercialization rights to PR600 outside of Europe, Australia and New Zealand.



 

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PRA023 Overview – anti-TL1A mAb

Our lead product candidate, PRA023, is an IgG1 humanized mAb that has been shown to block TL1A. Third-party antibody programs against this target have been shown to reduce both intestinal inflammation and fibrosis in preclinical studies. The TL1A target has been clinically validated in that a third-party Phase 2a 14-week open-label study in patients with moderate-to-severe UC observed a high proportion of patients (38%) achieving endoscopic improvement and 24% of patients achieved clinical remission. PRA023 binds both soluble and membrane-associated human TL1A with high affinity and specificity and has the potential to substantially improve outcomes for moderate-to-severe IBD patients predisposed to increased TL1A expression. We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Assuming favorable safety results in this trial, we expect to commence in parallel in 2021 a Phase 2 randomized placebo-controlled clinical trial in patients with moderate-to-severe UC and an open-label Phase 1b clinical trial in patients with moderate-to-severe CD, with data expected in the second half of 2022 for both indications. We are also developing a genetic-based companion diagnostic to identify patients who are predisposed to increased expression of TL1A and therefore potentially more likely to respond to PRA023. We intend to evaluate and use this companion diagnostic starting with the Phase 2 UC trial and the Phase 1b CD trial.

PR600 Overview – Anti-TNF Super Family Member mAb

Our PR600 program targets a member of the TNF super family. This target, expressed by immune cells, engages a receptor and drives downstream biological pathways distinct from those activated by TNF or TL1A. It has been shown that blocking this target inhibits disease in multiple third-party IBD animal models. We believe that a therapeutic developed against this target is likely to impede both the reactivation and propagation of the pathogenic immune response in IBD. We have identified multiple genetic variants linked to patient subpopulations with a complicated course of disease. We have conducted functional genetic studies in patient samples and have identified genetic variations associated with an increase in target expressing immune cells in CD peripheral blood and an increased capacity to produce inflammatory cytokines. We intend to leverage Prometheus360 in combination with functional assays to identify patients with these genetic variants. We entered into a co-development and manufacturing agreement (the Falk Agreement) with Dr. Falk Pharma GmbH (Falk) for our PR600 program, in order to leverage Falk’s experience in GI drug development and commercialization in Europe. Under this agreement, we granted to Falk exclusive commercialization rights in Europe, Australia and New Zealand, while we retained commercialization rights in the United States and the rest of the world for therapeutics developed from our PR600 program. We expect to submit an IND for a therapeutic candidate from the PR600 program in the second half of 2022.

PR300 Overview – GPCR Modulator Small Molecule

Our PR300 program targets an orphan G-protein coupled receptor (GPCR) expressed predominantly in the GI tract that we believe has important functions underlying intestinal epithelial integrity and innate immune cell function. We have identified a coding single nucleotide polymorphism (SNP) in the gene of this target that represents a very strong genetic association with UC. Through further datamining, we have also identified multiple additional genetic variants that are associated with both UC and CD. These variants are linked to hard-to-treat clinical patient subpopulations, including those with medically refractory UC and perianal CD.

PR1800 Overview – anti-Chemokine mAb

Our PR1800 program targets a chemo-attractant factor which contributes to the local accumulation of a defined inflammatory effector cell population in the GI tract. Factors secreted by these effector cells are believed to deteriorate the structure and protective functions of the intestinal mucosal barrier. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. These variants include coding SNPs and are linked to hard-to-treat clinical patient subpopulations.



 

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PR2100 Overview - anti-Inflammatory Cytokine mAb

Our PR2100 program targets a cytokine implicated in a range of inflammatory and fibrotic diseases. In IBD specifically, this cytokine has been implicated to contribute to non-response to anti-TNF therapies. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. In CD in particular, these variants are linked to ileal disease and extra-intestinal manifestation of disease in the skin.

Other Development Programs and Takeda-Partnered Program

We have several other programs with different mechanisms of action targeting UC and/or CD that are in the discovery stage of development. We also continue to evaluate numerous other drug targets identified through Prometheus360 for therapeutic utility for potential drug discovery development. In addition, we have a strategic collaboration with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (Takeda), pursuant to which we will collaborate with Takeda to develop a companion diagnostic for one or more therapeutic candidates developed by Takeda for the treatment of UC and CD.

Our Team and Investors

Our team is comprised of leaders and scientists with significant experience in IBD and other GI diseases, data analytics, biology and drug development. Mark McKenna, our President and Chief Executive Officer, was previously President at Salix Pharmaceuticals, Inc., a wholly owned subsidiary of Bausch Health Companies Inc., where he was responsible for the company’s GI franchise and launched several new products. Other members of our management team have served in senior positions at AbbVie Inc., Bayer AG, Bristol-Myers Squibb Company, Genentech, Inc., GlaxoSmithKline plc, Pfizer Inc., Sanofi S.A. and Takeda. We are also guided by our board of directors, led by Chairman Tadataka (Tachi) Yamada, M.D., and a scientific advisory board composed of key opinion leaders in IBD, including Stephan Targan, M.D., William Sandborn, M.D. and Dermot P. McGovern, M.D., Ph.D.

In addition, we are backed by leading life sciences investors, including Eventide Asset Management, RTW

Investments, LP, Perceptive Advisors, Cormorant Capital, Cowen Healthcare Investments, Point72 Asset

Management, Irving Investors, Ascend Global Investment Fund, Cedars-Sinai Medical Center and Nestlé S.A.

Our Strengths

We believe that our company has the following key differentiating competitive strengths:

 

   

We use a novel precision medicine approach to target the IBD market, which is primed for disruption.

 

   

Our proprietary Prometheus360 platform is a discovery engine for novel precision therapeutics and companion diagnostics.

 

   

Our lead product candidate, PRA023, targets a clinically-validated TL1A pathway and has the potential to be a differentiated treatment with improved patient outcomes.

 

   

Our platform has attracted partnerships with leading global pharmaceutical companies in the field of IBD.

 

   

We have assembled an experienced team comprised of industry leaders with drug discovery, development and commercialization expertise.



 

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Our Strategy

Our goal is to revolutionize the treatment of IBD with a precision medicine approach for patients with significant unmet medical needs. The key elements of our strategy to achieve this goal are:

 

   

Maximize the value of our Prometheus360 precision medicine platform for the treatment of IBD.

 

   

Advance PRA023 through the clinic and potentially accelerate its development by utilizing our companion diagnostic to identify patients expected to benefit from treatment.

 

   

Explore additional indications for PRA023.

 

   

Advance our other programs, including PR600, into and through the clinic.

 

   

Continue leveraging Prometheus360 to expand our pipeline to address additional patient subpopulations.

 

   

Selectively enter into strategic collaborations to maximize the value of our therapeutic pipeline.

Summary of Risks Related to Our Business

Our ability to execute our business strategy is subject to numerous risks, as more fully described in the section titled “Risk Factors” immediately following this Prospectus Summary. These risks include, among others:

 

   

We have a limited operating history, have incurred significant operating losses since our inception and expect to incur significant losses for the foreseeable future. We may not be able to generate sufficient revenue to achieve and maintain profitability.

 

   

In the near term, our ability to generate revenue will depend primarily on collaboration revenue.

 

   

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development programs, commercialization efforts or other operations.

 

   

Our approach to the discovery and development of precision medicines based on our Prometheus360 platform is unproven, and we do not know whether we will be able to develop any therapeutics or diagnostic products of commercial value, or if competing technological approaches will limit the commercial value of our product candidates and companion diagnostics or render Prometheus360 obsolete.

 

   

We are early in our development efforts and all of our development programs are in the clinical or discovery stage. If we are unable to successfully develop, obtain regulatory approval and ultimately commercialize product candidates and related companion diagnostics, or experience significant delays in doing so, our business will be materially harmed.

 

   

Preclinical and clinical development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies and early clinical trials are not necessarily predictive of future results. We have not tested any of our product candidates in clinical trials and our product candidates may not have favorable results in clinical trials, if any, or receive regulatory approval on a timely basis, if at all.

 

   

Any difficulties or delays in the commencement or completion, or termination or suspension, of our ongoing or planned clinical trials could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.



 

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We have entered, and may in the future seek to enter into, collaborations, licenses and other similar arrangements and may not be successful in doing so, and even if we are, we may relinquish valuable rights and may not realize the benefits of such relationships.

 

   

We rely on third parties to conduct many of our preclinical studies and clinical trials and to manufacture our product candidates, and these third parties may not perform satisfactorily.

 

   

We face significant competition, and if our competitors develop technologies or product candidates more rapidly than we do or their technologies are more effective, our ability to develop and successfully commercialize products may be adversely affected.

 

   

If we are unable to obtain and maintain patent protection for our therapeutic and diagnostic programs and other proprietary technologies we may develop, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our therapeutic and diagnostic programs and other proprietary technologies we may develop may be adversely affected.

 

   

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

 

   

We depend on intellectual property licensed from third parties, and our licensors may not always act in our best interest. If we fail to comply with our obligations under our intellectual property licenses, if the licenses are terminated or if disputes regarding these licenses arise, we could lose significant rights that are important to our business.

Corporate Information

We were originally founded as a Delaware corporation on October 26, 2016, under the name Precision IBD, Inc. On October 3, 2019, we changed our name to Prometheus Biosciences, Inc. Our principal executive offices are located at 9410 Carroll Park Drive, San Diego, California 92121, and our telephone number is 858-824-0895. Our website address is www.prometheusbiosciences.com. The information contained in, or accessible through, our website does not constitute part of this prospectus. We have included our website address as an inactive textual reference only.

We use our trademarks in this prospectus as well as trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames 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 tradenames.

Implications of Being an Emerging Growth Company and a Smaller Reporting Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). An emerging growth company may take advantage of reduced reporting requirements that are otherwise applicable to public companies. These provisions include, but are not limited to:

 

   

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

   

not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley Act;



 

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not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, unless the SEC determines the new rules are necessary for protecting the public;

 

   

reduced disclosure obligations regarding executive compensation; 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.

We may take advantage of these provisions until the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended (the Securities Act), which such fifth anniversary will occur in 2025. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the Exchange Act), our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any 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 this prospectus and 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 in this prospectus and that we provide to our stockholders in the future may be different than what you might receive from other public reporting companies in which you hold equity interests.

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. We have irrevocably elected to avail ourselves of this exemption and, therefore, we will not be subject to the same timing of adoption of new or revised accounting standards as other public companies that are not emerging growth companies.

We are also a smaller reporting company as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700.0 million measured on the last business day of our second fiscal quarter.



 

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The Offering

 

Common stock offered by us

                shares.

 

Option to purchase additional shares

The underwriters have a 30-day option to purchase up to a total of                 additional shares of our common stock.

 

Common stock to be outstanding immediately after this offering

                shares (                 shares if the underwriters exercise their option to purchase additional shares of common stock in full).

 

Use of proceeds

We intend to use the net proceeds of this offering to fund the research and development of our development programs and for working capital and general corporate purposes. See “Use of Proceeds.”

 

Risk factors

See the “Risk Factors” section of this prospectus and the other information included in this prospectus for a discussion of factors you should consider carefully before deciding to invest in our common stock.

 

Proposed Nasdaq Global Market symbol

RXDX

The number of shares of our common stock to be outstanding after this offering set forth above is based on 272,543,002 shares of our common stock outstanding as of December 31, 2020, including 546,979 shares subject to forfeiture or our right of repurchase, after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering, and excludes:

 

   

29,302,518 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2020, at a weighted-average exercise price of $0.29 per share;

 

   

21,168,757 shares of common stock issuable upon the exercise of outstanding stock options granted after December 31, 2020, at a weighted-average exercise price of $0.64 per share;

 

   

112,500 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2020, at a weighted-average exercise price of $1.00 per share;

 

   

                shares of common stock reserved for future issuance under our 2021 Incentive Plan (the 2021 Plan), which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 Plan); and

 

   

                shares of common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan (the 2021 ESPP), which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 ESPP).

Unless otherwise indicated, all information contained in this prospectus assumes or gives effect to:

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws, each of which will occur immediately prior to the closing of this offering;

 

   

the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021;

 

   

the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering;



 

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the conversion of outstanding warrants to purchase 112,500 shares of our Series C convertible preferred stock into warrants to purchase 112,500 shares of our common stock immediately prior to the closing of this offering;

 

   

a         -for-        reverse stock split of our common stock to be effected before the closing of this offering;

 

   

no exercise of the outstanding options or warrants described above; and

 

   

no exercise by the underwriters of their option to purchase                 additional shares of our common stock.



 

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Summary 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. We have derived the summary statements of operations data for the years ended December 31, 2019 and 2020 from our audited consolidated financial statements included elsewhere in this prospectus. You should read these data together with our consolidated financial statements and related notes included elsewhere in this prospectus and the sections titled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of our future results.

 

     Years Ended
December 31,
 
(in thousands, except share and per share data)    2019     2020  

Statements of Operations Data:

    

Collaboration revenue

   $ 1,118     $ 1,229  

Operating expenses:

    

Research and development

     10,958       19,147  

General and administrative

     6,128       11,089  
  

 

 

   

 

 

 

Total operating expenses

     17,086       30,236  
  

 

 

   

 

 

 

Loss from operations

     (15,968     (29,007
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     9       13  

Interest expense

     (770     (2,130

Other

     —         (15
  

 

 

   

 

 

 

Total other income (expense)

     (761     (2,132
  

 

 

   

 

 

 

Loss from continuing operations

     (16,729     (31,139

Loss from discontinued operations, net of income taxes

     (12,994     (5,999
  

 

 

   

 

 

 

Net loss

   $ (29,723   $ (37,138
  

 

 

   

 

 

 

Net loss per share, basic and diluted:

    

Continuing operations

   $ (1.49   $ (2.08

Discontinued operations

     (1.16     (0.40
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (2.65   $ (2.48
  

 

 

   

 

 

 

Weighted-average shares of common stock outstanding, basic and diluted

     11,227,009       14,989,769  
  

 

 

   

 

 

 

Pro forma net loss per share from continuing operations, basic and diluted (unaudited)(1)

     $ (0.12
    

 

 

 

Pro forma weighted-average shares of common stock outstanding, basic and diluted (unaudited)(1)

       269,849,503  
    

 

 

 

 

(1)

Unaudited basic and diluted pro forma net loss per share from continuing operations, were computed using the weighted-average number of common shares outstanding after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and (ii) the conversion of our convertible preferred stock using the as-if converted method into common shares as though the conversion had occurred as of the beginning of the period presented. The following table summarizes our unaudited pro forma net loss per share from continuing operations for the year ended December 31, 2020 (in thousands, except share and per share data):

 



 

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Numerator

  

Net loss attributable to common stockholders from continuing operations

   $ (31,139
  

 

 

 

Denominator

  

Weighted-average common shares outstanding, basic and diluted

     14,989,769  

Pro forma adjustments to reflect assumed conversion of convertible preferred stock

     254,859,734  
  

 

 

 

Weighted-average shares used to compute pro forma net loss per share, basic and diluted

     269,849,503  
  

 

 

 

Pro forma net loss per share attributable to common stockholders, basic and diluted

   $ (0.12
  

 

 

 

 

     As of December 31, 2020  
(in thousands)    Actual      Pro Forma(1)(3)      Pro Forma As
Adjusted(2)(3)
 
                 (unaudited)             (unaudited)  

Balance Sheet Data:

        

Cash and cash equivalents

   $ 54,201      $ 128,001     

Working capital(4)

     42,201        121,676     

Total assets

     59,633        133,433     

Long-term debt, net

     7,399        7,399     

Amounts due to Nestlé – related party, current

     5,675        —       

Preferred stock purchase right liability

     3,900        —       

Convertible preferred stock

     126,023        —       

Accumulated deficit

     (99,146      (99,146   

Total stockholders’ (deficit) equity

     (97,541      111,857     

 

(1)

Gives effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and our receipt of $73.8 million in gross proceeds and the satisfaction of amounts due to Nestlé recorded as of December 31, 2020 and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 254,859,734 shares of our common stock and the related reclassification of the carrying value as of December 31, 2020 of the convertible preferred stock and the preferred stock purchase right liability to permanent equity immediately prior to the closing of this offering. The impact of the preferred stock warrant liability on pro forma was excluded because it was immaterial.

(2)

Gives effect to (i) the pro forma adjustments set forth in footnote (1) above, and (ii) the issuance and sale of                shares of our common stock in this offering at the assumed initial public offering price of $        per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each $1.00 increase (decrease) in the assumed initial public offering price of $        per share would increase (decrease) the pro forma as adjusted amount of each of our cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $         , 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price of $        per share would increase (decrease) the pro forma as adjusted amounts of each of our cash and cash equivalents, working capital, total assets and total stockholders’ equity (deficit) by approximately $        , after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

(3)

The pro forma and pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of our initial public offering determined at pricing.

(4)

We define working capital as total current assets less total current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities.



 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes included elsewhere in this prospectus and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, before making an investment decision. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the trading price of our common stock could decline and you could lose part or all of your investment.

Risks Related to Our Limited Operating History, Financial Position and Capital Requirements

We have a limited operating history, have incurred significant operating losses since our inception and expect to incur significant losses for the foreseeable future. We may not be able to generate sufficient revenue to achieve and maintain profitability.

The development of product candidates, including therapeutic product candidates and companion diagnostic tests, is a highly speculative undertaking and involves a substantial degree of risk. We are in the early stages of our development efforts and have only one product candidate, PRA023, in early clinical development. We commenced operations in 2016, and to date, we have focused primarily on organizing and staffing our company, business planning, raising capital, developing Prometheus360, discovering and identifying product candidates, establishing our intellectual property portfolio and conducting research and preclinical studies. Our approach to the discovery and development of product candidates based on Prometheus360 is unproven, and we do not know whether we will be able to develop any product candidates that succeed in clinical development or products of commercial value. As an organization, we have not yet completed any clinical trials, successfully developed and validated a companion diagnostic test, obtained regulatory approvals, manufactured a commercial-scale product, or arranged for a third party to do so on our behalf, or conducted sales and marketing activities necessary for successful product commercialization. Consequently, any predictions made about our future success or viability may not be as accurate as they could be if we had a history of successfully developing and commercializing therapeutic products and companion diagnostics.

To date, we have only generated revenue from our diagnostic services business, Prometheus Laboratories, Inc. (PLI), which we acquired from Nestlé on June 30, 2019 and spun-off in December 2020, and our collaboration agreements with Takeda and Falk. We have incurred significant operating losses since our inception. We do not have any product candidates approved for sale, and we may never generate any significant revenue from product sales. Our net losses, including those generated from PLI, were $29.7 million and $37.1 million for the years ended December 31, 2019 and December 31, 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $99.1 million. Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. All of our development programs will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals and begin generating revenue from product sales. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for, and potentially commercialize any of our therapeutic product candidates and companion diagnostics.

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing preclinical studies and clinical trials of our product candidates, identifying lead product candidates, discovering additional product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. We are only in the preliminary stages of most of these activities. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability. In addition, we have not

 

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yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biotechnology industry. Because of the numerous risks and uncertainties associated with biopharmaceutical and companion diagnostic product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable may have an adverse effect on the value of our company and could impair our ability to raise capital, expand our business, maintain our research and development efforts, diversify our product candidates or even continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

We will require substantial additional financing to achieve our goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our development programs, commercialization efforts or other operations.

The development of therapeutic product candidates and companion diagnostics is capital-intensive. We expect our expenses to increase in connection with our ongoing activities, particularly as we conduct our ongoing and planned preclinical studies of our development programs, initiate clinical trials for our therapeutic product candidates and companion diagnostics, and seek regulatory approval for our current therapeutic product candidates and companion diagnostics and any future therapeutic product candidates and companion diagnostics we may develop. If we obtain regulatory approval for any of our therapeutic product candidates and companion diagnostics, we also expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. Because the outcome of any preclinical study or clinical trial is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of our therapeutic product candidates or companion diagnostics. Furthermore, following the completion of this offering, we expect to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

We believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will enable us to fund our operations for at least the next        months. In particular, we expect that the net proceeds from this offering and our existing cash and cash equivalents will allow us to complete our planned Phase 2 clinical trial in patients with moderate-to-severe UC and Phase 1b clinical trial in patients with moderate-to-severe CD for PRA023, and complete IND-enabling preclinical studies and commence clinical development for our PR600 program. We have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. Our operating plans and other demands on our cash resources may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned, through public or private equity or debt financings or other capital sources, including potentially additional collaborations, licenses and other similar arrangements. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. Attempting to secure additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to develop our product candidates.

Our future capital requirements will depend on many factors, including, but not limited to:

 

   

the type, number, scope, progress, expansions, results, costs and timing of discovery, preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;

 

   

the costs and timing of manufacturing for our product candidates and commercial manufacturing if any product candidate is approved;

 

   

the costs, timing and outcome of regulatory review of our product candidates;

 

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the costs and timing of developing our companion diagnostics, and the outcome of regulatory review;

 

   

the success of our current and any future collaborations, including the timing and amount of the milestone or other payments made to us under our companion diagnostics development and collaboration agreement with Takeda (the Takeda Agreement), our co-development and manufacturing agreement with Dr. Falk Pharma GmbH (the Falk Agreement) or any future collaboration agreements;

 

   

the costs of obtaining, maintaining and enforcing patents and other intellectual property rights;

 

   

the additional costs we may incur as a result of operating as a public company, including our efforts to enhance operational systems and hire additional personnel, including enhanced internal controls over financial reporting;

 

   

the timing and amount of payments that we must make to the licensors and other third parties from whom we have in-licensed intellectual property rights related to Prometheus360 and products and product candidates;

 

   

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;

 

   

the costs and timing of maintaining our sales and marketing capabilities and any expansion thereof, including if any product candidate is approved;

 

   

our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products and companion diagnostics;

 

   

the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; and

 

   

costs associated with any products or technologies that we may in-license or acquire.

Identifying potential product candidates and conducting preclinical studies and clinical trials is a time consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain regulatory approval and commercialize our therapeutic product candidates and companion diagnostics. In addition, our product candidates, if approved, may not achieve commercial success. Our therapeutic commercial revenues, if any, will be derived from sales of products that we do not expect to be commercially available for many years, if at all.

Accordingly, we will need to continue to rely on additional financing to achieve our business objectives. Adequate additional financing may not be available to us on acceptable terms, or at all.

Raising additional capital may cause dilution to our stockholders, including purchasers of common stock in this offering, restrict our operations or require us to relinquish rights to our technologies, product candidates or testing products.

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through equity offerings, debt financings, or other capital sources, including potential additional collaborations, licenses and other similar arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder. Our loan and security agreement (the Loan Agreement) with Oxford Finance LLC (Oxford) involves, and any future debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, selling or licensing our assets, making capital expenditures, declaring dividends or encumbering our assets to secure future

 

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indebtedness. Such restrictions could adversely impact our ability to conduct our operations and execute our business plan.

If we raise additional funds through future collaborations, licenses and other similar arrangements, we may have to relinquish valuable rights to our future revenue streams, research programs, product candidates, Prometheus360 or testing products, or grant licenses on terms that may not be favorable to us and/or that may reduce the value of our common stock. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed or on terms acceptable to us, we would be required to delay, limit, reduce, or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that we would otherwise prefer to develop and market ourselves.

Risks Related to the Discovery, Development and Regulatory Approval of Our Product Candidates, including our Therapeutic Product Candidates and Companion Diagnostics

Our approach to the discovery and development of precision medicines based on Prometheus360 is unproven, and we do not know whether we will be able to develop any therapeutics or companion diagnostic products of commercial value, or if competing technological approaches will limit the commercial value of our therapeutic product candidates and companion diagnostics or render Prometheus360 obsolete.

We have concentrated our therapeutic product research and development efforts on the application of precision medicine to the treatment and diagnosis of IBD, and our future success depends on the successful development of products based on Prometheus360 and the continued development of this platform. However, neither we nor any other company has received regulatory approval to market therapeutics targeting specific subpopulations of IBD patients. The success of our business depends primarily upon our ability to identify, develop and commercialize precision medicine products based on Prometheus360, which leverages a novel and unproven approach of applying data analytics and machine learning to the thousands of samples available to us through the biobank we license from Cedars-Sinai Medical Center (Cedars-Sinai). While we have had favorable preclinical study results utilizing Prometheus360, we have not yet succeeded and may not succeed in demonstrating efficacy and safety for any product candidates in clinical trials or in obtaining marketing approval thereafter. Our lead therapeutic product candidate, PRA023, entered Phase 1a clinical development in December 2020 and we have not yet completed any clinical trials for any product candidate. Our research methodology and novel approach to precision medicine for IBD may be unsuccessful in identifying additional therapeutic product candidates, and any therapeutic product candidates discovered using Prometheus360 may be shown to have harmful side effects or may have other characteristics that may necessitate additional clinical testing, or make the therapeutic product candidates unmarketable or unlikely to receive marketing approval. Further, because all of our therapeutic product candidates and development programs utilize Prometheus360, adverse developments with respect to one of our programs may have a significant adverse impact on the actual or perceived likelihood of success and value of our other programs.

In addition, the biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies. Our future success will depend in part on our ability to maintain a competitive position with Prometheus360, which relies on our ability to access the biobank owned and controlled by Cedars-Sinai as well as to maintain our exclusive license with Cedars-Sinai. If access to the biobank is lost or limited, it may materially and adversely affect our ability to create and develop therapeutic product candidates and companion diagnostics, and compete effectively. Our competitors may render our approach obsolete, or limit the commercial value of our therapeutic product candidates and companion diagnostics, by advances in existing technological approaches or the development of new or different approaches, potentially eliminating the advantages in our drug discovery process that we believe we derive from our research approach and proprietary technologies. By contrast, adverse developments with respect to other companies that attempt to use a similar approach to our approach may adversely impact the actual or perceived value of Prometheus360 and potential of our product candidates.

 

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If any of these events occur, we may be forced to abandon our development efforts for a program or programs, which would have a material adverse effect on our business and could potentially cause us to cease operations.

We are early in our development efforts and have only one product candidate in early clinical development. All of our other development programs are in the preclinical or discovery stage. If we are unable to successfully develop, obtain regulatory approval for and ultimately commercialize therapeutic product candidates and related companion diagnostics, or experience significant delays in doing so, our business will be materially harmed.

We are in the early stages of our development efforts and have only one product candidate in early clinical development. All of our other development programs are in the preclinical or drug discovery stage. We have not yet completed any clinical trials for any product candidate. We have invested substantially all of our efforts in developing Prometheus360, identifying potential therapeutic product candidates and conducting preclinical studies. Although PRA023 entered a Phase 1a clinical trial in December 2020, we will need to progress all of our other development programs through IND-enabling studies and receive authorization from the Food and Drug Administration (FDA) to proceed under an IND prior to initiating their clinical development. Our ability to generate therapeutic product revenues, which we do not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of our product candidates. In addition, our therapeutic development programs contemplate the development of companion diagnostics, which are assays or tests designed to identify an appropriate patient populations. Companion diagnostics are subject to regulation as medical devices and must themselves be approved for marketing by the FDA or certain other foreign regulatory agencies before we may commercialize our product candidates. The success of our product candidates will depend on several factors, including the following:

 

   

successful completion of preclinical studies with favorable results, including those compliant with good laboratory practice (GLP) toxicology studies, biodistribution studies and minimum effective dose studies in animals;

 

   

acceptance of INDs by the FDA, or similar regulatory filing by comparable foreign regulatory authorities for the conduct of clinical trials of our therapeutic product candidates and our proposed design of future clinical trials;

 

   

successful enrollment in clinical trials and completion of clinical trials with favorable results;

 

   

demonstrating safety and efficacy, or in the case of our therapeutic product candidates regulated as biologics, safety, purity and potency, to the satisfaction of applicable regulatory authorities;

 

   

successful development and validation of companion diagnostics for use with our product candidates, if required;

 

   

the performance of our collaborators;

 

   

receipt of marketing approvals from applicable regulatory authorities for our product candidates, including new drug applications (NDAs) or biologics license applications (BLAs) from the FDA, and the premarket approvals (PMAs) from the FDA for companion diagnostics required for our therapeutic product candidates, and maintaining such approvals;

 

   

making arrangements with our third-party manufacturers for, or establishing, commercial manufacturing capabilities;

 

   

establishing sales, marketing and distribution capabilities and launching commercial sales of our products, if and when approved, whether alone or in collaboration with others;

 

   

obtaining adequate coverage, reimbursement, and pricing policies for our products from governmental authorities and health insurers;

 

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the willingness of physicians and patients to utilize or adopt any of our product candidates or future product candidates over alternative or more conventional therapies;

 

   

establishing, maintaining, defending and enforcing patent, trade secret and other intellectual property protection or regulatory exclusivity for our therapeutic product candidates;

 

   

maintaining an acceptable safety profile of our products following approval; and

 

   

maintaining and growing an organization of people who can develop and commercialize our products and technology.

If we are unable to develop, obtain regulatory approval for, or, if approved, successfully commercialize our therapeutic product candidates and companion diagnostics, we may not be able to generate sufficient revenue to continue our business.

Preclinical and clinical development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies and early clinical trials are not necessarily predictive of future results. We have not tested any of our product candidates in clinical trials and our product candidates may not have favorable results in clinical trials.

Preclinical and clinical development is expensive and can take many years to complete, and its outcome is inherently uncertain. We cannot guarantee that any preclinical studies or clinical trials will be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the preclinical study or clinical trial process. Despite promising preclinical or clinical results, any product candidate can unexpectedly fail at any stage of preclinical or clinical development. The historical failure rate for product candidates in our industry is high.

The results from preclinical studies or clinical trials of a product candidate may not predict the results of later clinical trials of the product candidate, and interim, topline, or preliminary results of a clinical trial are not necessarily indicative of final results. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy characteristics despite having progressed through preclinical studies and initial clinical trials. In particular, while we have conducted certain preclinical studies of PRA023 and other potential product candidates targeting IBD, we do not know whether PRA023 or the other potential product candidates will perform in future clinical trials as they have performed in these prior studies. The positive results we have observed for PRA023 in preclinical animal models may not be predictive of our ongoing and future clinical trials in humans. It is not uncommon to observe results in clinical trials that are unexpected based on preclinical studies and early clinical trials, and many product candidates fail in clinical trials despite very promising early results. Moreover, preclinical and clinical data may be susceptible to varying interpretations and analyses. A number of companies in the biopharmaceutical and biotechnology industries have suffered significant setbacks in clinical development even after achieving promising results in earlier studies.

For the foregoing reasons, we cannot be certain that any of our ongoing and planned preclinical studies or clinical trials will be successful.

Any difficulties or delays in the commencement or completion, or termination or suspension, of our ongoing or planned clinical trials could result in increased costs to us, delay or limit our ability to generate revenue and adversely affect our commercial prospects.

Before we can initiate clinical trials for our product candidates, we must submit the results of preclinical studies to the FDA or comparable foreign regulatory authorities along with other information, including information about product candidate chemistry, manufacturing and controls and our proposed clinical trial protocol, as part of an IND or, in the case of a companion diagnostic, an investigational device exemption (IDE) application or similar regulatory filing required for authorization to proceed with clinical development. The FDA

 

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or comparable foreign regulatory authorities may require us to conduct additional preclinical studies for any product candidate before it allows us to initiate clinical trials under any IND, IDE, or similar regulatory filing, which may lead to delays and increase the costs of our preclinical development programs. Any such delays in the commencement or completion of our ongoing or planned clinical trials for PRA023 or any other product candidate could significantly affect our product development costs.

We do not know whether our planned trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:

 

   

obtaining regulatory authorizations to commence a trial or reaching a consensus with regulatory authorities on trial design;

 

   

the FDA or comparable foreign regulatory authorities disagreeing as to the design or implementation of our clinical studies;

 

   

any failure or delay in reaching an agreement with contract research organizations (CROs) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;

 

   

obtaining approval from one or more institutional review boards (IRBs);

 

   

IRBs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing their approval of the trial;

 

   

changes to clinical trial protocol;

 

   

clinical sites deviating from trial protocol or dropping out of a trial;

 

   

manufacturing sufficient quantities of our product candidates for use in clinical trials;

 

   

subjects failing to enroll or remain in our trials at the rate we expect, or failing to return for post-treatment follow-up, including subjects failing to remain in our trials due to movement;

 

   

delays in developing and validating the companion diagnostic to be used in a clinical trial, if applicable;

 

   

we may be required to submit an IDE application to the FDA with respect to our companion diagnostic product candidates, which must become effective prior to commencing certain human clinical trials of medical devices, and the FDA may reject our IDE application and notify us that we may not begin clinical trials;

 

   

restrictions, health reasons or otherwise resulting from the novel strain of coronavirus, COVID-19;

 

   

subjects choosing an alternative treatment for the indication for which we are developing our therapeutic product candidates, or participating in competing clinical trials;

 

   

lack of adequate funding to continue the clinical trial;

 

   

subjects experiencing severe or unexpected drug-related adverse effects;

 

   

occurrence of serious adverse events in trials of the same class of agents conducted by other companies;

 

   

selection of clinical endpoints that require prolonged periods of clinical observation or analysis of the resulting data;

 

   

a facility manufacturing our product candidates or any of their components being ordered by the FDA or comparable foreign regulatory authorities to temporarily or permanently shut down due to violations of current good manufacturing practice (cGMP) regulations or other applicable requirements, or infections or cross-contaminations of product candidates in the manufacturing process;

 

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any changes to our manufacturing process that may be necessary or desired;

 

   

third-party clinical investigators losing the licenses or permits necessary to perform our clinical trials, not performing our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices (GCP) or other regulatory requirements;

 

   

third-party contractors not performing data collection or analysis in a timely or accurate manner; or

 

   

third-party contractors becoming debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications.

In addition, disruptions caused by the COVID-19 pandemic may increase the likelihood that we encounter such difficulties or delays in initiating, enrolling, conducting or completing our ongoing or planned clinical trials. We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs of the institutions in which such trials are being conducted, by a Data Safety Monitoring Board for such trial or by the FDA or comparable foreign regulatory authorities. Such authorities may impose such a suspension or termination due to a number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by the FDA or comparable foreign regulatory authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a drug or diagnostic, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, changes in regulatory requirements and policies may occur, and we may need to amend clinical trial protocols to comply with these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial.

Further, conducting clinical trials in foreign countries, as we may do for our product candidates, presents additional risks that may delay completion of our clinical trials. These risks include the failure of enrolled patients in foreign countries to adhere to clinical protocol as a result of differences in healthcare services or cultural customs, managing additional administrative burdens associated with foreign regulatory schemes, as well as political and economic risks relevant to such foreign countries.

Moreover, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and receive compensation in connection with such services. Under certain circumstances, we may be required to report some of these relationships to the FDA or comparable foreign regulatory authorities. The FDA or comparable foreign regulatory authority may conclude that a financial relationship between us and a principal investigator has created a conflict of interest or otherwise affected interpretation of the study. The FDA or comparable foreign regulatory authority may therefore question the integrity of the data generated at the applicable clinical trial site and the utility of the clinical trial itself may be jeopardized. This could result in a delay in approval, or rejection, of our marketing applications by the FDA or comparable foreign regulatory authority, as the case may be, and may ultimately lead to the denial of marketing approval of one or more of our product candidates.

If we experience delays in the completion of, or termination of, any clinical trial of our product candidates, the commercial prospects of our product candidates will be harmed, and our ability to generate product revenues from any of these product candidates will be delayed. Moreover, any delays in completing our clinical trials will increase our costs, slow down our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenues.

In addition, many of the factors that cause, or lead to, the termination or suspension of, or a delay in the commencement or completion of, clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate. We may make formulation or manufacturing changes to our product candidates, in which case

 

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we may need to conduct additional preclinical studies to bridge our modified product candidates to earlier versions. Any delays to our clinical trials that occur as a result could shorten any period during which we may have the exclusive right to commercialize our product candidates and our competitors may be able to bring products to market before we do, and the commercial viability of our product candidates could be significantly reduced. Any of these occurrences may harm our business, financial condition and prospects significantly.

We may find it difficult to enroll patients in our clinical trials. If we encounter difficulties enrolling subjects in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.

Patient enrollment is a significant factor in the timing of clinical trials, and the timing of our clinical trials depends, in part, on the speed at which we can recruit patients to participate in our trials, as well as completion of required follow-up periods. We may not be able to initiate or continue clinical trials for our product candidates if we are unable to identify and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or similar regulatory authorities outside the United States. Subject enrollment is affected by many factors including the size and nature of the patient population, the severity of the disease under investigation, the availability and efficacy of approved drugs and diagnostics for the disease under investigation, the proximity of patients to clinical sites, the eligibility and exclusion criteria for the trial, the design of the clinical trial, the risk that enrolled patients will not complete a clinical trial, our ability to recruit clinical trial investigators with the appropriate competencies and experience, patient referral practices of physicians, the ability to monitor patients adequately during and after treatment, competing clinical trials and clinicians’ and patients’ perceptions as to the potential advantages and risks of the product candidate being studied in relation to other available therapies, including any new products that may be approved for the indications we are investigating as well as any product candidates under development.

We will be required to identify and enroll a sufficient number of subjects for each of our clinical trials. Utilizing our precision medicine approach, we plan to focus our development activities on genetically or biomarker defined patients that we believe will be most likely to respond to our therapeutic product candidates. As a result, the potential patient populations for our clinical trials are narrowed, and we may experience difficulties in identifying and enrolling a sufficient number of patients in our clinical trials. We may not be able to initiate or continue clinical trials if we are unable to locate a sufficient number of eligible subjects to participate in the clinical trials required by the FDA or comparable foreign regulatory authorities. In addition, the process of finding and diagnosing subjects may prove costly.

Our inability to enroll a sufficient number of subjects for any of our future clinical trials would result in significant delays or may require us to abandon one or more clinical trials altogether. In addition, we expect to rely on CROs and clinical trial sites to ensure proper and timely conduct of our future clinical trials and, while we intend to enter into agreements governing their services, we will have limited influence over their actual performance.

We cannot assure you that our assumptions used in determining expected clinical trial timelines are correct or that we will not experience delays in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.

Use of our therapeutic product candidates could be associated with side effects, adverse events or other properties or safety risks, which could delay or preclude approval, cause us to suspend or discontinue clinical trials, abandon a therapeutic product candidate, limit the commercial profile of an approved label or result in other significant negative consequences that could severely harm our business, prospects, operating results and financial condition.

We have not evaluated any product candidates in human clinical trials. As is the case with biopharmaceuticals generally, it is likely that there may be side effects and adverse events associated with our therapeutic product candidates’ use. Results of our clinical trials could reveal a high and unacceptable severity

 

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and prevalence of side effects or unexpected characteristics. Undesirable side effects caused by our therapeutic product candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or comparable foreign regulatory authorities. The drug-related side effects could affect patient recruitment or the ability of enrolled patients to complete the trial or result in potential product liability claims. Any of these occurrences may harm our business, financial condition and prospects significantly.

Moreover, if our therapeutic product candidates are associated with undesirable side effects in clinical trials or have characteristics that are unexpected, we may elect to abandon their development or limit their development to more narrow uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective, which may limit the commercial expectations for the therapeutic product candidate, if approved. We may also be required to modify our study plans based on findings after we commence our clinical trials. Many compounds that initially showed promise in early-stage testing have later been found to cause side effects that prevented further development of the compound. In addition, regulatory authorities may draw different conclusions or require additional testing to confirm these determinations.

It is possible that as we test our therapeutic product candidates in larger, longer and more extensive clinical trials, or as the use of these therapeutic product candidates becomes more widespread if they receive regulatory approval, illnesses, injuries, discomforts and other adverse events that were observed in earlier trials, as well as conditions that did not occur or went undetected in previous trials, may be reported by subjects. If such side effects become known later in development or upon approval, if any, such findings may harm our business, financial condition and prospects significantly.

Patients treated with our products, if approved, may experience previously unreported adverse reactions, and it is possible that the FDA or other regulatory authorities may ask for additional safety data as a condition of, or in connection with, our efforts to obtain approval of our therapeutic product candidates. If safety problems occur or are identified after our products, if any, reach the market, we may make the decision or be required by regulatory authorities to amend the labeling of our products, recall our products or even withdraw approval for our products.

Any of these events could prevent us from achieving or maintaining market acceptance of the particular therapeutic product candidate, if approved, and could significantly harm our business, results of operations and prospects.

As an organization, we have never completed any clinical trials or submitted an application for regulatory approval, and may be unable to do so for any of our product candidates.

We are early in our development efforts for our product candidates and we will need to successfully complete IND-enabling studies, Phase 1 clinical trials and later-stage and pivotal clinical trials, in order to obtain FDA or comparable foreign regulatory approval to market PRA023 or any other therapeutic product candidates. Carrying out clinical trials and the submission of a successful BLA or NDA is a complicated process. As an organization, we commenced our first Phase 1 clinical trial in December 2020. However, we have not previously conducted any clinical trials, have limited experience as a company in preparing, submitting and prosecuting regulatory filings and have not submitted a BLA or NDA or other comparable foreign regulatory submission for any therapeutic product candidate. In addition, we have had limited interactions with the FDA and cannot be certain how many clinical trials of PRA023 or any other product candidates will be required or how such trials should be designed. Consequently, we may be unable to successfully and efficiently execute and complete necessary clinical trials in a way that leads to regulatory submission and approval of any of our therapeutic product candidates. We may require more time and incur greater costs than our competitors and may not succeed in obtaining regulatory approvals of therapeutic product candidates that we develop. Failure to commence or complete, or delays in, our ongoing or planned clinical trials, could prevent us from or delay us in submitting BLAs or NDAs for and commercializing our therapeutic product candidates.

 

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Our product candidates are subject to extensive regulation and compliance, which is costly and time consuming, and such regulation may cause unanticipated delays or prevent the receipt of the required approvals to commercialize our product candidates.

The clinical development, manufacturing, labeling, packaging, storage, record-keeping, advertising, promotion, import, export, marketing, distribution and adverse event reporting, including the submission of safety and other information, of our product candidates are subject to extensive regulation by the FDA in the United States and by comparable foreign regulatory authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many years following the commencement of clinical trials and can vary substantially based upon the type, complexity and novelty of the product candidates involved, as well as the target indications and patient population. Approval policies or regulations may change, and the FDA has substantial discretion in the drug approval process, including the ability to delay, limit or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed. Neither we nor any current or future collaborator is permitted to market any of our product candidates in the United States until we receive approval from the FDA.

Prior to obtaining approval to commercialize a product candidate in the United States or abroad, we or our collaborators must demonstrate with substantial evidence from adequate and well-controlled clinical trials, and to the satisfaction of the FDA or comparable foreign regulatory authorities, that such product candidates are safe and effective, or with respect to a biological product candidate, safe, pure and potent, for their intended uses. Results from preclinical studies and clinical trials can be interpreted in different ways. Even if we believe the preclinical or clinical data for our product candidates are promising, such data may not be sufficient to support approval by the FDA and comparable foreign regulatory authorities. The FDA or comparable foreign regulatory authorities, as the case may be, may also require us to conduct additional preclinical studies or clinical trials for our product candidates either prior to or post-approval, or may object to elements of our clinical development program.

The FDA or comparable foreign regulatory authorities can delay, limit or deny approval of a product candidate for many reasons, including:

 

   

such authorities may disagree with the design or implementation of our or our current or future collaborators’ clinical trials;

 

   

negative or ambiguous results from our clinical trials or results may not meet the level of statistical significance required by the FDA or comparable foreign regulatory agencies for approval;

 

   

serious and unexpected drug-related side effects may be experienced by participants in our clinical trials or by individuals using drugs or biologics similar to our therapeutic product candidates;

 

   

such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is potentially different from that of the United States;

 

   

we or any of our current or future collaborators may be unable to demonstrate that a product candidate is safe and effective, and that the therapeutic product candidate’s clinical and other benefits outweigh its safety risks;

 

   

we may be unable to demonstrate to the satisfaction of such authorities that our companion diagnostics are suitable to identify appropriate patient populations;

 

   

such authorities may disagree with our interpretation of data from preclinical studies or clinical trials;

 

   

such authorities may not agree that the data collected from clinical trials of our product candidates are acceptable or sufficient to support the submission of a BLA, NDA, PMA or other submission or to obtain regulatory approval in the United States or elsewhere, and such authorities may impose requirements for additional preclinical studies or clinical trials;

 

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such authorities may disagree regarding the formulation, labeling and/or the specifications of our product candidates;

 

   

approval may be granted only for indications that are significantly more limited than what we apply for and/or with other significant restrictions on distribution and use;

 

   

such authorities may find deficiencies in the manufacturing processes, test procedures and specifications or facilities of our third-party manufacturers with which we or any of our current or future collaborators contract for clinical and commercial supplies;

 

   

regulations and approval policies of such authorities may significantly change in a manner rendering our or any of our potential future collaborators’ clinical data insufficient for approval; or

 

   

such authorities may not accept a submission due to, among other reasons, the content or formatting of the submission.

This lengthy approval process, as well as the unpredictability of the results of clinical trials, may result in our failing to obtain regulatory approval to market any of our product candidates, which would significantly harm our business, results of operations and prospects. In addition, even if we obtain approval of our product candidates, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request, may impose significant limitations in the form of narrow indications, warnings, or a Risk Evaluation and Mitigation Strategy (REMS).

In addition, with respect to foreign markets, approval procedures vary among countries and, in addition to the foregoing risks, may involve additional product testing, administrative review periods and agreements with pricing authorities. In addition, events raising questions about the safety of certain marketed biopharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs or biologics based on safety, efficacy or other regulatory considerations and may result in significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us or any of our potential future collaborators from commercializing our product candidates.

If we are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience significant delays in doing so, our therapeutic development strategy may be harmed and we may not realize the full commercial potential of our therapeutic product candidates.

Because we are focused on precision medicine, in which genetic alterations or predictive biomarkers will be used to identify the right patients for our product candidates, we believe that our success will depend, in part, on our ability to develop companion diagnostics, which are assays or tests to identify an appropriate patient population for these therapeutic product candidates. To achieve this, our development programs are dependent on the development and commercialization of a companion diagnostic. Companion diagnostics are developed in conjunction with clinical programs for the associated product and are subject to regulation as medical devices by the FDA and comparable regulatory authorities. In general, if the FDA determines that a companion diagnostic is essential to the safe and effective use of a novel therapeutic product or indication, the FDA will generally not approve the therapeutic product if the companion diagnostic is not also approved or cleared for that indication. Accordingly, the FDA expects to review and approve simultaneously the NDA or BLA and PMA submissions for a therapeutic and its companion diagnostic, respectively, so any delay in diagnostic approval could delay or prevent approval of the therapeutic product. The approval of a companion diagnostic as part of the product label will also limit the use of the therapeutic product candidate to only those patients who express the specific genetic alteration or biomarker it was developed to detect. Also, to the extent other approved diagnostics are able to broaden their labeling claims to include our approved therapeutic products, if any, we may be forced to abandon our companion diagnostic development plans or we may not be able to compete effectively upon approval, which could adversely impact our ability to generate revenue from the sale of our approved products and our business operations.

 

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In addition, it may be necessary to resolve issues such as selectivity/specificity, analytical validation, reproducibility, or clinical validation of companion diagnostics during the development and regulatory approval processes. Moreover, even if data from preclinical studies and early clinical trials appear to support development of a companion diagnostic for a therapeutic product candidate, data generated in later clinical trials may fail to support the analytical and clinical validation of the companion diagnostic. We may encounter difficulties in developing, obtaining regulatory approval for, manufacturing and commercializing companion diagnostics similar to those we face with respect to our therapeutic product candidates themselves, including issues with achieving regulatory clearance or approval, production of sufficient quantities at commercial scale and with appropriate quality standards, and in gaining market acceptance.

If we or any third parties we may engage are unable to successfully develop companion diagnostics for our therapeutic product candidates, or experience delays in doing so:

 

   

we may be unable to identify appropriate patients for enrollment in our clinical trials, which may adversely affect the development of our therapeutic product candidates;

 

   

our therapeutic product candidates may not receive marketing approval, if the FDA or other regulators determine that the safe and effective use of our therapeutic product candidates, if any, depends on the companion diagnostic; and

 

   

we may not realize the full commercial potential of any therapeutics that receive marketing approval if, among other reasons, we are unable to appropriately select patients who are likely to benefit from therapy with our medicines, if any.

As a result of any of these events, our business, financial condition, results of operations and prospects could be materially and adversely affected.

We have limited experience in developing and commercializing companion diagnostics and have never applied for or obtained regulatory clearance or approval for any diagnostic tests.

To be successful in developing and commercializing therapeutic product candidates in combination with companion diagnostics, we will need to address a number of scientific, technical, regulatory and logistical challenges. We currently anticipate that we or a collaborator will need to obtain approval of PMA applications from the FDA in order to legally market such companion diagnostics in the United States. As a company, we have little experience in the development of companion diagnostics and may not be successful in developing appropriate diagnostics to pair with any of our therapeutic product candidates that receive marketing approval, and have never applied for or obtained regulatory clearance or approval of any diagnostic tests. Given our limited experience in developing companion diagnostics, we may rely in part or in whole on third parties for their design, development and manufacture of such tests.

Before a new medical device, or a new intended use of, claim for, or significant modification to an existing device, can be marketed in the United States, a company must first submit an application for and receive 510(k) clearance pursuant to a premarket notification submitted under Section 510(k) of the Federal Food, Drug, and Cosmetic Act (FDCA), de-novo classification, or PMA approval from FDA, unless an exemption applies. The PMA approval pathway, which we expect to pursue for our companion diagnostic product candidates, requires an applicant to demonstrate the safety and effectiveness of the product based, in part, on valid scientific evidence, including, but not limited to, technical, preclinical, and clinical data. The 510(k) pathway requires a FDA finding that the test is substantially equivalent to a legally marketed predicate device. If no legally marketed predicate can be identified to enable use of the 510(k) pathway, the device is automatically classified under the FDCA into Class III, which generally requires PMA approval. However, for low- to moderate-risk novel devices, FDA allows for the possibility of marketing authorization through the “de novo classification” process rather than requiring the device to be subject to PMA approval. Products that are approved through a PMA application generally need prior FDA approval before modifications can be made that affect safety or effectiveness, and

 

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certain modifications to a 510(k)-cleared device may also require FDA premarket review before the modified product can be marketed. If we are unable to successfully develop, obtain regulatory clearance for and commercialize companion diagnostics to pair with our therapeutic product candidates, it could adversely impact our ability to develop and generate revenue from our product candidates.

We may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.

Because we have limited financial and managerial resources, we focus on specific product candidates and specific indications. As a result, we may forgo or delay pursuit of opportunities with other product candidates that could have had greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates for specific indications may not yield any commercially viable product candidates. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through collaborations, licenses and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

We may conduct certain of our clinical trials for our product candidates outside of the United States. However, the FDA and other foreign equivalents may not accept data from such trials, in which case our development plans will be delayed, which could materially harm our business.

We may conduct one or more of our clinical trials for our product candidates outside the United States. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance of this data is subject to certain conditions imposed by the FDA. For example, to accept data from a clinical trial that was conducted only at sites outside of the United States and not subject to an IND, the FDA requires such clinical trial to have been conducted in accordance with GCPs, and the FDA must be able to validate the data from the clinical trial through an on-site inspection if the FDA deems such inspection necessary. For such studies not subject to an IND, the FDA generally does not review clinical protocols for the studies, and therefore there is an additional potential risk that the FDA could determine that the study design, protocol, or results from a non-U.S. clinical trial was inadequate for the purposes we intend, which could require us to conduct additional clinical trials. There can be no assurance the FDA will accept data from clinical trials conducted outside of the United States. If the FDA does not accept data from our clinical trials of our product candidates, it would likely result in the need for additional clinical trials, which would be costly and time consuming and delay or permanently halt our development of our therapeutic product candidates.

Conducting clinical trials outside the United States also exposes us to additional risks, including risks associated with:

 

   

additional foreign regulatory requirements;

 

   

foreign exchange fluctuations;

 

   

compliance with foreign manufacturing, customs, shipment and storage requirements;

 

   

cultural differences in medical practice and clinical research; and

 

   

diminished protection of intellectual property in some countries.

Interim, topline and preliminary data from our preclinical studies and clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we may publicly disclose interim, preliminary or topline data from our preclinical studies and clinical trials, which is based on a preliminary analysis of then-available data, and the results and related

 

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findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the interim, preliminary or topline results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline and preliminary data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline and preliminary data should be viewed with caution until the final data are available.

From time to time, we may also disclose interim data from our clinical studies. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available or as patients from our clinical trials continue other treatments for their disease. Adverse differences between preliminary, topline or interim data and final data could significantly harm our business prospects. In addition, disclosure of interim data by us or by our competitors could result in volatility in the price of our common stock after this offering.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and the value of our company in general. In addition, the information we choose to publicly disclose regarding a particular study or clinical trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product, product candidate or our business. If the topline data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.

Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could hinder their ability to hire, retain or deploy key leadership and other personnel, or otherwise prevent new or modified products from being developed, approved or commercialized in a timely manner or at all, which could negatively impact our business.

The ability of the FDA to review and approve new products can be affected by a variety of factors, including government budget and funding levels, statutory, regulatory and policy changes, the FDA’s ability to hire and retain key personnel and accept the payment of user fees, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the FDA have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable. Disruptions at the FDA and other agencies may also slow the time necessary for new drugs, biologics, and medical devices, or modifications to approved drugs, biologics, and medical devices to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.

Separately, in response to the COVID-19 pandemic, on March 10, 2020 the FDA announced its intention to postpone most inspections of foreign manufacturing facilities and products, and on March 18, 2020 the FDA temporarily postponed routine surveillance inspections of domestic manufacturing facilities. Subsequently, on July 10, 2020, the FDA announced its intention to resume certain on-site inspections of domestic manufacturing facilities subject to a risk-based prioritization system. The FDA intends to use this risk-based assessment system

 

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to identify the categories of regulatory activity that can occur within a given geographic area, ranging from mission critical inspections to resumption of all regulatory activities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

Risks Related to Our Reliance on Third Parties

We are substantially dependent upon the Cedars-Sinai license agreement for access to the Cedars-Sinai database and biobank, which supports Prometheus360.

We rely on access to the Cedars-Sinai database and biobank and its over 200,000 samples linked to extensive clinical data from patients in order to stratify patients and carry out our precision medicine approach. We exclusively license the rights to the database and biobank from Cedars-Sinai under our license agreement. Cedars-Sinai may terminate the license agreement under certain circumstances, including as a result of our uncured breach of the agreement. Cedars-Sinai stores its biobank samples in a single location in Southern California, and we therefore are exposed to the risk that such samples could be destroyed pursuant to a natural or man-made disaster or that they may otherwise become unavailable. Without access to this data and samples, our business would be materially and adversely affected because we may not be able to identify additional therapeutic targets and/or develop therapeutic and diagnostic product candidates for development. Additionally, any dispute with Cedars-Sinai may result in costly litigation that diverts our management’s attention and resources away from our day-to-day activities and which may adversely affect our business, financial condition, results of operation and prospects.

We have entered, and may in the future seek to enter into, collaborations, licenses and other similar arrangements and may not be successful in doing so, and even if we are, we may relinquish valuable rights and may not realize the benefits of such relationships.

We have entered into the Takeda Agreement with Millennium Pharmaceuticals, Inc., pursuant to which we established a strategic collaboration to develop a companion diagnostic product for one selected drug target, with the option for Takeda to select an additional drug target, in support of development and potential commercialization by Takeda of any therapeutic clinical candidates that it develops in connection with the agreement for the treatment of IBD. In addition, we have entered into a co-development and manufacturing agreement with Falk pursuant to which we will co-develop and commercialize, exclusively in our respective territories, therapeutic product candidates targeting members of the TNF super family for the treatment of UC and CD under our PR600 program. With respect to Takeda and Falk, and what we expect will be the case with any future license or collaboration agreements, we have and would expect to have limited control over the amount and timing of resources that our collaborators dedicate to the development or commercialization of our product candidates. Our ability to generate revenues from these arrangements will depend on our collaborators’ willingness to successfully develop and commercialize the applicable development programs. Takeda and Falk may terminate the respective collaboration agreements for convenience and under certain other circumstances, including as a result of our uncured material breach of the agreement. Any such termination may adversely affect our business, financial condition, results of operation and prospects.

We may seek to enter into additional collaborations, joint ventures, licenses and other similar arrangements for the development or commercialization of other product candidates due to capital costs required to develop or commercialize the product candidate. We may not be successful in our efforts to establish such collaborations for our product candidates because our research and development pipeline may be insufficient, our product candidates may be deemed to be at too early of a stage of development for collaborative effort or third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy or

 

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significant commercial opportunity. In addition, we face significant competition in seeking appropriate strategic partners, and the negotiation process can be time-consuming and complex. We may have to relinquish valuable rights to our future revenue streams, research programs, product candidates or Prometheus360, or grant licenses on terms that may not be favorable to us, as part of any such arrangement, and such arrangements may restrict us from entering into additional agreements with other potential collaborators. We cannot be certain that, following a collaboration, license or strategic transaction, we will achieve an economic benefit that justifies such transaction.

The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators and partners. Collaborations are subject to numerous risks, which may include the following risks to us:

 

   

collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations and they may not devote the level of effort or resources we expect;

 

   

collaborators may not pursue development and commercialization of our product candidates or may elect not to continue or renew development or commercialization programs based on preclinical or clinical trial results, changes in the collaborators’ strategic focus or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;

 

   

collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;

 

   

collaborators could independently develop, or develop with third parties, products that compete directly or indirectly with our product candidates, particularly if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than ours;

 

   

collaborators with marketing and distribution rights to one or more products may not commit sufficient resources to the marketing and distribution of such product or products;

 

   

we could grant exclusive rights to our collaborators that would prevent us from collaborating with others;

 

   

collaborators may not properly maintain, defend or enforce 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 litigation or potential liability;

 

   

collaborators may infringe the intellectual property rights of third parties, which may expose us to litigation and potential liability;

 

   

disputes may arise between the collaborators and us that result in the delay or termination of the research, development or commercialization of our product candidates or that result in costly litigation or arbitration that diverts management attention and resources;

 

   

collaborators may not provide us with timely and accurate information regarding development, regulatory or commercialization status or results, which could adversely impact our ability to manage our own development efforts, accurately forecast financial results or provide timely information to our stockholders regarding our out-licensed product candidates; and

 

   

collaborations may be terminated and, if terminated, may result in a need for additional capital to pursue further development or commercialization of the applicable product candidates.

 

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We rely on third parties to conduct our preclinical and clinical studies and will rely on third parties to conduct our future clinical trials. If these third parties do not successfully carry out their contractual duties, comply with applicable regulatory requirements or meet expected deadlines, our development programs and our ability to seek or obtain regulatory approval for or commercialize our product candidates may be delayed.

We are dependent on third parties to conduct our preclinical studies and expect to rely on such third parties for our current and future clinical trials, including our ongoing Phase 1a clinical trial of PRA023. Specifically, we have used and relied on, and intend to use and rely on, medical institutions, clinical investigators, CROs and consultants to conduct our preclinical studies and planned clinical trials in accordance with our clinical protocols and regulatory requirements. These CROs, investigators and other third parties play a significant role in the conduct and timing of these trials and subsequent collection and analysis of data. While we have and will have agreements governing the activities of our third-party contractors, we have limited influence over their actual performance. Nevertheless, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on our CROs and other third parties does not relieve us of our regulatory responsibilities. We and our CROs are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA and comparable foreign regulatory authorities for all of our product candidates in clinical development. Regulatory authorities enforce these GCPs through periodic inspections of trial sponsors, principal investigators and trial sites. If we or any of our CROs or trial sites fail to comply with applicable GCPs, the clinical data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with products produced under cGMP regulations. Our failure to comply with these regulations may require us to repeat clinical trials, which would delay the regulatory approval process.

There is no guarantee that any of our CROs, investigators or other third parties will devote adequate time and resources to such trials or perform as contractually required. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, or otherwise performs in a substandard manner, our clinical trials may be extended, delayed or terminated. In addition, many of the third parties with whom we contract may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other development activities that could harm our competitive position. In addition, principal investigators for our clinical trials are expected to serve as scientific advisors or consultants to us from time to time and may receive cash or equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA concludes that the financial relationship may have affected the interpretation of the study, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection by the FDA of any BLA, NDA or PMA we submit. Any such delay or rejection could prevent us from commercializing our product candidates.

If any of our relationships with these third parties terminate, we may not be able to enter into arrangements with alternative third parties on commercially reasonable terms or at all. Switching or adding additional CROs, investigators and other third parties involves additional cost and requires our management’s time and focus. In addition, there is a natural transition period when a new CRO commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development timelines. Though we carefully manage our relationships with our CROs, investigators and other third parties, there can be no assurance that we will not encounter challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business, financial condition and prospects.

 

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We rely on third parties for the manufacture of our product candidates for preclinical and clinical development. This reliance on third parties increases the risk that we will not have sufficient quantities of our product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair our development or commercialization efforts.

We do not own or operate manufacturing facilities and have no plans to develop our own clinical or commercial-scale manufacturing capabilities. We rely and expect to continue to rely on third parties for the manufacture of our product candidates and related raw materials for preclinical and clinical development, as well as for commercial manufacture of any of our product candidates receive marketing approval. The facilities used by third-party manufacturers to manufacture our product candidates must be approved by the FDA and any comparable foreign regulatory authority pursuant to inspections that will be conducted after we submit a BLA, NDA or PMA to the FDA or any comparable filing to a foreign regulatory authority. We do not control the manufacturing process of, and are completely dependent on, third-party manufacturers for compliance with cGMP requirements for manufacture of products. If these third-party manufacturers cannot successfully manufacture material that conforms to our specifications and the strict regulatory requirements of the FDA or any comparable foreign regulatory authority, they will not be able to secure and/or maintain regulatory approval for their manufacturing facilities. In addition, we have no control over the ability of third-party manufacturers to maintain adequate quality control, quality assurance and qualified personnel. If the FDA or any comparable foreign regulatory authority does not approve these facilities for the manufacture of our product candidates or if it withdraws any such approval in the future, we may need to find alternative manufacturing facilities, which would significantly impact our ability to develop, obtain regulatory approval for or market our product candidates, if approved. Our failure, or the failure of our third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on us, including clinical holds, fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of our products.

Our or a third party’s failure to execute on our manufacturing requirements on commercially reasonable terms and in compliance with cGMP could adversely affect our business in a number of ways, including:

 

   

an inability to initiate clinical trials of our product candidates under development;

 

   

delay in submitting regulatory applications, or receiving marketing approvals, for our product candidates;

 

   

subjecting third-party manufacturing facilities or our manufacturing facilities to additional inspections by regulatory authorities;

 

   

requirements to cease development or to recall batches of our product candidates; and

 

   

in the event of approval to market and commercialize our product candidates, an inability to meet commercial demands for our product candidates or any other future product candidates.

In addition, we may be unable to establish any agreements with third-party manufacturers or to do so on acceptable terms. Even if we are able to establish agreements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

   

failure of third-party manufacturers to comply with regulatory requirements and maintain quality assurance;

 

   

breach of the manufacturing agreement by the third party;

 

   

failure to manufacture our product according to our specifications;

 

   

failure to manufacture our product according to our schedule or at all;

 

   

misappropriation of our proprietary information, including our trade secrets and know-how; and

 

   

termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for us.

 

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Our product candidates and any products that we may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for us.

Any performance failure on the part of our existing or future manufacturers could delay clinical development or marketing approval, and any related remedial measures may be costly or time consuming to implement. We do not currently have arrangements in place for redundant supply or a second source for all required raw materials used in the manufacture of our product candidates. If our existing or future third-party manufacturers cannot perform as agreed, we may be required to replace such manufacturers and we may be unable to replace them on a timely basis or at all.

Our current and anticipated future dependence upon others for the manufacture of our product candidates or products may adversely affect our future profit margins and our ability to commercialize any products that receive marketing approval on a timely and competitive basis.

Our reliance on third parties requires us to share our trade secrets, which increases the possibility that a competitor will discover them or that our trade secrets will be misappropriated or disclosed.

Because we currently rely on third parties to manufacture our product candidates and to perform quality testing, we must, at times, share our proprietary technology and confidential information, including trade secrets, with them. We seek to protect our proprietary technology, in part, by entering into confidentiality agreements, and, if applicable, material transfer agreements, collaborative research agreements, consulting agreements or other similar agreements with our collaborators, advisors, employees and consultants prior to beginning research or disclosing proprietary information. These agreements typically limit the rights of the third parties to use or disclose our confidential information. Despite the contractual provisions employed when working with third parties, the need to share trade secrets and other confidential information increases the risk that such trade secrets become known by our competitors, are intentionally or inadvertently incorporated into the technology of others or are disclosed or used in violation of these agreements. Given that our proprietary position is based, in part, on our know-how and trade secrets and despite our efforts to protect our trade secrets, a competitor’s discovery of our proprietary technology and confidential information or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business, financial condition, results of operations and prospects.

Risks Related to Commercialization of Our Product Candidates and Testing Products

Even if we receive regulatory approval for any therapeutic product candidate or companion diagnostic, we will be subject to ongoing regulatory obligations and continued regulatory review, which may result in significant additional expense. Additionally, our therapeutic product candidates and companion diagnostics, if approved, could be subject to labeling and other restrictions on marketing or withdrawal from the market, and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our therapeutic product candidates and companion diagnostics, when and if any of them are approved.

Any regulatory approvals that we may receive for our product candidates, including any therapeutic product candidates or companion diagnostics, will require the submission of reports to regulatory authorities and surveillance to monitor the safety and efficacy of the product candidate, may contain significant limitations related to use restrictions for specified age groups, warnings, precautions or contraindications, and may include burdensome post-approval study or risk management requirements. For example, the FDA may require a REMS in order to approve our therapeutic product candidates, which could entail requirements for a medication guide, physician training and communication plans or additional elements to ensure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. In addition, if one of our product candidates is approved, it will be subject to ongoing regulatory requirements for manufacturing, labeling,

 

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packaging, storage, advertising, promotion, sampling, record-keeping, conduct of post-marketing studies and submission of safety, efficacy, and other post-market information, including both federal and state requirements in the United States and requirements of comparable foreign regulatory authorities.

Manufacturers and manufacturers’ facilities are required to comply with extensive FDA and comparable foreign regulatory authority requirements, including ensuring that quality control and manufacturing procedures conform to cGMP regulations. As such, we and our contract manufacturers will be subject to continual review and inspections to assess compliance with cGMP and adherence to commitments made in any approved marketing application. Accordingly, we and others with whom we work must continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production and quality control.

If the FDA or another regulatory authority discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing or labeling of a product, such regulatory authorities may impose restrictions on that product or us, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory authority or enforcement authority may, among other things:

 

   

refuse to approve pending applications or supplements to approved applications;

 

   

require us to change the way a product is distributed, conduct additional clinical trials, change the labeling of a product or require us to conduct additional post-marketing studies or surveillance;

 

   

restrict our ability to conduct clinical trials, including full or partial clinical holds on ongoing or planned trials;

 

   

require additional warnings on the product label, such as a “black box” warning or a contraindication;

 

   

impose restrictions on the products, manufacturers or manufacturing process;

 

   

require warning or untitled letters;

 

   

seek injunctions or civil or criminal penalties;

 

   

suspend or withdraw regulatory approvals;

 

   

seize or detain products or implement import bans;

 

   

impose voluntary or mandatory product recalls and publicity requirements;

 

   

totally or partially suspend production; and

 

   

impose restrictions on operations, including costly new manufacturing requirements.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may adversely affect our ability to commercialize and generate revenue from our products. If regulatory sanctions are applied or if regulatory approval is withdrawn, our business will be seriously harmed.

Moreover, the policies of the FDA and of other regulatory authorities may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of our product candidates. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative or executive action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained and we may not achieve or sustain profitability.

 

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The commercial success of our product candidates will depend upon the degree of market acceptance of such product candidates by physicians, patients, healthcare payors and others in the medical community.

Our product candidates may not be commercially successful. Even if any of our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors or the medical community. The commercial success of any of our current or future product candidates will depend significantly on the broad adoption and use of the resulting product by physicians and patients for approved indications. The degree of market acceptance of our products will depend on a number of factors, including:

 

   

demonstration of clinical efficacy and safety compared to other more-established products;

 

   

the approval, availability, market acceptance and reimbursement for the companion diagnostic;

 

   

the indications for which our product candidates are approved;

 

   

the limitation of our targeted patient population and other limitations or warnings contained in any FDA-approved labeling;

 

   

acceptance of a new drug or biologic for the relevant indication by healthcare providers and their patients;

 

   

the pricing and cost-effectiveness of our products, as well as the cost of treatment with our products in relation to alternative treatments and therapies;

 

   

our ability to obtain and maintain sufficient third-party coverage and adequate reimbursement from government healthcare programs, including Medicare and Medicaid, private health insurers and other third-party payors;

 

   

the willingness of patients to pay all, or a portion of, out-of-pocket costs associated with our products in the absence of sufficient third-party coverage and adequate reimbursement;

 

   

any restrictions on the use of our products, and the prevalence and severity of any adverse effects;

 

   

potential product liability claims;

 

   

the timing of market introduction of our products as well as competitive drugs;

 

   

the effectiveness of our or any of our current or potential future collaborators’ sales and marketing strategies; and

 

   

unfavorable publicity relating to the product.

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors or patients, we may not generate sufficient revenue from that product and may not become or remain profitable. Our efforts to educate the medical community and third-party payors regarding the benefits of our products may require significant resources and may never be successful.

The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. If we are found or alleged to have improperly promoted off-label uses, we may become subject to significant liability.

The FDA and other regulatory agencies strictly regulate the promotional claims that may be made about prescription products, as our product candidates would be, if approved. In particular, a product may not be promoted for uses that are not approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. If we receive marketing approval for a product candidate, physicians may nevertheless prescribe it to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also required companies to enter into consent

 

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decrees or permanent injunctions under which specified promotional conduct is changed or curtailed. If we cannot successfully manage the promotion of our product candidates, if approved, we could become subject to significant liability, which would materially adversely affect our business and financial condition.

Our therapeutic product candidates for which we intend to seek approval as biologics may face competition sooner than anticipated.

The ACA includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated approval pathway for biological products that are biosimilar to or interchangeable with an FDA-licensed reference biological product. Under the BPCIA, an application for a highly similar or “biosimilar” product may not be submitted to the FDA until four years following the date that the reference product was first approved by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first approved. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing the sponsor’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of their product.

We believe that any of our therapeutic product candidates approved as biologics under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that this exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our therapeutic product candidates to be reference products for competing products, potentially creating the opportunity for competition sooner than anticipated. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. Moreover, the extent to which a biosimilar, once approved, will be substituted for any reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

The successful commercialization of our product candidates, if approved, will depend in part on the extent to which governmental authorities and health insurers establish coverage, adequate reimbursement levels and favorable pricing policies. Failure to obtain or maintain coverage and adequate reimbursement for our product candidates could limit our ability to market those products and decrease our ability to generate revenue.

The availability of coverage and the adequacy of reimbursement by governmental healthcare programs such as Medicare and Medicaid, private health insurers and other third-party payors are essential for most patients to be able to afford prescription medications such as our product candidates, if approved. Our ability to achieve coverage and acceptable levels of reimbursement for our products by third-party payors will have an effect on our ability to successfully commercialize those products. Even if we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate or may require co-payments that patients find unacceptably high. We cannot be sure that coverage and reimbursement in the United States, the European Union or elsewhere will be available for any product that we may develop, and any reimbursement that may become available may be decreased or eliminated in the future.

Third-party payors increasingly are challenging prices charged for biopharmaceutical products and services, and many third-party payors may refuse to provide coverage and reimbursement for particular drugs when an equivalent generic drug or a less expensive therapy is available. It is possible that a third-party payor may consider our product candidates as substitutable and only offer to reimburse patients for the less expensive product. These payors may deny or revoke the reimbursement status of a given product or establish prices for new or existing marketed products at levels that are too low to enable us to realize an appropriate return on our investment in product development. If reimbursement is not available or is available only at limited levels, we may not be able to successfully commercialize our products, if approved, and may not be able to obtain a satisfactory financial return on products that we may develop.

 

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There is significant uncertainty related to third-party payor coverage and reimbursement of newly approved products. In the United States, third-party payors, including private and governmental payors, such as the Medicare and Medicaid programs, play an important role in determining the extent to which new drugs will be covered. Some third-party payors may require pre-approval of coverage for new or innovative devices or drug therapies before they will reimburse healthcare providers who use such therapies. It is difficult to predict at this time what third-party payors will decide with respect to the coverage and reimbursement for our products.

Obtaining and maintaining reimbursement status is time consuming, costly and uncertain. The Medicare and Medicaid programs increasingly are used as models for how private payors and other governmental payors develop their coverage and reimbursement policies for drugs. However, no uniform policy for coverage and reimbursement for products exists among third-party payors in the United States. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Furthermore, rules and regulations regarding reimbursement change frequently, in some cases at short notice, and we believe that changes in these rules and regulations are likely.

In addition, companion diagnostic tests require coverage and reimbursement separate and apart from the coverage and reimbursement for their companion pharmaceutical or biological products. Similar challenges to obtaining coverage and reimbursement, applicable to pharmaceutical or biological products, will apply to companion diagnostics. Additionally, if any companion diagnostic provider is unable to obtain reimbursement or is inadequately reimbursed, that may limit the availability of such companion diagnostic, which would negatively impact prescriptions for our product candidates, if approved.

Outside the United States, international operations are generally subject to extensive governmental price controls and other market regulations, and we believe the increasing emphasis on cost-containment initiatives in Europe and other countries has and will continue to put pressure on the pricing and usage of our products. In many countries, the prices of medical products are subject to varying price control mechanisms as part of national health systems. Other countries allow companies to fix their own prices for medical products but monitor and control company profits. Additional foreign price controls or other changes in pricing regulation could restrict the amount that we are able to charge for our product candidates, if approved. Accordingly, in markets outside the United States, the reimbursement for our product candidates may be reduced compared with the United States and may be insufficient to generate commercially reasonable revenue and profits.

Moreover, increasing efforts by governmental and third-party payors in the United States and abroad to cap or reduce healthcare costs may cause such organizations to limit both coverage and the level of reimbursement for newly approved products and, as a result, they may not cover or provide adequate payment for our products. We expect to experience pricing pressures in connection with the sale of any of our product candidates due to the trend toward managed healthcare, the increasing influence of health maintenance organizations and additional legislative changes. The downward pressure on healthcare costs in general, particularly prescription drugs and surgical procedures and other treatments, has become very intense. As a result, increasingly high barriers are being erected to the entry of new products.

We face significant competition, and if our competitors develop technologies or product candidates more rapidly than we do or their technologies are more effective, our business and our ability to develop and successfully commercialize products may be adversely affected.

The biotechnology and biopharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary and novel products and product candidates. Our competitors have developed, are developing or may develop products, product candidates and processes competitive with our product candidates. Any product candidates that we successfully develop and

 

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commercialize will compete with existing therapies and new therapies that may become available in the future. We believe that a significant number of products are currently under development, and may become commercially available in the future, for the treatment of IBD. Our competitors include larger and better funded pharmaceutical, specialty pharmaceutical and biotechnology companies. Moreover, we may also compete with universities, governmental agencies and other research institutions who may be active in the indications we are targeting and could be in direct competition with us. We also compete with these organizations in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

We expect to face competition from existing products and products in development for each of our therapeutic product candidates. If approved for the treatment of patients with moderate-to-severe IBD, PRA023, would compete with Entyvio, which is an a4b7 integrin antibody marketed by Takeda, Humira, which is a TNF antibody marketed by Abbvie Inc., Stelara, which is an IL-12/IL-23 antibody marketed by Janssen Pharmaceuticals, Inc., Xeljanz, which is a JAK1 inhibitor marketed by Pfizer Inc., and Simponi, which is a TNF antibody marketed by Johnson & Johnson.

We are aware of several companies with product candidates for the treatment of patients with UC and/or CD, including Pfizer’s PF-06480605, which is a fully human anti-TL1A antibody being developed in Phase 2 trials for UC, Rinvoq, which is a JAK1 inhibitor being developed in Phase 3 clinical trials by AbbVie, ozanimod, which is a S1P inhibitor being developed in Phase 3 clinical trials by Bristol-Myers Squibb Company, etrolizumab, which is a b7 integrin being developed in Phase 3 clinical trials by Roche, mirikizumab, which is an anti-IL-23 antibody being developed in Phase 3 clinical trials by Eli Lilly and filgotinib, a JAK1 inhibitor being developed in Phase 3 clinical trials by Gilead Sciences, Inc. We are also aware of additional product candidates in clinical trials by AbbVie Inc., Abivax SA, Amgen Inc., Arena Pharmaceuticals, Inc., C.H. Boehringer Ingelheim Sohn AG & Ko. KG, Bristol-Myers Squibb Company, Celgene Corporation, Gilead Sciences, Inc., GlaxoSmithKline plc, Gossamer Bio, Inc., Incyte Corp., Janssen Pharmaceutica N.V., Landos Biopharma, Inc., Protagonist Therapeutics, Inc., Theravance Biopharma, Inc., Applied Molecular Transport Inc., Pandion Therapeutics, Inc., RedHill Biopharma Ltd. and Seres Therapeutics, Inc.

Many of our competitors have significantly greater financial, technical, manufacturing, marketing, sales and supply resources or experience than we do. If we successfully obtain approval for any product candidate, we will face competition based on many different factors, including the safety and effectiveness of our products, the ease with which our products can be administered, the effectiveness of any related companion diagnostic tests, the timing and scope of regulatory approvals for these products, the availability and cost of manufacturing, marketing and sales capabilities, price, reimbursement coverage and patent position. Competing products could present superior treatment alternatives, including by being more effective, safer, more convenient, less expensive or marketed and sold more effectively than any products we may develop. Competitive products or technological approaches may make any products we develop, or Prometheus360, obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. If we are unable to compete effectively, our opportunity to generate revenue from the sale of our products we may develop, if approved, could be adversely affected.

If the market opportunities for our products are smaller than we believe they are, our revenue may be adversely affected, and our business may suffer.

The precise incidence and prevalence for all the conditions we aim to address with our product candidates are unknown. Our projections of both the number of people who have these diseases, as well as the subset of people with these diseases who have the potential to benefit from treatment with our therapeutic product candidates, are based on our beliefs and estimates. These estimates have been derived from a variety of sources, including the scientific literature, surveys of clinics, patient foundations or market research, and may prove to be

 

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incorrect. Further, new trials may change the estimated incidence or prevalence of these diseases. The total addressable market across all of our product candidates will ultimately depend upon, among other things, the diagnosis criteria included in the final label for each of our product candidates approved for sale for these indications, the availability of alternative treatments and the safety, convenience, cost and efficacy of our therapeutic product candidates relative to such alternative treatments, acceptance by the medical community and patient access, drug pricing and reimbursement. The number of patients in the United States and other major markets and elsewhere may turn out to be lower than expected, patients may not be otherwise amenable to treatment with our products or new patients may become increasingly difficult to identify or gain access to, all of which would adversely affect our results of operations and our business. Further, even if we obtain significant market share for our product candidates, because some of our potential target populations are very small, we may never achieve profitability despite obtaining such significant market share.

Our future growth may depend, in part, on our ability to operate in foreign markets, where we would be subject to additional regulatory burdens and other risks and uncertainties.

Our future growth may depend, in part, on our ability to develop and commercialize our product candidates in foreign markets. We are not permitted to market or promote any of our product candidates before we receive regulatory approval from applicable regulatory authorities in foreign markets, and we may never receive such regulatory approvals for any of our product candidates. To obtain separate regulatory approval in many other countries we must comply with numerous and varying regulatory requirements regarding safety and efficacy and governing, among other things, clinical trials, commercial sales, pricing and distribution of our product candidates. If we obtain regulatory approval of our product candidates and ultimately commercialize our products in foreign markets, we would be subject to additional risks and uncertainties, including:

 

   

different regulatory requirements for approval of drugs in foreign countries;

 

   

reduced protection for intellectual property rights;

 

   

the existence of additional third-party patent and other intellectual property rights of potential relevance to our business;

 

   

unexpected changes in tariffs, trade barriers and regulatory requirements;

 

   

economic weakness, including inflation, or political instability in particular foreign economies and markets;

 

   

compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;

 

   

foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;

 

   

foreign reimbursement, pricing and insurance regimes;

 

   

workforce uncertainty in countries where labor unrest is common;

 

   

production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and

 

   

business interruptions resulting from geopolitical actions, including war and terrorism, medical epidemics or natural disasters including earthquakes, typhoons, floods and fires.

 

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Risks Related to Our Business Operations and Industry

Our operating results may fluctuate significantly, which makes our future operating results difficult to predict and could cause our operating results to fall below expectations or any guidance we may provide.

Our quarterly and annual operating results may fluctuate significantly, which makes it difficult for us to predict our future operating results. These fluctuations may occur due to a variety of factors, many of which are outside of our control, including, but not limited to:

 

   

the timing and cost of, and level of investment in, research, development, regulatory approval and commercialization activities relating to our therapeutic product candidates and companion diagnostics, which may change from time to time;

 

   

coverage and reimbursement policies with respect to our therapeutic product candidates and companion diagnostics, if approved, and potential future drugs that compete with our products;

 

   

the cost of manufacturing our product candidates and testing products, which may vary depending on the quantity of production and the terms of our agreements with third-party manufacturers;

 

   

the timing and amount of the milestone or other payments we may receive under collaboration agreements;

 

   

expenditures that we may incur to acquire, develop or commercialize additional product candidates and technologies;

 

   

the level of demand for any approved products, which may vary significantly;

 

   

future accounting pronouncements or changes in our accounting policies; and

 

   

the timing and success or failure of preclinical studies or clinical trials for our product candidates or competing product candidates, or any other change in the competitive landscape of our industry, including consolidation among our competitors or partners.

The cumulative effects of these factors could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Investors should not rely on our past results as an indication of our future performance.

This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings guidance we may provide.

Our business is subject to risks arising from the recent global outbreak of COVID-19 and other epidemic diseases.

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, physicians and other healthcare providers, communities and business operations, as well as the U.S. and global economies and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have implemented a work-from-home policy for certain of our employees. To date, we have not experienced material disruptions in our business operations. However, while it is not possible at this time to estimate the impact that COVID-19 could have on our business in the future, particularly as we advance our product candidates to clinical development, the continued spread of COVID-19 and the measures taken by the governmental authorities could: disrupt the supply chain and the manufacture or shipment of drug substances

 

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and finished drug products for our product candidates for use in our research, preclinical studies and clinical trials; delay, limit or prevent our employees and CROs from continuing research and development activities; impede our clinical trial initiation and recruitment and the ability of patients to continue in clinical trials, including the risk that participants enrolled in our clinical trials will contract COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events; and impede testing, monitoring, study procedures (such as endoscopies that are deemed non-essential), data collection and analysis and other related activities that may impact the integrity of subject data and clinical study endpoints; any of which could delay our preclinical studies and clinical trials and increase our development costs, and have a material adverse effect on our business, financial condition and results of operations. The COVID-19 outbreak could also potentially affect the business of the FDA, European Medicines Agency (EMA) or other regulatory authorities, which could result in delays in meetings related to ongoing or planned clinical trials. The COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition, including impairing our ability to raise capital when needed. The extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the virus and the actions to contain its impact.

We are dependent on the services of our management and other clinical and scientific personnel, and if we are not able to retain these individuals or recruit additional management or clinical and scientific personnel, our business will suffer.

Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, as well as our senior scientists and other members of our management team. The loss of services of any of these individuals could delay or prevent the successful development of our product pipeline, initiation or completion of our preclinical studies and clinical trials or the commercialization of our product candidates. Although we have executed employment agreements or offer letters with each member of our senior management team, these agreements are terminable at will with or without notice and, therefore, we may not be able to retain their services as expected. We do not currently maintain “key person” life insurance on the lives of our executives or any of our employees. This lack of insurance means that we may not have adequate compensation for the loss of the services of these individuals.

We will need to expand and effectively manage our managerial, operational, financial and other resources in order to successfully pursue our clinical development and commercialization efforts. We may not be successful in maintaining our unique company culture and continuing to attract or retain qualified management and scientific and clinical personnel in the future due to the intense competition for qualified personnel among biopharmaceutical, biotechnology and other businesses, particularly in the San Diego area. Our industry has experienced a high rate of turnover of management personnel in recent years. If we are not able to attract, integrate, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategy.

We may encounter difficulties in managing our growth and expanding our operations successfully.

We had 24 full-time employees and 3 part-time employees as of January 31, 2021. As we continue development and pursue the potential commercialization of our product candidates, as well as function as a public company, we will need to expand our financial, development, regulatory, manufacturing, marketing and sales capabilities or contract with third parties to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various strategic partners, suppliers and other third parties. Our future financial performance and our ability to develop and commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively.

 

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The terms of our Loan Agreement place restrictions on our operating and financial flexibility. If we raise additional capital through debt financing, the terms of any new debt could further restrict our ability to operate our business.

As of December 31, 2020, we have an outstanding term loan in the principal amount of $7.5 million under our Loan Agreement with Oxford. The term loan is secured by a lien covering substantially all of our personal property, rights and assets, excluding intellectual property, which is subject to a negative pledge. The Loan Agreement contains customary affirmative and negative covenants and events of default applicable to us. The affirmative covenants include, among others, covenants requiring us to maintain governmental approvals, deliver certain financial reports, maintain insurance coverage and protect material intellectual property. The negative covenants include, among others, restrictions on transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying cash dividends or making other distributions, making investments, creating liens, selling assets and making any payment on subordinated debt, in each case subject to certain exceptions. The restrictive covenants of the Loan Agreement could cause us to be unable to pursue business opportunities that we or our stockholders may consider beneficial. In addition, Oxford could declare a default upon the occurrence of any event that it interprets as a material adverse change as defined under the Loan Agreement. If we default under the Loan Agreement, Oxford may accelerate all of our repayment obligations and take control of our pledged assets, potentially requiring us to renegotiate our agreement on terms less favorable to us or to immediately cease operations. Further, if we are liquidated, Oxford’s right to repayment would be senior to the rights of the holders of our common stock to receive any proceeds from the liquidation. Any declaration by Oxford of an event of default could significantly harm our business and prospects and could cause the price of our common stock to decline. If we raise any additional debt financing, the terms of such additional debt could further restrict our operating and financial flexibility.

We are subject to various federal, state and foreign healthcare fraud and abuse laws and regulations, which could increase compliance costs, and our failure to comply with these laws and regulations could harm our results of operations and financial condition.

Our business operations and current and future arrangements with investigators, healthcare professionals, consultants, third-party payors and customers expose us to broadly applicable foreign, federal and state fraud and abuse and other healthcare laws and regulations. These laws may constrain the business or financial arrangements and relationships through which we conduct our operations and how we research, market, sell and distribute any products for which we obtain marketing approval. Such laws include:

 

   

the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting, offering, receiving or providing any remuneration (including any kickback, bribe or certain rebates), directly or indirectly, overtly or covertly, in cash or in kind, in return for, either the referral of an individual or the purchase, lease, or order, or arranging for or recommending the purchase, lease, or order of any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid. A person or entity does not need to have actual knowledge of the federal Anti- Kickback Statute or specific intent to violate it in order to have committed a violation;

 

   

the federal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, to the federal government, claims for payment or approval that are false or fraudulent, knowingly making, using or causing to be made or used, a false record or statement material to a false or fraudulent claim, or from knowingly making or causing to be made a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. 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 civil False Claims Act;

 

   

the federal Health Insurance Portability and Accountability Act of 1996, which imposes criminal and civil liability for, among other things, knowingly and willfully executing, or attempting to execute, a

 

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scheme to defraud any healthcare benefit program, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement, in connection with the delivery of, or payment for, healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

   

the federal Physician Payments Sunshine Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the CMS, information related to payments and other “transfers of value” made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by such healthcare professionals and their immediate family members. Beginning in 2022, applicable manufacturers also will be required to report such information regarding payments and transfers of value provided during the previous year to other health care providers, including physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, anesthesiology assistants and certified nurse-midwives; and

 

   

analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers; some state laws require biotechnology companies to comply with the biotechnology industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures; some state laws that require biotechnology companies to report information on the pricing of certain drug products; and some state and local laws require the registration or pharmaceutical sales representatives.

Efforts to ensure that our current and future business arrangements with third parties will comply with applicable healthcare laws and regulations will involve ongoing substantial costs. It is possible that governmental authorities will conclude that our business practices, including certain consulting agreements with physicians, some of whom are in a position to prescribe our product candidates, if approved, and are compensated in the form of stock or stock options for services provided to us, may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us, we may be subject to significant penalties, including civil, criminal and administrative penalties, damages, fines, disgorgement, imprisonment, exclusion from participation in government funded healthcare programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings and the curtailment or restructuring of our operations. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may be brought against us, our business may be impaired. Further, if any of the physicians or other healthcare providers or entities with whom we expect to do business is found to be not in compliance with applicable laws, they may be subject to significant criminal, civil or administrative sanctions, including exclusions from government funded healthcare program.

Recently enacted legislation, future legislation and healthcare reform measures may increase the difficulty and cost for us to obtain marketing approval for and commercialize our product candidates and may affect the prices we may set.

In the United States and some foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to the healthcare system, including cost-containment measures that may reduce or limit coverage and reimbursement for newly approved drugs and affect our ability to profitably sell any product candidates for which we obtain marketing approval. In particular, there have been and

 

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continue to be a number of initiatives at the U.S. federal and state levels that seek to reduce healthcare costs and improve the quality of healthcare.

For example, in March 2010, the ACA was enacted in the United States. Among the provisions of the Affordable Care Act of importance to our potential product candidates, the ACA: established an annual, nondeductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents; extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; expands eligibility criteria for Medicaid programs; expands the entities eligible for discounts under the Public Health program; increases the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program; creates a new Medicare Part D coverage gap discount program; establishes a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research; and establishes a Center for Medicare Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending.

There remain judicial and Congressional challenges to certain aspects of the ACA, as well as efforts by the current U.S. administration to repeal or replace certain aspects of the ACA. For example, the Tax Cuts and Jobs Act (the Tax Act), includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year, commonly referred to as the individual mandate. On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas ruled that the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit affirmed the District Court’s decision that the individual mandate was unconstitutional but remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. The U.S. Supreme Court is currently reviewing the case, although it remains unclear when or how the Supreme Court will rule. It is also unclear how other efforts to challenge, repeal or replace the ACA will impact the ACA or our business.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which, among other things, resulted in reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional Congressional action is taken. In addition, on January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. Although a number of these and other measures may require additional authorization to become effective, Congress and the current U.S. administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. The likelihood of implementation of any of these reform initiatives is uncertain, particularly in light of the new presidential administration. Any reduction in reimbursement from Medicare and other government programs may result in a similar reduction in payments from private payors.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. Legally mandated

 

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price controls on payment amounts by third-party payors or other restrictions could harm our business, results of operations, financial condition and prospects. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine what pharmaceutical products and which suppliers will be included in their prescription drug and other healthcare programs. This could reduce the ultimate demand for our therapeutic product candidates, if approved, or put pressure on our product pricing, which could negatively affect our business, results of operations, financial condition and prospects.

We expect that the ACA, these new laws and other healthcare reform measures that may be adopted in the future may result in additional reductions in Medicare and other healthcare funding, more rigorous coverage criteria, new payment methodologies and additional downward pressure on the price that we receive for any approved product. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability or commercialize our product candidates, if approved.

If product liability lawsuits are brought against us, we may incur substantial liabilities and may be required to limit commercialization of our products.

We face an inherent risk of product liability as a result of the clinical trials of our product candidates and will face an even greater risk if we commercialize our product candidates. For example, we may be sued if our product candidates allegedly cause injury or are found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product candidate, negligence, strict liability and a breach of warranties. Claims may be brought against us by clinical trial participants, patients or others using, administering or selling products that may be approved in the future. Claims could also be asserted under state consumer protection acts.

If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit or cease the commercialization of our products. Even a successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:

 

   

decreased demand for our products;

 

   

injury to our reputation and significant negative media attention;

 

   

withdrawal of clinical trial participants;

 

   

costs to defend the related litigation;

 

   

a diversion of our management’s time and our resources;

 

   

substantial monetary awards to trial participants or patients;

 

   

product recalls, withdrawals or labeling, marketing or promotional restrictions;

 

   

significant negative financial impact;

 

   

the inability to commercialize our product candidates; and

 

   

a decline in our stock price.

We currently do not hold product liability insurance coverage, but will need to obtain this insurance coverage prior to commencing clinical trials of our product candidates. We may need to increase our insurance coverage as we expand our clinical trials or if we commence commercialization of our product candidates. Insurance coverage is increasingly expensive. Our inability to obtain and retain sufficient product liability insurance at an acceptable cost to protect against potential product liability claims could prevent or inhibit the

 

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commercialization of our product candidates. Although we will maintain such insurance, any claim that may be brought against us could result in a court judgment or settlement in an amount that is not covered, in whole or in part, by our insurance or that is in excess of the limits of our insurance coverage. Our insurance policies will also have various exclusions, and we may be subject to a product liability claim for which we have no coverage. We may have to pay any amounts awarded by a court or negotiated in a settlement that exceed our coverage limitations or that are not covered by our insurance, and we may not have, or be able to obtain, sufficient capital to pay such amounts.

Our insurance policies are expensive and only protect us from some business risks, which will leave us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. Some of the policies we currently maintain include property, general liability, employment benefits liability, business automobile, workers’ compensation, products liability, malicious invasion of our electronic systems, and clinical trials, and directors’ and officers’, employment practices and fiduciary liability insurance. We do not know, however, if we will be able to maintain insurance with adequate levels of coverage. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our financial position and results of operations.

We and any of our current and potential future collaborators will be required to report to regulatory authorities if any of our approved products cause or contribute to adverse medical events, and any failure to do so would result in sanctions that would materially harm our business.

If we or any of our current and potential future collaborators are successful in commercializing our products, the FDA and foreign regulatory authorities would require that we and such collaborators report certain information about adverse medical events if those products may have caused or contributed to those adverse events. The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We and any of our current or potential future collaborators or CROs may fail to report adverse events within the prescribed timeframe. If we or any of our current or potential future collaborators or CROs fail to comply with such reporting obligations, the FDA or a foreign regulatory authority could take action, including criminal prosecution, the imposition of civil monetary penalties, seizure of our products or delay in approval or clearance of future products.

Our business could be affected by litigation, government investigations and enforcement actions.

We currently operate in a number of jurisdictions in a highly regulated industry and we could be subject to litigation, government investigation and enforcement actions on a variety of matters in the United States. or foreign jurisdictions, including, without limitation, intellectual property, regulatory, product liability, environmental, whistleblower, false claims, privacy, anti-kickback, anti-bribery, securities, commercial, employment and other claims and legal proceedings which may arise from conducting our business. Any determination that our operations or activities are not in compliance with existing laws or regulations could result in the imposition of fines, civil and criminal penalties, equitable remedies, including disgorgement, injunctive relief and/or other sanctions against us, and remediation of any such findings could have an adverse effect on our business operations.

Legal proceedings, government investigations and enforcement actions can be expensive and time consuming. An adverse outcome resulting from any such proceeding, investigations or enforcement actions could result in significant damages awards, fines, penalties, exclusion from the federal healthcare programs, healthcare debarment, injunctive relief, product recalls, reputational damage and modifications of our business practices, which could have a material adverse effect on our business and results of operations.

 

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Our employees and independent contractors, including principal investigators, CROs, consultants and vendors, may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements.

We are exposed to the risk that our employees and independent contractors, including principal investigators, CROs, consultants and vendors may engage in misconduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violate: (i) the laws and regulations of the FDA and other similar regulatory requirements, including those laws that require the reporting of true, complete and accurate information to such authorities, (ii) manufacturing standards, including cGMP requirements, (iii) federal and state data privacy, security, fraud and abuse and other healthcare laws and regulations in the United States and abroad or (iv) laws that require the true, complete and accurate reporting of financial information or data. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, the creation of fraudulent data in our preclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and cause serious harm to our reputation. It is not always possible to identify and deter misconduct by employees 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 be in compliance with such laws or regulations. In addition, we are subject to the risk that a person or government could allege such fraud or other misconduct, even if none occurred. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and financial results, including, without limitation, the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, disgorgements, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, imprisonment, contractual damages, reputational harm, diminished profits and future earnings, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

We may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions to our management.

From time to time, we may consider strategic transactions, including acquisitions of companies, asset purchases and out-licensing or in-licensing of intellectual property, products or technologies. Additional potential transactions that we may consider in the future include a variety of business arrangements, including spin-offs, strategic partnerships, joint ventures, restructurings, divestitures, business combinations and investments. Any future transactions could increase our near and long-term expenditures, result in potentially dilutive issuances of our equity securities, including our common stock, or the incurrence of debt, contingent liabilities, amortization expenses or acquired in-process research and development expenses, any of which could affect our financial condition, liquidity and results of operations. Future acquisitions may also require us to obtain additional financing, which may not be available on favorable terms or at all. These transactions may never be successful and may require significant time and attention of our management. In addition, the integration of any business that we may acquire in the future may disrupt our existing business and may be a complex, risky and costly endeavor for which we may never realize the full benefits of the acquisition. Accordingly, although there can be no assurance that we will undertake or successfully complete any additional transactions of the nature described above, any additional transactions that we do complete could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our ability to use net operating loss carryforwards and other tax attributes is likely to be limited in connection with this offering or other ownership changes.

We have incurred substantial losses during our history, do not expect to become profitable in the near future and may never achieve profitability. To the extent that we continue to generate taxable losses, unused losses will

 

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carry forward to offset future taxable income, if any, until such unused losses expire (if at all). At December 31, 2020, we had federal and state net operating loss (NOL) carryforwards of approximately $50.1 million and $9.8 million, respectively.

Under the Tax Act, federal NOL carryforwards arising in tax years beginning after December 31, 2017, may be carried forward indefinitely. Under the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), federal NOL carryforwards arising in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss. The deductibility of federal NOL carryforwards, particularly for tax years beginning after December 31, 2020, may be limited. It is uncertain if and to what extent various states will conform to the Tax Act or the CARES Act. In addition, our NOL carryforwards are subject to review and possible adjustment by the IRS and state tax authorities. Under Section 382 of the Code, our federal NOL carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership of our company. An “ownership change” pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the Code) generally occurs if one or more stockholders or groups of stockholders who own at least 5% of a company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Similar rules may apply under state tax laws. We have not yet formally determined the amount of the cumulative change in our ownership resulting from this offering or other transactions, or any resulting limitations on our ability to utilize our NOL carryforwards and other tax attributes. However, we believe that our ability to utilize our NOL carryforwards and other tax attributes to offset future taxable income or tax liabilities is likely to be limited as a result of ownership changes, including potential changes in connection with this offering. If we earn taxable income, such limitations could result in increased future income tax liability to us and our future cash flows could be adversely affected. We have recorded a full valuation allowance related to our NOL carryforwards and other deferred tax assets due to the uncertainty of the ultimate realization of the future benefits of those assets.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain patent protection for our therapeutic and diagnostic programs and other proprietary technologies we may develop, or if the scope of the patent protection obtained is not sufficiently broad, our competitors could develop and commercialize products and technology similar or identical to ours, and our ability to successfully commercialize our therapeutic and diagnostic programs and other proprietary technologies we may develop may be adversely affected.

Our success depends in large part on our ability and the ability of our licensors and collaborators to obtain and maintain patent protection in the United States and other countries with respect to our therapeutic and diagnostic programs and other proprietary technologies we may develop. We seek to protect our proprietary position, in part, by filing patent applications in the United States and abroad relating to our therapeutic and diagnostic programs and other proprietary technologies we may develop. If we or our licensors are unable to obtain or maintain patent protection with respect to our therapeutic programs and other proprietary technologies we may develop, our business, financial condition, results of operations and prospects could be materially harmed.

Our current patent portfolio contains a limited number of patents and patent applications, some of which are in-licensed from third parties, related to various aspects of our therapeutic and diagnostic programs. While we co-own with Dr. Falk Pharma GmbH one U.S. provisional patent application related to the composition of our PR600 product candidate, we do not currently own or license any issued composition of matter patents covering our PR600 product candidate, and we cannot be certain that any non-provisional patent applications we or our licensors may file will result in issued patent claims covering the composition of matter of our PR600 product candidate. Provisional patent applications are not eligible to become issued patents until, among other things, a non-provisional patent application is filed claiming priority to one or more of our related provisional applications within 12 months of filing the first-filed provisional patent application. Composition-of-matter patents on the active pharmaceutical ingredient, or API, in prescription drug products are generally considered to be the

 

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strongest form of intellectual property protection for drug products because those types of patents provide protection without regard to any particular method of use or manufacture or formulation of the API used. Method-of-use patents protect the use of a product for the specified method and formulation patents cover formulations of the API. These types of patents do not prevent a competitor or other third party from developing or marketing an identical product for an indication that is outside the scope of the patented method or from developing a different formulation that is outside the scope of the patented formulation. Moreover, with respect to method-of-use patents, even if competitors or other third parties do not actively promote their product for our targeted indications or uses for which we may obtain patents, physicians may recommend that patients use these products off-label, or patients may do so themselves. Although off-label use may infringe or contribute to the infringement of method-of-use patents, the practice is common, and this type of infringement is difficult to prevent or prosecute. Accordingly, there can be no assurance that our patent portfolio will provide us with any competitive advantage.

Changes in either the patent laws or their interpretation in the United States and other countries may diminish our ability to protect our inventions, obtain, maintain and enforce our intellectual property rights and, more generally, could affect the value of our intellectual property or narrow the scope of our protection. We cannot predict whether the patent applications we or our licensors are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any issued patents will provide sufficient protection against competitors or other third parties.

The patent prosecution process is expensive, time-consuming, and complex, and we may not be able to file, prosecute, maintain, defend, enforce, or license all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output in time to obtain patent protection. Moreover, in some circumstances, we do not have the right to control the preparation, filing and prosecution of patent applications, or to maintain and defend the patents, directed to technology that we license from third parties. We may also require the cooperation of our licensor in order to enforce the licensed patent rights, and such cooperation may not be provided. Therefore, these patents and patent applications may not be prosecuted and enforced in a manner consistent with the best interests of our business. We cannot be certain that patent prosecution and maintenance activities by our licensors have been or will be conducted in compliance with applicable laws and regulations, which may affect the validity and enforceability of such patents or any patents that may issue from such patent applications. If our licensors fail to do so, this could cause us to lose rights in any applicable intellectual property that we in-license, and as a result, our ability to develop and commercialize products or product candidates may be adversely affected and we may be unable to prevent competitors from making, using and selling competing products.

In addition, although we enter into non-disclosure and confidentiality agreements with parties who have access to confidential or patentable aspects of our research and development output, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties, any of these parties may breach the agreements and disclose such output before a patent application is filed, thereby jeopardizing our ability to obtain or maintain valid and enforceable patent protection. Furthermore, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or until issuance, or in some cases not at all. Therefore, we cannot be certain that we or our licensors were the first to make the inventions claimed in any of our owned or licensed patents or pending patent applications, or that we or our licensors were the first to file for patent protection of such inventions.

The patent position of biotechnology and pharmaceutical companies is highly uncertain in general, involves complex legal and factual questions, and has been the subject of much litigation in recent years. As a result, the issuance, scope, validity, enforceability and commercial value of our patent rights are highly uncertain. Our owned or in-licensed patent applications may not result in patents being issued which protect our therapeutic and diagnostic programs and other proprietary technologies we may develop or which effectively prevent others from commercializing competitive technologies and products.

 

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Moreover, the claim coverage in a patent application can be significantly reduced before a corresponding patent issues. Even if our owned or in-licensed patent applications issue as patents, they may not issue in a form that will provide us with meaningful protection, prevent competitors or other third parties from competing with us, or otherwise provide us with any competitive advantage. Any patents issuing from our owned or in-licensed patent applications may be challenged, narrowed, circumvented or invalidated by third parties. Consequently, we do not know whether our therapeutic and diagnostic programs and other proprietary technology will be protectable or remain protected by valid and enforceable patents. Even if a patent issues, our competitors or other third parties may be able to circumvent the patent by developing similar or alternative technologies or products in a non-infringing manner which could materially adversely affect our business, financial condition, results of operations and prospects. In addition, given the amount of time required for the development, testing and regulatory review of our therapeutic and diagnostic programs and eventual product candidates, patents protecting our product candidates might expire before or shortly after such product candidates are commercialized. As a result, our intellectual property may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

The issuance of a patent is not conclusive as to its inventorship, scope, validity, or enforceability and our patent rights may be challenged in the courts or patent offices in the United States and abroad. We or any of our licensors may be subject to a third-party pre-issuance submission of prior art to the United States Patent and Trademark Office (USPTO) or become involved in opposition, derivation, revocation, reexamination, post-grant and inter partes review, or other similar proceedings challenging our patent rights. An adverse determination in any such submission, proceeding or litigation could reduce the scope of, or invalidate or render unenforceable, our patent rights, allow third parties to commercialize our therapeutic and diagnostic programs and other proprietary technologies we may develop and compete directly with us, without payment to us, or result in our inability to manufacture or commercialize products without infringing third-party patent rights. Such proceedings also may result in substantial cost and require significant time from our scientists and management, even if the eventual outcome is favorable to us.

Moreover, some of our owned and in-licensed patent rights are, and may in the future be, co-owned with third parties. If we are unable to obtain an exclusive license to any such third-party co-owners’ interest in such patent rights, such co-owners may be able to license their rights to other third parties, including our competitors, and our competitors could market competing products and technology. In addition, we may need the cooperation of any such co-owners of such patent rights in order to enforce such patent rights against third parties, and such cooperation may not be provided to us. Any of the foregoing could have a material adverse effect on our competitive position, business, financial conditions, results of operations, and prospects.

Furthermore, our owned and in-licensed patent rights may be subject to a reservation of rights by one or more third parties. For example, the research resulting in certain of our patent rights and technology was funded in part by the U.S. government. As a result, the government may have certain rights, or march-in rights, to such patent rights and technology. When new technologies are developed with government funding, the government generally obtains certain rights in any resulting patents, including a non-exclusive license authorizing the government to use the invention for non-commercial purposes. These rights may permit the government to disclose our confidential information to third parties and to exercise march-in rights to use or allow third parties to use our licensed technology. The government can exercise its march-in rights if it determines that action is necessary because we fail to achieve practical application of the government-funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, our rights in such inventions may be subject to certain requirements to manufacture products embodying such inventions in the U.S. Any exercise by the government of such rights could harm our competitive position, business, financial condition, results of operations and prospects.

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

Filing, prosecuting, maintaining and defending patents on our therapeutic and diagnostic programs and other proprietary technologies we may develop in all countries throughout the world would be prohibitively expensive,

 

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and the laws of foreign countries may not protect our rights to the same extent as the laws of the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the United States. These products may compete with our products, and our patent rights or other intellectual property rights may not be effective or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, such as certain developing countries, do not favor the enforcement of patents, trade secrets and other intellectual property protection, particularly those relating to biotechnology products, which could make it difficult for us to stop the infringement of our patent rights or marketing of competing products in violation of our intellectual property and proprietary rights generally. In addition, some jurisdictions, such as Europe, Japan and China, may have a higher standard for patentability than in the United States, including, for example, the requirement of claims having literal support in the original patent filing and the limitation on using supporting data that is not in the original patent filing. Under those heightened patentability requirements, we may not be able to obtain sufficient patent protection in certain jurisdictions even though the same or similar patent protection can be secured in the U.S. and other jurisdictions.

Proceedings to enforce our intellectual property and proprietary rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patent rights at risk of being invalidated or interpreted narrowly, could put our owned or in-licensed patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property and proprietary rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Many countries have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties. In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our licensors are forced to grant a license to third parties with respect to any patents relevant to our business, our competitive position may be impaired, and our business, financial condition, results of operations and prospects may be adversely affected.

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

Periodic maintenance fees, renewal fees, annuity fees, and various other government fees on patents and patent applications will be due to be paid to the USPTO and various government patent agencies outside of the United States over the lifetime of our owned or licensed patents and patent applications. In certain circumstances, we rely on our licensing partners to pay these fees due to U.S. and non-U.S. patent agencies. The USPTO and various non-U.S. government agencies require compliance with several procedural, documentary, fee payment and other similar provisions during the patent application process. We are also dependent on our licensors to take the necessary action to comply with these requirements with respect to our licensed intellectual property. In some cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. There are situations, however, in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in a partial or complete loss of patent rights in the relevant jurisdiction. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

 

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The COVID-19 pandemic may impair our and our licensors’ ability to comply with these procedural, document submission, fee payment, and other requirements imposed by government patent agencies, which may materially and adversely affect our ability to obtain or maintain patent protection for our products and product candidates. This highly contagious disease has spread to most of the countries in the world and throughout the United States, creating a serious impact on patent offices worldwide and patent office personnel, as well as our employees and agents working directly with the patent offices to obtain and maintain patent protection in impacted countries. There may be situations in which a delay in, or failure to, file a patent application pertaining to certain subject matter will result in a lack of patent protection of that subject matter. Similarly, there may be situations in which a delay in, or failure to, respond to a patent office communication, pay a requisite fee, or otherwise maintain a patent application will result in loss of patent rights to that subject matter. In such an event, potential competitors might be able to enter the market with similar or identical products or technology, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

Changes in either the patent laws or interpretation of the patent laws in the United States could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act (the America Invents Act) enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant going forward of the time from invention to filing of a patent application. Since patent applications in the United States and most other countries are typically not published until 18 months after filing or until issuance, or in some cases not at all, we cannot be certain that we were the first to either (i) file any patent application related to our therapeutic and diagnostic programs and other proprietary technologies we may develop or (ii) invent any of the inventions claimed in our owned or in-licensed patent applications.

The America Invents Act also includes a number of significant changes that affect the way patent applications will be prosecuted and also may affect patent litigation. These include allowing third party submission of prior art to the USPTO during patent prosecution and additional procedures to attack the validity of a patent by USPTO administered post-grant proceedings, including post-grant review, inter partes review and derivation proceedings. Because of a lower evidentiary standard in USPTO proceedings compared to the evidentiary standard in United States federal courts necessary to invalidate a patent claim, a third party could potentially provide evidence in a USPTO proceeding sufficient for the USPTO to hold a claim invalid even though the same evidence would be insufficient to invalidate the claim if first presented in a district court action. Accordingly, a third party may attempt to use the USPTO procedures to invalidate our patent claims that would not have been invalidated if first challenged by the third party as a defendant in a district court action. Therefore, the America Invents Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our owned or in-licensed patent applications and the enforcement or defense of patents issuing from those patent applications, all of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals, as well as diagnostic methods, are particularly uncertain. Recent U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. For example, U.S. Supreme Court rulings, such as Mayo Collaborative Servs. v.

 

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Prometheus Labs., Inc., 566 U.S. 66 (2012) and Alice Corp. Pty. Ltd. v. CLS Bank Int’l, 573 U.S. 208 (2014), have created judicial exceptions to patentability of diagnostic methods in the U.S. that are directed to laws of nature or natural phenomena. As such, we cannot guarantee that we will be able to obtain patents covering our diagnostic products, including our companion diagnostic products. These cases and others like them have created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts and the USPTO, the laws and regulations governing patents could change in unpredictable ways. In addition, the complexity and uncertainty of European patent laws have also increased in recent years. Any of the foregoing could have a material adverse effect on our owned and in-licensed patent portfolio and our ability to protect and enforce our intellectual property in the future.

Issued patents covering our therapeutic or diagnostic programs or other proprietary technologies we may develop could be found invalid or unenforceable if challenged in court or before administrative bodies in the United States or abroad.

If we or one of our licensors initiated legal proceedings against a third party to enforce a patent covering our therapeutic or diagnostic programs or other proprietary technologies we may develop, the defendant could counterclaim that such patent is invalid or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a misleading statement, during prosecution. Third parties may raise claims challenging the validity or enforceability of a patent before administrative bodies in the United States or abroad, even outside the context of litigation. Such mechanisms include re-examination, post-grant review, inter partes review, derivation proceedings, and equivalent proceedings in foreign jurisdictions (e.g., opposition proceedings). Such proceedings could result in the revocation of, cancellation of or amendment to our patent rights in such a way that they no longer cover our therapeutic and diagnostic programs and other proprietary technologies we may develop. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we or our licensing partners and the patent examiner were unaware during prosecution. If a third party were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and perhaps all, of the patent protection on our therapeutic and diagnostic programs and other proprietary technologies we may develop. Such a loss of patent protection would have a material adverse impact on our business, financial condition, results of operations and prospects.

Patent terms may be inadequate to protect our competitive position on products and product candidates for an adequate amount of time.

Patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent is generally 20 years from its earliest U.S. non-provisional or international patent application filing date. Various extensions may be available, but the life of a patent, and the protection it affords, is limited. Even if patents covering our product candidates are obtained, once the patent has expired, we may be vulnerable to competition from competitive products, including generics or biosimilars. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such product candidates might expire before or shortly after such product candidates are commercialized. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

If we do not obtain patent term extension for our product candidate, our business may be materially harmed.

Depending upon the timing, duration and specifics of any FDA marketing approval of any of our product candidates, one or more of our issued U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Action of 1984 (Hatch-Waxman Amendments). The Hatch-

 

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Waxman Amendments permit a patent extension term (PTE) of up to five years as compensation for patent term lost during the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, only one patent may be extended and only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. Similar patent term restoration provisions to compensate for commercialization delay caused by regulatory review are also available in certain foreign jurisdictions, such as in Europe under Supplemental Protection Certificate (SPC). However, we may not be granted an extension because of, for example, failing to exercise due diligence during the testing phase or regulatory review process, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents, or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our business, financial condition, results of operations and prospects could be materially harmed.

We may be subject to claims challenging the inventorship of our owned or in-licensed patent rights and other intellectual property.

We may be subject to claims that former employees, collaborators or other third parties have an interest in our patent rights, trade secrets, or other intellectual property as an inventor or co-inventor. For example, we may have inventorship disputes arise from conflicting obligations of consultants or others who are involved in developing our therapeutic and diagnostic programs and other proprietary technologies we may develop. Litigation may be necessary to defend against these and other claims challenging inventorship or our patent rights, trade secrets or other intellectual property. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, intellectual property that is important to our therapeutic and diagnostic programs and other proprietary technologies we may develop. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to our management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

If we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.

In addition to seeking patent protection for our therapeutic and diagnostic programs and other proprietary technologies we may develop, we also rely on trade secrets and confidentiality agreements to protect our unpatented know-how, technology, and other proprietary information and to maintain our competitive position. With respect to Prometheus360 and our development programs, we consider trade secrets and know-how to be one of our important sources of intellectual property. Trade secrets and know-how can be difficult to protect. In particular, the trade secrets and know-how in connection with Prometheus360, development programs and other proprietary technology we may develop may over time be disseminated within the industry through independent development, the publication of journal articles describing the methodology and the movement of personnel with scientific positions in academia and industry.

We seek to protect these trade secrets and other proprietary technology, in part, by entering into non-disclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, CROs, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. We cannot guarantee that we have entered into such agreements with each party that may have or have had access to our trade secrets or proprietary technology and processes. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome

 

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is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be materially and adversely harmed.

We may be subject to claims that third parties have an ownership interest in our trade secrets. For example, we may have disputes arise from conflicting obligations of our employees, consultants or others who are involved in developing our product candidate. Litigation may be necessary to defend against these and other claims challenging ownership of our trade secrets. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable trade secret rights, such as exclusive ownership of, or right to use, trade secrets that are important to our therapeutic and diagnostic programs and other proprietary technologies we may develop. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to our management and other employees. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not identify relevant third-party patents or may incorrectly interpret the relevance, scope or expiration of a third-party patent, which might adversely affect our ability to develop and market our products and product candidates.

We cannot guarantee that any of our patent searches or analyses, including the identification of relevant patents, the scope of patent claims or the expiration of relevant patents, are complete or thorough, nor can we be certain that we have identified each and every third-party patent and pending patent application in the United States and abroad that is relevant to or necessary for the commercialization of our current and future products and product candidates in any jurisdiction. The scope of a patent claim is determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. Our interpretation of the relevance or the scope of a patent or a pending patent application may be incorrect, which may negatively impact our ability to market our products. We may incorrectly determine that our products or product candidates are not covered by a third-party patent or may incorrectly predict whether a third party’s pending patent application will issue with claims of relevant scope. Our determination of the expiration date of any patent in the United States or abroad that we consider relevant may be incorrect, and our failure to identify and correctly interpret relevant patents may negatively impact our ability to develop and market our products. Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may be subject to claims that our employees, consultants or advisors have wrongfully used or disclosed alleged trade secrets of their current or former employers or claims asserting ownership of what we regard as our own intellectual property.

Some of our employees, consultants and advisors are currently or were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although we try to ensure that our employees, consultants and advisors 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 these individuals have used or disclosed intellectual property, including trade secrets or other proprietary information, of any such individual’s current or former employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, 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 be a distraction to our management.

In addition, while it is our policy to require our employees and contractors who may be involved in the conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, conceives or develops

 

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intellectual property that we regard as our own. The assignment of intellectual property rights may not be self-executing, or the assignment agreements may be breached, and we may be forced to bring claims against third parties, or defend claims that they may bring against us, to determine the ownership of what we regard as our intellectual property. Such claims could have a material adverse effect on our business, financial condition, results of operations and prospects.

Third-party claims of intellectual property infringement, misappropriation or other violations against us or our collaborators may prevent or delay the development and commercialization of our therapeutic and diagnostic programs and other proprietary technologies we may develop.

Our commercial success depends in part on our ability, and the ability of our collaborators, to avoid infringing, misappropriating and otherwise violating the patents and other intellectual property rights of third parties. There is a substantial amount of complex litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents, including interference, derivation and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. As discussed above, recently, due to changes in U.S. law, new procedures including inter partes review and post-grant review have also been implemented. As stated above, these changes add uncertainty to the possibility of challenges to our patent rights in the future.

Numerous U.S. and foreign issued patents and pending patent applications owned by third parties exist in the fields in which we are commercializing or plan to commercialize our therapeutic and diagnostic programs and in which we are developing other proprietary technologies. As the biotechnology and pharmaceutical industries expand and more patents are issued, and as we gain greater visibility and market exposure as a public company, the risk that our therapeutic and diagnostic programs and commercializing activities may give rise to claims of infringement of the patent rights of others increases. We cannot assure you that our therapeutic and diagnostic programs and other proprietary technologies we may develop will not infringe existing or future patents owned by third parties. We may not be aware of patents that have already been issued and that a third party, including a competitor in the fields in which we are developing our therapeutic and diagnostic programs, might assert as infringed by us. It is also possible that patents owned by third parties of which we are aware, but which we do not believe we infringe or that we believe we have valid defenses to any claims of patent infringement, could be found to be infringed by us. It is not unusual that corresponding patents issued in different countries have different scopes of coverage, such that in one country a third-party patent does not pose a material risk, but in another country, the corresponding third-party patent may pose a material risk to our products or product candidates. As such, we monitor third-party patents in the relevant pharmaceutical markets. In addition, because patent applications can take many years to issue, there may be currently pending patent applications that may later result in issued patents that we may infringe.

In the event that any third party claims that we infringe their patents or that we are otherwise employing their proprietary technology without authorization and initiates litigation against us, even if we believe such claims are without merit, a court of competent jurisdiction could hold that such patents are valid, enforceable and infringed by us. Defense of infringement claims, regardless of their merit, would involve substantial litigation expense and would be a substantial diversion of management and other employee resources from our business, and may impact our reputation. In the event of a successful claim of infringement against us, we may be enjoined from further developing or commercializing the infringing products or technologies. In addition, we may have to pay substantial damages, including treble damages and attorneys’ fees for willful infringement, obtain one or more licenses from third parties, pay royalties and/or redesign our infringing products or technologies, which may be impossible or require substantial time and monetary expenditure. Such licenses may not be available on commercially reasonable terms or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. If we are unable to obtain a necessary license to a third-party patent on commercially reasonable terms, we may be unable to commercialize the infringing products or technologies or such commercialization efforts may be significantly delayed, which could in turn

 

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significantly harm our business. In addition, we may in the future pursue patent challenges with respect to third-party patents, including as a defense against the foregoing infringement claims. The outcome of such challenges is unpredictable.

Even if resolved in our favor, the foregoing proceedings could be very expensive, particularly for a company of our size, and time-consuming. Such proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such proceedings adequately. Some of our competitors may be able to sustain the costs of litigation or administrative proceedings more effectively than we can because of greater financial resources. Such legal proceedings may also absorb significant time of our technical and management personnel and distract them from their normal responsibilities. Uncertainties resulting from such proceedings could impair our ability to compete in the marketplace. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

We may become involved in lawsuits to protect or enforce our patent rights and other intellectual property rights, which could be expensive, time consuming and unsuccessful.

Third parties, such as a competitor, may infringe our patent rights. In an infringement proceeding, a court may decide that a patent owned by or licensed to us is invalid or unenforceable or may refuse to stop the other party from using the technology at issue on the grounds that the patent does not cover such technology. In addition, our patent rights may become involved in inventorship, priority or validity disputes. To counter or defend against such claims can be expensive and time consuming. An adverse result in any litigation proceeding could put our patent rights at risk of being invalidated, held unenforceable or interpreted narrowly. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation and proceedings, there is a risk that some of our confidential information could be compromised by disclosure during such litigation and proceedings.

Even if resolved in our favor, litigation or other legal proceedings relating to intellectual property claims may cause us to incur significant expenses and could distract our personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments, and if securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing or distribution activities. We may not have sufficient financial or other resources to conduct such litigation or proceedings adequately. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.

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 or declared generic or determined to be infringing on other marks. During trademark registration proceedings, we may receive rejections of our applications by the USPTO or in other foreign jurisdictions. Although we are given an opportunity to respond to such rejections, we may be unable to overcome them. In addition, in the USPTO and in comparable agencies in many foreign jurisdictions, third parties are given an opportunity to oppose pending

 

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trademark applications and to seek to cancel registered trademarks. Opposition or cancellation proceedings may be filed against our trademarks, which may not survive such proceedings. Moreover, any name we have proposed to use with our product candidate in the United States must be approved by the FDA, regardless of whether we have registered it, or applied to register it, as a trademark. Similar requirements exist in Europe. The FDA typically conducts a review of proposed product names, including an evaluation of potential for confusion with other product names. If the FDA or an equivalent administrative body in a foreign jurisdiction objects to any of our proposed proprietary product names, we may be required to expend significant additional resources in an effort to identify a suitable substitute name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. Furthermore, in many countries, owning and maintaining a trademark registration may not provide an adequate defense against a subsequent infringement claim asserted by the owner of a senior trademark.

We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential partners or customers in our markets of interest. At times, competitors or other third parties may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our registered or unregistered trademarks or trade names. Over the long term, 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 may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade names, domain name or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely affect our business, financial condition, results of operations and prospects.

Intellectual property rights do not necessarily address all potential threats.

The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations and may not adequately protect our business or permit us to maintain our competitive advantage. For example:

 

   

others may be able to make products that are similar to our products and product candidates or utilize similar technology but that are not covered by the claims of the patents that we own or license;

 

   

we, or our licensing partners or collaborators, might not have been the first to make the inventions covered by our owned or licensed current or future patent applications;

 

   

we, or our licensing partners or collaborators, might not have been the first to file patent applications covering our or their inventions;

 

   

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing, misappropriating or otherwise violating our intellectual property rights;

 

   

it is possible that our owned or licensed current or future patent applications will not lead to issued patents;

 

   

any patent issuing from our owned or licensed current or future patent applications may be held invalid or unenforceable, including as a result of legal challenges by our competitors or other third parties, or may not provide us with any competitive advantages;

 

   

our competitors or other third parties might conduct research and development activities in countries where we do not have patent or other intellectual property rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;

 

   

it is possible that there are prior public disclosures that could invalidate our or our licensors’ patents;

 

   

we may not develop additional proprietary technologies that are patentable;

 

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the patents or pending or future patent applications of others, if issued, may harm our business; and

 

   

we may choose not to file for patent protection in order to maintain certain trade secrets or know-how, and a third party may subsequently file a patent application covering such intellectual property.

Should any of the foregoing occur, it could adversely affect our business, financial condition, results of operations and prospects.

We depend on intellectual property licensed from third parties, and our licensors may not always act in our best interest. If we fail to comply with our obligations under our intellectual property licenses, if the licenses are terminated or if disputes regarding these licenses arise, we could lose significant rights that are important to our business.

We are dependent, in part, on patents, know-how and other intellectual property and proprietary technology licensed from others. We are a party to a number of license agreements under which we are granted rights to intellectual property that are important to our business and we may enter into additional license agreements in the future. For example, in September 2017, we entered into an exclusive license agreement with Cedars-Sinai that grants us an exclusive license from Cedars-Sinai under certain patent rights, information and materials related to novel therapeutic targets and diagnostic products for our therapeutic programs that are important to our business. This agreement and our other existing license agreements impose, and we expect that any future license agreements where we in-license intellectual property, will impose on us, various development, regulatory and/or commercial diligence obligations, payment of milestones and/or royalties and other obligations. If we fail to comply with our obligations under these agreements, or we are subject to bankruptcy-related proceedings, the licensor may have the right to terminate the license, in which event we would not be able to develop or market products covered by the license.

If we or our licensors fail to adequately protect our licensed intellectual property, our ability to commercialize product candidates could suffer. We do not have complete control over the maintenance, prosecution and litigation of our in-licensed patents, patent applications and other intellectual property and may have limited control over future intellectual property that may be in-licensed. For example, we cannot be certain that activities such as the maintenance and prosecution by our licensors have been or will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. It is possible that our licensors’ conduct of intellectual property enforcement or defense proceedings may be less vigorous than had we conducted them ourselves, or may not be conducted in accordance with our best interests.

In addition, the agreements under which we license intellectual property or technology from third parties are complex, and certain provisions in such agreements may be susceptible to multiple interpretations. The resolution of any contract interpretation disagreement that may arise could narrow what we believe to be the scope of our rights to the relevant patents, know-how and other intellectual property and proprietary technology, or increase what we believe to be our financial or other obligations under the relevant agreement. Disputes that may arise between us and our licensors regarding intellectual property subject to a license agreement could include disputes regarding:

 

   

the scope of rights granted under the license agreement and other interpretation-related issues;

 

   

whether and the extent to which our technology and processes infringe, misappropriate or otherwise violate intellectual property of the licensor that is not subject to the license agreement;

 

   

our right to sublicense patent and other rights to third parties under collaborative development relationships;

 

   

our diligence obligations with respect to the use of the licensed technology in relation to our development and commercialization of our products and product candidates and what activities satisfy those diligence obligations;

 

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our right to transfer or assign the license agreement; and

 

   

the ownership of inventions and know-how resulting from the joint creation or use of intellectual property by our licensors and us.

If disputes over intellectual property that we have licensed prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully develop and commercialize the affected technology, products or product candidates. As a result, any termination of or disputes over our intellectual property license agreements could result in the loss of our ability to develop and commercialize Prometheus360, or our therapeutic and diagnostic products or product candidates, or we could lose other significant rights, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects.

For example, our agreements with certain of our third-party research partners provide that improvements developed in the course of our relationship may be owned solely by either us or our third-party research partner, or jointly between us and the third party. If we determine that rights to such improvements owned solely by a research partner or other third party with whom we collaborate are necessary to commercialize our product candidates or maintain our competitive advantage, we may need to obtain a license from such third party in order to use the improvements and continue developing, manufacturing or marketing our products or product candidates. We may not be able to obtain such a license on an exclusive basis, on commercially reasonable terms, or at all, which could prevent us from commercializing our products or product candidates or allow our competitors or others the chance to access technology that is important to our business. We also may need the cooperation of any co-owners of our intellectual property in order to prosecute, maintain, defend and enforce such intellectual property against third parties, and such cooperation may not be provided to us.

We may not be successful in obtaining or maintaining necessary rights to product components and processes for our development pipeline through acquisitions and in-licenses.

The growth of our business may depend in part on our ability to acquire, in-license or use third-party intellectual property and proprietary rights. Other pharmaceutical companies and academic institutions may own patents or may have filed, or be planning to file, patent applications potentially relevant to our business. In order to avoid infringing such patent rights, we may find it necessary or prudent to obtain licenses to such patent rights from such third-parties. For example, our product candidates may require specific formulations to work effectively and efficiently, we may develop product candidates containing our compounds and pre-existing pharmaceutical compounds, or we may be required by the FDA or comparable foreign regulatory authorities to provide a companion diagnostic test or tests with our product candidates, any of which could require us to obtain rights to use intellectual property held by third parties. In addition, with respect to any patent or other intellectual property rights we may co-own with third parties, we may require licenses to such co-owners’ interest to such patent or other intellectual property rights. We may be unable to acquire or in-license any compositions, methods of use, processes or other third-party intellectual property rights from third parties that we identify as necessary or important to our business operations. In addition, we may fail to obtain any of these licenses at a reasonable cost or on reasonable terms, if at all. Were that to happen, we may need to cease use of the compositions or methods covered by those third-party intellectual property rights, and may need to seek to develop alternative approaches that do not infringe, misappropriate or otherwise violate those intellectual property rights, which may entail additional costs and development delays, even if we were able to develop such alternatives, which may not be feasible. Even if we are able to obtain a license, it may be non-exclusive, which means that our competitors may also receive access to the same technologies licensed to us. In that event, we may be required to expend significant time and resources to develop or license replacement technology.

Additionally, we sometimes collaborate with academic institutions to accelerate our preclinical research or development under written agreements with these institutions. In certain cases, these institutions provide us with an option to negotiate a license to any of the institution’s rights in technology resulting from the collaboration.

 

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Even if we hold such an option, we may be unable to negotiate a license from the institution within the specified timeframe or under terms that are acceptable to us. If we are unable to do so, the institution may offer the intellectual property rights to others, potentially blocking our ability to pursue our program.

The licensing and acquisition of third-party intellectual property rights is a competitive area, and companies that may be more established or have greater resources than we do may also be pursuing strategies to license or acquire third-party intellectual property rights that we may consider necessary or attractive in order to commercialize our product candidates. More established companies may have a competitive advantage over us due to their size, resources and greater clinical development and commercialization capabilities. In addition, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. There can be no assurance that we will be able to successfully complete these types of negotiations and ultimately acquire the rights to the intellectual property related to the products or product candidates that we may seek to develop or market. If we are unable to successfully obtain rights to required third-party intellectual property or to maintain the existing intellectual property rights we have, we may have to abandon development of certain programs and our business, financial condition, results of operations and prospects could suffer.

We, our collaborators and our service providers may be subject to a variety of data privacy and security laws, regulations, contractual obligations and industry standards, which could increase compliance costs and our failure to comply with them could subject us to potentially significant liability, fines or penalties and otherwise harm our business.

We maintain a large quantity of sensitive information, including confidential business information, protected health information and other personal information, and are subject to laws and regulations governing the privacy and security of such information. The global data protection landscape is rapidly evolving, and we and our collaborators and service providers may be affected by or subject to new, amended or existing laws and regulations in the future, including as our operations continue to expand or if we operate in foreign jurisdictions. These laws and regulations may be subject to differing interpretations, which adds to the complexity of processing personal data. Guidance on implementation and compliance practices are often updated or otherwise revised.

In the United States, there are numerous federal and state data privacy and security laws and regulations governing the collection, use, disclosure and protection of personal information, including federal and state health information privacy laws, federal and state security breach notification laws and federal and state consumer protection laws. Each of these laws is subject to varying interpretations and constantly evolving. By way of example, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, and the regulations promulgated thereunder, imposes privacy and security requirements and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity. HIPAA mandates the reporting of certain breaches of health information to the HHS, affected individuals and if the breach is large enough, the media. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health information, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Even when HIPAA does not apply, according to the Federal Trade Commission (FTC), violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards.

 

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In addition, certain state laws govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. By way of example, the California Consumer Privacy Act (CCPA), which went into effect on January 1, 2020, gives California residents expanded rights to access and delete their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches that is expected to increase data breach litigation. The CCPA may increase our compliance costs and potential liability. Although there are limited exemptions for certain health-related information, including certain clinical trial data, the precise application and scope of these exemptions as well as how they would apply to our business is not yet clear. As currently written, the CCPA may impact our business activities and exemplifies the vulnerability of our business to the evolving regulatory environment related to personal data and protected health information. Accordingly, based on the applicability of the CCA to our business, we may need to update our data privacy and security policies and procedures to comply with the CCPA. Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely affect our business.

In Europe, the GDPR went into effect in May 2018. The GDPR governs the collection, use, disclosure, transfer or other processing of personal data of individuals within the European Economic Area (EEA). Among other things, the GDPR requires the establishment of a lawful basis for the processing of data, imposes requirements relating to the consent of the individuals to whom the personal data relates, including detailed notices for clinical trial subjects and investigators, as well as requirements regarding the security of personal data and notification of data processing obligations to the competent national data processing authorities. In addition, the GDPR increases the scrutiny of transfers of personal data from clinical trial sites located in the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States. For example, on July 16, 2020, the Court of Justice of the European Union (CJEU) invalidated the EU-US Privacy Shield Framework (Privacy Shield) under which personal data could be transferred from the EEA to United States entities that had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. The GDPR imposes substantial fines for breaches and violations (up to the greater of €20 million or 4% of consolidated annual worldwide gross revenue). The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR. Further, following the withdrawal of the United Kingdom from the EU and the EEA on January 31, 2020 and the end of the transition period, we will have to comply with the GDPR and separately the GDPR as implemented in the United Kingdom, each regime having the ability to fine up to the greater of €20 million/£17 million or 4% of global turnover. The relationship between the United Kingdom and the EU and the EEA in relation to certain aspects of data protection law remains unclear, including how data transfers between EU and EEA member states and the United Kingdom will be treated.

In many jurisdictions, enforcement actions and consequences for noncompliance are rising. In the United States, these include enforcement actions in response to rules and regulations promulgated under the authority of federal agencies and state attorneys general and legislatures and consumer protection agencies. In addition, privacy advocates and industry groups have regularly proposed, and may propose in the future, self-regulatory standards that may legally or contractually apply to us. If we fail to follow these security standards, even if no personal information is compromised, we may incur significant fines or experience a significant increase in costs.

 

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Many state legislatures have adopted legislation that regulates how businesses operate online, including measures relating to privacy, data security and data breaches. Laws in all U.S. states require businesses to provide notice to customers whose personally identifiable information has been disclosed as a result of a data breach. The laws are not consistent, and compliance in the event of a widespread data breach is costly.

Compliance with U.S. and international data protection laws and regulations could require us to take on more onerous obligations in our contracts, restrict our ability to collect, use and disclose data, update our data privacy and security policies and procedures, or in some cases, impact our ability to operate in certain jurisdictions. Failure by us or our collaborators and service providers to comply with U.S. and international data protection laws and regulations could result in government enforcement actions (which could include civil or criminal penalties), private litigation and/or adverse publicity and could negatively affect our operating results and business. Moreover, clinical trial subjects about whom we or our potential collaborators obtain information, as well as the providers who share this information with us, may contractually limit our ability to use and disclose the information. Claims that we have violated individuals’ privacy rights, failed to comply with data protection laws, or breached our contractual obligations, even if we are not found liable, could be expensive and time consuming to defend, could result in adverse publicity and could have a material adverse effect on our business, financial condition, results of operations and prospects.

Risks Related to Our Common Stock and This Offering

There has been no public market for our common stock and an active, liquid and orderly market for our common stock may not develop, and you may not be able to resell your common stock at or above the public offering price.

Prior to this offering, there has been no public market for our common stock. Although we expect to list our common stock on the Nasdaq Global Market (Nasdaq), an active trading market for our common stock may never develop or be sustained following this offering. We and the representatives of the underwriters will determine the initial public offering price of our common stock through negotiation. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, an active trading market may not develop following the consummation of this offering or, if it is developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. An inactive market may also impair our ability to raise capital by selling shares and may impair our ability to acquire other businesses or technologies using our shares as consideration, which, in turn, could materially adversely affect our business.

The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.

Our stock price is likely to be volatile. The stock market in general and the market for stock of biopharmaceutical companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The market price for our common stock may be influenced by those factors discussed in this “Risk Factors” section and many others, including:

 

   

results of our preclinical studies and clinical trials, and the results of trials of our competitors or those of other companies in our market sector;

 

   

our ability to enroll subjects in our future clinical trials;

 

   

regulatory approval of our product candidates, or limitations to specific label indications or patient populations for its use, or changes or delays in the regulatory review process;

 

   

regulatory developments in the United States and foreign countries;

 

   

changes in the structure of healthcare payment systems;

 

   

the success or failure of our efforts to develop, acquire or license additional product candidates;

 

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innovations, clinical trial results, product approvals and other developments regarding our competitors;

 

   

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

manufacturing, supply or distribution delays or shortages;

 

   

any changes to our relationship with any manufacturers, suppliers, collaborators or other strategic partners;

 

   

achievement of expected product sales and profitability;

 

   

variations in our financial results or those of companies that are perceived to be similar to us;

 

   

market conditions in the biopharmaceutical sector and issuance of securities analysts’ reports or recommendations;

 

   

trading volume of our common stock;

 

   

an inability to obtain additional funding;

 

   

sales of our stock by insiders and stockholders;

 

   

general economic, industry and market conditions other events or factors, many of which are beyond our control;

 

   

additions or departures of key personnel; and

 

   

intellectual property, product liability or other litigation against us.

In addition, in the past, stockholders have initiated class action lawsuits against biopharmaceutical companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert our management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

We may allocate the net proceeds from this offering in ways that you and other stockholders may not approve.

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in “Use of Proceeds.” Because of the number and variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment, and the failure by our management to apply these funds effectively could harm our business. Pending their use, we may invest the net proceeds from this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. These investments may not yield a favorable return to our stockholders. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected results, which could cause our stock price to decline.

You will suffer immediate and substantial dilution in the net tangible book value of the common stock you purchase.

The initial public offering price of our common stock is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock immediately after the completion of this offering. Purchasers of common stock in this offering will experience immediate dilution of approximately $        per share, assuming an initial public offering price of $        per share, which is the midpoint of the price range set forth on the cover of this prospectus. In the past, we issued options to acquire common stock at prices significantly below the initial public offering price. To the extent these outstanding options are ultimately exercised, investors purchasing common stock in this offering will sustain further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

 

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After this offering, our executive officers, directors and principal stockholders, if they choose to act together, will continue to have the ability to significantly influence all matters submitted to stockholders for approval.

Following the completion of this offering, our executive officers, directors and greater than 5% stockholders, in the aggregate, will own approximately         % of our outstanding common stock (assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or warrants). As a result, such persons, acting together, will have the ability to significantly influence all matters submitted to our board of directors or stockholders for approval, including the appointment of our management, the election and removal of directors and approval of any significant transaction, as well as our management and business affairs. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control, impeding a merger, consolidation, takeover or other business combination involving us, or discouraging a potential acquiror from making a tender offer or otherwise attempting to obtain control of our business, even if such a transaction would benefit other stockholders.

We do not currently intend to pay dividends on our common stock, and, consequently, your ability to achieve a return on your investment will depend on appreciation, if any, in the price of our common stock.

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, under the terms of our Loan Agreement, we are prohibited from paying any cash dividends without the consent of the lenders and any future debt agreements may preclude us from paying dividends. Any return to stockholders will therefore be limited to the appreciation of their stock. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares.

Sales of a substantial number of shares of our common stock by our existing stockholders in the public market could cause our stock price to fall.

Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could significantly reduce the market price of our common stock and impair our ability to raise adequate capital through the sale of additional equity securities.

Based on shares of common stock outstanding as of December 31, 2020, upon the closing of this offering, we will have outstanding a total of                shares of common stock, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options or warrants. Of these shares, only the                shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable, without restriction, in the public market immediately following this offering, unless they are purchased by one of our affiliates.

Our directors and executive officers and holders of substantially all of our outstanding securities have entered into lock-up agreements with the underwriters pursuant to which they may not, with limited exceptions, for a period of 180 days from the date of this prospectus, offer, sell or otherwise transfer or dispose of any of our securities, without the prior written consent of SVB Leerink LLC and Credit Suisse Securities (USA) LLC. The underwriters may permit our officers, directors and other securityholders who are subject to the lock-up agreements to sell shares prior to the expiration of the lock-up agreements at any time in their sole discretion. See “Underwriting.” Sales of these shares, or perceptions that they will be sold, could cause the trading price of our common stock to decline. After the lock-up agreements expire, up to an additional                  shares of common stock will be eligible for sale in the public market, of which shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act.

In addition, as of December 31, 2020,                  shares of common stock that are subject to outstanding options under our employee benefit plans will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701

 

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under the Securities Act. If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

After this offering, the holders of                shares of our outstanding common stock, or approximately     % of our total outstanding common stock based on shares outstanding as of December 31, 2020, will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to vesting and the 180-day lock-up agreements described above. See “Description of Capital Stock—Registration Rights.” Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by affiliates, as defined in Rule 144 under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock.

We are an emerging growth company and a smaller reporting company, and the reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.

We are an emerging growth company, as defined in the JOBS Act, and may remain an emerging growth company until the last day of the 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 become a “large accelerated filer,” our annual gross revenues exceed $1.07 billion or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:

 

   

being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;

 

   

not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting pursuant to Sarbanes-Oxley;

 

   

not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, unless the SEC determines the new rules are necessary for protecting the public;

 

   

reduced disclosure obligations regarding executive compensation; and

 

   

exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have provided only two years of audited financial statements and have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we 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 reduced or more volatile. 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 allows an emerging growth company to delay the adoption of these accounting standards until they would otherwise apply to private companies. We have elected to avail ourselves of this exemption and, therefore, we will not be subject to the same timing of adoption of new or revised accounting standards as other public companies that are not emerging growth companies.

 

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We are also a smaller reporting company as defined in the Exchange Act. We may continue to be a smaller reporting company even after we are no longer an emerging growth company. We may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as our voting and non-voting common stock held by non-affiliates is less than $250.0 million measured on the last business day of our second fiscal quarter, or our annual revenue is less than $100.0 million during the most recently completed fiscal year.

We have identified a material weakness in our internal control over financial reporting. If we fail to remediate one or more of our material weaknesses, our ability to accurately and timely report our financial results could be adversely affected.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles (GAAP). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis.

Prior to the completion of this offering, we have been a private company with limited accounting personnel and other resources to address our internal control over financial reporting. In connection with the audits of our 2019 and 2020 annual consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal controls due to a lack of controls in the financial closing and reporting process, including a lack of segregation of duties and the documentation and design of formalized processes and procedures in the revenue cycle. Beginning in the third quarter of 2020, we began to take steps to address the material weakness through our remediation plan, which included the hiring of a Chief Financial Officer and the engagement of external advisors to provide financial accounting assistance in the short term. We have plans to hire additional personnel to improve the segregation of duties in our financial closing and reporting process. In addition, we plan to engage external advisors to evaluate and document the design and operating effectiveness of our internal controls and assist with the remediation and implementation of our internal controls as required. For a discussion of our remediation plan, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Internal Control Over Financial Reporting.” The actions we have taken are subject to continued review, supported by confirmation and testing by management as well as audit committee oversight. While we have implemented a plan to remediate this weakness we cannot assure you that we will be able to remediate this weakness, which could impair our ability to accurately and timely report our financial position, results of operations or cash flows. Moreover, our failure to remediate the material weakness identified above or the identification of additional material weaknesses, could adversely affect our stock price and we may be unable to maintain compliance with exchange listing requirements.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable and may lead to entrenchment of management.

Our amended and restated certificate of incorporation and amended and restated bylaws that will be in effect immediately prior to the consummation of this offering will contain provisions that could significantly reduce the value of our shares to a potential acquiror or delay or prevent changes in control or changes in our management without the consent of our board of directors. The provisions in our charter documents will include the following:

 

   

a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

 

   

no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

   

the exclusive right of our board of directors, unless the board of directors grants such right to the stockholders, to elect a director to fill a vacancy created by the expansion of the board of directors or

 

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the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

   

the required approval of at least 66-2/3% of the shares entitled to vote to remove a director for cause, and the prohibition on removal of directors without cause;

 

   

the ability of our board of directors to authorize the issuance of shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquiror;

 

   

the ability of our board of directors to alter our amended and restated bylaws without obtaining stockholder approval;

 

   

the required approval of at least 66-2/3% of the shares entitled to vote to adopt, amend or repeal our amended and restated bylaws or repeal the provisions of our amended and restated certificate of incorporation regarding the election and removal of directors;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

   

an exclusive forum provision providing that the Court of Chancery of the State of Delaware will be the exclusive forum for certain actions and proceedings;

 

   

the requirement that a special meeting of stockholders may be called only by the board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

   

advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

We are also subject to the anti-takeover provisions contained in Section 203 of the Delaware General Corporation Law. Under Section 203, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other exceptions, the board of directors has approved the transaction.

Our amended and restated certificate of incorporation and amended and restated bylaws will provide 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 and amended and restated bylaws will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided, that, this provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, our amended and restated certificate of incorporation will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act. These choice of forum provisions 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. By agreeing to this provision, however, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum

 

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provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. If a court were to find the choice of forum provisions 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 adversely affect our business and financial condition.

General Risk Factors

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Exchange Act, which will require, among other things, that we file with the SEC annual, quarterly and current reports with respect to our business and financial condition. In addition, Sarbanes-Oxley, as well as rules subsequently adopted by the SEC and Nasdaq to implement provisions of Sarbanes-Oxley, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory “say on pay” voting requirements that will apply to us when we cease to be an emerging growth company. 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 the manner in which we operate our business in ways we cannot currently anticipate.

We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to incur substantial costs to maintain the same or similar coverage. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

We are subject to U.S. and certain foreign export and import controls, sanctions, embargoes, anti-corruption laws and anti-money laundering laws and regulations. Compliance with these legal standards could impair our ability to compete in domestic and international markets. We could face criminal liability and other serious consequences for violations, which could harm our business.

We are subject to export control and import laws and regulations, including the U.S. Export Administration Regulations, U.S. Customs regulations, and various economic and trade sanctions regulations administered by the U.S. Treasury Department’s Office of Foreign Assets Controls and anti-corruption and anti-money laundering laws and regulations, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.S. domestic bribery statute contained in 18 U.S.C. § 201, the U.S. Travel Act, the USA PATRIOT Act and other state and national anti-bribery and anti-money laundering laws in the countries in which we conduct activities. Anti-corruption laws are interpreted broadly and prohibit companies and their employees, agents, CROs, contractors and other collaborators and partners from authorizing, promising, offering, providing, soliciting or receiving, directly or indirectly, improper payments or anything else of value to recipients in the public or private sector. We may engage third parties for clinical trials outside of the United States, to sell our products abroad once we

 

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enter a commercialization phase, and/or to obtain necessary permits, licenses, patent registrations and other regulatory approvals. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated hospitals, universities and other organizations. We can be held liable for the corrupt or other illegal activities of our employees, agents, CROs, contractors and other collaborators and partners, even if we do not explicitly authorize or have actual knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm and other consequences.

We and any of our third-party manufacturers or suppliers may use potent chemical agents and hazardous materials, and any claims relating to improper handling, storage or disposal of these materials could be time consuming or costly.

We and any of our third-party manufacturers or suppliers and current or potential future collaborators will use biological materials, potent chemical agents and may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety of the environment. Our operations and the operations of our third-party manufacturers and suppliers also produce hazardous waste products. Federal, state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot eliminate the risk of accidental injury or contamination from these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage, and our property, casualty and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or hazardous waste exposure or contamination. In the event of contamination or injury, we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals could be suspended. Although we maintain workers’ compensation insurance for certain costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials or other work-related injuries, this insurance may not provide adequate coverage against potential liabilities. We do not maintain insurance for toxic tort claims that may be asserted against us in connection with our storage or disposal of biologic, hazardous or radioactive materials.

In addition, we may incur substantial costs in order to comply with current or future environmental, health and safety laws and regulations, which have tended to become more stringent over time. These current or future laws and regulations may impair our research, development or production efforts. Failure to comply with these laws and regulations also may result in substantial fines, penalties or other sanctions or liabilities, which could materially adversely affect our business, financial condition, results of operations and prospects.

Our internal computer systems, or those of any of our CROs, manufacturers, other contractors or consultants or current or potential future collaborators, may fail or experience security breaches or other unauthorized or improper access, which could result in a material disruption of our product development programs.

In the ordinary course of business, we collect, store, transmit and otherwise process large amounts of data including, without limitation, proprietary business information and personal information. Despite the implementation of security measures, our internal technology systems (including infrastructure) and those of our current and any future CROs and other contractors, consultants and collaborators are vulnerable to privacy and information security incidents, such as data breaches, damage from computer viruses, cybersecurity threats (such as denial-of-service attacks, cyber-attacks or cyber-intrusions over the Internet, hacking, phishing and other social engineering attacks), unauthorized access or use, natural disasters, terrorism, war and telecommunication and electrical failures. As we become more dependent on information technologies to conduct our operations, such incidents, including deliberate attacks and attempts to gain unauthorized access to computer systems and networks, may increase in frequency and sophistication. If such an event were to occur and cause interruptions in our operations or result in the unauthorized disclosure of or access to personally

 

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identifiable information or protected health information (violating certain privacy laws such as HIPAA or the European General Data Protection Regulation (the GDPR)), it could result in a material disruption of our development programs and our business operations, whether due to a loss of our trade secrets or other similar disruptions. Some of the federal, state and foreign government requirements include obligations of companies to notify individuals of security breaches involving particular personally identifiable information, which could result from breaches experienced by us or by our vendors, contractors, or organizations with which we have formed strategic relationships.

Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we and our partners may be unable to anticipate these techniques or to implement adequate preventative measures. Further, we do not have any control over the operations of the facilities or technology of our cloud and service providers, including any third-party vendors that collect, process and store personal information on our behalf. Our systems, servers and platforms and those of our service providers may be vulnerable to computer viruses or physical or electronic break-ins that our or their security measures may not detect. Individuals able to circumvent such security measures may misappropriate our confidential or proprietary information, disrupt our operations, damage our computers or otherwise impair our reputation and business. We may need to expend significant resources and make significant capital investment to protect against security breaches or to mitigate the impact of any such breaches. There can be no assurance that we or our third-party providers will be successful in preventing security breaches or successfully mitigating their effects.

Any security breach or other incident, whether real or perceived, that results in a loss of or accidental, unlawful or unauthorized access to, use of, release of, or other processing of personal, proprietary or other sensitive information could impact our reputation, cause us to incur significant liability and costs, including legal expenses, fines and penalties for any noncompliance with any privacy and security laws, harm customer confidence, hurt our expansion into new markets, cause us to incur remediation costs, or cause us to lose existing customers. For example, the loss of clinical trial data from clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. We also rely on third parties to manufacture our product candidates, and similar events relating to their computer systems could also have a material adverse effect on our business. Any insurance we maintain against the risk of this type of loss may not be sufficient to cover actual losses, or may not apply to the circumstances relating to any particular loss. For further discussion on the potential liability related to the violation of these laws, see “Risk Factors—We, our collaborators and our service providers may be subject to a variety of privacy and data security laws and contractual obligations, which could increase compliance costs and our failure to comply with them could subject us to potentially significant fines or penalties and otherwise harm our business.”

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. We rely on third-party manufacturers to produce our product candidates. Our ability to obtain clinical supplies of our product candidates could be disrupted if the operations of these suppliers were affected by a man-made or natural disaster or other business interruption. In addition, our corporate headquarters is located in San Diego, California near major earthquake faults and fire zones, and the ultimate impact on us of being located near major earthquake faults and fire zones and being consolidated in a certain geographical area is unknown. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

 

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Unstable market and economic conditions may have serious adverse consequences on our business, financial condition and stock price.

The global credit and financial markets have recently experienced extreme volatility and disruptions (including as a result of the ongoing COVID-19 pandemic), which has included severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, it may make any necessary debt or equity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive an economic downturn, which could directly affect our ability to attain our operating goals on schedule and on budget.

Changes in U.S. tax law may materially adversely affect our financial condition, results of operations and cash flows.

Changes in laws and policy relating to taxes may have an adverse effect on our financial condition, results of operations and cash flows. For example, the Tax Act significantly changed the U.S. federal income taxation of U.S. corporations. The Tax Act remains unclear in various respects and has been, and may continue to be, the subject of amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (IRS), which have lessened or increased certain adverse impacts of the Tax Act and may continue to do so in the future. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. On March 27, 2020, the CARES Act was signed into law to address the COVID-19 crisis. The CARES Act is an approximately $2 trillion emergency economic stimulus package that includes numerous U.S. federal income tax provisions, including the modification of: (i) NOL rules (as discussed above), (ii) the alternative minimum tax refund and (iii) business interest deduction limitations under Section 163(j) of the Code). We continue to work with our tax advisors and auditors to determine the full impact the Tax Act and the CARES Act will have on us. We urge our investors to consult with their legal and tax advisors with respect to any changes in tax law and the potential tax consequences of investing in our common stock.

If securities or industry analysts do not publish research or reports or publish unfavorable research or reports 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, our business, our market or our competitors. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.

If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, investors may lose confidence in our financial reporting and the trading price of our common stock may decline.

Pursuant to Section 404 of Sarbanes-Oxley, our management will be required to report upon the effectiveness of our internal control over financial reporting beginning with the annual report for our fiscal year ending December 31, 2021. When we lose our status as an “emerging growth company” and reach an accelerated

 

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filer threshold, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we will need to upgrade our information technology systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. If we or, if required, our auditors are unable to conclude that our internal control over financial reporting is effective, investors may lose confidence in our financial reporting and the trading price of our common stock may decline.

We cannot assure you that there will not be material weaknesses or significant deficiencies in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective, or if our independent registered public accounting firm determines we have a material weakness or significant deficiency in our internal control over financial reporting once that firm begin its Section 404 reviews, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital markets.

We could be subject to securities class action litigation.

In the past, securities class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is especially relevant for us, because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. If we face such litigation, it could result in substantial costs and a diversion of our management’s attention and resources, which could harm our business.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy, research and development plans, the anticipated timing, costs, design and conduct of our ongoing and planned preclinical studies and clinical trials for our product candidates, our plans to use our Prometheus360 product platform to expand our pipeline of product candidates and develop marketable products, the anticipated timing and costs of our development of companion diagnostics, the potential benefits from our collaboration arrangements with third parties and our plans to enter into additional arrangements, the timing and likelihood of regulatory filings and approvals for our product candidates and companion diagnostics, our ability to commercialize our product candidates, if approved, the impact of COVID-19 on our business, the pricing and reimbursement of our product candidates, if approved, and testing products, the potential to develop future product candidates, the timing and likelihood of success, plans and objectives of management for future operations, and future results of anticipated product development efforts, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See the section titled “Where You Can Find More Information.”

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and you are cautioned not to rely unduly upon them.

 

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MARKET AND INDUSTRY DATA

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research, as well as from independent market research, industry and general publications and surveys, governmental agencies and publicly available information in addition to research, surveys and studies conducted by third parties. Internal estimates are derived from publicly available information released by industry analysts and third-party sources, our internal research and our industry experience, and are based on assumptions made by us based on such data and our knowledge of our industry and market, which we believe to be reasonable. In some cases, we do not expressly refer to the sources from which this data is derived. In that regard, when we refer to one or more sources of this type of data in any paragraph, you should assume that other data of this type appearing in the same paragraph is derived from the same sources, unless otherwise expressly stated or the context otherwise requires. In addition, while we believe the industry, market and competitive position data included in this prospectus is reliable and based on reasonable assumptions, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties or by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from the sale of the common stock that we are offering will be approximately $          million (or $        million if the underwriters exercise their option to purchase additional shares in full), assuming an initial public offering price of $          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $          per share, which is the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) 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 and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately $        million, assuming the assumed initial public offering price stays the same.

The principal purposes of this offering are to obtain additional capital to support our operations, to create a public market for our common stock and to facilitate our future access to the public equity markets. We intend to use net proceeds from this offering as follows, together with our existing cash and cash equivalents:

 

   

approximately $          to fund the clinical development of PRA023 in UC and CD;

 

   

approximately $          to fund the research and development of our PR600 program; and

 

   

the remainder for working capital and general corporate purposes.

We may also use a portion of the net proceeds to in-license, acquire, or invest in complementary businesses, technologies, products or assets. However, we have no current commitments or obligations to do so.

We believe, based on our current operating plan, that the net proceeds from this offering together with our existing cash and cash equivalents, will be sufficient to fund our operations for at least the next        months from the date of this prospectus. In particular, we expect that the net proceeds from this offering, together with our existing cash and cash equivalents, will allow us to complete our planned Phase 2 clinical trial in patients with moderate-to-severe UC and Phase 1b clinical trial in patients with moderate-to-severe CD for PRA023, and complete IND-enabling preclinical studies and commence clinical development for our PR600 program. We have based these estimates on assumptions that may prove to be wrong, and we could use our capital resources sooner than we currently expect. However, our expected use of proceeds from this offering described above represents our current intentions based on our present plans and business condition. We cannot predict with certainty all of the particular uses of the net proceeds from this offering or the actual amounts that we will spend on the uses set forth above. The net proceeds from this offering, together with our cash and cash equivalents, will not be sufficient for us to fund all of our product candidates through regulatory approval, and we will need to raise additional capital to complete the development and commercialization of each of our product candidates.

The amounts and timing of our actual expenditures will depend on numerous factors, including the time and cost necessary to conduct our ongoing and planned preclinical studies and clinical trials, the results of such studies and trials, and other factors described in “Risk Factors,” as well as the amount of cash used in our operations and any unforeseen cash needs. Therefore, our actual expenditures may differ materially from the estimates described above. We may find it necessary or advisable to use the net proceeds for other purposes, and we will have broad discretion in the application of the net proceeds.

Pending the uses described above, we plan to invest the net proceeds from this offering in short- and intermediate-term, investment grade interest-bearing instruments.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We intend to retain future earnings, if any, to finance the operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments. In addition, under the terms of our loan and security agreement, we are prohibited from paying any cash dividends without the consent of Oxford Finance LLC.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2020:

 

   

on an actual basis;

 

   

on a pro forma basis to reflect (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and our receipt of $73.8 million in gross proceeds and the satisfaction of amounts due to Nestlé and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock and the related reclassification of the carrying value of the convertible preferred stock and preferred stock purchase right liability to permanent equity immediately prior to the closing of this offering, and (iii) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

 

   

on a pro forma as adjusted basis to give further effect to our issuance and sale of                 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information below is illustrative only, and our cash and cash equivalents and capitalization following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this information in conjunction with our consolidated financial statements and related notes included in this prospectus and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information contained in this prospectus.

 

     As of December 31, 2020  
(in thousands, except share and par value data)    Actual     Pro Forma     Pro Forma
As
Adjusted(1)
 
           (unaudited)     (unaudited)  

Cash and cash equivalents

   $ 54,201     $ 128,001     $            
  

 

 

   

 

 

   

 

 

 

Capitalization:

      

Amounts due to Nestlé – related party

Long-term debt, net

   $

 

5,675

7,399

 

 

  $

 

—  

7,399

 

 

  $
 
 

Convertible preferred stock purchase right liability

     3,900       —      

Convertible preferred stock, $0.0001 par value; 254,983,985 shares authorized, 160,864,434 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma and pro forma as adjusted

     126,023       —      

Stockholders’ equity (deficit):

      

Preferred stock, $0.0001 par value; no shares authorized, issued and outstanding, actual; 40,000,000 shares authorized, no shares issued and no shares outstanding, pro forma and pro forma as adjusted

     —         —      

Common stock, $0.0001 par value; 325,000,000 shares authorized, 17,683,268 shares issued and 17,136,289 outstanding, excluding 546,979 shares subject to forfeiture or a right of repurchase, actual; 400,000,000 shares authorized, 272,543,002 shares issued and outstanding, excluding 546,979 shares subject to forfeiture or a right of repurchase, pro forma; 400,000,000 shares authorized,                 shares issued and                 shares outstanding, excluding 546,979 shares subject to forfeiture or a right of repurchase, pro forma as adjusted

     2       27    

Additional paid-in capital

     1,603       210,976    

Accumulated deficit

     (99,146     (99,146  
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (97,541     111,857    
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 45,456     $ 119,256     $    
  

 

 

   

 

 

   

 

 

 

 

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(1)

Each $1.00 increase (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 (decrease) the pro forma as adjusted amount of each of our cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $         , 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 the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us at the assumed initial public offering price of $        per share would increase (decrease) the pro forma as adjusted amount of each of our cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $        , after deducting the estimated 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 set forth above is based on 272,543,002 shares of our common stock outstanding as of December 31, 2020, including 546,979 shares subject to forfeiture or our right of repurchase, after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible stock in January 2021 and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering, and excludes:

 

   

29,302,518 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2020, at a weighted-average exercise price of $0.29 per share;

 

   

21,168,757 shares of common stock issuable upon the exercise of outstanding stock options granted after December 31, 2020, at a weighted-average exercise price of $0.64 per share;

 

   

112,500 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2020 at a weighted-average exercise price of $1.00 per share;

 

   

                shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 Plan); and

 

   

                shares of common stock reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 ESPP).

 

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DILUTION

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 and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

As of December 31, 2020, our historical net tangible book value (deficit) was $(97.5) million, or $(5.52) per share of our common stock, based on 17,683,268 shares of common stock issued and outstanding as of such date, including 546,979 shares subject to forfeiture or our right of repurchase as of such date. Our historical net tangible book value per share represents total tangible assets less total liabilities and convertible preferred stock, divided by the number of shares of common stock outstanding at December 31, 2020.

On a pro forma basis, after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and our receipt of $73.8 million in gross proceeds and the satisfaction of amounts due to Nestlé, (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock and (iii) the related reclassification of the carrying value of the convertible preferred stock and preferred stock purchase right liability to permanent equity immediately prior to the closing of this offering, our pro forma net tangible book value as of December 31, 2020 would have been approximately $111.9 million, or approximately $0.41 per share of our common stock.

After giving further effect to the 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, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been approximately $        million, or approximately $         per share. This amount represents an immediate increase in pro forma net tangible book value of approximately $         per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of approximately $         per share to new investors purchasing shares of common stock in this offering.

Dilution per share to new investors is determined by subtracting pro forma as adjusted net tangible book value per share after this offering from the initial public offering price per share paid by new investors. The following table illustrates this dilution (without giving effect to any exercise by the underwriters of their option to purchase additional shares):

 

Assumed initial public offering price per share

     $            

Historical net tangible book value (deficit) per share as of December 31, 2020

   $ (5.52  

Pro forma increase in historical net tangible book value per share as of December 31, 2020 attributable to the pro forma adjustments described above

     5.93    
  

 

 

   

Pro forma net tangible book value per share as of December 31, 2020

   $ 0.41    

Increase in pro forma net tangible book value per share attributable to new investors participating in this offering

    
  

 

 

   

Pro forma as adjusted net tangible book value per share after this offering

    
    

 

 

 

Dilution per share to new investors participating in this offering

     $    
    

 

 

 

Each $1.00 increase (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 (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $        , and dilution in pro forma as adjusted net tangible book value per share to new investors by approximately $        , 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 the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. Each increase (decrease) of 1.0 million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by approximately $        per share and decrease (increase) the dilution to investors participating in this offering by approximately $        per share, assuming that the assumed initial public offering price of $        per share remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.

 

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If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value after the offering would be approximately $         per share, the increase in pro forma as adjusted net tangible book value per share to existing stockholders would be approximately $         per share and the dilution per share to new investors would be $         per share, in each case assuming an initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

The following table summarizes on the pro forma as adjusted basis described above, as of December 31, 2020, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share paid by existing stockholders for shares issued prior to this offering and the price to be paid by new investors in this offering. The calculations below are 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 the prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

    

 

Shares Purchased

   

 

Total Consideration

    Weighted-
Average
Price

Per Share
 
     Number    Percent     Amount      Percent  

Existing stockholders before this offering

               $                             $                

New investors participating in this offering

                          $    
  

 

  

 

 

   

 

 

    

 

 

   

Total

        100        100  
  

 

  

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares of our common stock in full:

 

   

the percentage of shares of common stock held by existing stockholders before this offering will decrease to approximately      % of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares held by new investors participating in this offering will increase to                 , or approximately      % of the total number of shares of our common stock outstanding after this offering.

The foregoing tables and calculations on a pro forma and pro forma as adjusted basis are based on 272,543,002 shares of our common stock outstanding as of December 31, 2020, including 546,979 shares subject to forfeiture or our right of repurchase, after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and our receipt of $73.8 million in gross proceeds and the satisfaction of amounts due to Nestlé and (ii) the automatic conversion of all outstanding shares of our preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering, and exclude:

 

   

29,302,518 shares of common stock issuable upon the exercise of outstanding stock options as of December 31, 2020, at a weighted-average exercise price of $0.29 per share;

 

   

21,168,757 shares of common stock issuable upon the exercise of outstanding stock options granted after December 31, 2020, at a weighted-average exercise price of $0.64 per share;

 

   

112,500 shares of common stock issuable upon the exercise of outstanding warrants as of December 31, 2020, at a weighted-average exercise price of $1.00 per share;

 

   

                shares of common stock reserved for future issuance under our 2021 Plan, which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 Plan); and

 

   

                shares of common stock reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering (which number does not include any potential evergreen increases pursuant to the terms of the 2021 ESPP).

To the extent any outstanding options, warrants or other rights are exercised, or we issue additional equity or convertible securities in the future, there will be further dilution to new investors.

 

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SELECTED FINANCIAL DATA

The following tables set forth our selected historical financial data as of, and for the periods ended on, the dates indicated. We have derived the selected statements of operations data for the years ended December 31, 2019 and 2020 and the selected balance sheet data as of December 31, 2019 and 2020 from our audited consolidated financial statements included elsewhere in this prospectus. You should read these data together with our audited consolidated financial statements and related notes included elsewhere in this prospectus and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results for any prior period are not necessarily indicative of our future results.

 

     Years Ended
December 31,
 
(in thousands, except share and per share data)    2019     2020  

Statements of Operations Data:

    

Collaboration revenue

   $ 1,118     $ 1,229  

Operating expenses:

    

Research and development

     10,958       19,147  

General and administrative

     6,128       11,089  
  

 

 

   

 

 

 

Total operating expenses

     17,086       30,236  
  

 

 

   

 

 

 

Loss from operations

     (15,968     (29,007
  

 

 

   

 

 

 

Other income (expense):

    

Interest income

     9       13  

Interest expense

     (770     (2,130

Other

     —         (15
  

 

 

   

 

 

 

Total other income (expense)

     (761     (2,132
  

 

 

   

 

 

 

Loss from continuing operations

     (16,729     (31,139

Loss from discontinued operations, net of income taxes

     (12,994     (5,999
  

 

 

   

 

 

 

Net loss

   $ (29,723   $ (37,138
  

 

 

   

 

 

 

Net loss per share, basic and diluted:

    

Continuing operations

   $ (1.49   $ (2.08

Discontinued operations

     (1.16     (0.40
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (2.65   $ (2.48
  

 

 

   

 

 

 

Weighted-average shares of common stock outstanding, basic and diluted

     11,227,009       14,989,769  
  

 

 

   

 

 

 

Pro forma net loss per share from continuing operations, basic and diluted (unaudited)(1)

     $ (0.12
    

 

 

 

Pro forma weighted-average shares of common stock outstanding, basic and diluted (unaudited)(1)

       269,849,503  
    

 

 

 

 

(1)

Unaudited basic and diluted pro forma net loss per share from continuing operations were computed using the weighted-average number of common shares outstanding after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and (ii) the conversion of our convertible preferred stock using the as-if converted method into common shares as though the conversion had occurred as of the beginning of the period presented. The following table summarizes our unaudited pro forma net loss per share for the year ended December 31, 2020 (in thousands, except share and per share data):

 

 

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Numerator

  

Net loss attributable to common stockholders from continuing operations

   $ (31,139
  

 

 

 

Denominator

  

Weighted-average common shares outstanding, basic and diluted

     14,989,769  

Pro forma adjustments to reflect assumed conversion of convertible preferred stock

     254,859,734  
  

 

 

 

Weighted-average shares used to compute pro forma net loss per share, basic and diluted

     269,849,503  
  

 

 

 

Pro forma net loss per share attributable to common stockholders from continuing operations, basic and diluted

   $ (0.12
  

 

 

 

 

     Years Ended December 31,  
(in thousands)          2019           2020  

Balance Sheet Data:

    

Cash and cash equivalents

   $ 4,450     $ 54,201  

Working capital(1)

     5,658       42,201  

Total assets

     50,483       59,633  

Long-term debt, net

     —         7,399  

Amounts due to Nestlé – related party, current

     4,703       5,675  

Amounts due to Nestlé – related party, non-current

     8,335      
—  
 

Acquisition-related consideration held in escrow

     3,500       —    

Preferred stock purchase right liability

     —         3,900  

Convertible preferred stock

     43,740       126,023  

Accumulated deficit

     (37,451     (99,146

Total stockholders’ (deficit) equity

     (36,968     (97,541

 

(1)

We define working capital as total current assets less total current liabilities. See our consolidated financial statements included elsewhere in this prospectus for further details regarding our current assets and current liabilities.

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and related notes included elsewhere in this prospectus. Some of the information contained in this discussion and analysis are set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, and includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in “Risk Factors,” our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We are a biotechnology company pioneering a precision medicine approach to the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment and diagnosis of IBD. We leverage our proprietary precision medicine platform, Prometheus360, which includes one of the world’s largest GI bioinformatics databases, to identify novel therapeutic targets and develop therapeutic candidates to engage those targets. In parallel, we are developing companion diagnostic tests designed to identify patients more likely to respond to our therapeutic candidates.

Our lead product candidate, PRA023, is an IgG1 humanized mAb that has been shown to block TL1A, a target associated with both intestinal inflammation and fibrosis that was clinically validated in a third-party Phase 2a clinical trial in UC. PRA023 has the potential to substantially improve outcomes for moderate-to-severe IBD patients predisposed to increased TL1A expression. We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Our goal is to revolutionize the treatment of IBD with a precision medicine approach for patients with significant unmet medical needs We have generated a robust initial pipeline of therapeutic development programs for the treatment of IBD, and plan to develop a companion diagnostic for each program. The research and development of therapeutic product candidates and companion diagnostics comprises our therapeutics business segment. The following table summarizes our key current internal and partnered programs.

 

 

LOGO

 

  (1)

We retain all commercialization rights to PR600 outside of Europe, Australia and New Zealand.

In addition, we have several other programs with different mechanisms of action targeting UC and/or CD that are in the discovery stage of development. We also continue to evaluate numerous other drug targets identified through Prometheus360 for therapeutic utility for potential drug discovery development.

On June 30, 2019, we acquired from Nestlé Prometheus Laboratories, Inc. (PLI), which markets and conducts several laboratory developed tests useful to gastroenterologists in monitoring their IBD patients’

 

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disease state. Prior to our acquisition of PLI in June 2019, we had devoted substantially all of our resources to organizing and staffing our company, business planning, raising capital, developing our Prometheus360 platform, discovering and identifying potential product candidates, establishing our intellectual property portfolio and conducting research and preclinical studies, and providing other general and administrative support for these operations.

Based on our strategic objectives moving forward, on December 31, 2020, we completed the spinoff of PLI by making an in-kind distribution of 100% of our interest in PLI to our stockholders of record on December 30, 2020. Except as specifically indicated, the discussion of our operations excludes the operations of PLI, which are reported as a discontinued operation in the accompanying consolidated financial statements included elsewhere in this prospectus and in the following discussion.

We do not expect to generate any revenue from therapeutic product sales until we successfully complete development and obtain regulatory approval for one or more of our therapeutic product candidates and companion diagnostics, which we expect will take a number of years and may never occur.

We have incurred operating losses in each year since inception. Our net losses, including those generated from PLI, were $29.7 million and $37.1 million for the years ended December 31, 2019 and 2020, respectively. As of December 31, 2020, we had an accumulated deficit of $99.1 million. We expect our expenses and operating losses will increase substantially as we conduct our ongoing and planned preclinical studies and clinical trials, continue our research and development activities, develop and validate companion diagnostics, utilize third parties to manufacture our product candidates and related raw materials, hire additional personnel, protect our intellectual property and incur additional costs associated with being a public company, including audit, legal, regulatory, and tax-related services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums, and investor relations costs. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our preclinical studies and clinical trials and our expenditures on other research and development activities, as well as the generation of any services and collaboration revenue.

As of December 31, 2020, we had raised a total of $101.7 million to fund our operations from gross proceeds from the sale and issuance of convertible preferred stock and $7.5 million from proceeds under our loan and security agreement (the Loan Agreement) with Oxford Finance LLC (Oxford). As of December 31, 2020, we had cash and cash equivalents of $54.2 million, which does not include gross proceeds of $73.8 million received in January 2021 from the sale of 86,775,740 shares of Series D-2 convertible preferred stock. In addition, in January 2021 we issued 7,231,311 shares of Series D-2 convertible preferred stock to Nestlé in satisfaction of deferred purchase price obligations of $6.2 million.

If we obtain regulatory approval for any of our therapeutic product candidates and companion diagnostics, we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution. As we continue to advance our pipeline of diagnostic products, we expect to incur additional costs associated with conducting clinical studies to demonstrate the utility of our products and support reimbursement efforts. Accordingly, until such time as we can generate significant revenue from sales of our product candidates, if ever, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potential additional collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Our failure to raise capital or enter into such other arrangements when needed would have a negative impact on our financial condition and could force us to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

 

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COVID-19

The current COVID-19 worldwide pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, physicians and other healthcare providers, communities and business operations, as well as the U.S. and global economies and financial markets. International and U.S. governmental authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home” orders, and restricting business functions outside of one’s home. In response, we have implemented a work-from-home policy for certain of our employees. To date, we have not experienced material disruptions in our business operations. However, while it is not possible at this time to estimate the impact that COVID-19 could have on our business in the future, particularly as we advance our product candidates to clinical development, the continued spread of COVID-19 and the measures taken by the governmental authorities could disrupt the supply chain and the manufacture or shipment of drug substances and finished drug products for our product candidates for use in our research, preclinical studies and clinical trials, delay, limit or prevent our employees and CROs from continuing research and development activities, impede our clinical trial initiation and recruitment and the ability of patients to continue in clinical trials, impede testing, monitoring, data collection and analysis and other related activities, any of which could delay our preclinical studies and clinical trials and increase our development costs, and have a material adverse effect on our business, financial condition and results of operations. The COVID-19 outbreak could also potentially affect the business of the FDA, EMA or other regulatory authorities, which could result in delays in meetings related to our ongoing and planned clinical trials. The COVID-19 pandemic and mitigation measures have had and may continue to have an adverse impact on global economic conditions which could have an adverse effect on our business and financial condition, including impairing our ability to raise capital when needed. The extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the virus and the actions to contain its impact.

License and Collaboration Agreements

Our Collaboration with Cedars-Sinai Medical Center

We entered into an exclusive license agreement (the Cedars-Sinai License Agreement) with Cedars-Sinai in September 2017, pursuant to which Cedars-Sinai granted us an exclusive, worldwide license with respect to certain patents, information and materials related to therapeutic targets and companion diagnostic products, to conduct research, develop, and commercialize therapeutic and diagnostic products for the diagnosis and treatment of IBD. The licensed technology includes information and materials arising out of Cedars-Sinai’s database and biobank, as well as exclusive access to this database and biobank to develop diagnostic and therapeutic products for human use, which biobank is an integral part of our Prometheus360 platform. As upfront consideration for the license agreement, we issued to Cedars-Sinai 2,575,000 shares of fully vested common stock and 3,350,000 shares of restricted common stock, which shares fully vested in September 2020. We are obligated to pay Cedars-Sinai low- to mid-single digit percentage royalties on net sales of therapeutic and diagnostic products covered under the agreement, including any related companion diagnostic products, as well any diagnostic products we develop under the Takeda collaboration agreement discussed below, subject to the terms and conditions set forth in the Cedars-Sinai License Agreement.

Our Collaboration with Takeda

In March 2019, we entered into a companion diagnostics development and collaboration agreement (the Takeda Agreement) with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda. Pursuant to this agreement, we established a strategic collaboration to develop a companion diagnostic product (Diagnostic Product) for one selected drug target, with the option for Takeda to select an additional drug target (each, a Collaboration Target). Under the Takeda Agreement, Takeda is responsible for the development and commercialization of any therapeutic clinical candidates that it develops directed against a Collaboration Target

 

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for the treatment of IBD (Takeda Drugs) and we are responsible for development and commercialization of the Diagnostic Product(s). We received an upfront payment of $1.5 million in April 2019 and are also eligible to receive certain development, regulatory, commercial and sales milestone payments, and low-single digit royalties on net sales of Takeda Drugs, subject to the terms and conditions set forth in the Takeda Agreement.

Our Collaboration with Dr. Falk Pharma

We entered into a co-development and manufacturing agreement (the Falk Agreement) with Falk in July 2020, pursuant to which we will co-develop and commercialize, exclusively in our respective territories, therapeutic product candidates targeting members of the TNF super family for the treatment of UC and CD under our PR600 development program. We are responsible for regulatory approvals and commercialization of any products in the United States and the rest of the world, other than the Falk territory. Falk is responsible for regulatory approvals and commercialization of any products in the European Union, United Kingdom, Switzerland, the countries of the European Economic Area (excluding Malta and the Republic of Cyprus), Australia and New Zealand (Falk territory). Under the Falk Agreement, Falk agreed to fund 25% of our third party development costs. In addition, Falk is obligated to make future development milestone payments, and a mid-single digit to low-double digit royalty on net sales of all products incorporating antibodies covered by the agreement in the Falk territory and we agreed to pay Falk a low-single digit royalty on net sales for such products in our territory, subject to the terms and conditions set forth in the Falk Agreement.

For additional information regarding the Cedars-Sinai License Agreement, Takeda Agreement and Falk Agreement, as well as other agreements pursuant to which we in-license certain intellectual property rights, see “Business—License and Collaboration Agreements.”

Components of Results of Operations

Revenue

Collaboration revenue

We currently derive all of our revenue from our collaboration agreements. For the foreseeable future, we expect to generate revenue from services performed under the Takeda Agreement and Falk Agreement. We may receive a combination of upfront payments and milestone payments under our current and/or future collaboration agreements.

We do not expect to generate any revenue from the sale of therapeutic products unless and until such time that our therapeutic product candidates and companion diagnostics have advanced through clinical development and regulatory approval, if ever. We expect that any revenue we generate, if at all, will fluctuate from quarter-to-quarter as a result of the timing and amount of payments relating to such services and milestones and the extent to which any of our therapeutic product candidates are approved and successfully commercialized. If we fail to complete preclinical and clinical development of therapeutic product candidates or obtain regulatory approval for them, our ability to generate future revenues, and our results of operations and financial position would be adversely affected.

 

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Operating Expenses

Research and Development

Research and development expenses consist of external and internal costs associated with our research and development activities, including our discovery and research efforts, the preclinical and clinical development of our product candidates and the development and validation of our companion diagnostics. Our research and development expenses include:

 

   

external costs, including expenses incurred under arrangements with third parties, such as CROs, contract manufacturers, consultants and our scientific advisors; and

 

   

internal costs, including:

 

   

employee-related expenses, including salaries, benefits, and stock-based compensation; the costs of laboratory supplies and acquiring, developing and manufacturing preclinical study materials; and

 

   

facilities, information technology and depreciation, which include direct and allocated expenses for rent and maintenance of facilities and depreciation of equipment.

The following table summarizes our research and development expenses by product candidate and for our diagnostic services for the periods indicated (in thousands):

 

     December 31,  
     2019      2020  

PRA023

   $ 8,118      $ 15,846  

PR300

     1,987        502  

PR600

     266        1,444  

Other preclinical programs

     587        1,355  
  

 

 

    

 

 

 

Total research and development

   $ 10,958      $ 19,147  
  

 

 

    

 

 

 

We expect our research and development expenses to increase for the foreseeable future as we continue to conduct our ongoing research and development activities, advance our preclinical research programs toward clinical development, including conducting IND-enabling studies, develop companion diagnostics, and conduct clinical trials. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates.

The timelines and costs with research and development activities are uncertain and can vary significantly for each product candidate and development program and are difficult to predict. We anticipate we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to preclinical and clinical results, regulatory developments, ongoing assessments as to each program’s commercial potential, and our ability to maintain or enter into new collaborations, to the extent we determine the resources or expertise of a collaborator would be beneficial for a given program. We will need to raise substantial additional capital in the future. In addition, we cannot forecast which development programs may be subject to future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

Our development costs may vary significantly based on factors such as:

 

   

the number and scope of preclinical and IND-enabling studies;

 

   

per patient trial costs;

 

   

the number of trials required for approval;

 

   

the number of sites included in the trials;

 

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the countries in which the trials are conducted;

 

   

the length of time required to enroll eligible patients;

 

   

the number of patients that participate in the trials;

 

   

the number of doses that patients receive;

 

   

the drop-out or discontinuation rates of patients;

 

   

the number, costs and timing of developing companion diagnostics and scope of validation studies;

 

   

potential additional safety monitoring requested by regulatory agencies;

 

   

the duration of patient participation in the trials and follow-up;

 

   

the cost and timing of manufacturing our product candidates;

 

   

the phase of development of our product candidates; and

 

   

the efficacy and safety profile of our product candidates and effectiveness of our companion diagnostics.

General and Administrative

General and administrative expenses consist primarily of employee-related expenses, including salaries, benefits and stock-based compensation, for employees in our finance, accounting, legal, business development and support functions. Other general and administrative expenses include allocated facility, information technology and depreciation related costs not otherwise included in research and development expenses and professional fees for auditing, tax, intellectual property and legal services. Costs related to filing and pursuing patent applications are recognized as general and administrative expenses as incurred since recoverability of such expenditures is uncertain.

We expect our general and administrative expenses will increase for the foreseeable future to support our increased research and development activities and increased costs of operating as a public company. These increased costs will likely include increased expenses related to audit, legal, regulatory and tax services associated with maintaining compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs associated with operating as a public company.

Interest and Other Income (Expense)

Interest income

Interest income consists primarily of interest earned on our cash and cash equivalents.

Interest expense

Interest expense consists of interest expense incurred in connection with our borrowings under the Loan Agreement and non-cash interest expense associated with the deferred purchase payments for PLI.

Loss From Discontinued Operations

On December 31, 2020, we completed the spinoff of PLI by making an in-kind distribution of 100% of our interest in PLI to our stockholders of record on December 30, 2020. The results of PLI have been classified as discontinued operations for the years ended December 31, 2019 and 2020.

 

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Results of Operations

Comparison of the Years Ended December 31, 2019 and 2020

The following table summarizes our results of operations for the years ended December 31, 2019 and 2020 (in thousands):

 

     Years Ended
December 31,
        
     2019      2020      Change  

Collaboration revenue

   $ 1,118      $ 1,229      $ 111  

Operating expenses:

        

Research and development

     10,958        19,147        8,189  

General and administrative

     6,128        11,089        4,961  
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     17,086        30,236        13,150  
  

 

 

    

 

 

    

 

 

 

Loss from operations

     (15,968      (29,007      13,039  

Other income (expense), net

     (761      (2,132      1,371  
  

 

 

    

 

 

    

 

 

 

Loss from continuing operations

     (16,729      (31,139      14,410  

Loss from discontinued operations, net of income taxes

     (12,994      (5,999      (6,995
  

 

 

    

 

 

    

 

 

 

Net loss

   $ (29,723    $ (37,138    $ 7,415  
  

 

 

    

 

 

    

 

 

 

Revenue

Revenue was $1.1 million for the year ended December 31, 2019 compared to $1.2 million for the year ended December 31, 2020 due to additional revenue generated from the Falk Agreement.

Research and Development Expenses

Research and development expenses were $11.0 million for the year ended December 31, 2019 compared to $19.1 million for the year ended December 31, 2020. The increase of $8.2 million was primarily driven by a $5.6 million increase in expenses related to research and development expenses for our product candidates and a $1.4 million increase in expenses related to personnel costs due to increased headcount to support increased development activities.

General and Administrative Expenses

General and administrative expenses were $6.1 million for the year ended December 31, 2019 compared to $11.1 million for the year ended December 31, 2020. The increase of $5.0 million in 2020 was primarily driven by an increase of $4.1 million in corporate personnel costs due to the expansion of our executive team.

Other Income (Expense), Net

Interest and other expense, net was $0.8 million for the year ended December 31, 2019 compared to interest and other expense, net of $2.1 million for the year ended December 31, 2020. The increase of $1.4 million was primarily related to interest expense associated with our borrowings under the Loan Agreement and non-cash interest expense incurred in connection with the deferred purchase price of PLI.

Loss from discontinued operations

For the years ended December 31, 2019 and 2020, revenue from PLI totaled $22.7 million and $36.6 million, respectively, and total operating expenses totaled $36.2 million and $42.6 million, respectively.

 

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Liquidity and Capital Resources

Sources of Liquidity

From our inception through December 31, 2020, we have received aggregate gross proceeds of $101.7 million from the sale of convertible preferred stock, $7.5 million from borrowings under our long-term debt agreement with Oxford and $8.5 million from amounts received under the Takeda and Falk Agreements.

Oxford Loan and Security Agreement

In January 2020, we entered into a Loan and Security Agreement (the Loan Agreement) with Oxford Finance LLC and its affiliates (Oxford) which provided for total borrowings of up to $25.0 million, of which $7.5 million was drawn upon execution of the agreement. No additional amounts remain available for borrowing. Interest accrues at an annual rate equal to the sum of (I) the greater of (a) the 30-day U.S. LIBOR rate reported the last business day of the month that immediately precedes the month in which the interest will accrue, and (b) 2.01%, plus (II) 5.98%. Notwithstanding the foregoing, the rate from the period of the effective date of the Loan Agreement through and including January 31, 2020, shall be 7.99% and the annual rate shall at no time be less than 7.99%. From March 1, 2020, through February 28, 2023, we are required to make interest only payments. Beginning March 1, 2023, in addition to interest payments, the monthly payments will include an amount equal to the outstanding principal divided by 24 months. At maturity (or earlier prepayment), we are also required to make a final payment equal to 4.0% of the original principal amount borrowed and 3% of the future amount to be funded.

The Loan Agreement is collateralized by substantially all of our assets, excluding intellectual property, which is subject to a negative pledge. The Loan Agreement contains customary affirmative and negative covenants and events of default applicable to us. The affirmative covenants include, among others, covenants requiring us to maintain governmental approvals, deliver certain financial reports, maintain insurance coverage and protect material intellectual property. The negative covenants include, among others, restrictions on us transferring collateral, incurring additional indebtedness, engaging in mergers or acquisitions, paying cash dividends or making other distributions, making investments, creating liens, selling assets and making any payment on subordinated debt, in each case subject to certain exceptions.

In connection with execution of the Loan Agreement, we issued Oxford a warrant to purchase 112,500 shares of our Series C convertible preferred stock at an exercise price of $1.00 per share, exercisable at any time following issuance. The preferred stock warrant has a term of ten years. The warrant will become exercisable for an aggregate of 112,500 shares of our common stock upon the completion of this offering at an exercise price of $1.00 per share.

Future Capital Requirements

As of December 31, 2020, we had cash and cash equivalents in the amount of $54.2 million, which does not include gross proceeds of $73.8 million received in January 2021 from the sale of shares of our Series D-2 convertible preferred stock. Based upon our current operating plans, we believe that the estimated net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operations for at least the next                months from the date of this prospectus. However, our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward looking statement that involves risks and uncertainties, and actual results could vary materially. We have based this estimate on assumptions that may prove to be wrong, and we could deplete our capital resources sooner than we expect. Additionally, the process of conducting preclinical studies and testing product candidates in clinical trials is costly, and the timing of progress and expenses in these studies and trials is uncertain.

Our future capital requirements are difficult to forecast and will depend on many factors, including

but not limited to:

 

   

the type, number, scope, progress, expansions, results, costs and timing of, discovery, preclinical studies and clinical trials of our product candidates which we are pursuing or may choose to pursue in the future;

 

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the costs and timing of manufacturing for our product candidates and commercial manufacturing if any product candidate is approved;

 

   

the costs, timing and outcome of regulatory review of our product candidates;

 

   

the costs and timing of developing our companion diagnostics, and the outcome of regulatory review;

 

   

the success of our current and any future collaborations, including the timing and amount of the milestone or other payments made to us under the Takeda Agreement, the Falk Agreement or any future collaboration agreements;

 

   

the costs of obtaining, maintaining and enforcing our patents and other intellectual property rights;

 

   

the additional costs we may incur as a result of operating as a public company, including our efforts to enhance operational systems and hire additional personnel, including enhanced internal controls over financial reporting;

 

   

the timing and amount of payments that we must make to the licensors and other third parties from whom we have in-licensed intellectual property rights related to our Prometheus360 platform and product candidates;

 

   

the costs associated with hiring additional personnel and consultants as our preclinical and clinical activities increase;

 

   

the costs and timing of maintaining our sales and marketing capabilities and any expansion thereof, including if any product candidate is approved;

 

   

our ability to achieve sufficient market acceptance, coverage and adequate reimbursement from third-party payors and adequate market share and revenue for any approved products and companion diagnostics;

 

   

the terms and timing of establishing and maintaining collaborations, licenses and other similar arrangements; and

 

   

costs associated with any products or technologies that we may in-license or acquire.

Other than our collaboration agreements, we have no other committed sources of capital. Until we can generate a sufficient amount of product revenue to finance our cash requirements, if ever, we expect to finance our future cash needs primarily through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be or could be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our common stockholders. Our Loan Agreement with Oxford involves, and any future debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through other collaborations or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant rights to develop and market product candidates to third parties that we would otherwise prefer to develop and market ourselves.

 

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Cash Flows

The following table shows a summary of our cash flows for the periods presented (in thousands):

 

     Years Ended
December 31,
 
     2019      2020  

Net cash provided by (used in)

     

Operating activities from continuing operations

   $ (15,906    $ (29,931

Operating activities from discontinued operations

     (4,291      1,913  

Investing activities from continuing operations

     (279      (204

Investing activities from discontinued operations

     8,212        (859

Financing activities

     9,755        79,886  
  

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (2,509    $ 50,805  
  

 

 

    

 

 

 

Operating Activities

Cash used by operating activities from continuing operations was $15.9 million during the year ended December 31, 2019 as compared to cash used in operating activities of $29.9 million during the year ended December 31, 2020. The increase of $14.0 million was primarily the result of the increase in net loss between periods of $14.4 million.

Investing Activities

Including the operations of PLI, net cash provided by investing activities was $7.9 million during the year ended December 31, 2019 as compared to net cash used in investing activities $1.1 million during the year ended December 31, 2020. This change primarily was the result of $8.9 million cash obtained in connection with the acquisition of PLI.

Financing Activities

Net cash provided by financing activities was $9.8 million during the year ended December 31, 2019 as compared to $79.9 million during the year ended December 31, 2020. During 2019, we received $9.8 million from the sale of shares of our Series B convertible preferred stock, net of issuance costs. During 2020, we received $73.8 million from the issuance of our Series C and D-1 convertible preferred stock, net of issuance costs and $7.5 million from proceeds under the Loan Agreement with Oxford.

Contractual Obligations and Commitments

The following table summarizes our contractual obligations and commitments at December 31, 2020 (in thousands):

 

     Payments Due by Period  
     Total      Less than
1 Year
     1-3 Years      3-5 Years      More
than

5 Years
 

Operating sublease obligations(1)

   $ 960      $ 960      $ —        $ —        $ —    

Long-term debt obligations and final payment(2)

     9,750        608        8,211        931     

Non-cancellable purchase obligations(3)

     509        509        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,219      $ 2,077      $ 8,211      $ 931      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Represents monthly payments under our operating sublease obligations which relate to our corporate headquarters in San Diego, California. We lease approximately 40,000 square feet of office and laboratory space under an operating sublease that expires in December 2021, with an option to extend for an additional year.

 

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(2)

We will make principal and interest payments to Oxford in accordance with the required payment schedule.

(3)

Represents non-cancellable purchase commitments related to purchase of laboratory equipment and professional services.

We enter into contracts in the normal course of business for contract research services, contract manufacturing services, professional services and other services and products for operating purposes. These contracts generally provide for termination after a notice period, and, therefore, are cancellable contracts and not included in the table above.

The table above does not include any additional potential royalty payments we may be required to make under license agreements we have entered into pursuant to which we have in-licensed certain intellectual property. See the section entitled “Business—License and Collaboration Agreements” for additional information. The timing of when these additional payments will actually be made is uncertain and the payments are contingent upon the completion of future activities.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements as defined under rules and regulations of the SEC.

Critical Accounting Polices and Estimates

This management discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities revenue and expenses.

On an ongoing basis, we evaluate these estimates and judgments. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities and the recording of revenue and expenses that are not readily apparent from other sources. Actual results may differ materially from these estimates.

While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this prospectus, we believe that the following accounting policies are the most critical to understanding and evaluating our historical and future performance.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606). In accordance with ASC 606, we perform the following steps in determining the appropriate amount of revenue to be recognized as we fulfill our obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as satisfy each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assesses whether each promised good or service is distinct. We then recognize as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

For collaboration arrangements, we consider a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations,

 

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whether there are observable stand-alone prices, and whether any licenses are functional or symbolic. We evaluate each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, license fees, non-refundable upfront fees, and funding of research activities are considered fixed, while milestone payments are identified as variable consideration which must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. We estimate the amount of variable consideration using the most likely amount, as milestone payments typically only have two possible outcomes. We recognize revenue for sales-based royalty promised in exchange for the license of intellectual property only when the subsequent sale occurs.

We may allocate transaction price using a number of methods including estimating standalone selling price of performance obligations and using the residual approach when the standalone selling price of the license is highly variable or uncertain, and observable standalone selling prices exist for the other goods or services promised in the contract.

With respect to our assessment of the Takeda and Falk Agreements, we identified one performance obligation for each deliverable under the agreement since the delivered elements are not distinct within the context of the contract. Accordingly, we will recognize revenue for the transaction price in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the period over which it expects to deliver its performance obligations. We included certain milestones in the transaction price as they were deemed not probable of significant reversal at the inception of the agreement. Due to the uncertainty in the achievement of the developmental and commercial milestones, the variable consideration associated with these future milestone payments has been fully constrained (excluded) from the transaction price until such time that we conclude that it is probable that a significant reversal of previously recognized revenue will not occur.

Amounts received prior to satisfying the above revenue recognition criteria were recognized as deferred revenue until all applicable revenue recognition criteria were met. Deferred revenue represented the portion of payments received that have not been earned.

Stock-Based Compensation

Stock-based compensation expense represents the cost of the grant date fair value of equity awards recognized over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of stock option awards using the Black-Scholes option pricing model and recognize forfeitures as they occur.

The Black-Scholes option pricing model requires the use of subjective assumptions, including the risk-free interest rate, the expected stock price volatility, the expected term of stock options, the expected dividend yield and the fair value of the underlying common stock on the date of grant. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require judgment to develop. See Note 8 to our financial statements included elsewhere in this prospectus for information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options granted in the years ended December 31, 2019 and 2020. Stock-based compensation totaled approximately $0.2 million and $0.7 million for the years ended December 31, 2019 and 2020, respectively.

As of December 31, 2020, the unrecognized stock-based compensation expense related to stock options was $4.0 million which is expected to be recognized as expense over a weighted-average period of approximately 3.6 years. The intrinsic value of all outstanding stock options as of December 31, 2020 was approximately $                , based on the assumed public offering price of $        per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, of which approximately $        million related to vested options and approximately $        million related to unvested options.

 

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Common Stock Valuations

We are required to estimate the fair value of the common stock underlying our equity awards when performing fair value calculations. The fair value of the common stock underlying our equity awards was determined on each grant date by our board of directors, taking into account input from management and independent third-party valuation analyses. All options to purchase shares of our common stock are intended to be granted with an exercise price per share no less than the fair value per share of our common stock underlying those options on the date of grant, based on the information known to us on the date of grant. In the absence of a public trading market for our common stock, on each grant date we develop an estimate of the fair value of our common stock in order to determine an exercise price for the option grants. Our determinations of the fair value of our common stock were made using methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide: Valuation of Privately Held Company Equity Securities Issued as Compensation (the Practice Aid).

Our board of directors considered various objective and subjective factors, along with input from management, to determine the fair value of our common stock, including:

 

   

valuations of our common stock performed with the assistance of independent third-party valuation specialists;

 

   

our stage of development and business strategy, including the status of research and development efforts of our product candidates, and the material risks related to our business and industry;

 

   

our results of operations and financial position, including our levels of available capital resources;

 

   

the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies;

 

   

the lack of marketability of our common stock as a private company;

 

   

the prices of our convertible preferred stock sold to investors in arm’s length transactions and the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock;

 

   

the likelihood of achieving a liquidity event for the holders of our common stock, such as an initial public offering or a sale of our company, given prevailing market conditions;

 

   

trends and developments in our industry; and

 

   

external market conditions affecting the life sciences and biotechnology industry sectors.

The Practice Aid prescribes several valuation approaches for setting the value of an enterprise, such as the cost, income and market approaches, and various methodologies for allocating the value of an enterprise to its common stock. The cost approach establishes the value of an enterprise based on the cost of reproducing or replacing the property less depreciation and functional or economic obsolescence, if present. The income approach establishes the value of an enterprise based on the present value of future cash flows that are reasonably reflective of our future operations, discounting to the present value with an appropriate risk adjusted discount rate or capitalization rate. The market approach is based on the assumption that the value of an asset is equal to the value of a substitute asset with the same characteristics. Each valuation methodology was considered in our valuations.

Historically, we estimated the enterprise value of our business and underlying stock option grants using the back-solve method, the income and market approach, and used the Option Pricing Method (OPM) to allocate enterprise value. The back-solve method is a market approach that assigns an implied enterprise value based on the most recent round of funding or investment and allows for the incorporation of the implied future benefits and risks of the investment decision assigned by an outside investor. Under OPM, shares are valued by creating a series of call options with exercise prices based on the liquidation preferences and conversion terms of each equity class. The values of the preferred and common stock are inferred by analyzing these options. We believed

 

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the OPM was the most appropriate method at that time given the expectation of various potential liquidity outcomes and the difficulty of selecting and supporting appropriate enterprise values given our early stage of development. In August 2020, we changed to a hybrid of the OPM and Probability-Weighted Expected Return Method (PWERM). The PWERM is a scenario-based analysis that estimates the value per share based on the probability-weighted present value of expected future investment returns, considering each of the possible outcomes available to us, as well as the economic and control rights of each share class. Under this hybrid method, we considered the expected initial public offering liquidity scenario, but also used the OPM to capture all other scenarios in the event a near-term initial public offering does not occur.

There are significant judgments and estimates inherent in the determination of the fair value of our common stock. These judgments and estimates include assumptions regarding our future operating performance, the time to complete an initial public offering or other liquidity event and the determination of the appropriate valuation methods. If we had made different assumptions, our stock-based compensation expense, net loss and net loss per common share could have been significantly different.

Following the completion of this offering, the fair value of our common stock will be based on the closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.

Accrued Research and Development Costs

We are required to make estimates of our accrued expenses resulting from our obligations under contracts with CROs, manufacturers, vendors and consultants, in connection with conducting research and development activities. The financial terms of these contracts vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided under such contracts. We reflect research and development expenses in our financial statements by matching those expenses with the period in which services and efforts are expended.

We account for these expenses according to the progress of the preclinical study as measured by the timing of various aspects of the study or related activities. In accruing for these activities, we obtain information from various sources and estimates level of effort or expense allocated to each period. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts actually incurred.

Other Company Information

Net Operating Loss and Research and Development Carryforwards and Other Income Tax Information

As of December 31, 2020, we had federal and state net operating loss (NOL) carryforwards of $50.1 million and $9.8 million, respectively. The net operating losses generated subsequent to 2017 will carryforward indefinitely and may generally be used to offset up to 80% of future taxable income. The state NOL carryforwards will begin to expire in 2036, unless previously utilized.

As of December 31, 2020, we also had federal and state research credit carryforwards of $1.8 million and $1.7 million, respectively. The federal research and development tax credit carryforwards expire beginning in 2030 unless previously utilized, and the state research and development tax credit carryforwards do not expire. We have not completed a Section 382 study to assess whether an ownership change has occurred or whether there have been multiple ownership changes since our formation due to the complexity and cost associated with such a study and the fact that there may be additional such ownership changes in the future. Pursuant to Sections 382 and 383 of the Code, annual use of our NOL and research and development tax credit carryforwards may be limited in the event a cumulative change in ownership of more than 50% occurs within a three-year period.

 

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New Accounting Pronouncements Not Yet Adopted

See Note 2 to our financial statements included elsewhere in this prospectus for accounting pronouncements not yet adopted.

Quantitative and Qualitative Disclosures About Market Risk

Our cash and cash equivalents consist of cash in readily available checking accounts and money market accounts. We do not hold any short-term investments. As a result, the fair value of our portfolio is relatively insensitive to interest rate changes. Due to the nature of our cash and cash equivalents, an immediate hypothetical 10% change in interest rates would not have a material effect on the fair value of our cash and cash equivalents. Our long-term debt bears interest at a fixed rate.

JOBS Act

As an emerging growth company under the JOBS Act, we can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley.

We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year following the fifth anniversary of the consummation of this offering; (ii) the last day of the fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year; or (iv) the date on which we have issued more than $1.0 billion in nonconvertible debt securities during the prior three year period.

Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements will not be prevented or detected on a timely basis. In connection with the audits of our 2019 and 2020 annual consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal controls due to a lack of controls in the financial closing and reporting process, including a lack of segregation of duties and documentation and design of formalized processes and procedures in the revenue cycle. Beginning in the third quarter of 2020, we began to take steps to address the material weakness through our remediation plan, which included the hiring of a Chief Financial Officer and the engagement of external advisors to provide financial accounting assistance in the short term. We have plans to hire additional personnel to improve the segregation of duties in our financial closing and reporting process. In addition, we plan to engage external advisors to evaluate and document the design and operating effectiveness of our internal controls and assist with the remediation and implementation of our internal controls as required. We are evaluating the longer-term resource needs of our various financial functions. See the section titled “Risk Factors—Risks Related to Our Common Stock and This Offering—We have identified a material weakness in our internal control over financial reporting. If we fail to remediate one or more of our material weaknesses, our ability to accurately and timely report our financial results could be adversely affected.”

 

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BUSINESS

Overview

We are a biotechnology company pioneering a precision medicine approach to the discovery, development, and commercialization of novel therapeutic and companion diagnostic products for the treatment of inflammatory bowel disease (IBD). We leverage our proprietary precision medicine platform, Prometheus360, which includes one of the world’s largest gastrointestinal (GI) bioinformatics databases, to identify novel therapeutic targets and develop therapeutic candidates to engage those targets. In parallel, we are developing companion diagnostic tests designed to identify patients more likely to respond to our therapeutic candidates. We have generated a robust pipeline of therapeutic development programs for the treatment of IBD. Our lead product candidate, PRA023, is an IgG1 humanized monoclonal antibody (mAb) that has been shown to block the tumor necrosis factor (TNF)-like ligand 1A (TL1A), a target associated with both intestinal inflammation and fibrosis that was clinically validated in a third-party Phase 2a clinical trial in ulcerative colitis (UC). PRA023 has the potential to substantially improve outcomes for moderate-to-severe IBD patients predisposed to increased TL1A expression. We are developing PRA023 for the treatment of UC and Crohn’s disease (CD), and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Our goal is to revolutionize the treatment of IBD with a precision medicine approach for patients with significant unmet medical needs.

Inflammatory Bowel Disease

IBD is a complex disease with many contributing factors, including genetic, environmental and immunologic. UC and CD are two of the most common forms of IBD. Both UC and CD are chronic, relapsing, remitting, inflammatory conditions of the GI tract that begin most commonly during adolescence and young adulthood. UC involves the innermost lining of the large intestine, and symptoms include abdominal pain and diarrhea, frequently with blood and mucus. CD can affect the entire thickness of the bowel wall and all parts of the GI tract from mouth to anus. CD symptoms include abdominal pain, diarrhea, and other more systemic symptoms such as weight loss, nutritional deficiencies, and fever.

The current standard of care for the treatment of patients with moderate-to-severe IBD is typically anti-inflammatory agents; however, none of these therapies address fibrosis, or scarring, in IBD. The majority of IBD patients do not respond to first-line anti-TNF agents. Since the approval of the first anti-TNF agent for the treatment of CD in 1998, the availability of JAK inhibitors and newer biological agents, including anti-integrin and anti-IL12/23, has improved the care of moderate-to-severe IBD (JAK inhibitors in UC only). However, these subsequently approved therapies have generally failed to demonstrate a clinical remission effect size of more than 15% relative to placebo. Moreover, among those patients who do respond to therapy, up to 45% will lose response over time. Likewise, therapies under development have not demonstrated improved remission rates over previously approved therapies. Current therapies used for the treatment of UC and CD apply a one-size-fits-all approach without regard to biologic variations amongst patients, and substantial unmet need remains.

IBD is estimated to affect over 2,000,000 people in the United States and over 5,000,000 people globally. The IBD market was approximately $12.5 billion in the United States and $18.4 billion globally in 2019 and is expected to grow to approximately $14.2 billion in the United States and $21.4 billion globally by 2024. Based in part on patient cohort data for our companion diagnostic product candidate, we estimate this product candidate will identify an increased level of TLIA expression in over 30% of IBD patients. The IBD market is highly concentrated, with four therapeutic products accounting for 75% of global revenues.

Our Precision Medicine Approach

Precision medicine involves the discovery and development of therapies that integrate clinical and molecular information based on the biological basis of disease to improve clinical decision-making and patient

 

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outcomes. We are pioneering the application of precision medicine in IBD because we believe that by leveraging Prometheus360 we can identify novel therapeutic targets impacting the underlying pathways involved in IBD and the patient subgroups that will be responsive to a particular therapy.

We believe we have the potential to transform the entire IBD pharmaceutical value chain from discovery to commercialization with our precision medicine approach. Our Prometheus360 platform includes our extensive clinical database and associated biobank, which is one of the world’s largest collections of biospecimens from patients suffering from IBD and other GI disorders. This database and biobank, which we exclusively license from Cedars-Sinai Medical Center (Cedars-Sinai), includes more than 200,000 samples linked to extensive clinical data from over 20,000 patients collected over more than 20 years. This, in combination with our state-of-the-art machine-learning methodologies, make Prometheus360 a discovery engine for novel precision therapeutics and companion diagnostics. IBD clinical development programs can take up to seven to ten years to complete and physicians are often challenged with the task of enrolling patients from a limited pool of qualified candidates into a large number of trials with undifferentiated mechanisms of action. By using companion diagnostics to target a specific subset of the IBD population, we expect to reduce overall development time and cost through smaller trials and faster enrollment rates. We believe our precision medicine approach will result in a greater likelihood of identifying and developing the right drug for the right patient, help to maximize patient and trial outcomes, improve label claims, accelerate adoption of targeted therapeutics for addressable patients and provide attractive treatment options from a cost-benefit perspective for payors.

Our Portfolio

We have a robust pipeline of therapeutic development programs to address several clinical IBD patient subpopulations, and plan to develop a companion diagnostic for each program. The following table summarizes our key current internal and partnered programs.

 

 

LOGO

 

(1)

We retain all commercialization rights to PR600 outside of Europe, Australia and New Zealand.

PRA023 Overview—anti-TL1A mAb

Our lead product candidate, PRA023, is an IgG1 humanized mAb that has been shown to block TL1A. Third-party antibody programs against this target have been shown to reduce both intestinal inflammation and fibrosis in preclinical studies. The TL1A target has been clinically validated in that a third-party Phase 2a 14-week open-label study in patients with moderate-to-severe UC observed a high proportion of patients (38%) achieving endoscopic improvement and 24% of patients achieved clinical remission. PRA023 binds both soluble and membrane-associated human TL1A with high affinity and specificity and has the potential to substantially

 

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improve outcomes for moderate-to-severe IBD patients predisposed to increased TL1A expression. We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Assuming favorable safety results in this trial, we expect to commence in parallel in 2021 a Phase 2 randomized placebo-controlled clinical trial in patients with moderate-to-severe UC and an open-label Phase 1b clinical trial in patients with moderate-to-severe CD, with data expected in the second half of 2022 for both indications. We are also developing a genetic-based companion diagnostic to identify patients who are predisposed to increased expression of TL1A and therefore potentially more likely to respond to PRA023. We intend to evaluate and use this companion diagnostic starting with the Phase 2 UC trial and the Phase 1b CD trial.

PR600 Overview—anti-TNF Super Family Member mAb

Our PR600 program targets a member of the TNF super family. This target, expressed by immune cells, engages a receptor and drives downstream biological pathways distinct from those activated by TNF or TL1A. It has been shown that blocking this target inhibits disease in multiple third-party IBD animal models. We believe that a therapeutic developed against this target is likely to impede both the reactivation and propagation of the pathogenic immune response in IBD. We have identified multiple genetic variants linked to patient subpopulations with a complicated course of disease. We have conducted functional genetic studies in patient samples and have identified genetic variations associated with an increase in target expressing immune cells in CD peripheral blood and an increased capacity to produce inflammatory cytokines. We intend to leverage Prometheus360 in combination with functional assays to identify patients with these genetic variants. We entered into a co-development and manufacturing agreement (the Falk Agreement) with Dr. Falk Pharma GmbH (Falk) for our PR600 program, in order to leverage Falk’s experience in GI drug development and commercialization in Europe. Under this agreement, we granted to Falk exclusive commercialization rights in Europe, Australia and New Zealand, while we retained commercialization rights in the United States and the rest of the world for therapeutics developed from our PR600 program. We expect to submit an IND for a therapeutic candidate from the PR600 program in the second half of 2022.

PR300 Overview—GPCR Modulator Small Molecule

Our PR300 program targets an orphan G-protein coupled receptor (GPCR) expressed predominantly in the GI tract that we believe has important functions underlying intestinal epithelial integrity and innate immune cell function. We have identified a coding single nucleotide polymorphism (SNP) in the gene of this target that represents a very strong genetic association with UC. Through further datamining, we have also identified multiple additional genetic variants that are associated with both UC and CD. These variants are linked to hard-to-treat clinical patient subpopulations, including those with medically refractory UC and perianal CD.

PR1800 Overview—anti-Chemokine mAb

Our PR1800 program targets a chemo-attractant factor which contributes to the local accumulation of a defined inflammatory effector cell population in the GI tract. Factors secreted by these effector cells are believed to deteriorate the structure and protective functions of the intestinal mucosal barrier. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. These variants include coding SNPs and are linked to hard-to-treat clinical patient subpopulations.

PR2100 Overview—anti-Inflammatory Cytokine mAb

Our PR2100 program targets a cytokine implicated in a range of inflammatory and fibrotic diseases. In IBD specifically, this cytokine has been implicated to contribute to non-response to anti-TNF therapies. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. In CD in particular, these variants are linked to ileal disease and extra-intestinal manifestation of disease in the skin.

 

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Other Development Programs and Takeda-Partnered Program

We have several other programs with different mechanisms of action targeting UC and/or CD that are in the discovery stage of development. We also continue to evaluate numerous other drug targets identified through Prometheus360 for therapeutic utility for potential drug discovery development. In addition, we have a strategic collaboration with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (Takeda), pursuant to which we will collaborate with Takeda to develop a companion diagnostic for one or more therapeutic candidates developed by Takeda for the treatment of UC and CD.

Our Team and Investors

Our team is comprised of leaders and scientists with significant experience in IBD and other GI diseases, data analytics, biology and drug development. Mark McKenna, our President and Chief Executive Officer, was previously President at Salix Pharmaceuticals, Inc., a wholly owned subsidiary of Bausch Health Companies Inc., where he was responsible for the company’s GI franchise and launched several new products. Other members of our management team have served in senior positions at AbbVie Inc., Bayer AG, Bristol-Myers Squibb Company, Genentech, Inc., GlaxoSmithKline plc, Pfizer Inc., Sanofi S.A. and Takeda. We are also guided by our board of directors, led by Chairman Tadataka (Tachi) Yamada, M.D., and a scientific advisory board composed of key opinion leaders in IBD, including Stephan Targan, M.D., William Sandborn, M.D. and Dermot P. McGovern, M.D., Ph.D.

In addition, we are backed by leading life sciences investors, including Eventide Asset Management, RTW Investments, LP, Perceptive Advisors, Cormorant Capital, Cowen Healthcare Investments, Point72 Asset Management, Irving Investors, Ascend Global Investment Fund, Cedars-Sinai Medical Center and Nestlé S.A.

Our Strengths

We believe that our company has the following key differentiating competitive strengths:

 

   

We use a novel precision medicine approach to target the IBD market, which is primed for disruption. Current therapies used for the treatment of IBD apply a one-size-fits-all approach without regard to biologic variations amongst patients. We, on the other hand, apply a novel precision medicine approach by analyzing genetics and functional genomics to discover novel targets in order to address the heterogeneity of the IBD population and potentially improve patient outcomes substantially. Our approach builds on the recent successes of companies that employ precision medicine approaches in other therapeutic areas such as oncology. The global IBD market is projected to be over $21 billion by 2024, but there still exists a significant unmet medical need due to the heterogeneous nature of the IBD patient population.

 

   

Our proprietary Prometheus360 platform is a discovery engine for novel precision therapeutics and companion diagnostics. A central pillar of Prometheus360 is our extensive clinical database and associated biobank, one of the world’s largest collections of biospecimens from patients suffering from IBD and other GI disorders. This database and biobank, which we exclusively license from Cedars-Sinai, includes more than 200,000 samples linked to extensive clinical data from over 20,000 patients collected over more than 20 years. This, in combination with our state-of-the-art machine-learning methodologies, makes Prometheus360 a discovery engine for novel precision therapeutics and companion diagnostics. To date, Prometheus360 has generated multiple other precision medicine targets that we are interrogating for therapeutic utility and other criteria to consider advancing into the discovery stage of development.

 

   

Our lead product candidate, PRA023, targets a clinically validated TL1A pathway and has the potential to be a differentiated treatment with improved patient outcomes. PRA023 is an anti-TL1A mAb that targets both inflammation and fibrosis in IBD, whereas currently approved therapies only directly target inflammation. Using our precision medicine approach with a companion diagnostic,

 

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PRA023 has the potential to substantially improve patient outcomes by combining a clinically-validated pathway with the ability to identify patients more likely to respond favorably to the treatment.

 

   

Our platform has attracted partnerships with leading global pharmaceutical companies in the field of IBD. The strength of Prometheus360 has already led to collaborations with Takeda and Falk. We intend to leverage these global pharmaceutical organizations to expand the reach of our Prometheus360 platform and potentially accelerate the clinical development of precision medicine in IBD for patients with significant unmet medical need.

 

   

We have assembled an experienced team comprised of industry leaders with drug discovery, development, and commercialization expertise. Our team is comprised of leaders and scientists with significant experience in IBD and other GI diseases, data analytics, biology and drug development.

Our Strategy

Our goal is to revolutionize the treatment of IBD with a precision medicine approach for patients with significant unmet medical needs. The key elements of our strategy to achieve this goal are:

 

   

Maximize the value of our Prometheus360 precision medicine platform for the treatment of IBD. Prometheus360 serves as our drug discovery and development engine. We have generated a robust pipeline of therapeutic development programs for the treatment of IBD in a capital and time efficient manner and are designing and developing companion diagnostics. We intend to continue leveraging our platform to generate additional new targets, novel therapeutics and companion diagnostics, and to further advance our pipeline of precision therapeutic candidates.

 

   

Advance PRA023 through the clinic and potentially accelerate its development by utilizing our companion diagnostic to identify patients expected to benefit from treatment. PRA023 targets the TL1A pathway, which was clinically validated in a third-party Phase 2a clinical trial in UC, and has the potential to significantly improve the quality of life of IBD patients by targeting both inflammation and fibrosis. By developing a companion diagnostic in parallel, we expect to be able to identify patients who may specifically benefit from PRA023. Through this patient identification, we believe PRA023 has the potential to lead to improved patient outcomes. We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Assuming favorable safety results in this trial, we expect to commence in parallel in 2021 a Phase 2 randomized placebo-controlled clinical trial in patients with moderate-to-severe UC and an open-label Phase 1b clinical trial in patients with moderate-to-severe CD, with data expected in the second half of 2022 for both indications.

 

   

Explore additional indications for PRA023. Because PRA023 targets both inflammation and fibrosis, additional indications in dermatology, respiratory or liver disease may benefit from therapeutic intervention by such an approach. We plan to investigate the use of PRA023 in additional indications outside of IBD to fully explore its potential.

 

   

Advance our other programs, including PR600, into and through the clinic. We have a robust pipeline of additional programs for the treatment of IBD, including PR600, which we believe can address additional unmet medical need. By utilizing Prometheus360, we believe we will be able to identify subsets of IBD patients who will differentially benefit from our product candidates. We intend to submit an IND for a therapeutic candidate from the PR600 program in the second half of 2022.

 

   

Continue leveraging Prometheus360 to expand our pipeline to address additional patient subpopulations. We continue to identify and stratify IBD patients into disease subpopulations with our Prometheus360 platform and companion diagnostics. This will provide us the opportunity to develop additional product candidates designed to address the unmet need of additional patient subpopulations. We will continue to strengthen our datamining and machine-learning capabilities to further enhance our platform.

 

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Selectively enter into strategic collaborations to maximize the value of our therapeutic pipeline. For our PRA023 program, we intend to retain worldwide development and commercialization rights and use the intellectual property rights that we exclusively in-license from Cedars-Sinai related to the program. We will continue to explore business development opportunities to maximize the value of the novel targets and therapeutic candidates developed through our Prometheus360 platform. For example, in 2019 we entered into a companion diagnostics and development collaboration with Takeda to use Prometheus360 to develop companion diagnostics in tandem with Takeda’s therapeutic discovery efforts. Additionally, in 2020 we entered into the Falk Agreement in order to leverage Falk’s experience in GI drug development and commercialization in Europe for our PR600 program.

Limitations of Current IBD Drug Development

Despite the increasing global burden of IBD, the lack of evolution and innovation in drug development has left many patients with suboptimal outcomes. While there are many programs and mechanisms of action in development for IBD, nearly all are primarily focused on inflammation, and multiple programs are pursuing the same well established targets and pathways. Efficacy of approved treatments and therapies in development has remained undifferentiated since the approval of the first anti-TNF product for use in IBD. With the large number of therapies in clinical development and the undifferentiated landscape, there is intense competition for the limited pool of qualified patients for clinical trials, leading to very slow recruitment. As a consequence of the slow recruitment rate and the large studies required due to small treatment effect, clinical development in IBD has become costly and slow. We believe our ability to select patients with a higher probability of response to a specific therapy will enable smaller, faster, and less costly studies and allow for targeted recruitment in this crowded IBD development landscape.

Given the heterogeneous nature of IBD, there is a growing need for the development of predictive biomarkers and companion diagnostics that can be used to identify those patients more likely to benefit from a specific therapeutic. Although there are product candidates with predictive biomarkers in development for IBD, there is no therapy approved with a companion diagnostic that predicts whether an IBD patient will respond to a specific therapeutic.

Attempts to identify new, targeted therapeutics for IBD through the use of publicly available clinical datasets have been hampered by the significant challenges associated with generating high-volume and high-quality data in a standardized manner from these datasets. Furthermore, while post-hoc analysis of clinical trial data can be helpful to retrospectively understand patient responses to particular therapeutics, the ability to use these data for understanding pathway pathogenesis in IBD or target discovery for IBD is limited.

 

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Our Prometheus360 Precision Medicine Platform

We believe we have overcome these challenges by utilizing Prometheus360 to identify potential targeted treatments for IBD patients. We deploy the following three main components of Prometheus360 to stratify the overall, heterogeneous IBD patient population into biologically homogeneous subgroups: (1) our high-density clinical data; (2) our large collection of GI biospecimens; and (3) our advanced data analytics capabilities. We believe this allows us to identify novel drug targets which can be used to develop product candidates designed to be effective in the specific IBD patient subpopulations we have identified.

 

 

LOGO

Prometheus360 includes our extensive clinical database and associated biobank, which is one of the world’s largest collections of biospecimens from patients suffering from IBD and other GI disorders. This database and biobank, which we exclusively license from Cedars-Sinai, includes more than 200,000 samples linked to extensive clinical data from over 20,000 patients collected over more than 20 years. Clinical data sources included in Prometheus360 include electronic medical records, imaging data, clinical chemistry, pathology records and serologies. As such, clinical history, response to therapy and longitudinal data are available to us for analysis. In addition to clinical data, we have access to relevant, well-annotated patient samples for translational validation of therapeutic targets to help guide therapeutic development. Stored biorepository patient samples available to us include tissue biopsies (either from endoscopy or from surgery), serum/plasma, DNA, RNA, peripheral blood mononuclear cells (PBMC), lamina propria mononuclear cells (LPMC), stool and mesenteric adipose tissue. For many patients, we have multiple types of samples collected over multiple years. Samples from Prometheus360 are routinely interrogated by deep molecular profiling including SNP genotyping, whole exome sequencing, RNA sequencing, metabolomics and microbiomics. In addition to this large, well-annotated IBD cohort of data and biosamples, Prometheus360 also contains samples derived from independent cohorts and samples, which we believe gives us a competitive advantage in the discovery and development of our novel drug targets, therapeutic candidates and companion diagnostics.

Prometheus360 incorporates advanced datamining and bio-analytical capabilities that we employ to uncover insights about immunological pathways that drive IBD, while providing a holistic view of the biology surrounding potential targets. We apply machine-learning algorithms to our clinical data and molecular profiling data to reveal disease-related trends, patterns and associations that are more reflective of what happens at a molecular level in a complex disease like IBD. Unlike traditionally employed strategies such as relying on genome-wide association studies (GWAS) alone, our bioinformatics approach allows us to discover and examine

 

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the joint effects of multiple genetic variants in key inflammatory pathways that contribute to the development and progression of IBD. As a consequence, our approach allows us to create complex algorithm-based and proprietary companion diagnostic products that we use to identify patients likely to benefit from our product candidates.

Altogether, Prometheus360 provides what we believe to be a unique ability to discover and develop novel precision medicine therapeutics that have the potential to lead to substantially improved patient outcomes in IBD.

Advantages of Our Prometheus360 Precision Medicine Platform

We believe Prometheus360 can potentially revolutionize the drug development and treatment paradigm for IBD patients by identifying patients more likely to respond favorably to treatment. We believe our platform has several key advantages, including:

 

   

Potential to offer improved patient outcomes. IBD treatments approved and in development are largely undifferentiated and primarily target inflammation, resulting in a suboptimal clinical remission rate. We believe the ability to combine new mechanisms of action discovered through our platform and a novel patient selection approach utilizing companion diagnostics will allow for better patient outcomes. To realize this advantage, we are developing precision therapeutic candidates with companion diagnostics to address multiple targets and pathways in IBD.

 

   

Reduced trial costs and development timelines. IBD clinical development programs can take up to seven to ten years to complete and physicians are often challenged with the task of enrolling patients from a limited pool of qualified candidates into a large number of trials with undifferentiated mechanisms of action. We believe Prometheus360 has the potential to significantly reduce development time and cost and improve traditionally slow enrollment rates by allowing for the design of smaller clinical trials through the targeting of pre-identified patients more likely to respond to a therapeutic candidate. We believe our approach will enable pre-screening at a large network of sites with genotyped patients and motivate investigators to prioritize enrolling eligible patients in a trial with a therapy that addresses a target patient subpopulation, thereby also improving traditionally slow enrollment rates.

 

   

Potential to drive physician and payor adoption of our therapeutic product candidates. Our platform and approach will potentially offer physicians the ability to prescribe specific treatments for each individual, which we believe will lead to improved patient outcomes. We believe this will help drive physician adoption of our therapeutic product candidates. In addition, we believe our approach will be attractive to payors seeking to maximize overall cost-benefit and enhance our ability to more rapidly and effectively obtain payor coverage for any approved product we develop.

IBD and Market Opportunity Overview

IBD is a chronic relapsing and remitting inflammatory disease of the GI tract. It is a complex disease with many contributing factors, including genetic, environmental and immunologic. IBD typically onsets during adolescence and young adulthood and is diagnosed based on clinical, laboratory, endoscopy and histopathology and/or imaging findings. The IBD market was approximately $12.5 billion in the United States and $18.4 billion globally in 2019 and is expected to grow to approximately $14.2 billion in the United States and $21.4 billion globally by 2024.

UC and CD are the two most common types of IBD. UC causes long-lasting inflammation and ulcers in the digestive tract and affects the innermost lining of the large intestine (colon) and rectum. UC is debilitating and can lead to life-threatening complications. There are no treatments that cure UC and patients often require life-long treatment. Symptoms include diarrhea, bloody stools, abdominal pain and cramping, urgency to defecate, inability to defecate despite urgency, weight loss, fatigue, and fever. Chronic inflammation associated with UC

 

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puts a patient at increased risk of developing colon cancer. UC affects an estimated 926,000 people in the United States and 2,750,000 people globally. The UC market was approximately $4.2 billion in the United States and $6.2 billion globally in 2019 and is expected to grow to approximately $5.4 billion in the United States and $8.3 billion globally by 2024.

CD also causes long-lasting inflammation and ulcers in the digestive tract. It differs from UC in that it affects the entire thickness of the bowel wall and all parts of the digestive tract from mouth to anus. There are no treatments that cure the disease and patients often require life-long treatment. Symptoms include diarrhea, fever, fatigue, abdominal pain and cramping, bloody stools, mouth sores, reduced appetite and weight loss, and pain or drainage near or around the anus due to development of fistula from the inflammation. CD affects an estimated 1,157,000 people in the United States, and 2,446,000 people globally. The development of abnormal narrowing of the digestive tract, known as strictures is common and is the leading indication requiring surgical intervention. Up to 70% of CD patients develop a stricturing or perforating complication, and the use of anti-inflammatory agents over the past decade has not materially changed the rate of need for surgical resection due to stricturing disease. The CD market was approximately $8.4 billion in the United States and $12.2 billion globally in 2019 and is expected to grow to approximately $8.8 billion in the United States and $13.1 billion globally by 2024.

IBD Current Treatments and Limitations

Medical treatment of IBD is typically divided into two types of therapy: induction and maintenance. Induction therapy is used to reduce inflammation quickly (in three months or less) and maintenance therapy is used to sustain that reduction after three months. Patients with IBD are classified as mild, moderate or severe, based on the level of symptoms experienced, inflammatory biomarkers, and severity of disease on endoscopy. The current standard of care for the treatment of patients with moderate-to-severe IBD is typically anti-inflammatory agents.

Aminosalicylates (5-ASAs) are used as a first-line therapy in mild-to-moderate UC. Corticosteroids are used primarily during induction therapy and are effective for reducing symptoms but not for mucosal healing. There are serious side effects with extended corticosteroid use, including lowered quality of life, bone loss, weight gain and cardiovascular complications. Because of these serious long-term safety concerns, corticosteroids are used primarily as a bridge to manage symptoms until immunomodulators or biologic agents become effective and enable mucosal healing. Oral immunosuppressants (e.g. azathioprine and 6-mercatopurine) have not been effective as induction agents and are generally used for steroid-sparing or as an adjunctive therapy for reducing immunogenicity against biologic agents. Oral immunosuppressants are also associated with known toxicities such as drops in white blood cell counts and increased risk for infection.

Since the approval of the first anti-TNF agent for the treatment of CD in 1998, the availability of JAK inhibitors and newer biological agents, including anti-integrin and anti-IL12/23, has improved the care of moderate-to-severe IBD (JAK inhibitors in UC only), but these are all anti-inflammatory agents and have safety and tolerability concerns, including increased risks for cancers, infections and blood clots due to their systemic impact and resulting effects on the immune system outside of the GI tract. More importantly, these subsequently approved therapies have generally failed to demonstrate a clinical remission effect size of more than 15% relative to placebo. Moreover, among those patients who do respond to therapy, up to 45% will lose response over time. As a consequence, despite the advances in approved therapies over the past two decades, more than 15% of UC and 50% of CD patients require surgery within 10 years of diagnosis. The most common cause of surgery in UC is progressive disease not responsive to medical therapy and in CD it is development of strictures and/or perforation, requiring surgical resection of the intestine. The only novel mechanism of action that is currently in late stage clinical development is oral S1P modulators, which are also anti-inflammatory agents.

While fibrosis and stricturing are common in CD, clinically observable colonic strictures have also been reported in up to 11% of patients with UC, and we believe microscopic submucosal fibrosis is actually much more prevalent in UC patients than reported. In a study that examined 89 consecutive UC colectomy specimens

 

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from Cleveland Clinic, submucosal fibrosis was detected in 100% of the specimen. Microscopic evidence of fibrosis in the colonic wall may have significant clinical implications such as motility abnormalities leading to symptoms such as diarrhea, abdominal pain, urgency and incontinence. It has long been speculated that intestinal fibrosis may be the underlying cause of persistent UC symptoms, after the resolution of inflammation, that is commonly misclassified as irritable bowel syndrome.

Current treatment of IBD applies a one-size-fits-all approach without regard to genetic or biological variations in patients. We believe there must be a paradigm shift towards developing specific therapies for patients whose disease is driven by a specific biology. To date, we believe there are no clinical stage programs focused on integrating precision therapeutics with companion diagnostics to overcome the limitations of a one-size-fits-all treatment approach for IBD. Additionally, despite the advances in anti-inflammatory therapeutics for the treatment of UC and CD over the past two decades, fibrosis in these patients has largely not been addressed by therapy, representing an area of high unmet need. There is currently no therapy approved or under development that directly targets the reversal of fibrosis in IBD.

Our Solutions for the Treatment of IBD

PRA023 (anti-TL1A mAb) + Companion Diagnostic

Utilizing our precision medicine approach, we have developed our lead product candidate, PRA023, which is an investigational, IgG1 humanized mAb that has been shown to block TL1A. Third-party antibody programs against this target have been shown to reduce both intestinal inflammation and fibrosis in preclinical studies, and this target has been clinically validated in a third-party Phase 2a clinical trial in UC. PRA023 binds both soluble and membrane-associated human TL1A with high affinity and specificity and has the potential to substantially improve outcomes for moderate-to-severe IBD patients predisposed to increased TL1A expression. PRA023 binds to a novel epitope that differentiates it from other anti-TL1A mAbs in clinical development. We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in healthy volunteers in December 2020. Assuming favorable safety results in this trial, we expect to commence in parallel in 2021 a Phase 2 randomized placebo-controlled clinical trial in patients with moderate-to-severe UC and an open-label Phase 1b clinical trial in patients with moderate-to-severe CD, with data expected in the second half of 2022 for both indications.

We are developing a genetic-based companion diagnostic to identify patients who are predisposed to increased expression of TL1A and therefore potentially more likely to respond to PRA023. We intend to evaluate and use this companion diagnostic starting with the Phase 2 UC trial and the Phase 1b CD trial. We believe this approach will lead to reduced development costs and timelines, and ultimately lead to improved patient outcomes.

 

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TL1A as an IBD drug target—potential to address not only inflammation but also fibrosis

 

 

LOGO

Much of the early research and development on anti-TL1A therapy has focused on the TL1A-DR3 pathway with regards to regulation of inflammation. More recently, however, the potential for TL1A as a therapeutic target in intestinal fibrosis was demonstrated in a study conducted by Cedars-Sinai evaluating the effect of anti-TL1A antibodies in mouse models of IBD. In these studies, the authors used two mouse models of chronic colitis: adoptive T cell transfer and chronic DSS. In both models, a neutralizing TL1A mAb or an isotype control Ab was administered two times per week in mice (T cell transfer n=14; DSS n=28) with an established colitis. In both disease models, treatment with the TL1A mAb reduced colonic collagen deposition levels back to those seen in healthy control mice, suggesting that blocking TL1A signaling not only prevented progression of colonic fibrosis, but also reversed established fibrosis to similar levels measured prior to the onset of inflammation. We believe there is currently no other anti-fibrotic therapy approved for CD. Thus, intestinal fibrosis mediated by increased levels of TL1A in the gut, continues to remain an area of high unmet medical need in IBD and differentiates the TL1A pathway mechanism of action from other approved therapies.

TL1A—a clinically-validated drug target in UC

Pfizer’s TL1A compound (PF-06480605) was studied in a Phase 2a 14-week open-label study in 50 patients with moderate-to-severe UC, with inclusion criteria that did not select patients with companion diagnostic markers. The study observed a high proportion of patients (38%) achieving endoscopic improvement (defined as a Mayo endoscopic subscore of 0 or 1 and without friability) with endoscopies read at an independent reading center, compared to a historic placebo rate of 6% in a pre-specified analysis. In addition, 24% of subjects achieved clinical remission (defined as a total Mayo score £ 2 with no individual subscore > 1). The Mayo score is used to assess disease activity in UC and measures stool frequency, rectal bleeding, endoscopic findings and physician global assessment. Lastly, substantial decreases in disease biomarkers (fecal calprotectin and high sensitivity c-reactive protein) were observed with early onset of action at weeks 2 to 4, a faster onset and response compared to the current standard of care. Treatment was generally well-tolerated. Serious adverse events were reported in three participants, one of which, alopecia (hair loss), was considered treatment-related. We believe these results clinically validate TL1A as a target in UC.

Preclinical Studies of PRA023

PRA023 is an investigational, humanized IgG1 mAb that uses a novel epitope relative to PF-006480605 and potently binds human and cynomolgus monkey TL1A. PRA023 has sub-nanomolar binding affinity to soluble TL1A and nanomolar affinity to membrane-associated TL1A. In in vitro studies, PRA023 blocked TL1A’s ability to bind and activate its receptor, DR3. In whole blood, PRA023 inhibited the TL1A-dependent IFN-g response following the ex vivo exposure to immune-complex and a combination of IL-12 and IL-18.

 

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Additionally, PRA023 was observed to be highly selective for TL1A with no detectable binding to related TNF super family members FAS, LIGHT, or TRAIL.

We assessed the potential toxicity of PRA023 in a series of nonclinical in vitro assays and in vivo studies in cynomolgus monkeys. The monkey was selected as a pharmacologically relevant nonclinical species because of similar TL1A protein sequence homology and nearly equivalent binding affinity of PRA023 to monkey TL1A, as compared to human. PRA023 is similarly active in monkey and human in vitro cell-based assays.

PRA023 has been engineered to remove the potential for the mAb to induce an immune response. In non-good laboratory practice (GLP) cell-based in vitro assays, PRA023 treatment did not lead to antibody- or cell-mediated cytotoxicity or cytokine release from peripheral blood cells thus indicating that it was not provoking an undesired immune response.

In a non-GLP tolerability and pharmacokinetic (PK) study, cynomolgus monkeys (1/sex/group) were administered PRA023 intravenous (IV) at 30, 100 and 243 mg/kg/week on Days 1 and 8 and subsequently followed for approximately 11 weeks to assess systemic exposure of PRA023. There were no PRA023-related clinical observations or changes in body weight, clinical chemistry, or hematology parameters. PK measurements suggested that PRA023 has a long half-life of 5 to 11 days, which is consistent with human IgG1 in monkeys.

A GLP study was performed to evaluate the potential toxicity, including immunotoxicity, of PRA023 and associated systemic exposure after six weeks of once-weekly dosing (7 total doses) in cynomolgus monkeys. PRA023 was administered IV (bolus) to male and female monkeys (3/sex/group) at doses of 0 (vehicle control), 30, 100, or 300 mg/kg/week. Recovery animals (2/sex/group) were administered 0 or 300 mg/kg/week of PRA023. The clinically relevant no observed adverse effect level (NOAEL) in this study was determined to be 300 mg/kg/week (the highest dose tested). There were findings observed that were secondary to generation of anti-drug antibodies (ADA) in response to administration of a humanized monoclonal antibody including a single death in the 30 mg/kg group and minimal vascular inflammation, which was the only finding that was considered adverse. All findings were fully reversible after a 6-week recovery period except for perivascular infiltrates, which persisted minimally in only a few tissues at 300 mg/kg/week, and minimal glomerulopathy noted in one recovery female at 300 mg/kg/week. ADA-related findings observed in nonclinical animal toxicity studies with human monoclonal antibodies generally are not considered relevant to humans. In December 2020, the FDA accepted our IND for PRA023, which included our toxicology data, and we began a Phase 1a clinical study in normal healthy volunteers.

A six-month repeat-dose monkey toxicity study is currently ongoing to evaluate the potential for chronic dosing in our planned future upcoming UC and CD studies.

Our Companion Diagnostic Product Candidate for PRA023

TL1A was one of the first targets shown by GWAS to be genetically associated with risk of developing IBD in a diverse patient population. Peripheral blood cells from patients carrying the TNFSF15 polymorphism risk SNPs produce higher levels of TL1A than those without the risk-associated polymorphism, suggesting this polymorphism may provide a means to identify patients with TL1A-driven disease and who are thus more likely to respond to anti-TL1A therapy. We are developing a genetic-based, 3-SNP polymerase chain reaction assay as a companion diagnostic for PRA023. In establishing our 3-SNP genomic biomarker set, we utilized machine-learning algorithms that, in contrast to traditional GWAS methodologies, allow us to take into account complex, non-linear genomic interactions that drive complex biology such as IBD. Our approach also prioritizes combinations that correlate with high TL1A pathway activity and not merely all patients with an observed set of symptoms. As of January 31, 2021, we have tested our companion diagnostic product candidate in approximately 300 IBD patients recruited from Cedars-Sinai and U.S. community IBD centers and have identified over 30% of these patients as having increased TL1A expression with a positive predictive value of over 85%. A positive predictive value is the probability that subjects with a positive screening test actually have increased TL1A expression.

 

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Clinical Development Plan for PRA023

We are developing PRA023 for the treatment of UC and CD, and initiated a Phase 1a clinical trial in normal healthy volunteers in December 2020. Assuming favorable safety results in this trial, we expect to commence in parallel in 2021 a Phase 2 randomized placebo-controlled clinical trial in patients with moderate-to-severe UC and an open label Phase 1b clinical trial in patients with moderate-to-severe CD, with data expected in the second half of 2022 for both indications. Concurrently with these clinical trials, we expect to submit an investigational device exemption (IDE) application for our companion diagnostic for PRA023.

The Phase 1a clinical trial is a single-center, double-blind, placebo-controlled safety, tolerability and PK study in normal healthy volunteers receiving IV administration of PRA023. The single ascending dose (SAD) phase of the trial consist of 8 subjects (6 active and 2 placebo) per cohort with up to 6 dose levels. The multiple ascending dose (MAD) phase of the trial will commence after an equal or higher SAD dose has been studied and acceptable safety and tolerability has been observed. The MAD phase will consist of 8 subjects (6 active and 2 placebo) per cohort with up to 5 dose levels. The trial will evaluate the safety, tolerability and pharmacokinetics of single and multiple doses of PRA023 via IV administration as well as the PK of PRA023 after single and multiple doses in healthy, ambulatory, non-smoking, male or female volunteers aged 18 to 60 years. In addition, the trial will determine the effects of PRA023 on pharmacodynamic (PD) markers as well as the exposure-response relationship of PRA023 on PD markers.

PR600 Program

Our PR600 program targets a member of the TNF super family, whose expression is limited to immune cells. It has been shown that blocking this target inhibits disease in multiple third-party IBD animal models. We believe that a therapeutic developed against this target is likely to impede both the reactivation and propagation of the pathogenic immune response in IBD. We have identified multiple genetic variants linked to patient subpopulations with a complicated course of disease. We have conducted functional genetic studies in patient samples and have identified genetic variations associated with an increase in target expressing immune cells in CD peripheral blood and an increased capacity to produce inflammatory cytokines. We intend to leverage Prometheus360 in combination with functional assays to identify patients with these genetic variants. We entered into the Falk Agreement in order to leverage Falk’s experience in GI drug development and commercialization in Europe. Under this agreement, we granted to Falk exclusive commercialization rights in Europe, Australia and New Zealand, while we retained commercialization rights in the United States and the rest of the world for therapeutics developed from our PR600 program. We expect to submit an IND for a therapeutic candidate from the PR600 program in the second half of 2022.

PR300 Program

Our PR300 program targets an orphan GPCR expressed predominantly in the GI tract that we believe has important functions underlying intestinal epithelial integrity and innate immune cell function. We have identified a coding SNP in the gene of this target that represents a very strong genetic association with UC. Through further datamining, we have also identified multiple additional genetic variants that are associated with both UC and CD. These variants are linked to hard-to-treat clinical patient subpopulations, including those with medically refractory UC and perianal CD.

PR1800 Program

Our PR1800 program targets a chemo-attractant factor which contributes to the local accumulation of a defined inflammatory effector cell population in the GI tract. Factors secreted by these effector cells are believed to deteriorate the structure and protective functions of the intestinal mucosal barrier. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. These variants include coding SNPs and are linked to hard-to-treat clinical patient subpopulations.

 

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PR2100 Program

Our PR2100 program targets a cytokine implicated in a range of inflammatory and fibrotic diseases. In IBD specifically, this cytokine has been implicated to contribute to non-response to anti-TNF therapies. We have identified multiple SNPs in the gene locus of this target that are associated with both UC and CD. In CD in particular, these variants are linked to ileal disease and extra-intestinal manifestation of disease in the skin.

Intellectual Property

Our commercial success depends in part on our ability to obtain, maintain and protect intellectual property and other proprietary rights for our current and future product candidates, novel discoveries, product development technologies, patient enrichment strategies and companion diagnostics, and know-how, to operate without infringing, misappropriating or otherwise violating the intellectual property and proprietary rights of others, and to prevent others from infringing, misappropriating or otherwise violating our intellectual property and proprietary rights. We seek to protect our proprietary position by, among other methods, filing or exclusively in-licensing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development and implementation of our business. We also rely on trade secrets, know-how, continuing technological innovation and potential in-licensing of intellectual property to develop and maintain our proprietary position.

As for the therapeutic product candidates we are developing and seeking to commercialize, we intend to pursue composition and therapeutic method of use patents, dosage formulation patents, and therapeutic use patents on novel indications. For our therapeutic product candidates that are biologics, and more particularly monoclonal antibodies, we also intend to seek protection for epitopes, amino acid and nucleotide sequences, and other claims conventionally used to protect aspects of therapeutic biological agents. As for diagnostic and prognostic products and product candidates, we intend to pursue methods of use patents on novel patient selection methods for our therapeutic candidates and known compounds, and novel patient stratification criteria useful in the prognosis or diagnosis of disease. We may also pursue patents with respect to our proprietary screening and drug development processes and technology. We may also seek patent protection, either alone or jointly with our collaborators, as our collaboration agreements may dictate.

Our patent portfolio as of February 18, 2021 includes approximately 11 issued U.S. patents, 19 pending U.S. non-provisional patent applications and 24 pending U.S. provisional patent applications with claims relating to all of our product candidates, all of which are owned or in-licensed by us. We own one of the issued or allowed U.S. patents and own or co-own approximately seven of the pending U.S. non-provisional patent applications. We license approximately 10 of the issued U.S. patents, as well as 12 of the pending U.S. non-provisional patent applications. Our patent portfolio as of February 18, 2021 also includes approximately 10 pending Patent Cooperation Treaty (PCT) applications and certain foreign counterparts of approximately 15 of the aforementioned U.S. patents and U.S. patent applications in at least one of the following foreign countries: Argentina, Australia, Canada, China, Japan, South Korea, Taiwan and countries within the European Patent Convention, with claims relating to all of our product candidates.

With respect to our lead therapeutic product candidate, PRA023, we own or license two issued U.S. patents, four pending U.S. non-provisional patent applications and six pending U.S. provisional patent applications in nine different patent families relating to the composition of PRA023 and its therapeutic use, as well as two pending U.S. non-provisional patent applications and three pending U.S. provisional patent applications related to the companion diagnostic for PRA023. In addition, our non-U.S. patent portfolio directed to the composition of PRA023 and its companion diagnostic includes two pending PCT applications and foreign counterparts in foreign countries, including Argentina, Australia, Taiwan, Japan, Laos, Malaysia, Philippines, Singapore, Thailand, Brunei, Canada, Cambodia, Hong Kong, Korea, China, Indonesia, New Zealand, Venezuela, as well as countries within the European Patent Convention. As of February 18, 2021, we expect the expiry dates for the issued U.S. patents for the composition of PRA023 to be 2037 for the first patent family, and 2039 for the second

 

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patent family, without taking into account any possible patent term adjustment or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. As of February 18, 2021, we co-own and license from Cedars-Sinai one pending U.S. non-provisional patent application related to patient selection for our PR600 program. In addition, we co-own one pending U.S. provisional patent application related to the composition of matter of PR600. As of February 18, 2021, we expect any U.S. non-provisional patent application timely filed based on this provisional application, if issued, to expire no earlier than 2042, in each case without taking into account any possible patent term adjustment or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees. As of February 18, 2021, we own one pending U.S. non-provisional patent application and three pending U.S. provisional patent applications, as well as one pending PCT application, related to the composition of matter for our PR300 program. As of February 18, 2021, we expect the expiry dates for such patent applications related to PR300, if issued, to be no earlier than 2040, without taking into account any possible patent term adjustment or extensions and assuming payment of all appropriate maintenance, renewal, annuity or other governmental fees.

Provisional patent applications are not eligible to become issued patents until, among other things, we file a non-provisional patent application within 12 months of filing of one or more of our related provisional patent applications. Moreover, PCT patent applications are not eligible to become an issued patent until, among other things, we file one or more national stage patent applications within, depending on the country, 30 to 32 months of the PCT application’s priority date in the countries in which we seek patent protection. If we do not timely file any non-provisional patent applications or national stage patent applications, we may lose our priority date with respect to our provisional patent applications or PCT patent applications and any patent protection on the inventions disclosed in our provisional patent applications. While we intend to timely file non-provisional patent applications relating to our provisional patent applications and national stage patent applications relating to our PCT patent applications, we cannot predict whether any such patent applications will result in the issuance of patents that provide us with any competitive advantage.

Individual issued patents extend for varying periods depending on the date of filing of the patent application or the date of patent issuance and the legal term of patents in the countries in which they are obtained. Generally, utility patents issued for applications filed in the United States are granted a term of 20 years from the earliest effective filing date of a non-provisional patent application. The term of a patent, and the protection it affords, is therefore limited and once the patent term of our issued patents have expired, we may face competition, including from other competing technologies. Because of the extensive time required for clinical development and regulatory review of a drug we may develop, it is possible that, before any of our product candidates can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of any such patent.

In addition, in certain instances, a U.S. patent term can be extended to recapture a portion of the term effectively lost as a result of the Food and Drug Administration (FDA) regulatory review period or delay by the USPTO in issuing the patent. However, with respect to patent term extensions granted as a result of the FDA regulatory review period, the restoration period cannot be longer than five years, the total patent term including the restoration period must not exceed 14 years following FDA approval, only one patent applicable to each regulatory review period may be extended and only those claims covering the approved drug or a method for using it may be extended. We may not receive an extension if we fail to exercise due diligence during the testing phase or regulatory review process, fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Moreover, the length of the extension could be less than we request. There can be no assurance that we will benefit from any patent term extension or favorable adjustment to the term of any of our patents.

The duration of foreign patents varies in accordance with provisions of applicable local law, but typically is also 20 years from the earliest effective filing date. However, the actual protection afforded by a patent varies on a product by product basis, from country to country, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of regulatory related extensions, the availability of legal

 

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remedies in a particular country and the validity and enforceability of the patent. As a result, our owned and licensed patent portfolio may not provide us with sufficient rights to exclude others from commercializing products similar or identical to ours.

If we do not adequately protect our intellectual property, third parties, including our competitors, may be able to use our technologies to produce and market drugs or diagnostic and/or prognostic products in direct competition with us and erode our competitive advantage. The patent positions of biotechnology and pharmaceutical products and processes like those we may develop and commercialize are generally uncertain and involve complex legal and factual questions that may diminish our ability to protect our intellectual property. For more information regarding risks related to our intellectual property, see “Risk Factors—Risks Related to Our Intellectual Property.”

Rapidly evolving patent laws in the United States and elsewhere make it difficult to predict the breadth of claims that may be allowed or enforced in our patents. Moreover, patent offices in general can require that patent applications concerning pharmaceutical and/or biotechnology-related inventions be limited or narrowed substantially to cover only the specific innovations exemplified in the patent application, thereby limiting the scope of protection against competitive challenges. Thus, even if we are able to obtain patents, the patents may be substantially narrower than anticipated.

Our ability to maintain and defend our intellectual property and proprietary position for our products, product candidates and other technologies will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of the patent applications that we may file or license from third parties will result in the issuance of any patents. The issued patents that we own, may receive in the future, or license from third parties may be challenged, invalidated, held unenforceable, narrowed or circumvented, and the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages against third parties, including our competitors, with similar technology. Furthermore, third parties, including our competitors, may be able to independently develop and commercialize similar drugs or products, or duplicate our technology, business model or strategy without infringing our patents.

Trade Secrets

We also rely upon unpatented trade secrets and know-how and continuing technological innovation to develop, protect and maintain our competitive position and aspects of our business that are not amenable to, or that we do not presently consider appropriate for, patent protection and prevent competitors from reverse engineering or copying our technologies. However, the foregoing rights are difficult to protect. We seek to protect our proprietary information, in part, using confidentiality agreements with our commercial partners, collaborators, employees and consultants and invention assignment agreements with our employees. We also have confidentiality agreements or invention assignment agreements with our commercial partners and selected consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of technologies that are developed through a relationship with a third party. These agreements may be breached, and we may not have adequate remedies for any breach. There can be no assurance that these agreements will be self-executing or otherwise provide meaningful protection for our trade secrets or other intellectual property or proprietary information. In addition, our trade secrets may otherwise become known or be independently discovered by third parties, including our competitors. To the extent that our commercial partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. For more information regarding risks related to our trade secrets, see “Risk Factors—Risks Related to Our Intellectual Property.”

 

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Collaboration and License Agreement Overview

Our Collaboration with Cedars-Sinai Medical Center

In September 2017, we entered into an exclusive license agreement with Cedars-Sinai that grants us an exclusive, worldwide license from Cedars-Sinai with respect to certain patent rights, information and materials related to therapeutic targets and companion diagnostic products for the diagnosis and treatment of IBD, in each case to conduct research and development, as well as to commercialize diagnostic or therapeutic products (Cedars-Sinai Products) that are covered by the patents or that are developed through use of the licensed rights. The technology subject to the foregoing license includes information and materials arising out of the Cedars-Sinai database and biobank, as well as exclusive access to this database and biobank to develop diagnostic and therapeutic products for human use, which biobank is an integral part of our Prometheus360 platform. All of our current pipeline programs and any related companion diagnostics, as well as any diagnostic products we develop under the Takeda collaboration agreement discussed below, are all covered as Cedars-Sinai Products under the agreement, to the extent covered by the licensed patents or developed through the licensed rights. We were also granted an exclusive first right to negotiate with Cedars-Sinai to obtain exclusive licenses to future patent rights claiming inventions invented by certain Cedars-Sinai employees after the effective date of the agreement through any use of the patent rights and technology initially licensed to us by Cedars-Sinai. We have the right to sublicense our rights under the license agreement, subject to certain conditions. We are required to use commercially reasonable efforts to develop and commercialize Cedars-Sinai Products and to achieve certain development and regulatory milestones.

As upfront consideration for the license agreement, we issued to Cedars-Sinai 2,575,000 shares of fully vested common stock and 3,350,000 shares of restricted common stock, which shares fully vested in September 2020. We are obligated to pay Cedars-Sinai low- to mid-single digit percentage royalties on net sales of therapeutic and diagnostic Cedars-Sinai Products.

The term of, and our royalty obligations under, the license agreement expires on a licensed Cedars-Sinai Product-by-Cedars-Sinai Product and country-by-country basis on the later of ten years from the date of first commercial sale or when there is no longer a valid patent covering such licensed Cedars-Sinai Product in such country. As of January 15, 2021, the estimated expiry date for the latest to expire valid patent will be November 2042, if issued. We may terminate the agreement in the event that we determine that it would not be commercially reasonable to continue to develop and/or commercialize Cedars-Sinai Products. Cedars-Sinai may terminate the agreement if the performance by either party would jeopardize Cedars-Sinai’s legal status or is illegal or unethical. In addition, either party may terminate the agreement in the event of an uncured material breach by the other party. The agreement will terminate automatically in the event of our bankruptcy. Upon termination of the agreement for any reason all rights and licenses granted to us under the agreement will terminate.

In March 2019, we entered into two additional exclusive license agreements with Cedars-Sinai, pursuant to which Cedars-Sinai granted us an exclusive license in certain additional patent rights related to the treatment of UC and CD, respectively. In consideration for each such license, we paid Cedars-Sinai an upfront license fee. Each agreement will terminate automatically in the event of our bankruptcy. Cedars-Sinai may terminate either agreement if the performance by either party would jeopardize Cedars-Sinai’s legal status or is illegal or unethical. In addition, either party may terminate either agreement in the event of an uncured material breach by the other party.

Our Collaboration with Takeda

In March 2019, we entered into the Takeda Agreement with Millennium Pharmaceuticals, Inc., a wholly owned subsidiary of Takeda. Pursuant to this agreement, we established a strategic collaboration pursuant to which we will develop a companion diagnostic product (Diagnostic Product) for one selected drug target, with the option for Takeda to select an additional drug target (each, a Collaboration Target), in support of

 

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development and potential commercialization by Takeda of any therapeutic clinical candidates that it develops in connection with the agreement directed against a Collaboration Target for the treatment of IBD (Takeda Drugs). The parties are obligated to use diligent efforts (as defined in the agreement) to perform their respective obligations under the agreement. With respect to each Collaboration Target, the parties have agreed to work exclusively with each other on the development and commercialization of the Diagnostic Product(s) for use with a specific Takeda Drug during the term of the agreement. We will be responsible for development and commercialization of the Diagnostic Product(s) pursuant to the terms and conditions of the agreement, while Takeda will be responsible for all future clinical development and commercialization of the Takeda Drug(s).

We own all right, title and interest in and to intellectual property arising out of the collaboration that relates to (i) methods of selecting patients for treatment, (ii) methods of treating those patients generally, and (iii) any assays or tests, including compositions used in, and methods of manufacturing, such assays or tests. Takeda owns all right, title and interest in and to intellectual property arising out of the collaboration that relates to a compound or the chemical genus thereof owned or controlled by Takeda, as well as formulations and methods of therapeutic use of such compound. We granted Takeda a non-exclusive, worldwide license under our relevant background intellectual property and certain intellectual property arising under the agreement as necessary to exploit Takeda Drugs for use with Diagnostic Products and to perform its obligations under the agreement. In addition, we granted Takeda an exclusive, worldwide license under certain intellectual property arising from the agreement that primarily relates to the Diagnostic Products to exploit the Takeda Drugs with the Diagnostic Products. Takeda granted us a worldwide, royalty-free license under Takeda’s background intellectual property and intellectual property arising under the agreement to develop and commercialize Diagnostic Products for use with Takeda Drugs, which license is non-exclusive other than with respect to certain arising intellectual property related to the Takeda Drugs and their use for this purpose, in which case it is exclusive.

Takeda paid us an upfront technology access fee of $1.5 million under the agreement, and is obligated to pay us a pre-specified amount to cover our internal development expenses for activities undertaken pursuant to a mutually agreed upon work plan under the agreement. Takeda is obligated to make future development and regulatory milestone payments to us of up to $47.9 million for each Collaboration Target, commercial milestone payments of up to $25 million in connection with each Collaboration Target for successful commercialization of the applicable Takeda Drug and the associated Diagnostic Product, and sales milestone payments of up to $75 million in connection with each Collaboration Target, provided that regulatory approval for the applicable Takeda Drug includes use of the associated Diagnostic Product. In addition, Takeda is obligated to pay us a low-single digit percentage royalty on net sales of all Takeda Drugs, which are subject to certain reductions, including in the case that the regulatory approval for the applicable Takeda Drug does not require use of the associated Diagnostic Product.

The term of, and royalty obligations under, the Takeda Agreement expires on a Takeda Drug-by-Takeda Drug and country-by-country basis on the later of (i) ten years from the date of first commercial sale, (ii) when there is no longer a valid patent covering a Takeda Drug in such country, and (iii) expiration of any applicable regulatory exclusivity for such Takeda Drug. Takeda may terminate the agreement, in whole or with respect to a given Collaboration Target, at any time with or without cause. We may terminate the agreement on a diagnostic product-by-diagnostic product or Target-by-Target basis in the case of lack of scientific merits or insurmountable technical challenges in developing such diagnostic products, or diagnostic products specific for such Collaboration Target generally, despite using diligent efforts (as defined in the agreement). In addition, either party may terminate the agreement in the event of an uncured material breach by, or bankruptcy of, the other party. Upon termination of the agreement, the licenses granted to each party by the other party under the agreement will terminate; except that if we terminate the agreement due to scientific or technical challenges, or Takeda terminates the agreement due to an uncured material breach by us, or bankruptcy of ours and Takeda opts to continue the development and commercialization of any Takeda Drug for use with the associated Diagnostic Product then if Takeda proceeds to commercialize any Takeda Drug for use with the associated Diagnostic Product after the termination of the agreement, any remaining Takeda payment obligations in connection with the associated Collaboration Target will be reduced by a specified percent.

 

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If Takeda opts to commercialize a Takeda Drug independent of the associated Diagnostic Product(s), Takeda may request a target license that survives termination of this agreement. Under such target license, we will grant Takeda an exclusive, worldwide license to use the information with respect to the applicable target to develop, manufacture and commercialize such Takeda Drugs. Takeda is obligated to pay a low single-digit percentage royalty on sales of such Takeda Drug pursuant to such target license.

Our Collaboration with Falk

In July 2020, we entered into a co-development and manufacturing agreement (the Falk Agreement) with Dr. Falk Pharma GmbH (Falk), pursuant to which we will co-develop and commercialize, exclusively in our respective territories, therapeutic product candidates targeting members of the TNF super family for the treatment of UC and CD under our PR600 program. We will mutually agree with Falk on a development plan with respect to such products, and each party agreed to use commercially reasonable efforts to conduct such development activities. We will be responsible for regulatory approvals and commercialization of any products in the United States and the rest of the world, other than the Falk territory. Falk is responsible for regulatory approvals and commercialization of any products in the European Union, United Kingdom, Switzerland, the countries of the European Economic Area (excluding Malta and the Republic of Cyprus), Australia and New Zealand (Falk territory). Under the agreement, Falk agreed to fund 25% of our third party development costs set forth in the mutually agreed upon development plan.

Falk paid us an upfront payment in the low seven figures under the Falk Agreement, and made a second cash payment in a similar amount to us following our mutual agreement on the development plan. In addition, Falk is obligated to make future development milestone payments to us of up to $15 million, and to pay us a mid-single to low-double digit royalty on net sales of all products incorporating antibodies covered by the agreement in the Falk territory. We agreed to pay Falk a low-single digit royalty on net sales for such products in our territory. Any intellectual property, including know-how, owned by us, Falk, or our respective affiliates that existed prior to the effective date of the agreement or is generated during the term of the agreement, that is also necessary or useful to develop, manufacture, or commercialize the compounds and/or products that result from the collaboration, are jointly owned by us and Falk at a share of 75% for us and a 25% for Falk.

The term of, and our respective royalty obligations under, the agreement expires on a product-by-product and country-by-country basis on the later of (i) ten years from the date of first commercial sale, (ii) when there is no longer a valid patent covering a product in such country, or (iii) expiration of any applicable regulatory exclusivity for such product. As of January 12, 2021, the estimated expiry date for the latest to expire valid patent will be April 2039, if issued. Falk may terminate the agreement without cause, and either party may terminate the agreement for regulatory or scientific reasons. In the event of such termination, all licenses granted to the terminating party will cease and be transferred to the non-terminating party, and such non-terminating party will have access to the know-how and any other intellectual property controlled by the terminating party, if in existence as of the effective date of the agreement or during the term of the agreement, provided the know-how and other intellectual property is necessary or useful to develop, manufacture, or commercialize the therapeutic candidates under the PR600 program, subject to the obligation to pay the applicable royalties to the terminating party. In addition, either party may terminate the agreement in the event of an uncured material breach by, or bankruptcy of, the other party. In the event of such termination, the terminating party has the option to purchase the non-terminating party’s ownership share of any jointly owned intellectual property at a fair market price. Additionally, in the event of such termination for uncured material breach or bankruptcy: all rights of the terminating party granted under the agreement will be maintained and extended as required to develop, manufacture and commercialize the compounds and/or products that result from the collaboration for the remainder of the term, while any licenses granted to the non-terminating party shall terminate upon the effective date of termination and the obligation of each party to co-fund development will remain unaffected.

 

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Our License Agreement with Alloy Therapeutics, LLC

In March 2020, we entered into a license agreement with Alloy Therapeutics, LLC (Alloy), pursuant to which Alloy granted us a non-exclusive license under Alloy’s patent and other intellectual property rights to use Alloy’s platform technology solely for antibody discovery, and to exploit products incorporating such antibodies discovered using Alloy’s platform technology (Alloy Products). In return, we granted to Alloy a non-exclusive license to certain data we generate under this agreement, solely for marketing Alloy’s platform technology and developing improvements to the same. We are using Alloy’s technology in connection with our PR600 development program. We paid Alloy a five-digit upfront fee, and the license is subject to a five-digit annual maintenance fee. In addition, we are obligated to make future milestone payments of up to $15.6 million per product. We have the right to sublicense our rights under the license agreement, subject to a one-time fee. The term of our access to the Alloy technology for new antibody discovery purposes expires two years from the effective date of the agreement. We may terminate the agreement for any or no reason. In addition, either party may terminate the agreement in the event of an uncured material breach by or bankruptcy of the other party. Our right to use and license to antibodies selected by us under the agreement survive any termination of the agreement, subject to the foregoing payment obligations.

Manufacturing

We do not own or operate, and currently have no plans to establish, any manufacturing facilities. We rely, and expect to continue to rely on third parties for the manufacture of our product candidates and related raw materials for preclinical and clinical development, as well as for commercial manufacture of any of our product candidates that receive marketing approval. We believe there are multiple sources for all of the materials required for the manufacture of our product candidates and development programs. As our product candidates advance through development, we expect to enter into longer-term commercial supply agreements with key suppliers and manufacturers to fulfill and secure our production needs.

Sales and Marketing

We believe that we can maximize the value of our products by retaining substantial commercialization rights to our product candidates and companion diagnostics, and, where appropriate, entering into collaborations for specific therapeutic indications or geographic territories.

As we progress PRA023 and other development programs through clinical development, we will leverage the knowledge and experience of our sales team and company brand awareness to prepare for and implement a potential product launch.

We have global commercial rights to PRA023 and its companion diagnostic. Our current commercial strategy is to market PRA023 and its companion diagnostics using a dedicated sales force focused on selected gastroenterologists in the United States. These target prescribers are typically affiliated with leading hospitals and medical centers and tend to have well-established referral networks. We expect to benefit from preexisting relationships with many of these gastroenterology prescribers and believe that we can appropriately manage outreach and effectively commercialize PRA023 through a specialty care sales model.

We retain rights similar to those for PRA023 for each of our unpartnered programs. For PR600, which is subject to the Falk collaboration, we have exclusively outlicensed commercialization rights to Falk in Europe, Australia and New Zealand. However, we retain commercial rights to our PR600 program in the United States and the rest of the world and plan to take a similar commercialization approach as with PRA023, if approved.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. While we believe that our scientific knowledge, technology and development experience, our Prometheus360 platform and our pioneering culture

 

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provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and biotechnology companies, academic institutions, governmental agencies and public and private research institutions. Any therapeutic candidates and companion diagnostics that we successfully develop and commercialize will compete with existing products and new products that may become available in the future.

Many of the companies against which we are competing or against which we may compete in the future have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Mergers and acquisitions in the pharmaceutical and biotechnology industry may result in even more resources being concentrated among a smaller number of our competitors. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.

Our commercial opportunity could be reduced or eliminated if our competitors develop and commercialize therapeutic products that are safer, more effective, have fewer or less severe side effects, or companion diagnostics that are more effective, are more convenient or are less expensive than any products that we may develop. Our competitors also may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result in our competitors establishing a strong market position before we are able to enter the market. In addition, our ability to compete may be affected in many cases by insurers or other third-party payors seeking to encourage the use of generic products. If our product candidates achieve marketing approval, we expect that they will be priced at a significant premium over competitive products.

The key competitive factors affecting the success of all of our therapeutic product candidates if approved, are likely to be efficacy, safety, convenience, price, the level competition, intellectual property protection and the availability of reimbursement from government and other third-party payors.

If approved for the treatment of patients with moderate-to-severe IBD, PRA023 and our other development programs would compete with Entyvio, which is an a4b7 integrin antibody marketed by Takeda, Humira, which is a TNF antibody marketed by AbbVie Inc., Stelara, which is an IL-12/IL-23 antibody marketed by Johnson & Johnson, Xeljanz, which is a JAK1 inhibitor marketed by Pfizer Inc., and Simponi, which is a TNF antibody marketed by Johnson & Johnson.

We are aware of several companies with product candidates in development for the treatment of patients with UC and/or CD, including Pfizer Inc.’s PF-06480605, Rinvoq, which is a JAK1 inhibitor being developed in Phase 3 clinical trials by AbbVie Inc., ozanimod, which is a S1P inhibitor being developed in Phase 3 clinical trials by Bristol-Myers Squibb Company, etrolizumab, which is a b7 integrin being developed in Phase 3 clinical trials by F. Hoffman-La Roche AG, mirikizumab, which is an anti-IL-23 antibody being developed in Phase 3 clinical trials by Eli Lilly and Company, and filgotinib, a JAK1 inhibitor being developed in Phase 3 clinical trials by Gilead Sciences, Inc. We are also aware of additional product candidates in clinical trials by AbbVie Inc., Abivax SA, Amgen Inc., Arena Pharmaceuticals, Inc., C.H. Boehringer Sohn AG & Ko. KG, Bristol-Myers Squibb Company, Celgene Corporation, Gilead Sciences, Inc., GlaxoSmithKline plc, Gossamer Bio, Inc., Incyte Corp., Janssen Pharmaceutica N.V., Landos Biopharma, Inc., Protagonist Therapeutics, Inc., Theravance Biopharma, Inc., Applied Molecular Transport Inc., Pandion Therapeutics, Inc., RedHill Biopharma Ltd. and Seres Therapeutics, Inc.

 

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Government Regulation

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution, marketing, post-approval monitoring and reporting, pricing, and export and import of diagnostic tests and pharmaceutical products such as those we are currently marketing and developing. The process of obtaining and maintaining regulatory approvals and the subsequent compliance with appropriate federal, state, local, and foreign statutes and regulations require the expenditure of substantial time and financial resources.

U.S. Regulation of Diagnostic Tests and other Medical Devices

In the United States, the laws and regulations governing the marketing of diagnostic products are evolving, extremely complex, and in many instances, there are no significant regulatory or judicial interpretations of these laws and regulations. The Federal Food, Drug and Cosmetic Act (FDCA) defines a medical device to include any instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory, intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals. Among other things, pursuant to the FDCA and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses.

PMA Pathway

We are developing companion diagnostics to be used in connection with our therapeutic product candidates, if approved. These companion diagnostics are regulated by the FDA as medical devices. The FDA categorizes medical devices into one of three classes—Class I, II, or III—based on the risks presented by the device and the regulatory controls necessary to provide a reasonable assurance of the device’s safety and effectiveness. Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of the Quality System Regulation (QSR) facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising, and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. Special controls are established by the FDA for a specific device type and often include specific labeling provisions, performance metrics, and other types of controls that mitigate risks of the device (usually incorrect results for an in-vitro diagnostic device (IVD)). Devices deemed by the FDA to pose the greatest risks, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are placed in Class III, requiring approval of an application for premarket approval (PMA). Some pre-amendment devices are unclassified, but are subject to the FDA’s premarket notification and clearance process in order to be commercially distributed.

Class III devices, including most companion diagnostics, generally require PMA approval before they can be marketed. Obtaining PMA approval requires the submission of “valid scientific evidence” to the FDA to support a finding of a reasonable assurance of the safety and effectiveness of the device. A PMA must provide complete analytical and clinical performance data and also information about the device and its components regarding, among other things, device design, manufacturing and labeling. Following receipt of a PMA, the FDA determines whether the application is sufficiently complete to permit a substantive review. If the FDA accepts the application for review, it has 180 days under the FDCA to complete its review of a PMA, although in practice, FDA’s review often takes significantly longer, and can take up to several years. An advisory panel of experts from outside the FDA may be convened to review and evaluate the application and provide

 

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recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s recommendation. As part of the FDA’s review of a PMA, the FDA will typically inspect the manufacturer’s facilities for compliance with QSR requirements, which impose requirements related to design controls, manufacturing controls, documentation and other quality assurance procedures. The user fee costs and the length of FDA review time for obtaining PMA approval are significantly higher than for a 510(k) notification or a de novo classification.

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

Certain changes to an approved device, such as changes in manufacturing facilities, methods, or quality control procedures, or changes in the design performance specifications, which affect the safety or effectiveness of the device, require submission of a PMA supplement. PMA supplements often require submission of the same type of information as a PMA, except that the supplement is limited to information needed to support any changes from the device covered by the original PMA and may not require as extensive clinical data or the convening of an advisory panel. Certain other changes to an approved device require the submission of a new PMA, such as when the design change causes a different intended use, mode of operation, and technical basis of operation, or when the design change is so significant that a new generation of the device will be developed, and the data that were submitted with the original PMA are not applicable for the change in demonstrating a reasonable assurance of safety and effectiveness.

We expect that any companion diagnostics we develop, either alone or in collaboration with third parties, will require approval of a PMA before they can be marketed for use with a therapeutic product.

510(k) Notification Pathway

To obtain 510(k) clearance, a manufacturer must submit a premarket notification demonstrating to the FDA’s satisfaction that the proposed device is “substantially equivalent” to another legally marketed device that itself does not require PMA approval (a predicate device). A predicate device is a legally marketed device that is not subject to premarket approval, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was found substantially equivalent through the 510(k) process. The FDA’s 510(k) clearance process usually takes from three to twelve months, but often takes longer. FDA may require additional information, including clinical data, to make a determination regarding substantial equivalence. In addition, the FDA collects user fees for certain medical device submissions and annual fees and for medical device establishments.

If the FDA agrees that the device is substantially equivalent to a lawfully marketed predicate device, it will grant 510(k) clearance to authorize the device for commercialization. If the FDA determines that the device is “not substantially equivalent” to a previously cleared device, the device is automatically designated as a Class III device. The device sponsor must then fulfill more rigorous PMA requirements, or can request a risk-based classification determination for the device in accordance with the de novo process, which is a route to market for

 

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novel medical devices that are low to moderate risk and are not substantially equivalent to a predicate device, discussed below.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, PMA approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k) or a PMA in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are accomplished by a “letter to file” in which the manufacturer documents the rationale for the change and why a new 510(k) is not required. However, if the FDA disagrees with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or request the recall of the modified device until 510(k) marketing clearance or PMA approval is obtained. Also, in these circumstances, the manufacturer may be subject to significant regulatory fines or penalties.

Over the last several years, the FDA has proposed reforms to its 510(k) clearance process, and such proposals could include increased requirements for clinical data and a longer review period, or could make it more difficult for manufacturers to utilize the 510(k) clearance process for their products. For example, in November 2018, FDA officials announced steps that the FDA intended to take to modernize the premarket notification pathway under Section 510(k) of the FDCA. Among other things, the FDA announced that it planned to develop proposals to drive manufacturers utilizing the 510(k) pathway toward the use of newer predicates. These proposals included plans to potentially sunset certain older devices that were used as predicates under the 510(k) clearance pathway, and to potentially publish a list of devices that have been cleared on the basis of demonstrated substantial equivalence to predicate devices that are more than 10 years old.

These proposals have not yet been finalized or adopted, and the FDA may work with Congress to implement such proposals through legislation. More recently, in September 2019, the FDA published revised final guidance outlining an optional “safety and performance based” premarket review pathway for manufacturers of “well-understood device types” to demonstrate substantial equivalence under the 510(k) clearance pathway, by demonstrating that such device meets objective safety and performance criteria established by the FDA, obviating the need for manufacturers to compare the safety and performance of their medical devices to specific predicate devices in the clearance process. The FDA maintains a list of device types appropriate for the “safety and performance based pathway” and has continued to develop product-specific guidance documents that identify the performance criteria for each such device type, as well as recommended the testing methods for such devices where feasible.

If no legally marketed predicate can be identified for a new device to enable use of the 510(k) pathway, the device is automatically classified under the FDCA into Class III, which generally requires PMA approval. However, the FDA can reclassify or seek de novo classification for a device that meets the FDCA standards for a Class I or Class II device, permitting the device to be marketed without PMA approval. To grant such a reclassification, the FDA must determine that the FDCA’s general controls alone, or general controls and special controls together, are sufficient to provide a reasonable assurance of the device’s safety and effectiveness. The de novo classification route is generally less burdensome than the PMA approval process.

De Novo Classification

Medical device types that the FDA has not previously classified as Class I, II or III are automatically classified under the FDCA into Class III regardless of the level of risk they pose. The Food and Drug Administration Modernization Act of 1997 established a route to market for low to moderate risk medical devices that are automatically placed into Class III due to the absence of a predicate device, called the “Request for Evaluation of Automatic Class III Designation,” or the de novo classification procedure. This procedure allows a manufacturer whose novel device is automatically classified into Class III to request down-classification of its medical device into Class I or Class II on the basis that the device presents low or moderate risk, rather than

 

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requiring the submission and approval of a PMA application. Prior to the enactment of the Food and Drug Administration Safety and Innovation Act of 2012 (FDASIA) a medical device could be eligible for de novo classification only if the manufacturer first submitted a 510(k) premarket notification and received a determination from the FDA that the device was not substantially equivalent to a legally marketed predicate device. FDASIA streamlined the de novo classification pathway by permitting manufacturers to request de novo classification directly without first submitting a 510(k) premarket notification to the FDA and receiving a not substantially equivalent determination. If the manufacturer seeks reclassification into Class II, the manufacturer must include a draft proposal for special controls that are necessary to provide a reasonable assurance of the safety and effectiveness of the medical device. In addition, the FDA may reject the request if it identifies a legally marketed predicate device that would be appropriate for a 510(k) notification, determines that the device is not low to moderate risk, or that general controls would be inadequate to control the risks and special controls cannot be developed. After a device receives de novo classification, any modification that could significantly affect its safety or efficacy, or that would constitute a major change or modification in its intended use, will require a new 510(k) clearance or, depending on the modification, another de novo request or even PMA approval.

Investigational Device Exemption Process.

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

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

During a study, the sponsor is required to comply with the applicable FDA requirements, including, for example, trial monitoring, selecting clinical investigators and providing them with the investigational plan, ensuring IRB review, adverse event reporting, record keeping, and prohibitions on the promotion of investigational devices or on making safety or effectiveness claims for them. The clinical investigators in the

 

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clinical study are also subject to FDA regulations and must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition of the investigational device, and comply with all reporting and recordkeeping requirements. Additionally, after a trial begins, we, the FDA or the IRB could suspend or terminate a clinical trial at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits.

Expedited Development and Review Programs for Medical Devices

Through recent federal legislation, the FDA has implemented a Breakthrough Devices Program, which is a voluntary program offering manufacturers of certain devices an opportunity to interact with the FDA more frequently and efficiently as they develop their products with the goal of expediting commercialization of such products to help patients have more timely access. The program is available to medical devices that meet certain eligibility criteria, including that the device provides more effective treatment or diagnosis of life-threatening or irreversibly debilitating diseases or conditions, and constitutes a device (i) that represents a breakthrough technology, (ii) for which no approved or cleared alternatives exist, (iii) that offer significant advantages over existing approved or cleared alternatives, or (iv) the availability of which is in the best interest of patients. Devices granted Breakthrough Device designation are eligible to rely on certain features of the Breakthrough Device Program, including interactive and timely communications with FDA staff, use of post-market data collection, when scientifically appropriate, to facilitate expedited and efficient development and review of the device, opportunities for efficient and flexible clinical study design and priority review of premarket submissions.

Postmarket Regulation of Medical Devices

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

 

   

establishment registration and device listing with the FDA;

 

   

QSR requirements, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the design and manufacturing process;

 

   

labeling regulations and FDA prohibitions against the promotion of “off-label” uses of cleared or approved products;

 

   

requirements related to promotional activities;

 

   

clearance or approval of product modifications to 510(k)-cleared devices that could significantly affect safety or effectiveness or that would constitute a major change in intended use of cleared devices, or approval of certain modifications to PMA-approved devices;

 

   

medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;

 

   

correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;

 

   

The FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and

 

   

post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.

 

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

The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including the following:

 

   

issuance of warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;

 

   

requesting or requiring recalls, withdrawals, or administrative detention or seizure of our products;

 

   

imposing operating restrictions or partial suspension or total shutdown of production;

 

   

refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;

 

   

withdrawing 510(k) clearances or PMA approvals that have already been granted;

 

   

refusal to grant export approvals for our products; or

 

   

criminal prosecution.

FDA U.S. Regulation of Companion Diagnostics

If safe and effective use of a therapeutic depends on an IVD, then the FDA generally will require approval or clearance of that diagnostic, known as a companion diagnostic, at the same time that the FDA approves the therapeutic product. In August 2014, the FDA issued final guidance clarifying the requirements that will apply to approval of therapeutic products and in vitro companion diagnostics. According to the guidance, if the FDA determines that a companion diagnostic device is essential to the safe and effective use of a novel therapeutic product or indication, FDA generally will not approve the therapeutic product or new therapeutic product indication if the companion diagnostic device is not approved or cleared for that indication. Approval or clearance of the companion diagnostic device will ensure that the device has been adequately evaluated and has adequate performance characteristics in the intended population. The review of in vitro companion diagnostics in conjunction with the review of our therapeutic product candidates will, therefore, likely involve coordination of review by the FDA’s Center for Drug Evaluation and Research or the FDA’s Center for Biologics Evaluations and Research and the FDA’s Center for Devices and Radiological Health Office of In Vitro Diagnostics and Radiological Health.

We currently anticipate that each of our therapeutic product candidates will require us to develop and obtain FDA approval of a companion diagnostic for such therapeutic product candidates.

U.S. Regulation of Drugs and Biologics

In the United States, the FDA regulates drugs under the FDCA, and its implementing regulations, and biologics under the FDCA and the Public Health Service Act and its implementing regulations. FDA approval is required before any new unapproved drug or dosage form, including a new use of a previously approved drug,

 

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can be marketed in the United States. Drugs and biologics are also subject to other federal, state, and local statutes and regulations. The process required by the FDA before product candidates may be marketed in the United States generally involves the following:

 

   

completion of extensive preclinical laboratory tests and preclinical animal studies, all performed in accordance with GLP regulations;

 

   

submission to the FDA of an IND, which must become effective before human clinical studies may begin and must be updated annually;

 

   

approval by an independent institutional review board (IRB) or ethics committee representing each clinical site before each clinical study may be initiated;

 

   

performance of adequate and well-controlled human clinical studies in accordance with good clinical practice (GCP) requirements to establish the safety and efficacy, or with respect to biologics, the safety, purity and potency of the product candidate for each proposed indication;

 

   

preparation of and submission to the FDA of a new drug application (NDA) or biologics license application (BLA) after completion of all pivotal clinical studies;

 

   

potential review of the product application by an FDA advisory committee, where appropriate and if applicable;

 

   

a determination by the FDA within 60 days of its receipt of an NDA or BLA to file the application for review;

 

   

satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities where the proposed product drug substance is produced to assess compliance with current Good Manufacturing Practices (cGMP) and audits of selected clinical trial sites to ensure compliance with GCP; and

 

   

FDA review and approval of an NDA or BLA prior to any commercial marketing or sale of the drug in the United States.

An IND is a request for authorization from the FDA to administer an investigational new drug product to humans. The central focus of an IND submission is on the general investigational plan and the protocol or protocols for preclinical studies and clinical trials. The IND also includes results of animal and in vitro studies assessing the toxicology, PK, pharmacology and PD characteristics of the product, chemistry, manufacturing and controls (CMC) information, and any available human data or literature to support the use of the investigational product. An IND must become effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold and the IND sponsor and the FDA must resolve any outstanding concerns or questions before the clinical trial can begin. Submission of an IND therefore may or may not result in FDA authorization to begin a clinical trial.

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP, which includes the requirement that all research subjects provide their informed consent for their participation in any clinical study. Clinical trials are conducted under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. A separate submission to the existing IND must be made for each successive clinical trial conducted during product development and for any subsequent protocol amendments. Furthermore, an independent IRB for each site proposing to conduct the clinical trial must review and approve the plan for any clinical trial and its informed consent form before the clinical trial begins at that site, and must monitor the study until completed. Regulatory authorities, the IRB or the sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk or that the trial is unlikely to meet its stated objectives. Some studies also include oversight by an independent group of qualified experts organized by the clinical study sponsor, known as a data

 

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safety monitoring board, which provides authorization for whether or not a study may move forward at designated check points based on access to certain data from the study and may halt the clinical trial if it determines that there is an unacceptable safety risk for subjects or other grounds, such as no demonstration of efficacy. There are also requirements governing the reporting of ongoing preclinical studies and clinical trials and clinical study results to public registries.

The clinical investigation of a drug is generally divided into three phases. Although the phases are usually conducted sequentially, they may overlap or be combined.

 

   

Phase 1. The investigational product is initially introduced into healthy human subjects or patients with the target disease or condition. These studies are designed to test the safety, dosage tolerance, absorption, metabolism and distribution of the investigational product in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness.

 

   

Phase 2. The investigational product is administered to a limited patient population with a specified disease or condition to evaluate the preliminary efficacy, optimal dosages and dosing schedule and to identify possible adverse side effects and safety risks. Multiple Phase 2 clinical trials may be conducted to obtain information prior to beginning larger and more expensive Phase 3 clinical trials.

 

   

Phase 3. The investigational product is administered to an expanded patient population to further evaluate dosage, to provide statistically significant evidence of clinical efficacy and to further test for safety, generally at multiple geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the investigational product and to provide an adequate basis for product approval.

In some cases, the FDA may condition approval of an NDA or BLA for a product candidate on the sponsor’s agreement to conduct additional clinical studies after approval. In other cases, a sponsor may voluntarily conduct additional clinical studies after approval to gain more information about the drug. Such post-approval studies are typically referred to as Phase 4 clinical studies. Concurrent with clinical trials, companies may complete additional animal studies and develop additional information about the biological characteristics of the product candidate, and must finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, must develop methods for testing the identity, strength, quality and purity of the final product, or for biologics, the safety, purity and potency.

NDA and BLA Review Process

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of an NDA or BLA requesting approval to market the product for one or more indications. The NDA or BLA must include all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s CMC and proposed labeling, among other things. Data can come from company-sponsored clinical studies intended to test the safety and effectiveness of the product, or from a number of alternative sources, including studies initiated and sponsored by investigators. The submission of an NDA or BLA requires payment of a substantial application user fee to the FDA, unless a waiver or exemption applies.

In addition, under the Pediatric Research Equity Act (PREA) a NDA or BLA or supplement to an NDA or BLA must contain data to assess the safety and effectiveness of the biological product candidate for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDASIA requires that a sponsor who is planning to submit a marketing application for a drug or biological product that includes a new active ingredient, new indication, new dosage form, new dosing regimen or new route of administration submit an initial pediatric study

 

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plan within sixty days after an end-of-Phase 2 meeting or as may be agreed between the sponsor and FDA. Unless otherwise required by regulation, PREA does not apply to any biological product for an indication for which orphan designation has been granted.

Within 60 days following submission of the application, the FDA reviews the submitted BLA or NDA to determine if the application is substantially complete before the agency accepts it for filing. The FDA may refuse to file any NDA or BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the NDA or BLA must be resubmitted with the additional information. Once an NDA or BLA has been accepted for filing, the FDA’s goal is to review standard applications within ten months after the filing date, or, if the application qualifies for priority review, six months after the FDA accepts the application for filing. In both standard and priority reviews, the review process may also be extended by FDA requests for additional information or clarification. The FDA reviews an NDA to determine, among other things, whether a product is safe and effective for its intended use and whether its manufacturing is sufficient to assure and preserve the product’s identity, strength, quality and purity. The FDA reviews a BLA to determine, among other things, whether a product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product’s continued safety, purity and potency. When reviewing an NDA or BLA, the FDA may convene an advisory committee to provide clinical insight on application review questions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.

Before approving an NDA or BLA, the FDA will typically inspect the facility or facilities where the product is manufactured. The FDA will not approve an application unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA or BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. If the FDA determines that the application, manufacturing process or manufacturing facilities are not acceptable, it will outline the deficiencies in the submission and often will request additional testing or information. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

After the FDA evaluates the NDA or BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter or a Complete Response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response letter will describe all of the deficiencies that the FDA has identified in the NDA or BLA, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response letter without first conducting required inspections, testing submitted product lots and/or reviewing proposed labeling. In issuing the Complete Response letter, the FDA may recommend actions that the applicant might take to place the NDA or BLA in condition for approval, including requests for additional information or clarification. The FDA may delay or refuse approval of an NDA or BLA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.

If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. For example, the FDA may approve the NDA or BLA with a Risk Evaluation and Mitigation Strategy (REMS) to ensure the benefits of the product outweigh its risks. A REMS is a safety strategy to manage a known or potential serious risk associated with a product and to enable patients to have continued access to such medicines by managing their safe use, and could include medication guides, physician communication plans, or elements to assure safe use, such as restricted distribution methods, patient registries and other risk minimization tools. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The

 

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FDA may require one or more Phase 4 post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.

Expedited Development and Review Programs for Drugs and Biologics

The FDA offers a number of expedited development and review programs for qualifying product candidates. The fast track program is intended to expedite or facilitate the process for reviewing new products that meet certain criteria. Specifically, new products are eligible for fast track designation if they are intended to treat a serious or life-threatening disease or condition and demonstrate the potential to address unmet medical needs for the disease or condition. Fast track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a fast track product has opportunities for more frequent interactions with the review team during product development and, once an NDA or BLA is submitted, the product may be eligible for priority review. A fast track product may also be eligible for rolling review, where the FDA may consider for review sections of the NDA or BLA on a rolling basis before the complete application is submitted, if the sponsor provides a schedule for the submission of the sections of the NDA or BLA, the FDA agrees to accept sections of the NDA or BLA and determines that the schedule is acceptable, and the sponsor pays any required user fees upon submission of the first section of the NDA or BLA.

A product intended to treat a serious or life-threatening disease or condition may also be eligible for breakthrough therapy designation to expedite its development and review. A product can receive breakthrough therapy designation if preliminary clinical evidence indicates that the product, alone or in combination with one or more other drugs or biologics, may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The designation includes all of the fast track program features, as well as more intensive FDA interaction and guidance beginning as early as Phase 1 and an organizational commitment to expedite the development and review of the product, including involvement of senior managers.

Any marketing application for a biologic submitted to the FDA for approval, including a product with a fast track designation and/or breakthrough therapy designation, may be eligible for other types of FDA programs intended to expedite the FDA review and approval process, such as priority review and accelerated approval. A product is eligible for priority review if it has the potential to provide a significant improvement in the treatment, diagnosis or prevention of a serious disease or condition. For new-molecular-entity NDAs and original BLAs, priority review designation means the FDA’s goal is to take action on the marketing application within six months of the 60-day filing date (as compared to ten months under standard review).

Additionally, products studied for their safety and effectiveness in treating serious or life-threatening diseases or conditions may receive accelerated approval upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit, or on a clinical endpoint that can be measured earlier than irreversible morbidity or mortality, that is reasonably likely to predict an effect on irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of accelerated approval, the FDA will generally require the sponsor to perform adequate and well-controlled post-marketing clinical studies to verify and describe the anticipated effect on irreversible morbidity or mortality or other clinical benefit. Products receiving accelerated approval may be subject to expedited withdrawal procedures if the sponsor fails to conduct the required post-marketing studies or if such studies fail to verify the predicted clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product.

Fast track designation, breakthrough therapy designation, priority review, and accelerated approval do not change the standards for approval but may expedite the development or approval process. Even if a product qualifies for one or more of these programs, the FDA may later decide that the product no longer meets the

 

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conditions for qualification or decide that the time period for FDA review or approval will not be shortened. We may explore some of these opportunities for our product candidates as appropriate.

Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States for which there is no reasonable expectation that the cost of developing and making available in the United States a drug or biologic for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan drug designation must be requested before submitting an NDA or BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product is entitled to orphan drug exclusive approval (or exclusivity), which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug or biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug or biologic was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA or BLA application user fee.

A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

Post-Approval Requirements for Drugs and Biologics

Any products manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing user fee requirements, under which the FDA assesses an annual program fee for each product identified in an approved NDA or BLA. Drug and biologic manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMPs, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMPs and impose reporting requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMPs and other aspects of regulatory compliance.

The FDA may withdraw approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown

 

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problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical studies to assess new safety risks; or imposition of distribution restrictions or other restrictions under a REMS program. Other potential consequences include, among other things:

 

   

restrictions on the marketing or manufacturing of a product, complete withdrawal of the product from the market or product recalls;

 

   

fines, warning letters or holds on post-approval clinical studies;

 

   

refusal of the FDA to approve pending applications or supplements to approved applications, or suspension or revocation of existing product approvals;

 

   

product seizure or detention, or refusal of the FDA to permit the import or export of products;

 

   

consent decrees, corporate integrity agreements, debarment or exclusion from federal healthcare programs;

 

   

mandated modification of promotional materials and labeling and the issuance of corrective information;

 

   

the issuance of safety alerts, Dear Healthcare Provider letters, press releases and other communications containing warnings or other safety information about the product; or

 

   

injunctions or the imposition of civil or criminal penalties.

The FDA closely regulates the marketing, labeling, advertising and promotion of biologics. A company can make only those claims relating to safety and efficacy, purity and potency that are approved by the FDA and in accordance with the provisions of the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties. Physicians may prescribe legally available products for uses that are not described in the product’s labeling and that differ from those tested by us and approved by the FDA. Such off-label uses are common across medical specialties. Physicians may believe that such off-label uses are the best treatment for many patients in varied circumstances. The FDA does not regulate the behavior of physicians in their choice of treatments. The FDA does, however, restrict manufacturer’s communications on the subject of off-label use of their products.

Drug Product Marketing Exclusivity

Market exclusivity provisions authorized under the FDCA can delay the submission or the approval of certain marketing applications. For example, the FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to obtain approval of an NDA for a new chemical entity. A drug is a new chemical entity if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not approve or even accept for review an abbreviated new drug application (ANDA) or an NDA submitted under Section 505(b)(2), or 505(b)(2) NDA, submitted by another company for another drug based on the same active moiety, regardless of whether the drug is intended for the same indication as the original innovative drug or for another indication, where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement to one of the patents listed with the FDA by the innovator NDA holder.

The FDCA alternatively provides three years of marketing exclusivity for an NDA, or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application, for example new

 

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indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the modification for which the drug received approval on the basis of the new clinical investigations and does not prohibit the FDA from approving ANDAs or 505(b)(2) NDAs for drugs containing the active agent for the original indication or condition of use. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to any preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

Pediatric exclusivity is another type of marketing exclusivity available in the United States. Pediatric exclusivity provides for an additional six months of marketing exclusivity attached to another period of exclusivity if a sponsor conducts clinical trials in children in response to a written request from the FDA. The issuance of a written request does not require the sponsor to undertake the described clinical trials. In addition, orphan drug exclusivity, as described above, may offer a seven-year period of marketing exclusivity, except in certain circumstances.

Biosimilars and Reference Product Exclusivity

The Biologics Price Competition and Innovation Act of 2009 (BPCIA) created an abbreviated approval pathway for biological products that are highly similar, or “biosimilar,” to or interchangeable with an FDA-approved reference biological product. The FDA has issued several guidance documents outlining an approach to review and approval of biosimilars. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, is generally shown through analytical studies, animal studies, and a clinical study or studies. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product in any given patient and, for products that are administered multiple times to an individual, the biologic and the reference biologic may be alternated or switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. A product shown to be biosimilar or interchangeable with an FDA-approved reference biological product may rely in part on the FDA’s previous determination of safety and effectiveness for the reference product for approval, which can potentially reduce the cost and time required to obtain approval to market the product. Complexities associated with the larger, and often more complex, structures of biological products, as well as the processes by which such products are manufactured, pose significant hurdles to implementation of the abbreviated approval pathway that are still being worked out by the FDA.

Under the BPCIA, an application for a biosimilar product may not be submitted to the FDA until four years following the date that the reference product was first licensed by the FDA. In addition, the approval of a biosimilar product may not be made effective by the FDA until 12 years from the date on which the reference product was first licensed. During this 12-year period of exclusivity, another company may still market a competing version of the reference product if the FDA approves a full BLA for the competing product containing that applicant’s own preclinical data and data from adequate and well-controlled clinical trials to demonstrate the safety, purity and potency of its product. The BPCIA also created certain exclusivity periods for biosimilars approved as interchangeable products. At this juncture, it is unclear whether products deemed “interchangeable” by the FDA will, in fact, be readily substituted by pharmacies, which are governed by state pharmacy law.

A biological product can also obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods and patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.

 

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U.S. Healthcare Fraud and Abuse Laws and Compliance Requirements

In addition to FDA regulation of pharmaceutical products, U.S. federal and state healthcare laws and regulations restrict business practices in the pharmaceutical industries. These laws may impact, among other things, our current and future business operations, including our clinical research activities, and constrain the business or financial arrangements and relationships with healthcare providers and other parties. These laws include anti-kickback, self-referral and false claims laws, civil monetary penalties laws, and physician payment transparency laws. In addition to the federal laws summarized below, we may also be subject to similar state and local laws and regulations that may apply to business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, or by patients themselves.

The federal Anti-Kickback Statute prohibits, among other things, individuals or entities from knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind to induce or in return for purchasing, leasing, ordering or arranging for or recommending the purchase, lease or order of any item or service reimbursable under Medicare, Medicaid or other federal healthcare programs. A person or entity does not need to have actual knowledge of this statute or specific intent to violate it in order to have committed a violation.

The federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws prohibit, among other things, any individual or entity from knowingly presenting, or causing to be presented, a false claim for payment to the federal government, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim to the federal government, or from knowingly making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government. 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 civil False Claims Act.

The federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) created additional federal criminal statutes that prohibit, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payors and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the U.S. federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the healthcare fraud statute implemented under HIPAA or specific intent to violate it in order to have committed a violation.

The federal Physician Payments Sunshine Act requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services (CMS) information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare providers beginning in 2022 and teaching hospitals, and applicable manufacturers and applicable group purchasing organizations to report annually to CMS ownership and investment interests held by physicians (as defined under the statute) and their immediate family members.

Similar state and local laws and regulations may also restrict business practices in the pharmaceutical industry, such as state anti-kickback and false claims laws, which may apply to business practices, including but not limited to, research, distribution, sales and marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers, or by patients themselves; state laws that require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state

 

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laws and regulations that require drug manufacturers to file reports relating to pricing and marketing information or which require tracking gifts and other remuneration and items of value provided to physicians, other healthcare providers and entities; and state and local laws that require the registration of pharmaceutical sales representatives.

Violation of any of such laws or any other governmental regulations that apply may result in significant criminal, civil and administrative penalties including damages, fines, imprisonment, disgorgement, additional reporting requirements and oversight if we become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws, contractual damages, reputational harm, diminished profits and future earnings, disgorgement, exclusion from participation in government healthcare programs and the curtailment or restructuring of our operations.

U.S. Coverage and Reimbursement of Drugs

Significant uncertainty exists as to the coverage and reimbursement status of any product candidate for which we may seek regulatory approval. Sales in the United States will depend, in part, on the availability of sufficient coverage and adequate reimbursement from third-party payors, which include government health programs such as Medicare, Medicaid, TRICARE and the Veterans Administration, as well as managed care organizations and private health insurers. Prices at which we or our customers seek reimbursement for our product candidates can be subject to challenge, reduction or denial by third-party payors.

The process for determining whether a third-party payor will provide coverage for a product is typically separate from the process for setting the reimbursement rate that the payor will pay for the product. In the United States, there is no uniform policy among payors for coverage or reimbursement. Decisions regarding whether to cover any of a product, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own coverage and reimbursement policies, but also have their own methods and approval processes. Therefore, coverage and reimbursement for products can differ significantly from payor to payor. As a result, the coverage determination process is often a time-consuming and costly process that can require manufacturers to provide scientific and clinical support for the use of a product to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance.

Third-party payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit sales of any product that receives approval. Third-party payors may not consider our product candidates to be medically necessary or cost-effective compared to other available therapies, or the rebate percentages required to secure favorable coverage may not yield an adequate margin over cost or may not enable us to maintain price levels sufficient to realize an appropriate return on our investment in drug development. Additionally, decreases in third-party reimbursement for any product or a decision by a third-party payor not to cover a product could reduce physician usage and patient demand for the product.

U.S. Healthcare Reform

In the United States, there has been, and continues to be, several legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval of product candidates, restrict or regulate post-approval activities, and affect the profitable sale of product candidates.

Among policy makers and payors in the United States, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In March 2010, the Patient Protection and Affordable Care Act (Affordable Care Act) was passed, which substantially changed the way healthcare is financed by both governmental and private insurers, and significantly

 

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affected the pharmaceutical and medical device industries. The Affordable Care Act increased the minimum level of Medicaid rebates payable by manufacturers of brand name drugs from 15.1% to 23.1%; required collection of rebates for drugs paid by Medicaid managed care organizations; required manufacturers to participate in a coverage gap discount program, in which manufacturers must agree to offer point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D; imposed a non-deductible annual fee on pharmaceutical manufacturers or importers who sell certain “branded prescription drugs” to specified federal government programs, implemented a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted, or injected; expanded eligibility criteria for Medicaid programs; creates a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; and established a Center for Medicare Innovation at the CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending.

Since its enactment, there have been judicial and political challenges to certain aspects of the Affordable Care Act. For example, the Tax Cuts and Jobs Act of 2017, or Tax Act, includes a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a U.S. District Court Judge in the Northern District of Texas (the Texas District Court Judge) ruled that the individual mandate is a critical and inseverable feature of the Affordable Care Act, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the Affordable Care Act are invalid as well. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit ruled that that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. The U.S. Supreme Court is currently reviewing the case, although it is unclear when or how the Supreme Court will rule. It is also unclear how other efforts to challenge, repeal or replace the Affordable Care Act will impact the law.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. These changes included aggregate reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020 through March 31, 2021, unless additional Congressional action is taken. In addition, on January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for pharmaceutical products. Individual states in the United States have also become increasingly active in implementing regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing. In addition, regional healthcare authorities and individual hospitals are increasingly using bidding procedures to determine which drugs and suppliers will be included in their healthcare programs Furthermore, there has been increased interest by third-party payors and governmental authorities in reference pricing systems and publication of discounts and list prices.

 

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Foreign Regulation

In order to market any product outside of the United States, we would need to comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of our products. Whether or not we obtain FDA approval for a product, we would need to obtain the necessary approvals by the comparable foreign regulatory authorities before we can commence clinical trials or marketing of the product in foreign countries and jurisdictions. Although many of the issues discussed above with respect to the United States apply similarly in the context of the European Union, or EU, the approval process varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.

To market a medicinal product in the European Economic Area (EEA) (which is comprised of the 28 Member States of the EU plus Norway, Iceland and Liechtenstein), we must obtain a Marketing Authorization (MA). There are two types of marketing authorizations:

 

   

the Community MA, which is issued by the European Commission through the Centralized Procedure, based on the opinion of the Committee for Medicinal Products for Human Use of the EMA and which is valid throughout the entire territory of the EEA. The Centralized Procedure is mandatory for certain types of products, such as biotechnology medicinal products, orphan medicinal products, advanced therapy products, and medicinal products containing a new active substance indicated for the treatment certain diseases, such as AIDS, cancer, neurodegenerative disorders, diabetes, auto-immune and viral diseases. The Centralized Procedure is optional for products containing a new active substance not yet authorized in the EEA, or for products that constitute a significant therapeutic, scientific or technical innovation or which are in the interest of public health in the EU; and

 

   

National MAs, which are issued by the competent authorities of the Member States of the EEA and only cover their respective territory, are available for products not falling within the mandatory scope of the Centralized Procedure. Where a product has already been authorized for marketing in a Member State of the EEA, this National MA can be recognized in another Member State through the Mutual Recognition Procedure. If the product has not received a National MA in any Member State at the time of application, it can be approved simultaneously in various Member States through the Decentralized Procedure.

Under the above described procedures, before granting the MA, the EMA or the competent authorities of the Member States of the EEA make an assessment of the risk-benefit balance of the product on the basis of scientific criteria concerning its quality, safety and efficacy.

Data and marketing exclusivity

In the EEA, new products authorized for marketing, or reference products, qualify for eight years of data exclusivity and an additional two years of market exclusivity upon marketing authorization. The data exclusivity period prevents generic or biosimilar applicants from relying on the pre-clinical and clinical trial data contained in the dossier of the reference product when applying for a generic or biosimilar marketing authorization in the EU during a period of eight years from the date on which the reference product was first authorized in the EU. The market exclusivity period prevents a successful generic or biosimilar applicant from commercializing its product in the EU until 10 years have elapsed from the initial authorization of the reference product in the EU. The 10-year market exclusivity period can be extended to a maximum of 11 years if, during the first eight years of those 10 years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies.

 

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Pediatric investigation plan

In the EEA, marketing authorization applications for new medicinal products not authorized have to include the results of studies conducted in the pediatric population, in compliance with a pediatric investigation plan (PIP) agreed with the EMA’s Pediatric Committee (PDCO). The PIP sets out the timing and measures proposed to generate data to support a pediatric indication of the drug for which marketing authorization is being sought. The PDCO can grant a deferral of the obligation to implement some or all of the measures of the PIP until there are sufficient data to demonstrate the efficacy and safety of the product in adults. Further, the obligation to provide pediatric clinical trial data can be waived by the PDCO when these data is not needed or appropriate because the product is likely to be ineffective or unsafe in children, the disease or condition for which the product is intended occurs only in adult populations, or when the product does not represent a significant therapeutic benefit over existing treatments for pediatric patients. Once the marketing authorization is obtained in all Member States of the EU and study results are included in the product information, even when negative, the product is eligible for six months’ supplementary protection certificate extension.

Clinical trials

Clinical trials of medicinal products in the European Union must be conducted in accordance with European Union and national regulations and the International Conference on Harmonization guidelines on GCPs. Additional GCP guidelines from the European Commission, focusing in particular on traceability, apply to clinical trials of advanced therapy medicinal products. If the sponsor of the clinical trial is not established within the European Union, it must appoint an entity within the European Union to act as its legal representative. The sponsor must take out a clinical trial insurance policy, and in most EU countries, the sponsor is liable to provide ‘no fault’ compensation to any study subject injured in the clinical trial.

Prior to commencing a clinical trial, the sponsor must obtain a clinical trial authorization from the competent authority, and a positive opinion from an independent ethics committee. The application for a clinical trial authorization must include, among other things, a copy of the trial protocol and an investigational medicinal product dossier containing information about the manufacture and quality of the medicinal product under investigation. Currently, clinical trial authorization applications must be submitted to the competent authority in each EU Member State in which the trial will be conducted. Under the new Regulation on Clinical Trials, which is currently expected to take effect in 2019, there will be a centralized application procedure where one national authority takes the lead in reviewing the application and the other national authorities have only a limited involvement. Any substantial changes to the trial protocol or other information submitted with the clinical trial applications must be notified to or approved by the relevant competent authorities and ethics committees. Medicines used in clinical trials must be manufactured in accordance with cGMP. Other national and European Union-wide regulatory requirements also apply.

Privacy and data protection laws

Numerous state, federal and foreign laws, including consumer protection laws and regulations, govern the collection, dissemination, use, access to, confidentiality and security of personal information, including health-related information. In the United States, numerous federal and state laws and regulations, including state data breach notification laws, state health information privacy laws, and federal and state consumer protection laws and regulations (e.g., Section 5 of the FTC Act), that govern the collection, use, disclosure, and protection of health-related and other personal information could apply to our operations or the operations of our partners. For example, HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 and their respective implementing regulations, imposes privacy, security and breach notification obligations on certain health care providers, health plans, and health care clearinghouses, known as covered entities, as well as their business associates that perform certain services that involve creating, receiving, maintaining or transmitting individually identifiable health information for or on behalf of such covered entities. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health information, a

 

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complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Further, entities that knowingly obtain, use, or disclose individually identifiable health information maintained by a HIPAA covered entity in a manner that is not authorized or permitted by HIPAA may be subject to criminal penalties.

Even when HIPAA does not apply, according to the FTC, violating consumers’ privacy rights or failing to take appropriate steps to keep consumers’ personal information secure may constitute unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards.

Further, certain state laws govern the privacy and security of health-related information or other personal information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California recently enacted legislation, the California Consumer Privacy Act (CCPA) which went into effect January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information. The CCPA also creates a private right of action with statutory damages for certain data breaches, thereby potentially increasing risks associated with a data breach.

In addition, we are also subject to laws and regulations in non-U.S. countries covering data privacy and the protection of health-related and other personal information. EU member states and other jurisdictions have adopted data protection laws and regulations, which impose significant compliance obligations. Laws and regulations in these jurisdictions apply broadly to the collection, use, storage, disclosure, processing and security of personal information that identifies or may be used to identify an individual, such as names, contact information, and sensitive personal data such as health data. These laws and regulations are subject to frequent revisions and differing interpretations, and have generally become more stringent over time.

For example, the General Data Protection Regulation (GDPR) which is in effect across the EEA, imposes several stringent requirements for controllers and processors of personal data, and has increased our obligations, for example, by imposing higher standards for obtaining consent from individuals to process their personal data, requiring more robust disclosures to individuals, strengthening individual data rights, shortening timelines for data breach notifications, limiting retention periods and secondary use of information, increasing requirements pertaining to health data and pseudonymised (i.e., key-coded) data and imposing additional obligations when we contract third-party processors in connection with the processing of the personal data. The GDPR allows EU and EEA member states to make additional laws and regulations further limiting the processing of genetic, biometric or health data.

Further, the GDPR prohibits, without an appropriate legal basis, the transfer of personal data to countries outside of the EEA, such as the United States, which are not considered by the European Commission to provide an adequate level of data protection. Recent legal developments in Europe have created complexity and uncertainty regarding transfers of personal data from the EEA to the United States. For example, on July 16, 2020, the Court of Justice of the European Union (the CJEU) invalidated the EU-US Privacy Shield Framework (Privacy Shield) under which personal data could be transferred from the EEA to United States entities that had self-certified under the Privacy Shield scheme. While the CJEU upheld the adequacy of the standard contractual clauses (a standard form of contract approved by the European Commission as an adequate personal data transfer

 

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mechanism, and potential alternative to the Privacy Shield), it made clear that reliance on them alone may not necessarily be sufficient in all circumstances. Use of the standard contractual clauses must now be assessed on a case-by-case basis taking into account the legal regime applicable in the destination country, in particular applicable surveillance laws and rights of individuals and additional measures and/or contractual provisions may need to be put in place, however, the nature of these additional measures is currently uncertain. As we expand into other foreign countries and jurisdictions, we may be subject to additional laws and regulations that may affect how we conduct business.

Failure to comply with the requirements of GDPR and the applicable national data protection laws of the EU and EEA member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. Additionally, following the United Kingdom’s withdrawal from the EU and the EEA, companies have to comply with the GDPR and the GDPR as incorporated into United Kingdom national law, the latter regime having the ability to separately fine up to the greater of £17.5 million or 4% of global turnover. The relationship between the United Kingdom and the EU in relation to certain aspects of data protection law remains unclear, for example around how data can lawfully be transferred between each jurisdiction, which exposes us to further compliance risk.

Employees

As of January 31, 2021, we had 24 full-time employees and 3 part-time employees. Of these employees, 19 are engaged in research and development. We consider our relationship with our employees to be good.

Facilities

We lease approximately 40,000 square feet of office and laboratory space in San Diego, California under a sublease agreement that expires in December 2021, with an option to extend for an additional year. We believe that our existing facility will meet our current and near-term needs and that suitable additional space will be available as and when needed.

Legal Proceedings

From time to time, we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Regardless of outcome, legal proceedings or claims can have an adverse impact on the company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth the name, age and position of each of our executive officers and directors as of February 17, 2021.

 

Name

   Age     

Position

Executive Officers

     

Mark C. McKenna

     41      President and Chief Executive Officer

Keith W. Marshall, Ph.D.

     53      Chief Financial Officer and Treasurer

Allison Luo, M.D.

     47      Chief Medical Officer

Timothy K. Andrews

     42      General Counsel and Secretary

Key Employees

     

Laurens Kruidenier, Ph.D.

     51      Chief Scientific Officer

Olivier Laurent, Ph.D.

     49      Chief Technology Officer

Non-Employee Directors

     

Tadataka Yamada, M.D.(1)(3)

     75      Chairman of the Board of Directors

Helen C. Adams, CPA(2)

     61      Director

Martin Hendrix, Ph.D.(2)

     52      Director

James Laur(3)

     60      Director

Joseph C. Papa(3)

     65      Director

Judith L. Swain, M.D.(3)

     72      Director

Mary Szela(1)(2)

     57      Director

 

(1)

Member of the compensation committee

(2)

Member of the audit committee

(3)

Member of the nominating and corporate governance committee

Executive Officers

Mark C. McKenna has served as our President and Chief Executive Officer and as a member of our board of directors since September 2019. Prior to joining us, he served as President and Chief Executive Officer of Salix Pharmaceuticals, Inc. (Salix), a wholly-owned subsidiary of Bausch Health Companies, Inc. (Bausch), from March 2016 through August 2019. Prior to Salix, Mr. McKenna spent more than a decade in various roles with Bausch + Lomb, also a division of Bausch, most recently as Senior Vice President and General Manager of its U.S. Vision Care business. Before joining Bausch + Lomb, he held several positions with Johnson & Johnson. Mr. McKenna holds a B.S. in Marketing from Arizona State University and an M.B.A. from Azusa Pacific University. Mr. McKenna’s knowledge of our business, as well as his significant development, commercial and executive management experience, contributed to our board of directors’ conclusion that he should serve as a director of the company.

Keith W. Marshall, Ph.D. has served as our Chief Financial Officer served since August 2020. Previously, he served as Executive Vice President, Chief Operating Officer, and Chief Financial Officer of Conatus Pharmaceuticals Inc., now Histogen, Inc., from August 2017 to May 2020. Dr. Marshall served as Chief Financial Officer and Head of Corporate Development at Torque Therapeutics Inc. from 2015 to 2017, where his responsibilities included finance, operations, human resources, corporate strategy and business development. He served as Managing Director and Advisor in Healthcare Investment Banking from 2012 to 2014 at GCA Savvian Advisors, where he provided strategic counsel to healthcare companies, and continued from 2014 to 2015 at TAG Healthcare Advisors under an alliance with GCA Savvian. Previously, Dr. Marshall was Managing Director from 2011 to 2012 at Sagent Advisors and Managing Director, Co-founder, and Chief Financial Officer from 2008 to 2011 at Montgomery, Marshall Healthcare Partners. Dr. Marshall began his banking career at JPMorgan.

 

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He holds an A.B. in Biology from Washington University in St. Louis, a Ph.D. in Pharmaceutical Chemistry from the University of California, San Francisco, and an M.B.A. with concentrations in Finance, Strategy, and Entrepreneurship from the University of Chicago Booth School of Business.

Allison Luo, M.D., has served as our Chief Medical Officer since August 2018. Prior to that, Dr. Luo concurrently served as Chief Medical Officer at Oppilan Pharma and Escalier Pharma since March 2017, and as Senior Vice President of Clinical Development for Gastroenterology at Progenity Inc. since June 2017. Before that, Dr. Luo was Vice President of Clinical Development at Ophthotech Corp., now Iveric bio, Inc., since September 2015. She was an Executive Director at Bristol-Myers Squibb Company from September 2006 to October 2014, where she was responsible for inflammatory bowel disease and led the Phase 3 program for Orencia (abatacept) and the Phase 2 programs for eldelumab (anti-IP10 antibody) for ulcerative colitis and Crohn’s disease. Earlier in her career, Dr. Luo was a Medical Director at Abbott Laboratories, where she submitted the Japanese NDA for Humira in rheumatoid arthritis and developed the clinical trial protocols for Humira in ulcerative colitis. Dr. Luo holds a B.S. in Biochemistry and an M.D. from Northwestern University.

Timothy K. Andrews, Esq. has served as our General Counsel since November 2020. From October 2016 through December 2019 he served as General Counsel and Secretary for Sienna Biopharmaceuticals, Inc., a publicly traded, clinical-stage biotech company. Prior to his role at Sienna, Mr. Andrews served as the Head of Legal at Whitecap Biosciences LLC, a start-up company founded by former Allergan, Inc. research and development executives, from July 2015 to October 2016. From 2011 to 2015 Mr. Andrews served as Senior Corporate Counsel and Assistant Secretary at Allergan, Inc. from 2011 through 2015, where he had legal responsibility for U.S. and international business development transactions, including acquisitions, licensing and partnerships, as well as corporate governance and securities law compliance. From 2006 to 2011, Mr. Andrews was a corporate attorney at Latham & Watkins LLP. He was previously a Business Analyst at Deloitte Consulting. Mr. Andrews holds a B.A. in Political Economy from the University of California, Berkeley and a J.D. from Loyola Law School, Los Angeles.

Key Employees

Laurens Kruidenier, Ph.D. has served as our Chief Scientific Officer since May 2019, and previously served as our SVP of Research from July 2018 to May 2019. He has over 25 years of experience in IBD discovery research, both in academic settings as well as in the life sciences industry. Most recently, Dr. Kruidenier was Vice President of Discovery at Second Genome Inc. from July 2017 to July 2018, where he was responsible for a portfolio of microbiome programs. Previously, Dr. Kruidenier served as Head of GI Immunology Research at Takeda Pharmaceuticals from January 2015 to June 2017. Dr. Kruidenier also held various positions at GlaxoSmithKline plc. starting in April 2006, including most recently as Head of Biology of the Protein Degradation Unit from January 2013 to January 2015. Dr. Kruidenier holds a M.Sc. in Medical Biology from Utrecht University in the Netherlands and a Ph.D. in Experimental Gastroenterology from Leiden University in the Netherlands.

Olivier Laurent, Ph.D. has served as our Chief Technology Officer since September 2020. Before joining our company, Dr. Laurent served from October 2019 to September 2020 as Chief Scientific Officer at Intrepida Bio, an immuno-oncology company focused on developing novel antibodies for the treatment of solid tumors. Prior to this position, Dr. Laurent was Chief Scientific Officer at Dauntless Pharmaceuticals, a company working on novel formulations of octreotide for the treatment of metabolic and oncology indications, from July 2015 to October 2019. Before joining Dauntless Pharmaceuticals, Dr. Laurent held positions of increasing responsibilities at Sanofi S.A., Bayer AG, Genentech, Inc., Pfizer Inc., CovX (acquired by Pfizer in 2008) and Ambrx (acquired by a Chinese consortium in 2015). Dr. Laurent holds a Ph.D. in Cell Biology from the University of Grenoble, an M.S. in Molecular and Cell Biology earned in a dual program from the University of Grenoble and the University of Lyon and a B.S. in Molecular and Cell Biology from the University of Lyon.

 

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Non-Employee Directors

Tadataka Yamada, M.D. has served as Chairman of our board of directors since June 2018 and as a Venture Partner at Frazier Life Sciences since June 2015. From June 2011 to June 2015, Dr. Yamada served as the Chief Medical and Scientific Officer of Takeda Pharmaceutical Company Ltd. From 2006 to 2011, Dr. Yamada served as President of the Global Health Program of the Bill & Melinda Gates Foundation. Previously, he was the

Chairman of Research and Development of GlaxoSmithKline Inc. and held research and development positions at SmithKline Beecham. Prior to that, Dr. Yamada served as Chairman of the Department of Internal Medicine at the University of Michigan Medical School and Physician-in-Chief of the University of Michigan Medical Center. Dr. Yamada is a member of the National Academy of Medicine, a Fellow of the Imperial College of Medicine, a Master of the American College of Physicians, a Fellow of the Royal College of Physicians, a Member of the American Academy of Arts and Sciences and a past-President of the American Gastroenterological Association and the Association of American Physicians. Dr. Yamada has served as the Chairman of the boards of directors of Phathom Pharmaceuticals, Inc. and Passage Bio, Inc. since March 2019 and July 2017, respectively. He has also served since 2011 as a member of the board of directors of Agilent Technologies, Inc. and previously served on the boards of directors of Takeda Pharmaceutical Company Ltd, GlaxoSmithKline Inc. and CSL Limited. Dr. Yamada received a B.A. in History from Stanford University and his M.D. from New York University School of Medicine. Dr. Yamada’s extensive research and experience in product development, as well as his service as a director or officer of other healthcare companies, contributed to our board of directors’ conclusion that he should serve as Chairman of our board of directors.

Helen C. Adams, CPA has been a member of our board of directors since February 2021. From January 2013 to March 2018, Ms. Adams was the San Diego Area Managing Partner for Haskell & White LLP, a regional certified public accounting firm. Previously, Ms. Adams was a certified public accountant at Deloitte & Touche LLP from 1982 to 2009, serving most recently as a Partner in the Life Sciences and Technology Group. From 2010 to 2013, Ms. Adams was a member of the board of directors of Genasys Inc. (formerly known as LRAD Corporation), serving as the Audit Committee Chair and member of the Compensation Committee. In addition to her public company board service, Ms. Adams has served on the boards of directors of several organizations, including Athena San Diego, the Athena Foundation, Make A Wish San Diego and the California State University at San Marcos Foundation. Ms. Adams’ experience with accounting, auditing and financial oversight of public and private companies in the life sciences industry contributed to our board of directors’ conclusion that she should serve as a director of our company.

Martin Hendrix, Ph.D. has served as a member of our board of directors since October 2020. He joined Nestlé Health Science US in April 2012, and currently serves as its Head of Global Business Development and M&A. In this position, Dr. Hendrix oversees all deal flow of Nestlé Health Science and is also responsible for its venture capital partnerships and direct equity investments. Dr. Hendrix has represented Nestlé on the boards of Enterome, Microbiome Diagnostic Partners, Procise Dx, Bodymed AG, as well as board observer roles for Evelo, Kaleido and Senda. Prior to joining Nestlé, from January 1998 to March 2012, Dr. Hendrix was a research chemist and subsequently a member of the Strategic Planning Group, as well as a Senior Director of Business Strategy at Bayer AG. Dr. Hendrix currently serves on the board of directors of Procise Dx, Bodymed AG, and Senda (observer). Dr. Hendrix holds a Ph.D. in Chemistry from The Scripps Research Institute, an M.S. in Chemistry from the Georgia Institute of Technology. Dr. Hendrix’s extensive management and governance experience in the biotechnology industry contributed to our board of director’s conclusion that Dr. Hendrix should serve as a director of our company.

James Laur has served on our board of directors since April 2020, and through his work leading Cedars-Sinai Medical Center’s Technology Transfer Office, Mr. Laur played a role in our founding. Mr. Laur currently serves as Vice President, Intellectual Property for Cedars-Sinai, and, in addition to his role with Cedars-Sinai’s Technology Transfer Office, Mr. Laur helps lead the Cedars-Sinai Accelerator program and Cedars-Sinai Health Ventures, Cedars-Sinai’s venture fund. Mr. Laur has served in a variety of business roles at Cedars-Sinai since originally joining its Legal Affairs Department in 1991. Mr. Laur is a member of the California State Bar and

 

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holds a dual degree B.A. in Political Science and Philosophy from the University of California, Los Angeles, as well as a J.D. from Boston College Law School. Mr. Laur’s extensive experience with early-stage life science companies, the healthcare sector, as well as his knowledge of intellectual property issues, technology ventures, innovation development and commercialization strategies contributed to our board of directors’ conclusion that he should serve as a director of our company.

Joseph C. Papa has served on our board of directors since August 2020 and has been Chairman of the board of directors and Chief Executive Officer of Bausch Health Companies Inc. since May 2016. Mr. Papa has more than 35 years of experience in the pharmaceutical, healthcare and specialty pharmaceutical industries, including 20 years of branded prescription drug experience. He served as the CEO of Perrigo Company plc from 2006 to April 2016, where he also served as Chairman from 2007 to April 2016. Prior to joining Perrigo, Mr. Papa served from 2004 to 2006 as Chairman and CEO of the Pharmaceutical and Technologies Services segment of Cardinal Health, Inc. From 2001 to 2004, he served as President and Chief Operating Officer of Watson Pharmaceuticals, Inc. Prior to joining Watson, Mr. Papa held management positions at DuPont Pharmaceuticals, Pharmacia/Searle and Novartis AG. Mr. Papa served as a director of Smith & Nephew plc, a developer of advanced medical devices, from 2008 to April 2018. Mr. Papa’s extensive leadership experience in the pharmaceutical industry contributed to our board of directors’ conclusion that he should serve as a director of our company.

Judith L. Swain, M.D. has served as a member of our board of directors since February 2021, and is the Chief Medical Officer of Physiowave, Inc., a medical device company, a role she has held since July 2016. She has also served as a Visiting Professor in the Department of Medicine at the National University of Singapore since July 2017. Prior to these roles, Dr. Swain was Executive Director of the Singapore Institute for Clinical Sciences, a research institute of the Agency for Science, Technology and Research (A*STAR), Singapore, and Professor, National University of Singapore from 2006 to 2017. Dr. Swain served as Dean for Translational Medicine at the University of California, San Diego from 2005 to 2006 and as Chair and Professor of Medicine at Stanford University from 1996 to 2005. Dr. Swain is a co-founder of Synecor, LLC and currently serves on the board of directors of Lexicon Pharmaceuticals, Inc., Upstream Medical Technologies, Ltd, and the Institute for Life Changing Medicines. She previously served on the boards of directors of the National Healthcare Group (Singapore) and the Lee Kong Chian School of Medicine of Nanyang Technological University. Dr. Swain earned an M.D. from the University of California, San Diego, and a B.S. in Chemistry from the University of California, Los Angeles. Dr. Swain’s extensive medical and scientific research experience with a variety of prominent research and academic institutions contributed to our board of directors’ conclusion that she should serve as a director of our company.

Mary Szela has served as a member of our board of directors since February 2021. Ms. Szela also currently serves as the Chief Executive Officer and President of TriSalus Life Sciences, Inc. (formerly Surefire Medical, Inc.), a privately held medical device company. From January 2016 to November 2016, Ms. Szela served as Chief Executive Officer and a director of Aegerion Pharmaceuticals, Inc. In November 2016, Aegerion Pharmaceuticals, Inc. merged with QLT Inc. to form Novelion Therapeutics Inc. where Ms. Szela served as Chief Executive Officer and as a member of its board of directors until November 2017. Ms. Szela served as the Chief Executive Officer and a member of the board of directors of Melinta Therapeutics, Inc., an antibiotic development company, from April 2013 to August 2015. Ms. Szela held ascending management positions at Abbott Laboratories from 1987 to 2012, including President of the company’s U.S. pharmaceutical business from January 2008 to December 2010. Ms. Szela has served as a member of the boards of directors of Kura Oncology, Inc. since November 2018, Alimera Sciences Inc. since June 2018 and TriSalus Life Sciences, Inc. since January 2018. She also previously served as a member of the board of directors of Receptos, Inc. from June 2014 to July 2015, Novo Nordisk from March 2014 to March 2017, and Macrolide Pharmaceuticals, from March 2018 to July 2019. She earned an M.B.A. in Business and a B.S. in nursing, both from the University of Illinois. Ms. Szela’s extensive leadership experience in the pharmaceutical industry contributed to our board of directors’ conclusion that she should serve as a director of our company.

 

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Family Relationships

William Sandborn, M.D., who served as a member of our board of directors until February 2021, is the spouse of Dr. Luo, our Chief Medical Officer. There are no other family relationships among our directors and executive officers.

Board Composition and Election of Directors

Director Independence

Our board of directors currently consists of nine members. Our board of directors has determined that all of our directors, other than Mr. Laur and Mr. McKenna, are independent directors in accordance with the listing requirements of the Nasdaq Global Market (Nasdaq). The Nasdaq independence definition includes a series of objective tests, including that the director is not, and has not been for at least three years, one of our employees and that neither the director nor any of his or her family members has engaged in various types of business dealings with us. In addition, as required by Nasdaq rules, our board of directors has made a subjective determination as to each independent director that no relationships exist, which, in the opinion of our board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of the director. In making these determinations, our board of directors reviewed and discussed information provided by the directors and us with regard to each director’s business and personal activities and relationships as they may relate to us and our management. There are no family relationships among any of our directors or executive officers.

Classified Board of Directors

In accordance with the terms of our amended and restated certificate of incorporation that will go into effect immediately prior to the closing of this offering, our board of directors will be divided into three classes with staggered, three-year terms. At each annual meeting of stockholders, the directors whose terms then expire will be eligible for reelection until the third annual meeting following reelection. Effective upon the closing of this offering, our directors will be divided among the three classes as follows:

 

   

the Class I directors will be Mr. Papa, Ms. Szela and Dr. Yamada, and their terms will expire at our first annual meeting of stockholders following this offering;

 

   

the Class II directors will be Ms. Adams, Dr. Hendrix and Dr. Swain, and their terms will expire at our second annual meeting of stockholders following this offering; and

 

   

the Class III directors will be Mr. Laur and Mr. McKenna, and their terms will expire at our third annual meeting of stockholders following this offering.

Our amended and restated certificate of incorporation that will go into effect immediately prior to the closing of this offering will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our board of directors or a change in control of our company. Our directors may be removed only for cause by the affirmative vote of the holders of at least two-thirds of our outstanding voting stock then entitled to vote in an election of directors.

Board Leadership Structure

Our board of directors is currently led by our Chairman, Dr. Yamada. Our board of directors recognizes that it is important to determine an optimal board leadership structure to ensure the independent oversight of management as the company continues to grow. We separate the roles of chief executive officer and chairman of

 

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the board of directors in recognition of the differences between the two roles. The chief executive officer is responsible for setting the strategic direction for our company and the day-to-day leadership and performance of our company, while the chairman of the board of directors provides guidance to the chief executive officer and presides over meetings of the full board of directors. We believe that this separation of responsibilities provides a balanced approach to managing the board of directors and overseeing our company.

Our board of directors has concluded that our current leadership structure is appropriate at this time. However, our board of directors will continue to periodically review our leadership structure and may make such changes in the future as it deems appropriate.

Role of Board in Risk Oversight Process

Our board of directors has responsibility for the oversight of our risk management processes and, either as a whole or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business and the steps we take to manage them. The risk oversight process includes receiving regular reports from board committees and members of senior management to enable our board of directors to understand our risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk.

The audit committee reviews information regarding liquidity and operations, and oversees our management of financial risks. Periodically, the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance. Oversight by the audit committee includes direct communication with our external auditors, and discussions with management regarding significant risk exposures and the actions management has taken to limit, monitor or control such exposures. The compensation committee is responsible for assessing whether any of our compensation policies or programs has the potential to encourage excessive risk-taking. The nominating and corporate governance committee manages risks associated with the independence of the board of directors, corporate disclosure practices and potential conflicts of interest. While each committee is responsible for evaluating certain risks and overseeing the management of such risks, the entire board of directors is regularly informed through committee reports about such risks. Matters of significant strategic risk are considered by our board of directors as a whole.

Board Committees and Independence

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.

Audit Committee

The audit committee’s main function is to oversee our accounting and financial reporting processes and the audits of our consolidated financial statements. This committee’s responsibilities include, among other things:

 

   

appointing our independent registered public accounting firm;

 

   

evaluating the qualifications, independence and performance of our independent registered public accounting firm;

 

   

approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

   

reviewing the design, implementation, adequacy and effectiveness of our internal accounting controls and our critical accounting policies;

 

   

discussing with management and the independent registered public accounting firm the results of our annual audit and the review of our quarterly unaudited consolidated financial statements;

 

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reviewing, overseeing and monitoring the integrity of our consolidated financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters;

 

   

reviewing on a periodic basis, or as appropriate, any investment policy and recommending to our board of directors any changes to such investment policy;

 

   

reviewing with management and our auditors any earnings announcements and other public announcements regarding our results of operations;

 

   

preparing the report that the SEC requires in our annual proxy statement;

 

   

reviewing and approving any related party transactions and reviewing and monitoring compliance with our code of conduct and ethics; and

 

   

reviewing and evaluating, at least annually, the performance of the audit committee and its members including compliance of the audit committee with its charter.

The members of our audit committee are Ms. Adams, Dr. Hendrix and Ms. Szela. Ms. Adams serves as the chairperson of the committee. All members of our audit committee meet the requirements for financial literacy under the applicable rules and regulations of the SEC and Nasdaq. Our board of directors has determined that Ms. Adams is an “audit committee financial expert” as defined by applicable SEC rules and has the requisite financial sophistication as defined under the applicable Nasdaq listing standards. Our board of directors has determined each of Ms. Adams, Dr. Hendrix, and Ms. Szela is independent under the applicable rules of the SEC and Nasdaq. Upon the listing of our common stock on Nasdaq, the audit committee will operate under a written charter that satisfies the applicable standards of the SEC and Nasdaq.

Compensation Committee

Our compensation committee approves policies relating to compensation and benefits of our officers and employees. The compensation committee approves corporate goals and objectives relevant to the compensation of our Chief Executive Officer and other executive officers, evaluates the performance of these officers in light of those goals and objectives and approves the compensation of these officers based on such evaluations. The compensation committee also approves the issuance of stock options and other awards under our equity plans. The compensation committee will review and evaluate, at least annually, the performance of the compensation committee and its members, including compliance by the compensation committee with its charter.

The members of our compensation committee are Mr. Papa, Ms. Szela and Dr. Yamada. Mr. Papa serves as the chairperson of the committee. Our board of directors has determined that each of Mr. Papa, Ms. Szela and Dr. Yamada is independent under the applicable Nasdaq listing standards, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act. Upon the listing of our common stock on Nasdaq, the compensation committee will operate under a written charter, which the compensation committee will review and evaluate at least annually.

Nominating and Corporate Governance Committee

The nominating and corporate governance committee is responsible for assisting our board of directors in discharging the board of directors’ responsibilities regarding the identification of qualified candidates to become board members, the selection of nominees for election as directors at our annual meetings of stockholders (or special meetings of stockholders at which directors are to be elected), and the selection of candidates to fill any vacancies on our board of directors and any committees thereof. In addition, the nominating and corporate governance committee is responsible for overseeing our corporate governance policies, reporting and making recommendations to our board of directors concerning governance matters and oversight of the evaluation of our board of directors. The members of our nominating and corporate governance committee are Dr. Yamada, Mr. Laur and Dr. Swain. Dr. Yamada serves as the chairperson of the committee. Our board of directors has

 

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determined that each of Dr. Yamada and Dr. Swain is independent under the applicable Nasdaq listing standards. Under applicable Nasdaq rules, we are permitted to phase in our compliance with the independent nominating and corporate governance committee requirements of Nasdaq, which requires all members to be independent within one year of listing. We will comply with the phase-in requirements of the Nasdaq rules and within one year of our listing on Nasdaq, all members of our this committee will be independent under Nasdaq rules. Upon the listing of our common stock on Nasdaq, the nominating and corporate governance committee will operate under a written charter, which the nominating and corporate governance committee will review and evaluate at least annually.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee is currently, or has at any time been, one of our officers or employees. None of our executive officers currently serves, or has served, as a member of the board of directors or compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Board Diversity

Upon the closing of this offering, our nominating and corporate governance committee will be responsible for reviewing with the board of directors, on an annual basis, the appropriate characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating the suitability of individual candidates (both new candidates and current members) for election or appointment, the nominating and corporate governance committee and the board of directors will take into account many factors, including the following:

 

   

personal and professional integrity, ethics and values;

 

   

experience in corporate management, such as serving as an officer or former officer of a publicly-held company;

 

   

experience as a board member or executive officer of another publicly-held company;

 

   

strong finance experience;

 

   

diversity of expertise and experience in substantive matters pertaining to our business relative to other board members;

 

   

diversity of background and perspective, including, but not limited to, with respect to age, gender, race, place of residence and specialized experience;

 

   

experience relevant to our business industry and with relevant social policy concerns; and

 

   

relevant academic expertise or other proficiency in an area of our business operations.

Currently, our board of directors evaluates, and following the closing of this offering will evaluate, each individual in the context of the board of directors as a whole, with the objective of assembling a group that can best maximize the success of the business and represent stockholder interests through the exercise of sound judgment using its diversity of experience in these various areas.

 

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Code of Conduct and Ethics

We plan to adopt a written code of 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, which will be effective upon the closing of this offering. Upon the closing of this offering, our code of conduct and ethics will be available under the Corporate Governance section of our website at www.prometheusbiosciences.com. In addition, we intend to post on our website all disclosures that are required by law or the listing standards of Nasdaq concerning any amendments to, or waivers from, any provision of the code. The reference to our website address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be a part of this prospectus.

 

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EXECUTIVE AND DIRECTOR COMPENSATION

This section discusses the material components of the executive compensation program for our executive officers who are named in the “Summary Compensation Table” below, whom we refer to as our named executive officers or NEOs.

This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the closing of this offering may differ materially from the currently planned programs summarized in this discussion.

Summary Compensation Table

The following table presents summary information regarding the total compensation that was awarded to, earned by or paid to our NEOs for services rendered during the years ended December 31, 2020 and December 31, 2019.

 

Name and principal position

  Year     Salary
($)(1)
    Bonus
($)
    Stock
awards
($)
    Option
awards
($)(2)
    Non-equity
incentive
plan
compensation
($)
    All other
compensation
($)(3)
    Total
($)
 

Mark C. McKenna

    2020       500,000       750,000 (4)      —         1,393,712       —         262,250       2,908,962  

President and Chief Executive Officer

    2019       156,891       —         —         635,857       —         183,102       975,850  

Keith W. Marshall, Ph.D.

    2020       157,212       73,000       —         531,894       —         210       762,316  

Chief Financial Officer and Treasurer

               

Allison Luo, M.D.(5)

    2020       416,486       164,000       —         460,294       —         5,646       1,046,426  

Chief Medical Officer

    2019       293,077       83,333 (6)      —         42,500       —         2,839       421,749  

 

(1)

Mr. McKenna commenced employment with us on September 9, 2019, and was appointed as our President and Chief Executive Officer on October 1, 2019. Dr. Marshall commenced employment with us on August 3, 2020, and was appointed as Chief Financial Officer and Treasurer on August 12, 2020.

(2)

Represents the grant date fair value of stock options to purchase shares of common stock of Prometheus Biosciences, Inc. computed in accordance with FASB ASC 718. See Note 8 to the consolidated financial statements for the fiscal years ended December 31, 2020 and December 31, 2019 included with this prospectus for a description of the assumptions used in valuing our stock options.

(3)

Includes matching contributions made by us on behalf of the NEOs under our 401(k) plan (in 2020, $4,615 for Mr. McKenna and $4,974 for Dr. Luo and, in 2019, $4,487 for Mr. McKenna and $2,667 for Dr. Luo), life insurance premiums paid by us on behalf of the NEOs and cell phone allowances provided to the NEOs. For Mr. McKenna, also includes, in 2020, $255,273 in relocation assistance provided by the company, of which $88,124 was a tax-gross up on such portion of the relocation benefits that were taxable to him, and, in 2019, $178,549 in relocation assistance provided by the company, of which $68,154 was a tax-gross up on such portion of the relocation benefits that were taxable to him.

(4)

Includes a transaction bonus of $500,000 paid in August 2020 in consideration of the company’s execution of the Falk Agreement.

(5)

Dr. Luo is married to William Sandborn, M.D., one of our former non-employee directors. Dr. Sandborn’s compensation is described below under “Director Compensation.”

(6)

Represents a transaction bonus of $25,000 paid to Dr. Luo in consideration of the company’s acquisition of PLI in June 2019 and a guaranteed annual bonus of $58,333 for 2019 pursuant to her employment letter.

 

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Narrative Disclosure to Compensation Tables

The primary elements of compensation for our NEOs are base salary, annual performance bonuses and equity awards. The NEOs also participate in employee benefit plans and programs that we offer to our other employees, as described below.

Annual Base Salary

We pay our NEOs a base salary to compensate them for the performance of services rendered to us. The base salary payable to each NEO is intended to provide a fixed component of compensation reflecting the executive’s skill set, experience, role and responsibilities. Base salaries for our NEOs have generally been set at levels deemed necessary to attract and retain individuals with superior talent.

Mr. McKenna’s annual base salary of $500,000 was established in connection with his commencement of employment in September 2019.

Dr. Marshall’s annual base salary of $375,000 was established in connection with his commencement of employment in August 2020.

Dr. Luo’s annual base salary was $200,000 prior to her conversion to full-time employment in July 2019, at which time her annual base salary increased to $400,000. In connection with our standard merit increase process, Dr. Luo’s annual base salary was increased to $410,000 in March 2020.

In February 2021, our board of directors approved our NEOs’ annual base salaries for 2021 as follows: Mr. McKenna, $575,000; Dr. Marshall, $425,000; and Dr. Luo, $456,000.

Bonus Compensation

From time to time, our board of directors or compensation committee may approve bonuses for our NEOs based on individual performance, company performance or as otherwise determined appropriate.

Each NEO has an established target annual bonus amount. The 2020 target annual bonus amount for each NEO, expressed as a percentage of annual base salary, was 50% for Mr. McKenna, 40% for Dr. Marshall (pro-rated for 2020) and 40% for Dr. Luo. In February 2021, our board of directors reviewed the company’s overall performance for 2020 and determined to pay our NEOs the annual bonuses reflected in the Summary Compensation Table above.

Mr. McKenna was paid a transaction bonus in the amount of $500,000 in August 2020 in consideration of the company’s execution of the Falk Agreement.

In February 2021, our board of directors approved our NEOs’ 2021 target bonuses as follows: Mr. McKenna, 55%; Dr. Marshall, 40%; and Dr. Luo, 40%.

Equity-Based Incentive Awards

Our equity-based incentive awards are designed to align our interests and the interests of our stockholders with those of our employees and consultants, including our named executive officers. The board of directors or the compensation committee is responsible for approving equity grants. We typically grant equity awards to new hires upon their commencing employment with us. Generally, our equity awards vest over four years, subject to the employee’s continued employment with us on each vesting date.

In February 2020, we granted Dr. Luo an option to purchase 100,000 shares of our common stock under our 2017 Equity Incentive Plan, as amended, or the 2017 Plan. Twenty-five percent of the options vest on the

 

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12-month anniversary of the vesting commencement date, or February 3, 2020, and 1/48th of the options vest monthly thereafter, subject to Dr. Luo’s continuous service through each vesting date. The options were granted at an exercise price of $0.29 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in her employment letter.

In May 2020, we granted Mr. McKenna an option to purchase 1,327,440 shares of our common stock under the 2017 Plan. The options were granted pursuant to Mr. McKenna’s employment letter in recognition of the closing of the company’s Series C preferred stock financing. Twenty-five percent of the options vest on the 12-month anniversary of the vesting commencement date, or March 27, 2020, and 1/48th of the options vest monthly thereafter, subject to Mr. McKenna’s continuous service through each vesting date. The options were granted at an exercise price of $0.17 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in his employment letter.

In August 2020, in connection with his commencement of employment, we granted Dr. Marshall an option to purchase 1,310,000 shares of our common stock under the 2017 Plan. Twenty-five percent of the options vest on the 12-month anniversary of his employment commencement date, or August 3, 2020, and 1/48th of the options vest monthly thereafter, subject to Dr. Marshall’s continuous service through each vesting date. The options were granted at an exercise price of $0.31 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in his employment letter.

Also in August 2020, we granted Mr. McKenna an option to purchase 200,000 shares of our common stock under the 2017 Plan. The options were granted in recognition of the completion of the company’s Series C preferred stock financing. Twenty-five percent of the options vest on the 12- month anniversary of the vesting commencement date, or June 30, 2020, and 1/48th of the options vest monthly thereafter, subject to Mr. McKenna’s continuous service through each vesting date. The options were granted at an exercise price of $0.31 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in his employment letter.

Also in August 2020, we granted Dr. Luo an option to purchase 75,000 shares of our common stock under the 2017 Plan. The options were granted in recognition of the company’s execution of the Falk Agreement. The options vest on August 12, 2021, subject to Dr. Luo’s continuous service through such vesting date. The options were granted at an exercise price of $0.31 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in her employment letter.

In December 2020, we granted each of Mr. McKenna, Dr. Marshall and Dr. Luo options to purchase 5,317,252, 1,230,407 and 1,865,407 shares of our common stock, respectively, under the 2017 Plan. The options were granted in recognition of the closing of the initial tranche of the company’s Series D preferred stock financing. Twenty-five percent of the options vest on the 12-month anniversary of the vesting commencement date, or November 5, 2020, and 1/48th of the options vest monthly thereafter, subject to continuous service through each vesting date. The options were granted at an exercise price of $0.37 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in their respective employment letters.

In February 2021, we granted each of Mr. McKenna, Dr. Marshall and Dr. Luo options to purchase 5,663,076, 1,359,138 and 1,359,138 shares of our common stock, respectively, under the 2017 Plan. The options were granted in recognition of the closing of the second tranche of the company’s Series D preferred stock financing. Twenty-five percent of the options vest on the 12-month anniversary of the vesting commencement

 

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date, or February 4, 2021, and 1/48th of the options vest monthly thereafter, subject to continuous service through each vesting date. The options were granted at an exercise price of $0.67 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options are also eligible for accelerated vesting on the terms provided in their respective employment letters.

Employment Letter Agreements with our NEOs

Employment Letter Agreement with Mr. McKenna

We have entered into an employment letter agreement with Mr. McKenna, which governs the terms of his employment with us as our President and Chief Executive Officer. Pursuant to his letter agreement, Mr. McKenna is entitled to an annual base salary of $575,000 and is eligible to receive an annual performance bonus with a target amount of 55% of his base salary. Mr. McKenna’s employment is at-will.

Regardless of the manner in which his service terminates, Mr. McKenna is entitled to receive amounts previously earned during his term of service, including unpaid salary and bonus and cash out of unused vacation or paid time off. In addition, Mr. McKenna is entitled to certain severance benefits under his employment letter agreement in the event of his termination under certain circumstances, subject to his execution of a release of claims and compliance with post-termination obligations.

Upon a termination without cause or resignation for good reason (as such terms are defined below), Mr. McKenna is entitled to: (i) continuation of his base salary for 12 months (such applicable period, the severance period), (ii) his target bonus, payable in lump sum, (iii) payment of the COBRA premiums for him and his eligible dependents until the end of the severance period, and (iv) accelerated vesting of any unvested time-based vesting equity awards. In the event of Mr. McKenna’s termination without cause or resignation for good reason within 24 months following a change in control (as such term is defined in our 2021 Plan), the severance period will be increased to 18 months.

Pursuant to his employment letter, Mr. McKenna is also eligible for a transaction bonus in the amount of $1,000,000 payable to Mr. McKenna upon the completion of this offering.

For purposes of Mr. McKenna’s employment letter agreement:

 

   

“cause” generally means his (i) conviction of a felony, plea of guilty or no contest to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to us or our prospects, including, but not limited to (a) dishonesty or a breach of fiduciary duty to us or our stockholders, or (b) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of our board of directors determined in good faith, any material duty or responsibility assigned to him, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by our board of directors, setting forth in reasonable detail the nature of such failure of performance; or (iv) the material breach of any of the provisions of his employment letter agreement or any other written agreement between him and us.

 

   

“good reason” generally means a resignation that occurs following the occurrence of any of the following without his written consent: (i) a material change in the geographic location at which he must perform his duties (with a relocation outside a 35-mile radius of his principal place of employment prior to such relocation considered material for this purpose); (ii) a material reduction of his base compensation, target bonus and/or benefits; (iii) any action or inaction that constitutes a material breach of his employment letter agreement by us; or (iv) a material reduction in his authority, duties or responsibilities (including a requirement to report to any person or entity other than our board of directors, or following a change in control, the board of directors (or similar governing body) of the ultimate parent company of the surviving entity in such change in control that has at least one class of publicly traded securities listed on a national stock exchange).

 

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Employment Letter Agreement with Dr. Marshall

We have entered into an employment letter agreement with Dr. Marshall, which governs the terms of his employment with us as our Chief Financial Officer. Pursuant to his letter agreement, Dr. Marshall is entitled to an annual base salary of $425,000 and is eligible to receive an annual performance bonus with a target amount of 40% of his base salary. Dr. Marshall’s employment is at-will.

Regardless of the manner in which his service terminates, Dr. Marshall is entitled to receive amounts previously earned during his term of service, including unpaid salary and bonus and cash out of unused vacation or paid time off. In addition, Dr. Marshall is entitled to certain severance benefits under his employment letter agreement in the event of his termination under certain circumstances, subject to his execution of a release of claims and compliance with post-termination obligations.

Upon a termination without cause or resignation for good reason, Dr. Marshall is entitled to: (i) continuation of his base salary for 12 months (such applicable period, the severance period), (ii) his target bonus, payable in lump sum, (iii) payment of the COBRA premiums for him and his eligible dependents until the end of the severance period, and (iv) accelerated vesting of any unvested time-based vesting equity awards.

Pursuant to his employment letter, Dr. Marshall is also eligible for a transaction bonus in the amount of $200,000 payable to Dr. Marshall upon the completion of this offering.

For purposes of Dr. Marshall’s employment letter agreement, the terms cause and good reason generally have the same meanings as given to such terms in Mr. McKenna’s employment agreement described above.

Employment Letter Agreement with Dr. Luo

We have entered into an employment letter agreement with Dr. Luo, which governs the terms of her employment with us as our Chief Medical Officer. Pursuant to her letter agreement, Dr. Luo is entitled to an annual base salary of $456,000 and is eligible to receive an annual performance bonus with a target amount of 40% of her base salary. Dr. Luo’s employment is at-will.

Regardless of the manner in which her service terminates, Dr. Luo is entitled to receive amounts previously earned during her term of service, including unpaid salary and bonus and cash out of unused vacation or paid time off. In addition, Dr. Luo is entitled to certain severance benefits under her employment letter agreement in the event of her termination under certain circumstances, subject to her execution of a release of claims and compliance with post-termination obligations.

Upon a termination without cause or resignation for good reason, Dr. Luo is entitled to: (i) continuation of her base salary for 12 months (such applicable period, the severance period), (ii) her target bonus, payable in lump sum, (iii) payment of the COBRA premiums for her and her eligible dependents until the end of the severance period, and (iv) accelerated vesting of any unvested time-based vesting equity awards.

For purposes of Dr. Luo’s employment letter agreement, the terms cause and good reason generally have the same meanings as given to such terms in Mr. McKenna’s employment agreement described above.

 

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Outstanding Equity Awards at Fiscal Year-End

The following table sets forth information with respect to outstanding equity awards for each of our NEOs as of December 31, 2020.

 

    Option Awards(1)     Stock Awards  
    Grant Date     Vesting
Commencement
Date
    Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number of
Shares or
Units of
Stock That
Have Not
Vested
(#)(2)
    Market
Value of
Shares or
Units of
Stock
That Have
Not Vested
($)(3)
 

Mark C. McKenna

    12/18/2020       11/5/2020       —         5,317,252     $ 0.37       12/17/2030       —         —    
    8/12/2020       6/30/2020       —         200,000     $ 0.31       8/11/2030       —         —    
    5/5/2020       3/27/2020       —         1,327,440     $ 0.17       5/4/2030       —         —    
    11/7/2019       9/9/2019       1,168,855       2,571,481     $ 0.29       11/6/2029       —         —    

Keith W. Marshall

    12/18/2020       11/5/2020       —         1,230,407     $ 0.37       12/17/2030       —         —    
    8/12/2020       8/3/2020       —         1,310,000     $ 0.31       8/11/2030       —         —    

Allison Luo

    12/18/2020       11/5/2020       —         1,865,407     $ 0.37       12/17/2030       —         —    
    8/12/2020       8/12/2020       —         75,000     $ 0.31       8/11/2030       —         —    
    2/3/2020       2/3/2020       —         100,000     $ 0.29       2/2/2030       —         —    
    10/1/2019       7/15/2019       —         —         —         —         161,458     $ 59,740  
    8/2/2018       7/1/2018       —         —         —         —         98,958     $ 36,614  

 

(1)

With the exception of the award granted to Dr. Luo on August 12, 2020, stock option awards generally vest as to 25% of such grant on the one year anniversary of the vesting commencement date and monthly thereafter in equal installments until fully vested at the fourth anniversary of the vesting commencement date, subject to the recipient’s continued service through each vesting date, and subject to accelerated vesting in certain circumstances as described above under “Employment Letter Agreements with our NEOs.” Dr. Luo’s August 12, 2020 award vests as to 100% of such grant on the one year anniversary of the vesting commencement date, subject to her continuous service through such vesting date.

(2)

Represents restricted shares issued upon early exercise of stock options originally granted to Dr. Luo on October 1, 2019 at an exercise price of $0.29 per share and on August 2, 2018 at an exercise price of $0.05 per share, which options were subject to the standard vesting schedule described in footnote (1) above. The remaining restricted shares will vest in equal monthly installments until fully vested on July 15, 2023 and on July 1, 2022, respectively, subject to accelerated vesting in certain circumstances as described above under “Employment Letter Agreements with our NEOs.”

(3)

Represents the fair market value per share of our common stock as of December 31, 2020 of $0.37 per share, which our board of directors determined was the fair market value per share of our common stock on such date.

Other Elements of Compensation

Perquisites, Health, Welfare and Retirement Benefits

Our named executive officers are eligible to participate in our employee benefit plans, including our medical, dental, vision, group life, disability and accidental death and dismemberment insurance plans, in each case on the generally on same basis as all of our other employees. We offer a 401(k) plan to our employees, including our named executive officers, as discussed in the section below entitled “401(k) Plan.”

We generally do not provide perquisites or personal benefits to our named executive officers, with the exception of cell phone allowances upon company approval on the same terms as such allowances are provided to other employees. We provided Mr. McKenna with relocation assistance in connection with his commencement

 

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of employment, and relocation benefits may be provided in the future to new executives on a case-by-case basis. Our board of directors may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in our best interests.

401(k) Plan

We maintain a defined contribution employee retirement plan, or 401(k) plan, for our employees. Our named executive officers are eligible to participate in the 401(k) plan on the same basis as our other employees. The 401(k) plan is intended to be a tax-qualified plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan provides that each participant may make pre-tax deferrals from his or her compensation up to the statutory limit, which is $19,500 for calendar year 2021, and other testing limits. Participants who are age 50 or older can also make “catch-up” contributions, which in calendar year 2021 may be up to an additional $6,500 above the statutory limit. We currently match employee deferrals under the 401(k) plan at 100% of deferrals up to the first 3% of eligible compensation and 50% of deferrals up to the next 2% of eligible compensation. Participant contributions are held and invested, pursuant to the participant’s instructions, by the 401(k) plan’s trustee.

Nonqualified Deferred Compensation

We do not maintain nonqualified defined contribution plans or other nonqualified deferred compensation plans. Our board of directors may elect to provide our officers and other employees with non-qualified defined contribution or other nonqualified deferred compensation benefits in the future if it determines that doing so is in our best interests.

Termination or Change in Control Benefits

Our named executive officers may become entitled to certain benefits or enhanced benefits in connection with a change in control of our company. Each NEO’s employment letter agreement entitles him or her to certain benefits, including accelerated vesting of equity awards, upon a qualifying termination of employment and/or a qualifying termination in connection with a change in control of our company. For additional discussion, please see the section titled “Employment Letter Agreements with our NEOs.”

Incentive Award Plans

2021 Incentive Award Plan

Prior to this offering, we intend to adopt and ask our stockholders to approve the 2021 Plan, which would become effective in connection with this offering. Under the 2021 Plan, we may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which we compete. The material terms of the 2021 Plan, as it is currently contemplated, are summarized below. Our board of directors is still in the process of developing, approving and implementing the 2021 Plan and, accordingly, this summary is subject to change.

Eligibility and Administration

Our employees, consultants and directors, and employees and consultants of our subsidiaries, will be eligible to receive awards under the 2021 Plan. Following our initial public offering, the 2021 Plan will generally be administered by our board of directors with respect to awards to non-employee directors and by our compensation committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directors and/or officers (referred to collectively as the plan administrator below), subject to certain limitations that may be imposed under the 2021 Plan, Section 16 of the Exchange Act and/or stock exchange rules, as applicable. The plan administrator will have the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2021 Plan, subject to its express terms and conditions. The plan administrator will also set the terms and conditions of all awards under the 2021 Plan, including any vesting and vesting acceleration conditions.

 

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Limitation on Awards and Shares Available

The number of shares initially available for issuance under awards granted pursuant to the 2021 Plan will be the sum of (1)            shares of our common stock, plus (2) any shares subject to outstanding awards under the 2017 Plan as of the effective date of the 2021 Plan that become available for issuance under the 2021 Plan thereafter in accordance with its terms. The number of shares initially available for issuance will be increased on January 1 of each calendar year beginning in 2022 and ending in 2031, by an amount equal to the lesser of (a) 5% of the shares of common stock outstanding on the final day of the immediately preceding calendar year and (b) such smaller number of shares as determined by our board of directors. No more than             shares of common stock may be issued upon the exercise of incentive stock options under the 2021 Plan. Shares issued under the 2021 Plan may be authorized but unissued shares, shares purchased in the open market or treasury shares.

If an award under the 2021 Plan or the 2017 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased, cancelled without having been fully exercised or forfeited, any shares subject to such award will, as applicable, become or again be available for new grants under the 2021 Plan. Awards granted under the 2021 Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which we enter into a merger or similar corporate transaction will not reduce the shares available for grant under the 2021 Plan.

Awards

The 2021 Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs; restricted stock; dividend equivalents; restricted stock units, or RSUs; stock appreciation rights, or SARs; and other stock or cash-based awards. Certain awards under the 2021 Plan may constitute or provide for a deferral of compensation, subject to Section 409A of the Internal Revenue Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the 2021 Plan will be set forth in award agreements, which will detail the terms and conditions of the awards, including any applicable vesting and payment terms and post-termination exercise limitations. A brief description of each award type follows.

Stock options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. ISOs, by contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other requirements of the Internal Revenue Code are satisfied. The exercise price of a stock option will not be less than 100% of the fair market value of the underlying share on the date of grant (or 110% in the case of ISOs granted to certain significant stockholders), except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years (or five years in the case of ISOs granted to certain significant stockholders). Vesting conditions determined by the plan administrator may apply to stock options and may include continued service, performance and/or other conditions. ISOs generally may be granted only to our employees and employees of our parent or subsidiary corporations, if any.

SARs. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR will not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction), and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs and may include continued service, performance and/or other conditions.

Restricted stock and RSUs. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met and may be accompanied by the right to receive the equivalent value of dividends paid on shares of our common stock prior to the delivery of the underlying shares.

 

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Delivery of the shares underlying RSUs may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Conditions applicable to restricted stock and RSUs may be based on continuing service, the attainment of performance goals and/or such other conditions as the plan administrator may determine.

Other stock or cash-based awards. Other stock or cash-based awards are awards of cash, fully vested shares of our common stock and other awards valued wholly or partially by referring to, or otherwise based on, shares of our common stock. Other stock or cash-based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards. The plan administrator will determine the terms and conditions of other stock or cash-based awards, which may include vesting conditions based on continued service, performance and/or other conditions.

Performance Awards

Performance awards include any of the foregoing awards that are granted subject to vesting and/or payment based on the attainment of specified performance goals or other criteria the plan administrator may determine, which may or may not be objectively determinable. Performance criteria upon which performance goals are established by the plan administrator may include: net earnings or losses (either before or after one or more of interest, taxes, depreciation, amortization and non-cash equity-based compensation expense); gross or net sales or revenue or sales or revenue growth; net income (either before or after taxes) or adjusted net income; profits (including, but not limited to, gross profits, net profits, profit growth, net operation profit or economic profit), profit return ratios or operating margin; budget or operating earnings (either before or after taxes or before or after allocation of corporate overhead and bonus); cash flow (including operating cash flow and free cash flow or cash flow return on capital); return on assets; return on capital or invested capital; cost of capital; return on stockholders’ equity; total stockholder return; return on sales; costs, reductions in costs and cost control measures; expenses; working capital; earnings or loss per share; adjusted earnings or loss per share; price per share or dividends per share (or appreciation in or maintenance of such price or dividends); regulatory achievements or compliance; implementation, completion or attainment of objectives relating to research, development, regulatory, commercial or strategic milestones or developments; market share; economic value or economic value added models; division, group or corporate financial goals; customer satisfaction/growth; customer service; employee satisfaction; recruitment and maintenance of personnel; human resources management; supervision of litigation and other legal matters; strategic partnerships and transactions; financial ratios (including those measuring liquidity, activity, profitability or leverage); debt levels or reductions; sales-related goals; financing and other capital raising transactions; cash on hand; acquisition activity; investment sourcing activity; and marketing initiatives, any of which may be measured in absolute terms or as compared to any incremental increase or decrease. Such performance goals also may be based solely by reference to our performance or the performance of a subsidiary, division, business segment or business unit, or based upon performance relative to performance of other companies or upon comparisons of any of the indicators of performance relative to performance of other companies.

Provisions of the 2021 Plan Relating to Director Compensation

The 2021 Plan provides that the plan administrator may establish compensation for non-employee directors from time to time subject to the 2021 Plan’s limitations. Prior to this offering, our stockholders will approve the initial terms of our non-employee director compensation program, which is described below under the heading “Director Compensation.” Our board of directors or its authorized committee may modify the non-employee director compensation program from time to time in the exercise of its business judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to time, provided that the sum of any cash compensation or other compensation and the grant date fair value (as determined in accordance with ASC 718, or any successor thereto) of any equity awards granted as compensation for services as a non-employee director during any calendar year, commencing with the first calendar year following the year in

 

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which this offering occurs, may not exceed $1,000,000 (which limit will not apply to the compensation for any non-employee director who serves in any capacity in addition to that of a non-employee director for which he or she receives additional compensation or any compensation paid to any non-employee director during the calendar year in which this offering occurs). The plan administrator may make exceptions to this limit for individual non-employee directors in extraordinary circumstances, as the plan administrator may determine in its discretion, provided that the non-employee director receiving such additional compensation may not participate in the decision to award such compensation or in other contemporaneous compensation decisions involving non-employee directors.

Certain Transactions

In connection with certain transactions and events affecting our common stock, including a change in control, or change in any applicable laws or accounting principles, the plan administrator has broad discretion to take action under the 2021 Plan to prevent the dilution or enlargement of intended benefits, facilitate such transaction or event, or give effect to such change in applicable laws or accounting principles. This includes canceling awards in exchange for either an amount in cash or other property with a value equal to the amount that would have been obtained upon exercise or settlement of the vested portion of such award or realization of the participant’s rights under the vested portion of such award, accelerating the vesting of awards, providing for the assumption or substitution of awards by a successor entity, adjusting the number and type of shares available, replacing awards with other rights or property or terminating awards under the 2021 Plan. In the event of a change in control where the acquirer does not assume awards granted under the 2021 Plan, awards issued under the 2021 Plan shall be subject to accelerated vesting such that 100% of the awards will become vested and exercisable or payable, as applicable. In addition, in the event of certain non-reciprocal transactions with our stockholders (an equity restructuring) the plan administrator will make equitable adjustments to the 2021 Plan and outstanding awards as it deems appropriate to reflect the equity restructuring.

For purposes of the 2021 Plan, a “change in control” means and includes each of the following:

 

   

a transaction or series of transactions whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Exchange Act) (other than our company or our subsidiaries or any employee benefit plan maintained by us or any of our subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, us) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of our securities possessing more than 50% of the total combined voting power of our securities outstanding immediately after such acquisition; or

 

   

during any period of two consecutive years, individuals who, at the beginning of such period, constitute our board of directors together with any new directors (other than a director designated by a person who shall have entered into an agreement with us to effect a change in control transaction) whose election by our board of directors or nomination for election by our stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the two-year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

 

   

the consummation by us (whether directly or indirectly) of (x) a merger, consolidation, reorganization, or business combination or (y) a sale or other disposition of all or substantially all of our assets in any single transaction or series of related transactions or (z) the acquisition of assets or stock of another entity, in each case other than a transaction:

 

   

which results in our voting securities outstanding immediately before the transaction continuing to represent either by remaining outstanding or by being converted into voting securities of the company or the person that, as a result of the transaction, controls, directly or indirectly, the company or owns, directly or indirectly, all or substantially all of our assets or otherwise succeeds to our business, directly or indirectly, at least a majority of the combined voting power of the successor entity’s outstanding voting securities immediately after the transaction, and

 

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after which no person or group beneficially owns voting securities representing 50% or more of the combined voting power of the successor entity; provided, however, that no person or group shall be treated as beneficially owning 50% or more of the combined voting power of the successor entity solely as a result of the voting power held in our company prior to the consummation of the transaction.

Foreign Participants, Claw-back Provisions, Transferability and Participant Payments

With respect to foreign participants, the plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above. All awards will be subject to the provisions of any claw-back policy implemented by our company to the extent set forth in such claw-back policy or in the applicable award agreement. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2021 Plan are generally non-transferable prior to vesting and are exercisable only by the participant. With regard to tax withholding obligations arising in connection with awards under the 2021 Plan and exercise price obligations arising in connection with the exercise of stock options under the 2021 Plan, the plan administrator may, in its discretion, accept cash, wire transfer, or check, shares of our common stock that meet specified conditions (a market sell order) or such other consideration as it deems suitable or any combination of the foregoing.

Plan Amendment and Termination

Our board of directors may amend or terminate the 2021 Plan at any time; however, except in connection with certain changes in our capital structure, stockholder approval will be required for any amendment that increases the number of shares available under the 2021 Plan. The plan administrator will have the authority, without the approval of our stockholders, to amend any outstanding stock option or SAR to reduce its exercise or base price per share. No award may be granted pursuant to the 2021 Plan after the tenth anniversary of the date on which our board of directors adopts the 2021 Plan.

Securities Laws

The 2021 Plan is intended to conform to all provisions of the Securities Act, the Exchange Act and any and all regulations and rules promulgated by the SEC thereunder, including, without limitation, Exchange Act Rule 16b-3. The 2021 Plan will be administered, and awards will be granted and may be exercised, only in such a manner as to conform to such laws, rules and regulations.

Federal Income Tax Consequences

The material federal income tax consequences of the 2021 Plan under current federal income tax law are summarized in the following discussion, which deals with the general U.S. federal income tax principles applicable to the 2021 Plan. The following discussion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed due to the fact that they may vary depending on individual circumstances and from locality to locality.

Stock options and SARs. A 2021 Plan participant generally will not recognize taxable income and we generally will not be entitled to a tax deduction upon the grant of a stock option or SAR. The tax consequences of exercising a stock option and the subsequent disposition of the shares received upon exercise will depend upon whether the option qualifies as an ISO or an NSO. Upon exercising an NSO when the fair market value of our stock is higher than the exercise price of the option, a 2021 Plan participant generally will recognize taxable income at ordinary income tax rates equal to the excess of the fair market value of the stock on the date of exercise over the purchase price, and we (or our subsidiaries, if any) generally will be entitled to a corresponding tax deduction for compensation expense, in the amount equal to the amount by which the fair market value of the

 

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shares purchased exceeds the purchase price for the shares. Upon a subsequent sale or other disposition of the option shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

Upon exercising an ISO, a 2021 Plan participant generally will not recognize taxable income, and we will not be entitled to a tax deduction for compensation expense. However, upon exercise, the amount by which the fair market value of the shares purchased exceeds the purchase price will be an item of adjustment for alternative minimum tax purposes. The participant will recognize taxable income upon a sale or other taxable disposition of the option shares. For federal income tax purposes, dispositions are divided into two categories: qualifying and disqualifying. A qualifying disposition generally occurs if the sale or other disposition is made more than two years after the date the option was granted and more than one year after the date the shares are transferred upon exercise. If the sale or disposition occurs before these two periods are satisfied, then a disqualifying disposition generally will result.

Upon a qualifying disposition of ISO shares, the participant will recognize long-term capital gain in an amount equal to the excess of the amount realized upon the sale or other disposition of the shares over their purchase price. If there is a disqualifying disposition of the shares, then the excess of the fair market value of the shares on the exercise date (or, if less, the price at which the shares are sold) over their purchase price will be taxable as ordinary income to the participant. If there is a disqualifying disposition in the same year of exercise, it eliminates the item of adjustment for alternative minimum tax purposes. Any additional gain or loss recognized upon the disposition will be recognized as a capital gain or loss by the participant.

We will not be entitled to any tax deduction if the participant makes a qualifying disposition of ISO shares. If the participant makes a disqualifying disposition of the shares, we should be entitled to a tax deduction for compensation expense in the amount of the ordinary income recognized by the participant.

Upon exercising or settling a SAR, a 2021 Plan participant will recognize taxable income at ordinary income tax rates, and we should be entitled to a corresponding tax deduction for compensation expense, in the amount paid or value of the shares issued upon exercise or settlement. Payments in shares will be valued at the fair market value of the shares at the time of the payment, and upon the subsequent disposition of the shares the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

Restricted stock and RSUs. A 2021 Plan participant generally will not recognize taxable income at ordinary income tax rates and we generally will not be entitled to a tax deduction upon the grant of restricted stock or RSUs. Upon the termination of restrictions on restricted stock or the payment of RSUs, the participant will recognize taxable income at ordinary income tax rates, and we should be entitled to a corresponding tax deduction for compensation expense, in the amount paid to the participant or the amount by which the then fair market value of the shares received by the participant exceeds the amount, if any, paid for them. Upon the subsequent disposition of any shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares. However, a 2021 Plan participant granted restricted stock that is subject to forfeiture or repurchase through a vesting schedule such that it is subject to a risk of forfeiture (as defined in Section 83 of the Internal Revenue Code) may make an election under Section 83(b) of the Internal Revenue Code to recognize taxable income at ordinary income tax rates, at the time of the grant, in an amount equal to the fair market value of the shares of common stock on the date of grant, less the amount paid, if any, for the shares. We will be entitled to a corresponding tax deduction for compensation, in the amount recognized as taxable income by the participant. If a timely Section 83(b) election is made, the participant will not recognize any additional ordinary income on the termination of restrictions on restricted stock, and we will not be entitled to any additional tax deduction.

Other stock or cash-based awards. A 2021 Plan participant will not recognize taxable income and we will not be entitled to a tax deduction upon the grant of other stock or cash-based awards until cash or shares are paid

 

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or distributed to the participant. At that time, any cash payments or the fair market value of shares that the participant receives will be taxable to the participant at ordinary income tax rates and we should be entitled to a corresponding tax deduction for compensation expense. Payments in shares will be valued at the fair market value of the shares at the time of the payment. Upon the subsequent disposition of the shares, the participant will recognize a short-term or long-term capital gain or loss in the amount of the difference between the sales price of the shares and the participant’s tax basis in the shares.

2017 Equity Incentive Plan

Our board of directors adopted the 2017 Plan in September 2017 and our stockholders approved our 2017 Plan in September 2017. Our 2017 Plan was most recently amended by our board of directors and our stockholders in January 2021.

Stock Awards

Our 2017 Plan provides for the grant of ISOs (within the meaning of Section 422 of the Internal Revenue Code) to employees, including employees of any parent or subsidiary, and for the grant of NSOs, restricted stock awards, RSUs, and other stock-based awards to employees, directors and consultants.

Authorized Shares

Subject to certain adjustments, awards may be made under the 2017 Plan covering up to 55,243,552 shares of common stock. Shares subject to stock awards granted under our 2017 Plan that expire, lapse or are terminated, surrendered, cancelled without having been fully exercised or that are forfeited or repurchased, in any case in a manner that results in any shares of common stock covered by the award not being issued or being so reacquired, then those shares will again become available for issuance under the 2017 Plan. This includes shares used to pay the exercise price of a stock award or to satisfy the tax withholding obligations related to a stock award.

As of December 31, 2020, 29,302,518 shares of our common stock were subject to outstanding awards under the 2017 Plan and 3,737,843 shares of our common stock remained available for future issuance under the 2017 Plan. Following the adoption of the 2021 Plan, no further awards will be granted under the 2017 Plan.

Effective January 29, 2021, the share reserve under our 2017 Plan was increased to 55,243,552 shares pursuant to an amendment approved by our board of directors and our stockholders. As of February 15, 2021, 49,960,296 shares of our common stock were subject to outstanding awards under the 2017 Plan and 1,921,188 shares of our common stock remained available for issuance under the 2017 Plan.

Plan Administration

Our board of directors, or a duly authorized committee of our board of directors to which the board delegates its administrative authority, administers our 2017 Plan and is referred to as the plan administrator herein. Under our 2017 Plan, the plan administrator has the authority to, among other things, select the persons to whom awards are to be made, to determine the type or types of awards to be granted to each person, determine the number of awards to grant, determine the number of shares to be subject to awards, and the terms and conditions of awards, and make all other determinations and decisions and to take all other actions necessary or advisable for the administration of the 2017 Plan. The plan administrator is also authorized to establish, adopt, amend or revise rules relating to administration of the 2017 Plan, subject to certain restrictions.

Stock Options

ISOs and NSOs are granted under stock option agreements adopted by the plan administrator. The plan administrator determines the exercise price for stock options, within the terms and conditions of the 2017 Plan,

 

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provided that the exercise price of a stock option generally cannot be less than 100% of the fair market value of our common stock on the date of grant (or 110% of the fair market value for certain major stockholders). Options granted under the 2017 Plan vest at the rate specified in the stock option agreement, as determined by the plan administrator.

The plan administrator determines the term of stock options granted under the 2017 Plan, up to a maximum of ten years (or five years, for certain major stockholders).

Acceptable consideration for the purchase of common stock issued upon the exercise of a stock option will be determined by the plan administrator and may include (1) cash or check, (2) an irrevocable and unconditional undertaking by a broker or a copy of an irrevocable or unconditional instruction to a broker, (3) shares of our common stock owned by the optionholder, (4) shares of our common stock then issuable upon exercise of the option, (5) a promissory note, (6) property of any other kind, or (7) any combination of the above permitted forms of payment.

Unless the plan administrator provides otherwise, options generally are not transferable except by will or the laws of descent and distribution.

Tax Limitations on ISOs. The aggregate fair market value, determined at the time of grant, of our common stock with respect to ISOs that are exercisable for the first time by an optionholder during any calendar year under all of our stock plans may not exceed $100,000. Options or portions thereof that exceed such limit will generally be treated as NSOs. No ISO may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (1) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant, and (2) the term of the ISO does not exceed five years from the date of grant.

Restricted Stock Unit Awards

RSUs are granted under RSU award agreements adopted by the plan administrator. An RSU may be settled by cash or other property as set forth in the RSU award agreement. Additionally, dividend equivalents may be paid currently or credited to an account and may be settled in cash and/or shares of common stock.

Corporate Transactions

The plan administrator has broad discretion to equitably adjust the provisions of the 2017 Plan and the terms and conditions of existing and future awards, including with respect to aggregate number and type of shares subject to the 2017 Plan and awards granted pursuant to the 2017 Plan, to prevent the dilution or enlargement of intended benefits and/or facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. The plan administrator may also provide for the acceleration, cash-out, termination, assumption, substitution or conversion of awards in the event of a change in control or certain other unusual or nonrecurring events or transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders (an equity restructuring) the plan administrator will make equitable adjustments to the 2017 Plan and outstanding awards as it deems appropriate to reflect the equity restructuring.

Change in Control. In the event of a change in control where the acquirer does not assume awards granted under the 2017 Plan, with respect to awards issued under the 2017 Plan held by persons who have not experienced a termination of service, the plan administrator may provide for accelerated vesting such that 100% of the awards will become vested and exercisable or payable, as applicable, immediately prior to the change in control. Under the 2017 Plan, a change of control is generally defined as: (i) a merger or consolidation of our company with or into any other corporation or other entity or person; (ii) a sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of our company’s assets; or (iii) any

 

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other transaction, including the sale by us of new shares of our capital stock or a transfer of existing shares of our capital stock, the result of which is that a third party that is not an affiliate of us or our stockholders (or a group of third parties not affiliated with us or our stockholders) immediately prior to such transaction acquires or holds capital stock representing a majority of our outstanding voting power immediately following such transaction; provided that the following events shall not constitute a “change in control” under the 2017 Plan: (a) a transaction (other than a sale of all or substantially all of our assets) in which the holders of our voting securities immediately prior to the merger or consolidation hold, directly or indirectly, at least a majority of the voting securities in the successor corporation or its parent immediately after the merger or consolidation; (b) a sale, lease, exchange or other transaction in one transaction or a series of related transactions of all or substantially all of our assets to an affiliate of ours; (c) an initial public offering of any of our securities; (d) a reincorporation solely to change our jurisdiction; or (e) a transaction undertaken for the primary purpose of creating a holding company that will be owned in substantially the same proportion by the persons who held our securities immediately before such transaction.

Plan Amendment or Termination

Our board of directors has the authority to amend, suspend or terminate the 2017 Plan, provided that such action does not materially and adversely affect any award outstanding without the affected participant’s consent. Stockholder approval of any amendment to the 2017 Plan will be obtained to the extent necessary and desirable to comply with any applicable law. Unless terminated sooner, the 2017 Plan will automatically terminate in September 2027.

Securities Laws and Federal Income Tax Consequences    

The 2017 Plan is designed to comply with applicable securities laws in the same manner as described above in the description of the 2021 Plan under the heading “—2021 Incentive Award Plan—Securities Laws.” The general U.S. federal income tax consequences of awards under the 2017 Plan are the same as those described above with respect to similar awards in the description of the 2021 Plan under the heading “—2021 Incentive Award Plan—Federal Income Tax Consequences.”

2021 Employee Stock Purchase Plan

Effective the day prior to the first public trading date of our common stock, we intend to adopt and ask our stockholders to approve the 2021 Employee Stock Purchase Plan, or the 2021 ESPP, the material terms of which are summarized below.

The 2021 ESPP is comprised of two distinct components in order to provide increased flexibility to grant options to purchase shares under the 2021 ESPP to U.S. and to non-U.S. employees. Specifically, the 2021 ESPP authorizes (1) the grant of options to U.S. employees that are intended to qualify for favorable U.S. federal tax treatment under Section 423 of the Code, (the “Section 423 Component”), and (2) the grant of options that are not intended to be tax-qualified under Section 423 of the Code to facilitate participation for employees located outside of the U.S. who do not benefit from favorable U.S. federal tax treatment and to provide flexibility to comply with non-U.S. law and other considerations (the “Non-Section 423 Component”). Where permitted under local law and custom, we expect that the Non-Section 423 Component will generally be operated and administered on terms and conditions similar to the Section 423 Component.

Shares Available for Awards; Administration. A total of              shares of our common stock will initially be reserved for issuance under the 2021 ESPP. In addition, the number of shares available for issuance under the 2021 ESPP will be annually increased on January 1 of each calendar year beginning in 2022 and ending in and including 2031, by an amount equal to the lesser of (A) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (B) such smaller number of shares as is determined by our board of directors, provided that no more than              shares of our common stock may be issued under the Section 423 Component. Our board

 

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of directors or a committee of our board of directors will administer and will have authority to interpret the terms of the 2021 ESPP and determine eligibility of participants. We expect that the compensation committee will be the initial administrator of the 2021 ESPP.

Eligibility. We expect that all of our employees will be eligible to participate in the 2021 ESPP. However, an employee may not be granted rights to purchase stock under our 2021 ESPP if the employee, immediately after the grant, would own (directly or through attribution) stock possessing 5% or more of the total combined voting power or value of all classes of our stock.

Grant of Rights. Stock will be offered under the 2021 ESPP during offering periods. The length of the offering periods under the 2021 ESPP will be determined by the plan administrator and may be up to twenty-seven months long. Employee payroll deductions will be used to purchase shares on each purchase date during an offering period. The purchase dates for each offering period will be the final trading day in the offering period. Offering periods under the 2021 ESPP will commence when determined by the plan administrator. The plan administrator may, in its discretion, modify the terms of future offering periods. In non-U.S. jurisdictions where participation in the 2021 ESPP through payroll deductions is prohibited, the plan administrator may provide that an eligible employee may elect to participate through contributions to the participant’s account under the 2021 ESPP in a form acceptable to the 2021 ESPP administrator in lieu of or in addition to payroll deductions.

The 2021 ESPP permits participants to purchase common stock through payroll deductions of up to a specified percentage of their eligible compensation. The plan administrator will establish a maximum number of shares that may be purchased by a participant during any offering period. In addition, no employee will be permitted to accrue the right to purchase stock under the Section 423 Component at a rate in excess of $25,000 worth of shares during any calendar year during which such a purchase right is outstanding (based on the fair market value per share of our common stock as of the first day of the offering period).

On the first trading day of each offering period, each participant will automatically be granted an option to purchase shares of our common stock. The option will expire at the end of the applicable offering period, and will be exercised at that time to the extent of the payroll deductions accumulated during the offering period. The purchase price of the shares, in the absence of a contrary designation, will be 85% of the lower of the fair market value of our common stock on the first trading day of the offering period or on the purchase date. Participants may voluntarily end their participation in the 2021 ESPP at any time during a specified period prior to the end of the applicable offering period, and will be paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon a participant’s termination of employment.

A participant may not transfer rights granted under the 2021 ESPP other than by will or the laws of descent and distribution, and are generally exercisable only by the participant.

Certain Transactions. In the event of certain non-reciprocal transactions or events affecting our common stock, the plan administrator will make equitable adjustments to the 2021 ESPP and outstanding rights. In the event of certain unusual or non-recurring events or transactions, including a change in control, the plan administrator may provide for (1) either the replacement of outstanding rights with other rights or property or termination of outstanding rights in exchange for cash, (2) the assumption or substitution of outstanding rights by the successor or survivor corporation or parent or subsidiary thereof, if any, (3) the adjustment in the number and type of shares of stock subject to outstanding rights, (4) the use of participants’ accumulated payroll deductions to purchase stock on a new purchase date prior to the next scheduled purchase date and termination of any rights under ongoing offering periods or (5) the termination of all outstanding rights.

Plan Amendment. The plan administrator may amend, suspend or terminate the 2021 ESPP at any time. However, stockholder approval will be obtained for any amendment that increases the aggregate number or changes the type of shares that may be sold pursuant to rights under the 2021 ESPP or changes the corporations or classes of corporations whose employees are eligible to participate in the 2021 ESPP.

 

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Securities Laws. The 2021 ESPP has been designed to comply with various securities laws in the same manner as described above in the description of the 2021 Plan.

Federal Income Taxes. The material U.S. federal income tax consequences of the 2021 ESPP under current U.S. federal income tax law are summarized in the following discussion, which deals with the general U.S. federal income tax principles applicable to the 2021 ESPP. The following discussion is based upon U.S. laws, regulations, rulings and decisions now in effect, all of which are subject to change. Foreign, state and local tax laws, and employment, estate and gift tax considerations are not discussed due to the fact that they may vary depending on individual circumstances and from locality to locality.

The 2021 ESPP, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Section 423 of the Internal Revenue Code. Under the applicable Internal Revenue Code provisions, no income will be taxable to a participant until the sale or other disposition of the shares purchased under the 2021 ESPP. This means that an eligible employee will not recognize taxable income on the date the employee is granted an option under the 2021 ESPP (i.e., the first day of the offering period). In addition, the employee will not recognize taxable income upon the purchase of shares. Upon such sale or disposition, the participant will generally be subject to tax in an amount that depends upon the length of time such shares are held by the participant prior to disposing of them. If the shares are sold or disposed of more than two years from the first day of the offering period during which the shares were purchased and more than one year from the date of purchase, or if the participant dies while holding the shares, the participant (or his or her estate) will recognize ordinary income measured as the lesser of: (1) the excess of the fair market value of the shares at the time of such sale or disposition over the purchase price; or (2) an amount equal to 15% of the fair market value of the shares as of the first day of the offering period. Any additional gain will be treated as long-term capital gain. If the shares are held for the holding periods described above but are sold for a price that is less than the purchase price, there is no ordinary income and the participating employee has a long-term capital loss for the difference between the sale price and the purchase price.

If the shares are sold or otherwise disposed of before the expiration of the holding periods described above, the participant will recognize ordinary income generally measured as the excess of the fair market value of the shares on the date the shares are purchased over the purchase price and we will be entitled to a tax deduction for compensation expense in the amount of ordinary income recognized by the employee. Any additional gain or loss on such sale or disposition will be long-term or short-term capital gain or loss, depending on how long the shares were held following the date they were purchased by the participant prior to disposing of them. If the shares are sold or otherwise disposed of before the expiration of the holding periods described above but are sold for a price that is less than the purchase price, the participant will recognize ordinary income equal to the excess of the fair market value of the shares on the date of purchase over the purchase price (and we will be entitled to a corresponding deduction), but the participant generally will be able to report a capital loss equal to the difference between the sales price of the shares and the fair market value of the shares on the date of purchase.

Director Compensation

From time to time, we have granted stock-based compensation to the non-employee members of our board of directors for their services as directors.

During 2020, we paid cash compensation to three of our non-employee members of our board of directors for their service as directors. Dr. Yamada receives an annual cash fee of $100,000, paid monthly, for his service as Chairman of our board of directors. Effective November 5, 2020, Dr. Sandborn commenced receiving an annual cash retainer of $35,000 for his services as a member of our board of directors. Mr. Papa received an annual cash retainer of $30,000 commencing with his commencement of service on our board of directors, in consideration of his board service and his service as chairman of our compensation committee, which retainer was increased to $35,000 annually effective November 5, 2020.

We have provided stock-based compensation to certain of our non-employee directors. Drs. Yamada and Sandborn and Mr. Papa are the only non-employee directors who received equity awards during 2020. Effective

 

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August 25, 2020, we granted Mr. Papa options to purchase 150,000 shares of our common stock under our 2017 Plan in connection with his commencement of service on our board of directors and as chairman of our compensation committee. Twenty-five percent of the options vest on the first anniversary of the date of grant and 1/48th of the options vest monthly thereafter, subject to the director’s continuous service through each vesting date. The stock options have a ten-year term. The stock options granted to Mr. Papa in August 2020 have an exercise price of $0.31 per share, and the stock options granted to our non-employee directors in December 2020 have an exercise price of $0.37 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the applicable date of grant.

In February 2021, we granted each of Dr. Yamada, Mr. Papa, Ms. Adams and Ms. Swain options to purchase 1,359,138, 226,523, 300,000 and 300,000 shares of our common stock, respectively, under the 2017 Plan. The options were granted to Dr. Yamada and Mr. Papa in recognition of the closing of the second tranche of the company’s Series D preferred stock financing. The options were granted to Ms. Adams and Ms. Swain in connection with their commencement of service on our board of directors. Twenty-five percent of the options vest on the 12-month anniversary of the vesting commencement date, or February 4, 2021, and 1/48th of the options vest monthly thereafter, subject to continuous service through each vesting date. The options were granted at an exercise price of $0.67 per share, which our board of directors determined was equal to the fair market value per share of our common stock on the date of grant. The options also vest on an accelerated basis in the event of a change in control.

In connection with his transition from Chief Executive Officer to non-executive employee Advisor in November 2019, we entered into an employment letter agreement with Mr. Glenn, pursuant to which he remained an employee through December 31, 2020. Pursuant to his letter agreement, Mr. Glenn received an annual base salary of $500,000 and, for 2020, is eligible to receive an annual bonus with a target amount equal to 50% of his eligible earnings for 2020. In addition, Mr. Glenn was entitled to certain severance benefits under his employment letter agreement in the event of his termination under certain circumstances prior to December 31, 2020, subject to his execution of a release of claims and compliance with post-termination obligations. Upon a termination without cause, resignation for good reason, or termination due to death or disability before December 31, 2020, Mr. Glenn would have been entitled to: (i) continuation of his monthly base salary until December 31, 2020 (such applicable period, the severance period), (ii) his target bonus for 2020, payable in lump sum, (iii) payment of the COBRA premiums for him until the earliest of (a) the end of the severance period, or (b) the date he became eligible for health insurance coverage in connection with his new employment, and (iv) accelerated vesting of the unvested portion of his option grant. Pursuant to his employment letter agreement, Mr. Glenn was not eligible for any severance benefits as a result of any termination of his employment for any reason on or after December 31, 2020. Pursuant to his employment letter, Mr. Glenn is also eligible for two transaction bonuses. The first transaction bonus in the amount of $250,000 was paid to Mr. Glenn in August 2020 in recognition of the execution of the Falk Agreement. The second transaction bonus in the amount of $500,000 will be payable to Mr. Glenn upon the completion of this offering. Mr. Glenn is not required to remain employed by us in order to receive the transaction bonus payable upon an initial public offering.

In addition, we have reimbursed, and will continue to reimburse, our non-employee directors for their actual out-of-pocket costs and expenses incurred in connection with attending board meetings. Mark C. McKenna, our President and Chief Executive Officer, is also a member of our board of directors, but does not receive any additional compensation for his service as a director.

 

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The following table summarizes compensation received by our non-employee directors during the year ended December 31, 2020. Mr. McKenna is excluded from the following table because he served as our President and Chief Executive Officer during 2020. His compensation is included in the Summary Compensation Table above.

 

Name

   Fees Earned or
Paid in Cash
($)
     Option Awards
($)(1)
     All Other
Compensation

($)
     Total
($)
 

Grégory Behar(2)

     —          —          —          —    

Scott Glenn(3)

     —          —          980,167        980,167  

Joy Ghosh(4)

     —          —          —          —    

Martin Hendrix

     —          —          —          —    

James D. Laur

     —          —          —          —    

Shlomo Melmed, M.D.(5)

     —          —          —          —    

Joseph C. Papa

     11,288        91,382        —          102,670  

Gerald T. Proehl(6)

     —          —          —          —    

William Sandborn, M.D.(7)

     5,370        46,000        —          51,370  

Mark Stenhouse(8)

     —          —          —          —    

Adam Stone(4)

     —          —          —          —    

Douglas F. Wall(9)

     —          —          —          —    

Shierley Widjaja(10)

     —          —          —          —    

Tadataka (Tachi) Yamada, M.D.

     99,996        262,294        —          362,290  

 

(1)

Represents the grant date fair value of stock options to purchase shares of common stock of Prometheus Biosciences, Inc. computed in accordance with FASB ASC 718. See Note 8 to the consolidated financial statements for the fiscal year ended December 31, 2020 included with this prospectus for a description of the assumptions used in valuing our stock options.

(2)

Mr. Behar resigned from our board of directors effective October 30, 2020.

(3)

Mr. Glenn resigned from our board of directors effective October 26, 2020, but continued to serve as an employee and advisor to the company through December 31, 2020. The amounts in the “All Other Compensation” column for Mr. Glenn represent compensation paid to him during 2020 for his role as an non-executive employee advisor to the company as follows: annual base salary ($479,327); 2020 annual bonus ($250,000); transaction bonus paid in recognition of the execution of the Falk Agreement ($250,000); and life insurance benefits provided at company expense ($840).

(4)

Mr. Ghosh and Mr. Stone resigned from our board of directors effective February 4, 2021.

(5)

Dr. Melmed resigned from our board of directors effective September 29, 2020.

(6)

Mr. Proehl resigned from our board of directors effective March 27, 2020, but continues to serve as an advisor to the company.

(7)

Dr. Sandborn is married to Allison Luo, our Chief Medical Officer. Dr. Luo’s compensation is described above under “Executive Compensation.” Dr. Sandborn resigned from our board of directors effective February 4, 2021, but continues to serve as an advisor to the company and the chairman of our scientific advisory board.

(8)

Mr. Stenhouse resigned from our board of directors effective October 30, 2020.

(9)

Mr. Wall resigned from our board of directors effective September 29, 2020, but continues to serve as an advisor to the company.

(10)

Ms. Widjaja resigned from our board of directors effective February 17, 2021.

 

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The aggregate number of shares subject to stock options outstanding at December 31, 2020 for the individuals who served as non-employee directors during 2020 was as follows:

 

Name

   Number of Securities
Underlying Options
Outstanding at
December 31, 2020
 

Grégory Behar

     —    

Scott Glenn

     1,000,000  

Joy Ghosh

     —    

Martin Hendrix

     —    

James D. Laur

     —    

Shlomo Melmed, M.D.

     —    

Joseph C. Papa

     423,401  

Gerald T. Proehl

     400,000  

William Sandborn, M.D.

     272,917  

Mark Stenhouse

     400,000  

Adam Stone

     —    

Douglas F. Wall

     —    

Shierley Widjaja

     —    

Tadataka (Tachi) Yamada, M.D.

     2,540,407  

Each of Dr. Sandborn and Mr. Wall also held 677,083 and 150,000 shares of common stock as of December 31, 2020, respectively, which shares were issued to them upon the early exercise of stock options granted to them prior to 2020, 128,125 and 34,375 of which remained restricted as of December 31, 2020, respectively.

In connection with this offering, we intend to adopt and ask our stockholders to approve the initial terms of our non-employee director compensation program. The material terms of the non-employee director compensation program, as it is currently contemplated, are summarized below. Our board of directors is still in the process of developing, approving and implementing the non-employee director compensation program and, accordingly, this summary is subject to change.

The non-employee director compensation policy will provide for annual retainer fees and/or equity awards for our non-employee directors. We expect each non-employee director will receive an annual retainer of $40,000, with our chairman receiving an annual retainer of $100,000. A non-employee director serving as the chair of the audit, compensation and nominating and corporate governance committees will receive additional annual retainers of $15,000, $10,000 and $8,000, respectively. A non-employee director serving as a member of the audit, compensation and nominating and corporate governance committees will receive additional annual retainers of $7,500, $5,000 and $4,000, respectively. The non-employee directors will also receive initial grants of options to purchase            shares of our common stock, vesting over three years, upon election to the board of directors, and thereafter annual grants of options to purchase             shares of our common stock, vesting on the first to occur of (1) the first anniversary of the grant date or (2) the next occurring annual meeting of our stockholders, in each case subject to the non-employee director’s continued service through the applicable vesting date. In addition, equity awards granted to our non-employee directors will vest upon a change in control of our company.

Compensation under our non-employee director compensation policy will be subject to the annual limits on non-employee director compensation set forth in the 2021 Plan, as described above. Our board of directors or its authorized committee may modify the non-employee director compensation program from time to time in the exercise of its business judgment, taking into account such factors, circumstances and considerations as it shall deem relevant from time to time, subject to the annual limit on non-employee director compensation set forth in the 2021 Plan. As provided in the 2021 Plan, our board of directors or its authorized committee may make exceptions to this limit for individual non-employee directors in extraordinary circumstances, as the board of directors or its authorized committee may determine in its discretion, provided that the non-employee director receiving such additional compensation may not participate in the decision to award such compensation or in other compensation decisions involving non-employee directors.

 

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Limitations of Liability and Indemnification Matters

Our amended and restated certificate of incorporation and our amended and restated bylaws provide that we will indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, which prohibits our amended and restated certificate of incorporation from limiting the liability of our directors for the following:

 

   

any breach of the director’s 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 payment of dividends or unlawful stock repurchases or redemptions; or

 

   

any transaction from which the director derived an improper personal benefit.

Our amended and restated certificate of incorporation and our amended and restated bylaws also provide that if Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law, as so amended. This limitation of liability does not apply to liabilities arising under the federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.

Our amended and restated certificate of incorporation and our amended and restated bylaws also provide that we shall have the power to indemnify our employees and 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 have entered into separate indemnification agreements with our directors and executive officers, in addition to indemnification provided for in our amended and restated certificate of incorporation and 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 in our amended and restated certificate of incorporation and amended and restated bylaws and indemnification 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 certificate of incorporation, 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 filed as an exhibit to the registration statement of which this prospectus is 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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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

The following includes a summary of transactions since January 1, 2017 to which we have been a party in which the amount involved exceeded or will exceed the lesser of $120,000 and one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements, which are described under “Executive and Director Compensation.” We also describe below certain other transactions with our directors, executive officers and stockholders.

Preferred Stock Financings

Series B Convertible Preferred Stock Financings. In November 2018, we entered into a Series B preferred stock purchase agreement, pursuant to which we sold to investors in an initial closing and subsequent closing in November 2018 and May 2019, respectively, in private placements, an aggregate of 26,666,667 shares of Series B convertible preferred stock. The per share purchase price was $0.75, and we received gross proceeds of approximately $20 million.

Series C Convertible Preferred Stock Financings. In June 2019, we entered into a Series C preferred stock purchase agreement, as amended in March 2020, pursuant to which we sold to investors in an initial closing and subsequent closing in June 2019 and March 2020, respectively, in a private placement, an aggregate of 53,063,500 shares of Series C convertible preferred stock, including shares issued to Nestlé Health Science US Holdings Inc. (NHS) and Société des Produits Nestlé S.A. (SPN) as part of our acquisition of PLI described below. The per share purchase price was $1.00, and we received gross proceeds of approximately $28.1 million from the sale of stock to investors, excluding NHS and SPN.

Series D Convertible Preferred Stock Financing. In October 2020, we entered into a Series D preferred stock purchase agreement, pursuant to which we sold to investors, in a private placement, an aggregate of 66,155,067 shares of Series D-1 convertible preferred stock in an initial closing, including shares issued to NHS as part of our acquisition of PLI described below, at a per share purchase price of $0.7558. In January 2021, in a subsequent closing, we sold to investors 93,995,300 shares of Series D-2 convertible preferred stock, in a private placement, including shares issued to NHS as part of our acquisition of PLI described below, at a per share purchase price of $0.8510. We received gross proceeds of approximately $120.0 million from the sale of stock to investors, excluding NHS.

The following table sets forth the aggregate number of these securities acquired by the listed directors, executive officers or holders of more than 5% of our capital stock, or their affiliates. Each outstanding share of preferred stock, will convert into shares of common stock at a ratio of one-for-one immediately prior to the closing of this offering.

 

Participants

  Series B
Preferred
Shares
    Series C
Preferred
Shares
    Series D-1
Preferred
Shares
    Series D-2
Preferred
Shares
 

5% or Greater Stockholders(1)

       

Cedars-Sinai Medical Center

    12,000,000       25,000,000       2,544,425       3,615,656  

Société des Produits Nestlé S.A(2)

    —         16,450,000       —         —    

Ascend Global Investment Fund SPC—Strategic Segregated Portfolio

    10,084,791       —         508,885       723,131  

Nestlé Health Science US Holdings Inc.(3)

    —         8,550,000       5,088,851       7,219,560  

Mutual Fund Series Trust, on behalf of Eventide Healthcare & Life Sciences Fund

    —         —         10,177,703       14,462,623  

 

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Participants

  Series B
Preferred
Shares
    Series C
Preferred
Shares
    Series D-1
Preferred
Shares
    Series D-2
Preferred
Shares
 

Perceptive Life Sciences Master Fund, Ltd.

    —         —         10,177,703       14,462,623  

Entities affiliated with RTW Master Fund, Ltd.

    —         —         10,177,703       14,462,623  

Entities affiliated with Cowen Healthcare Investments III LP

    —         —         10,177,703       14,462,623  

Entities affiliated with Cormorant Global Healthcare Master Fund, LP

    —         —        
7,633,277
 
    10,846,968  

Point72 Biotech Private Investments, LLC

    —         —        
7,633,277
 
    10,846,968  

Officers and Directors

       

Tadataka Yamada, M.D.

    133,334       —         —         —    

 

(1)

Additional details regarding these stockholders and their equity holdings are provided in the section titled “Principal Stockholders.”

(2)

Represents securities acquired by SPN in connection with our acquisition of PLI.

(3)

Represents 3,550,000 shares acquired by NHS in June 2019, 5,000,000 shares acquired by NHS in June 2020, 5,088,851 shares acquired by NHS in October 2020 upon conversion of deferred purchase price from cash to stock, in connection with our acquisition of PLI and 7,219,560 shares acquired by NHS in January 2021 upon conversion of deferred purchase price from cash to stock, in connection with our acquisition of PLI.

Agreements with Cedars-Sinai

In September 2017 and March 2019, we and Cedars-Sinai, one of our 5% stockholders, entered into exclusive license agreements. Such agreements are described in “Business—Collaboration and License Agreement Overview—Our Collaboration with Cedars-Sinai Medical Center.” In May 2018, Prometheus Laboratories, Inc. and Cedars-Sinai entered into a reference laboratory services agreement, which agreement was amended in June 2019 and October 2019, under which we provide certain laboratory services to Cedars-Sinai on an ongoing basis. As more fully described below, we acquired Prometheus Laboratories in June 2019. During the year ended, December 31, 2019, Cedars-Sinai has paid us approximately $0.2 million for such services.

Shlomo Melmed, M.D., a member of our board of directors until his resignation effective September 29, 2020, is the Executive Vice President of Academic Affairs, Dean of the Medical Faculty and Professor of Medicine at Cedars-Sinai. James Laur, also a member of our board of directors, is the Vice President, Intellectual Property for Cedars-Sinai.

Prometheus Laboratories, Inc.

PLI Acquisition and Spinoff

In June 2019, we, NHS and SPN entered into a stock purchase agreement whereby we acquired 100% of the issued and outstanding equity of PLI from NHS, as well as certain intellectual property rights from SPN. In consideration for the acquisition, we issued to NHS and SPN an aggregate of 25,000,000 shares of Series C convertible preferred stock in connection with our Series C convertible preferred stock financing described above (or approximately $25 million of stock based upon a fair market value of $1.00 per share). Under the terms of the agreement, we are also required to pay NHS $15.0 million in deferred cash payments due as follows: $5.0 million due on June 30, 2020 and $10.0 million due on June 30, 2021, which were settled as follows: $5.0 million of deferred cash payments were converted to 5,000,000 Series C convertible preferred stock in June 2020; $3.8 million of deferred cash payments were converted to 5,088,851 shares of Series D-1 convertible preferred stock in October 2020; and $6.2 million of deferred cash payments were converted to 7,219,560 shares of Series D-2 convertible preferred stock in January 2021. Grégory Behar, a former member of our board of directors, is the Chief Executive Officer of NHS, and Martin Hendrix, Ph.D., a member of our board of directors, is the Head of Global Business Development and M&A at NHS.

 

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On December 31, 2020, we completed a spinoff of PLI, by means of a pro rata distribution of all its outstanding stock to our stockholders of record on December 30, 2020.

Transition Services Agreement

In connection with the spinoff, we and PLI entered into a transition services agreement. Pursuant to this agreement, we are providing PLI certain transitional services, including general and administrative, finance and clinical operations support, and PLI is providing us with certain transitional services, including providing for the use of our current facilities under a sublease, in each case for specified monthly service fees. The initial term of the agreement is for one year, subject to earlier termination and extension thereafter.

Registration Rights Agreement

We entered into an amended and restated investors’ rights agreement in November 2018, as amended and restated in June 2019, and as amended and restated in October 2020, with the holders of our convertible preferred stock, including entities with which certain of our directors are affiliated. The registration rights agreement provides for certain rights relating to the registration of their shares of common stock issuable upon conversion of their convertible preferred stock and certain additional covenants made by us. Except for the registration rights (including the related provisions pursuant to which we have agreed to indemnify the parties to the investors’ rights agreement), all rights under this agreement will terminate upon closing of this offering. The registration rights will continue following this offering and will terminate seven years after the closing of this offering. See the section titled “Description of Capital Stock—Registration Rights” for more information regarding these registration rights.

Voting Agreement

We entered into an amended and restated voting agreement in November 2018, as amended and restated in March 2020, as further amended in August 2020, and as amended and restated in October 2020, with the holders of our convertible preferred stock, including entities with which certain of our directors are affiliated, pursuant to which the following directors were each elected to serve as members on our board of directors and, as of the date of this prospectus, continue to so serve: Helen C. Adams, Martin Hendrix, Ph.D., James Laur, Mark C. McKenna, Joseph C. Papa, Judith Swain, M.D., Mary Szela and Tadataka Yamada, M.D. Pursuant to the voting agreement, Mr. McKenna, as our Chief Executive Officer, serves on our board of directors as the CEO director. Dr. Hendrix and Mr. Laur, as designated by NHS and Cedars-Sinai, respectively, and Dr. Swain and Ms. Szela were initially selected to serve on our board of directors as representatives of the holders of our convertible preferred stock. Ms. Adams, Mr. Papa and Dr. Yamada were initially selected to serve on our board of directors as representatives of the holders of our common stock and convertible preferred stock, as designated by a majority of our common and preferred stockholders, voting together as a single class.

The voting agreement will terminate upon the closing of this offering, and members previously elected to our board of directors pursuant to this agreement will continue to serve as directors until they resign, are removed or their successors are duly elected by holders of our common stock. The composition of our board of directors after this offering is described in more detail under “Management—Board Composition and Election of Directors.”

Equity Grants to Executive Officers and Directors

We have granted restricted stock and stock options to certain of our executive officers and non-employee directors, as more fully described in “Executive and Director Compensation” with respect to our NEOs and non-employee directors.

 

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Employment Arrangements

We have entered into employment letter agreements with our executive officers. For more information regarding these letter agreements, see the section titled “Executive and Director Compensation—Employment Letter Agreements with our NEOs.”

Director and Officer Indemnification

We have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us or will require us to indemnify each director (and in certain cases their related venture capital funds) and executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’ fees, judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action or proceeding by or in right of us, arising out of the person’s services as a director or executive officer.

Our amended and restated certificate of incorporation and our amended and restated bylaws provide that we will indemnify each of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. Further, 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 the section titled “Executive and Director Compensation—Limitations of Liability and Indemnification Matters.”

Policies and Procedures for Related Person Transactions

Our board of directors will adopt a written related person transaction policy, to be effective upon the closing of this offering, setting forth the policies and procedures for the review and approval or ratification of related-person transactions. This policy will cover, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, where the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related person’s interest in the transaction. All of the transactions described in this section occurred prior to the adoption of this policy.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth information with respect to the beneficial ownership of our common stock as of February 17, 2021, and as adjusted to reflect the sale of shares of common stock in this offering, by:

 

   

our named executive officers;

 

   

each of our directors;

 

   

all of our executive officers and directors as a group; and

 

   

each person or group of affiliated persons known by us to beneficially own more than 5% of our common stock.

The number of shares beneficially owned by each stockholder is determined under rules issued by the SEC. Under these rules, beneficial ownership includes any shares as to which a person has sole or shared voting power or investment power. Applicable percentage ownership is based on 272,543,002 shares of common stock outstanding on December 31, 2020, after giving effect to the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021, the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering and includes 546,979 shares subject to forfeiture or a right of repurchase. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to warrants, options or other rights held by such person that are currently exercisable or will become exercisable within 60 days of December 31, 2020 are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person.

Unless otherwise indicated, the address of each beneficial owner listed below is c/o Prometheus Biosciences, Inc., 9410 Carroll Park Dr., San Diego, California 92121. We believe, based on information provided to us, that each of the stockholders listed below has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.

 

     Number of
Shares
Beneficially

Owned
     Percentage of
Shares Beneficially
Owned
 

Name of Beneficial Owner

   Before
Offering
    After
Offering
 

5% or Greater Stockholders

       

Cedars-Sinai Medical Center(1)

     50,085,081        18.4  

Entities affiliated with Nestlé S.A.(2)

     37,308,411        13.7  

Entities affiliated with Cowen Healthcare Investments III LP(3)

     24,640,326        9.1  

Mutual Fund Series Trust, on behalf of Eventide Healthcare & Life Sciences Fund(4)

     24,640,326        9.0  

Perceptive Life Sciences Master Fund, Ltd.(5)

     24,640,326        9.0  

Entities affiliated with RTW Master Fund, Ltd.(6)

     24,640,326        9.0  

Entities affiliated with Cormorant Global Private Healthcare Fund III, LP(7)

     18,480,245        6.8  

Point72 Biotech Private Investments, LLC(8).

     18,480,245        6.8  

Ascend Global Investment Fund SPC—Strategic Segregated Portfolio(9)

     17,316,807        6.4  

Executive Officers and Directors

       

Mark C. McKenna(10)

     1,324,702        *    

Timothy K. Andrews

     —          *    

Allison Luo, M.D.(11)

     1,177,083        *    

Keith Marshall

     —          *    

Tadataka Yamada, M.D.(12)

     1,156,251        *    

Helen C. Adams

     —          *    

 

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     Number of
Shares
Beneficially

Owned
     Percentage of
Shares Beneficially
Owned
 

Name of Beneficial Owner

   Before
Offering
     After
Offering
 

Martin Hendrix, Ph.D.

     —          *     

James Laur

     —          *     

Joseph C. Papa

     —          *     

Judith L. Swain

     —          *     

Mary Szela

     —          *     

All executive officers and directors as a group (11 persons)(13)

     3,658,036        *     

 

*

Less than 1%.

(1)

Includes 50,085,081 shares held by Cedars-Sinai Medical Center. Thomas M. Priselac, the President and Chief Executive Officer of Cedars-Sinai Medical Center, and Edward M. Prunchunas, the Senior Vice President and Chief Financial Officer of Cedars-Sinai Medical Center, are deemed to share voting and dispositive power with respect to the shares held by Cedars-Sinai Medical Center.

(2)

Includes (i) 20,858,411 shares of common stock held by NHS and (ii) 16,450,000 shares of common stock held by SPN. Each of (a) SPN, an indirect parent of NHS, (b) NIMCO US, Inc., or NIMCO, the direct parent of NHS, (c) Nestlé US Holdco, Inc., or Nestlé US Holdco, an indirect parent of NHS, and (d) Nestlé S.A. a publicly traded company and the ultimate parent of each of NHS, NIMCO, Nestlé US Holdco and SPN, has shared voting power and shared dispositive power with respect to the 20,858,411 shares held by NHS. Each of (x) SPN and (y) Nestlé S.A. has shared voting power and shared dispositive power with respect to the 16,450,000 shares held by SPN. The principal executive office of NHS, NIMCO and Nestlé US Holdco is 1812 North Moore Street, Arlington, VA 22209 and the principal executive office of SPN and Nestlé S.A. is Avenue Nestlé 55, CH-1800, Vevey Switzerland.

(3)

Consists of (i) 23,968,910 shares held by Cowen Healthcare Investments III LP and (ii) 671,416 shares held by CHI EF III LP. CHI Advisors LLC is the investment manager of Cowen Healthcare Investments III LP and CHI EF III LP and has voting and investment power with respect to the securities held by each of the respective entities. The business address for Cowen Healthcare Investments III LP and CHI EF III LP c/o CHI Advisors LLC, 599 Lexington Avenue, 19th Floor, New York, New York 10022.

(4)

Consists of 24,640,326 shares of common stock held by Mutual Fund Series Trust, on behalf of Eventide Healthcare & Life Sciences Fund. Eventide Healthcare & Life Sciences Fund is a registered investment companies for which Eventide Asset Management, LLC acts as investment advisor. Eventide Asset Management, LLC has voting and investment power with respect to the shares.

(5)

Consists of 24,640,326 shares of common stock held by Perceptive Life Sciences Master Fund, Ltd. (the “Master Fund”). Perceptive Advisors LLC (“Perceptive”) is the investment manager to the Master Fund and may be deemed to beneficially own the securities directly held by the Master Fund. Joseph Edelman is the managing member of Perceptive. Perceptive and Mr. Edelman may be deemed to beneficially own the shares held by the Master Fund. The address of Perceptive is 51 Astor Place, 10th Floor, New York, New York 10003.

(6)

Consists of 24,640,326 shares of common stock held in the aggregate by RTW Innovation Master Fund, Ltd., RTW Master Fund, Ltd. and RTW Venture Fund Limited. RTW Investments, LP is the manager of RTW Master Fund, Ltd., RTW Venture Fund Limited and RTW Innovation Master Fund. Roderick Wong, M.D. is the Managing Partner and Chief Investment Officer of RTW Investments, LP and as such has sole voting and investment control over such shares. Dr. Wong disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. The address of RTW Investments, LP and Dr. Wong is 40 10th Avenue, Floor 7, New York, New York, 10014.

(7)

Consists of 18,480,245 shares of common stock held by Point72 Biotech Private Investments, LLC (Point72 Biotech). Differentiated Ventures Investments, LLC (DVI) is the managing member of Point72 Biotech and has sole voting and investment control over the shares held by Point72 Biotech. 72 Investment Holdings, LLC (72 IH) is the sole member of DVI and has sole voting and investment control over such interest held by DVI. Steven A. Cohen (SC) is the sole member of 72 IH and has sole voting and investment control over such interest held by 72 IH. SC disclaims beneficial ownership of such shares except to the extent of any

 

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  pecuniary interest therein. The address of Point72 Biotech, DVI, 72 IH and SC is c/o Point72, L.P., 72 Cummings Point Road, Stamford, CT 06902.
(8)

Consists of (i) 14,791,588 shares of common stock held by Cormorant Private Healthcare Fund III, LP (Cormorant Fund III), (ii) 3,442,869 shares of common stock held by Cormorant Global Healthcare Master Fund, LP (Cormorant Master Fund), and (iii) 245,788 shares held by CRMA SPV, L.P. (CRMA, and, together with Cormorant Fund III and Cormorant Master Fund, the Cormorant Funds). Cormorant Global Healthcare GP, LLC (Global GP) is the general partner of Cormorant Master Fund and Cormorant Private Healthcare III GP, LLC (Private GP) is the general partner of Cormorant Fund III. Bihua Chen serves as the managing member of both Global GP and Private GP. Cormorant Asset Management LP serves as the investment manager to Cormorant Fund III, Cormorant Master Fund and CRMA, and Ms. Chen serves as the managing member of Cormorant Asset Management GP, LLC. Ms. Chen has sole voting and investment control over the shares held by the Cormorant Funds. Ms. Chen disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein. The address of the Cormorant Funds, Global GP, Private GP, Cormorant Asset Management LP, and Ms. Chen is 200 Clarendon Street, 52nd Floor, Boston, Massachusetts 02116.

(9)

Consists of 17,316,807 shares of common stock held by Ascend Global Investment Fund SPC – Strategic Segregated Portfolio, or Ascend Global. Ascend Global is managed by Ascend Capital Advisors (S) Pte. Ltd, or Ascend Capital. SJE Investments is an adviser of Ascend Capital. Shierley Widjaja is an Executive Director and Chief Investment Officer of SJE Investments and as such may be deemed to beneficially own such shares. Ms. Widjaja disclaims beneficial ownership of such shares except to the extent of any pecuniary interest therein.

(10)

Consists of shares of common stock underlying options held by Mr. McKenna that are exercisable as of December 31, 2020 or that will become exercisable within 60 days after such date.

(11)

Consists of (i) 500,000 shares of common stock held by Dr. Luo and (ii) 677,083 shares of common stock held by Dr. Sandborn, Dr. Luo’s spouse.

(12)

Consists of (i) 133,334 shares of common stock held by Dr. Yamada and (ii) 1,022,917 shares of common stock underlying options held by Dr. Yamada that are exercisable as of December 31, 2020 or that will become exercisable within 60 days after such date.

(13)

Consists of the shares described in footnotes 10 through 12 above.

 

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DESCRIPTION OF CAPITAL STOCK

General

The following description summarizes some of the terms of our amended and restated certificate of incorporation and amended and restated bylaws, the investors’ rights agreement and of the Delaware General Corporation Law. Because it is only a summary, it does not contain all the information that may be important to you. For a complete description you should refer to our amended and restated certificate of incorporation, amended and restated bylaws and registration rights agreement, copies of which have been filed as exhibits to the registration statement of which this prospectus is a part.

Following the closing of this offering, our authorized capital stock will consist of 400,000,000 shares of common stock, $0.0001 par value per share, and 40,000,000 shares of preferred stock, $0.0001 par value per share.

Common Stock

As of December 31, 2020, there were 272,543,002 shares of our common stock outstanding and held of record by 31 stockholders, including 546,979 shares of restricted common stock which are subject to forfeiture or our right of repurchase, after giving effect to (i) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021 and (ii) the automatic conversion of all outstanding shares of our convertible preferred stock into 254,859,734 shares of common stock, which will automatically occur immediately prior to the closing of this offering. Based on the number of shares of common stock outstanding as of December 31, 2020, and further assuming the issuance by us of                 shares of common stock in this offering, there will be                 shares of common stock outstanding upon the closing of this offering. 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. Accordingly, the holders of a majority of the outstanding shares of common stock entitled to vote in any election of directors can elect all of the directors standing for election, if they so choose, other than any directors that holders of any preferred stock we may issue may be entitled to elect. Subject to the supermajority votes for some matters, other matters shall be decided by the affirmative vote of our stockholders having a majority in voting power of the votes cast by the stockholders present or represented and voting on such matter. Our amended and restated certificate of incorporation and amended and restated bylaws also provide that our directors may be removed only for cause and only by the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock entitled to vote thereon. In addition, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock entitled to vote thereon is required to amend or repeal, or to adopt any provision inconsistent with, several of the provisions of our amended and restated certificate of incorporation. See below under the heading “—Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws—Amendment of Charter Provisions.”

Subject to preferences that may be applicable to any then outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends, if any, as may be declared by the board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, the holders of common stock will be entitled to share ratably in the assets legally available for distribution to stockholders after the payment of or provision for all of our debts and other liabilities, subject to the prior rights of any preferred stock then outstanding. Holders of common stock have no preemptive or conversion rights or other subscription rights and there are no redemption or sinking funds provisions applicable to the common stock. All outstanding shares of common stock are, and the common stock to be outstanding upon the closing of this offering will be, duly authorized, validly issued, fully paid and nonassessable. 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

Upon the closing of this offering, all of our previously outstanding shares of convertible preferred stock will have been converted into common stock, there will be no authorized shares of our previously outstanding

 

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convertible preferred stock, and we will have no shares of preferred stock outstanding. Under the terms of our amended and restated certificate of incorporation, which will become effective immediately prior to the closing of this offering, our board of directors has the authority, without further action by our stockholders, to issue up to             shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the dividend, voting and other rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.

Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deterring or preventing a change in our control and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

On January 24, 2020, in connection with our Loan Agreement with Oxford, we issued Oxford a warrant to purchase 112,500 Series C convertible preferred stock at an exercise price of $1.00 per share. In connection with this offering, the warrant will convert into a warrant to purchase 112,500 shares of common stock. The warrant contains a cashless exercise provision under which Oxford may, in lieu of payment of the exercise price in cash, surrender the warrant and receive a net amount of shares of our common stock based on the fair market value of our common stock at the time of the net exercise of the warrant after deduction of the aggregate exercise price. The warrant expires ten years from its date of issuance.

Options

As of December 31, 2020, options to purchase 29,302,518 shares of our common stock were outstanding, of which 5,232,626 were vested and exercisable as of that date. For additional information regarding the terms of our 2017 Plan, see the section titled “Executive and Director Compensation—Other Elements of Compensation—2017 Equity Incentive Plan.”

Registration Rights

As of December 31, 2020, upon the closing of this offering holders of                shares of our common stock, which includes all of the shares of common stock issuable upon the automatic conversion convertible preferred stock immediately prior to the closing of this offering, will be entitled to the following rights with respect to the registration of such shares for public resale under the Securities Act, pursuant to investors’ rights agreement by and among us and certain investors. The registration of shares of common stock as a result of the following rights being exercised would enable holders to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective.

Demand Registration Rights

Form S-1. If at any time beginning six months following the effective date of the registration statement of which this prospectus forms a part, the holders of at least a majority of the registrable securities request in writing that we effect a registration with respect to all or a part of the registrable securities then outstanding where the aggregate price to the public of the offering is $10.0 million or more, we may be required to provide notice to all holders of registrable securities and to use commercially reasonable efforts to effect such registration; provided, however, that we will not be required to effect such a registration if, among other things, within the preceding 12 months, we have already effected two registrations for the holders of registrable securities in response to these demand registration rights.

 

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Form S-3. If at any time we become entitled under the Securities Act to register our shares on Form S-3, the holders of the registrable securities request in writing that we effect a registration with respect to all or a part of the registrable securities then outstanding where the price to the public of the offering is $5.0 million or more, we may be required to provide notice to all holders of registrable securities and to use commercially reasonable efforts to effect such registration; provided, however, that we will not be required to effect such a registration if, among other things, within the preceding 12 months, we have already effected two registrations on Form S-3 for the holders of registrable securities.

If the holders requesting registration intend to distribute their shares by means of an underwriting, the underwriter of such offering will have the right to limit the numbers of shares to be underwritten for reasons related to the marketing of the shares.

Piggyback Registration Rights

If at any time following the closing of this offering we propose to register any shares of our common stock under the Securities Act, subject to certain exceptions, the holders of registrable securities will be entitled to notice of the registration and to include their shares of registrable securities in the registration. If our proposed registration involves an underwriting, the managing underwriter of such offering will have the right to limit the number of shares to be underwritten for reasons related to the marketing of the shares.

Indemnification

Our registration rights agreement contains customary cross indemnification provisions, under which we are obligated to indemnify holders of registrable securities in the event of material misstatements or omissions in a registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

Expenses

Ordinarily, other than underwriting discounts and commissions, we will be required to pay all expenses incurred by us related to any registration effected pursuant to the exercise of these registration rights. These expenses may include all registration and filing fees, printing expenses, fees and disbursements of our counsel, reasonable fees and disbursements of a counsel for the selling securityholders, blue sky fees and expenses and the expenses of any special audits incident to the registration.

Termination of Registration Rights

The registration rights terminate three years after the closing of this offering.

Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and 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

 

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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.

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 of directors, 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.

Staggered Board of Directors

Our amended and restated bylaws provides that our board of directors will be divided into three classes. The directors in each class will serve for a three-year term, with one class being elected each year by our stockholders. For more information on the classified board of directors, see “Management—Board Composition and Election of Directors.” This system of electing directors may tend to discourage a third party from attempting to obtain control of us, because it generally makes it more difficult for stockholders to replace a majority of the directors.

Removal of Directors

Our amended and restated certificate of incorporation provides that no member of our board of directors may be removed from office 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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Delaware Anti-Takeover Statute

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits persons deemed to be “interested stockholders” from engaging in a “business combination” with a publicly held Delaware corporation for three years following the date these persons become interested stockholders unless the business combination is, or the transaction in which the person became an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination of interested stockholder status did own, 15% or more of a corporation’s voting stock. Generally, a “business combination” includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board of directors.

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 the following types of actions or proceedings under Delaware statutory or common law: (i) any derivative action or proceeding brought on our behalf; (ii) 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, creditors or other constituents; (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware or our amended and restated certificate of incorporation or amended and restated bylaws; (iv) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws; or (v) any action asserting a claim governed by the internal affairs doctrine. The provision would not apply to suits brought to enforce a duty or liability created by the Exchange Act. Furthermore, our amended and restated certificate of incorporation will also provide that unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the exclusive forum for the resolution of any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering. In any case, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. 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.

Amendment of Charter Provisions

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

The provisions of 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 of directors 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.

 

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Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be Computershare Trust Company, N.A. The transfer agent and registrar’s address is 150 Royall Street, Canton, Massachusetts 02021.

Nasdaq Listing

We have applied to list our common stock on Nasdaq under the symbol “RXDX.”

Limitations of Liability and Indemnification Matters

For a discussion of liability and indemnification, see the section titled “Executive and Director Compensation—Limitations of Liability and Indemnification Matters.”

 

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SHARES ELIGIBLE FOR FUTURE SALE

Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market, or the perception that such sales may occur, could adversely affect the market price of our common stock. Although we have applied to list our common stock on Nasdaq, we cannot assure you that there will be an active public market for our common stock.

Based on the number of shares of our common stock outstanding as of December 31, 2020, and assuming (i) the issuance of            shares in this offering, (ii) the issuance of 93,995,300 shares of our Series D-2 convertible preferred stock in January 2021, (iii) the automatic conversion of all of our outstanding shares of convertible preferred stock into 254,859,734 shares of common stock and the related reclassification of the carrying value of the convertible preferred stock to permanent equity upon the closing of this offering, (iv) no exercise of the underwriters’ option to purchase additional shares of common stock and (v) no exercise or vesting of outstanding options, warrants or other rights, we will have outstanding an aggregate of            shares of common stock.

Of these shares, all shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our “affiliates,” as that term is defined in Rule 144 under the Securities Act. Shares purchased by our affiliates would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement.

The remaining                  shares of common stock will be “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act, each of which is summarized below. We expect that substantially all of these shares will be subject to the 180-day lock-up period under the lock-up agreements described below.

Lock-Up Agreements

We, our officers, directors and holders of substantially all of our securities have agreed with the underwriters that for a period of 180 days, after the date of this prospectus, subject to specified exceptions, we or they will not offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to sell, or otherwise dispose of or transfer any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, request or demand that we file a registration statement related to our common stock or enter into any swap or other agreement that transfers to another, in whole or in part, directly or indirectly, the economic consequence of ownership of the common stock. Upon expiration of the lock-up period, certain of our stockholders will have the right to require us to register their shares under the Securities Act. See the section titled “—Registration Rights” below and “Description of Capital Stock—Registration Rights.”

SVB Leerink LLC and Credit Suisse Securities (USA) LLC may, in their sole discretion and at any time or from time to time before the termination of the lock-up period, in certain cases without public notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the underwriters and any of our stockholders who will execute a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period.

Upon the expiration of the lock-up period, substantially all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.

Rule 10b5-1 Trading Plans

Following the closing of this offering, certain of our officers, directors and significant stockholders may adopt written plans, known as Rule 10b5-1 trading plans, in which they will contract with a broker to buy or sell

 

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shares of our common stock on a periodic basis to diversify their assets and investments. Under these 10b5-1 trading plans, a broker may execute trades pursuant to parameters established by the officer, director or stockholder when entering into the plan, without further direction from such officer, director or stockholder. Such sales would not commence until the expiration of the applicable lock-up agreements entered into by such officer, director or stockholder in connection with this offering.

Rule 144

Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours, or who was an affiliate at any time during the 90 days before a sale, who has beneficially owned shares of our common stock for at least six months would be entitled to sell in “broker’s transactions” or certain “riskless principal transactions” or to market makers, a number of shares within any three-month period that does not exceed the greater of:

 

   

1% of the number of shares of our common stock then outstanding, which will equal approximately                shares immediately after this offering; or

 

   

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

Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the SEC and Nasdaq concurrently with either the placing of a sale order with the broker or the execution of a sale directly with a market maker.

Non-Affiliate Resales of Restricted Securities

In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.

Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.

Rule 701

In general, under Rule 701, any of an issuer’s employees, directors, officers, consultants or advisors who purchases shares from the issuer in connection with a compensatory stock or option plan or other written agreement before the effective date of a registration statement under the Securities Act is entitled to sell such shares 90 days after such effective date in reliance on Rule 144. An affiliate of the issuer can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, and non-affiliates of the issuer can resell shares in reliance on Rule 144 without having to comply with the current public information and holding period requirements.

Equity Plans

We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of common stock subject to outstanding stock options and common stock issued or issuable under our

 

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equity incentive plans and employee stock purchase plan. We expect to file the registration statement covering shares offered pursuant to these stock plans shortly after the date of this prospectus, permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act and the sale by affiliates in the public market subject to compliance with the resale provisions of Rule 144.

Registration Rights

As of December 31, 2020, upon the closing of this offering holders of                shares of our common stock, which includes all of the shares of common stock issuable upon the automatic conversion of our convertible preferred stock into 254,859,734 shares of our common stock immediately prior to the closing of this offering, will be entitled to various rights with respect to the registration of these shares under the Securities Act upon the closing of this offering. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration, except for shares purchase by our affiliates. See the section titled “Description of Capital Stock—Registration Rights” for additional information. Shares covered by a registration statement will be eligible for sale in the public market upon the expiration or release from the terms of the lock-up agreement.

 

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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the IRS), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our common stock.

This discussion is limited to Non-U.S. Holders that hold our common stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holder’s particular circumstances, including the impact of the Medicare contribution tax on net investment income and the alternative minimum tax. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:

 

   

U.S. expatriates and former citizens or long-term residents of the United States;

 

   

persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

 

   

banks, insurance companies, and other financial institutions;

 

   

brokers, dealers or traders in securities;

 

   

“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

   

partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

 

   

tax-exempt organizations or governmental organizations;

 

   

persons deemed to sell our common stock under the constructive sale provisions of the Code;

 

   

persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;

 

   

tax-qualified retirement plans; and

 

   

“qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds.

If an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

 

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THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.

Definition of a Non-U.S. Holder

For purposes of this discussion, a “Non-U.S. Holder” is any beneficial owner of our common stock that is neither a “U.S. person” nor an entity treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:

 

   

an individual who is a citizen or resident of the United States;

 

   

a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia;

 

   

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

   

a trust that (i) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (ii) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

Distributions

As described in the section entitled “Dividend Policy,” we do not anticipate declaring or paying cash dividends to holders of our common stock in the foreseeable future. However, if we do make distributions of cash or property on our common stock, such distributions will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will constitute a return of capital and first be applied against and reduce a Non-U.S. Holder’s adjusted tax basis in its common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under “—Sale or Other Taxable Disposition.”

Subject to the discussion below on effectively connected income, dividends paid to a Non-U.S. Holder will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). If a Non-U.S. Holder holds the stock through a financial institution or other intermediary, the Non-U.S. Holder will be required to provide appropriate documentation to the intermediary, which then will be required to provide certification to the applicable withholding agent, either directly or through other intermediaries. A Non-U.S. Holder that does not timely furnish the required documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.

If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States.

 

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Any such effectively connected dividends will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules.

Sale or Other Taxable Disposition

A Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our common stock unless:

 

   

the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable);

 

   

the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or

 

   

our common stock constitutes a U.S. real property interest, or USRPI, by reason of our status as a U.S. real property holding corporation, or USRPHC, for U.S. federal income tax purposes.

Gain described in the first bullet point above generally will be subject to U.S. federal income tax on a net income basis at the regular rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on such effectively connected gain, as adjusted for certain items.

A Non-U.S. Holder described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on gain realized upon the sale or other taxable disposition of our common stock, which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the Non-U.S. Holder is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.

With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however, on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance we currently are not a USRPHC or will not become one in the future. Even if we are or were to become a USRPHC, gain arising from the sale or other taxable disposition of our common stock by a Non-U.S. Holder will not be subject to U.S. federal income tax if our common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market (such as the Nasdaq), and such Non-U.S. Holder owned, actually and constructively, 5% or less of our common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Information Reporting and Backup Withholding

Payments of dividends on our common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a United States person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E or W-8ECI, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any distributions on our common stock paid to the Non-U.S. Holder,

 

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regardless of whether such distributions constitute dividends or whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a United States person, or the holder otherwise establishes an exemption. Proceeds of a disposition of our common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.

Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

Additional Withholding Tax on Payments Made to Foreign Accounts

Withholding taxes may be imposed under Sections 1471 to 1474 of the Code (such Sections are commonly referred to as the Foreign Account Tax Compliance Act, or FATCA) on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or subject to the proposed Treasury Regulations discussed below, gross proceeds from the sale or other disposition of, our common stock paid to a “foreign financial institution” or a “non-financial foreign entity” (each as defined in the Code), unless (i) the foreign financial institution undertakes certain diligence and reporting obligations, (ii) the non-financial foreign entity either certifies it does not have any “substantial United States owners” (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (iii) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence and reporting requirements in clause (i) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain “specified United States persons” or “United States owned foreign entities” (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.

Under the applicable Treasury Regulations and administrative guidance, withholding under FATCA generally applies to payments of dividends on our common stock. While withholding under FATCA would also have applied to payments of gross proceeds from the sale or other disposition of stock on or after January 1, 2019, proposed Treasury Regulations eliminate FATCA withholding on payments of gross proceeds entirely. Taxpayers generally may rely on these proposed Treasury Regulations until final Treasury Regulations are issued.

Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our common stock.

 

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UNDERWRITING

SVB Leerink LLC and Credit Suisse Securities (USA) LLC are acting as representatives of each of the underwriters named below and as joint bookrunning managers for this offering. Subject to the terms and conditions set forth in the underwriting agreement among us and the underwriters, we have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us, the number of shares of common stock set forth opposite its name below.

 

Underwriter

   Number of
Shares
 

SVB Leerink LLC

  

Credit Suisse Securities (USA) LLC

  

Stifel, Nicolaus & Company, Incorporated

  

Guggenheim Securities, LLC

  
  

 

 

 

Total

                       
  

 

 

 

Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of the shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.

We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

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 officers’ certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

Discounts and Commissions

The representatives have advised us that the underwriters propose initially to offer the shares to the public at the initial public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $        per share. After the initial offering of the shares, the public offering price, concession or any other term of this offering may be changed by the representatives.

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

 

            Total  
     Per
Share
     Without
Option
     With
Option
 

Initial public offering price

   $                $                $            

Underwriting discounts and commissions

   $            $        $    

Proceeds, before expenses, to us

   $            $        $    

We estimate expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $        . We also have agreed to reimburse the underwriters for up to $        for their FINRA counsel fee. In accordance with FINRA Rule 5110, this reimbursed fee is deemed underwriting compensation for this offering.

 

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Over-Allotment Option

We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to additional shares at the initial public offering price, less underwriting discounts and commissions. If the underwriters exercise this option, each underwriter will be obligated, subject to the conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriter’s initial amount reflected in the above table. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus.

No Sales of Similar Securities

We, our executive officers and directors and all of our other existing security holders have agreed not to sell or transfer any common stock or securities convertible into or exchangeable or exercisable for common stock, for 180 days after the date of this prospectus without first obtaining the written consent of SVB Leerink LLC and Credit Suisse Securities (USA) LLC on behalf of the underwriters. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly:

 

   

offer, pledge, sell or contract to sell any common stock;

 

   

sell any option or contract to purchase any common stock;

 

   

purchase any option or contract to sell any common stock;

 

   

grant any option, right or warrant for the sale of any common stock;

 

   

otherwise dispose of or transfer any common stock;

 

   

request or demand that we file a registration statement related to the common stock; or

 

   

enter into any swap or other agreement or any transaction that transfers, in whole or in part, the economic consequence of ownership of any common stock, whether any such swap, agreement or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

The restrictions described in the paragraph above relating to the officers, directors, and our shareholders do not apply, subject in certain cases to various conditions (including no filing requirements and the transfer of the lock-up restrictions), to transfers:

 

   

as a bona fide gift or gifts;

 

   

to any trust for the direct or indirect benefit of the lock-up party or the immediate family of the lock-up party (for purposes of the lock-up agreement, “immediate family” shall mean any relationship by blood, marriage or adoption, not more remote than first cousin);

 

   

as a distribution or other transfer by a partnership to its partners or former partners or by a limited liability company to its members or retired members or by a corporation to its stockholders or former stockholders or to any wholly-owned subsidiary of such corporation;

 

   

if the lock-up party is a corporation, partnership, limited liability company or other business entity, in connection with the sale or other bona fide transfer in a single transaction of all or substantially all of the lock-up party’s capital stock, partnership interests, membership interests or other similar equity interests, as the case may be, or all or substantially all of the lock-up party’s assets, in any such case not undertaken for the purpose of avoiding the restrictions imposed by this agreement;

 

   

to the lock-up party’s affiliates or to any investment fund or other entity controlled or managed by the lock-up party;

 

   

pursuant to a court or regulatory agency order, a qualified domestic relations order or in connection with a divorce settlement;

 

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by will or intestate succession upon the death of the lock-up party;

 

   

if the lock-up party is a trust, to a trustor, trustee (or co-trustee) or beneficiary of the trust or to the estate of the beneficiary of such trustor; or

 

   

to us in satisfaction of any tax withholding obligation.

The lock-up provisions apply to common stock and to securities convertible into or exchangeable or exercisable for common stock. They also apply to common stock owned now or acquired later by the person executing the lock-up agreement or for which the person executing the lock-up agreement later acquires the power of disposition.

Nasdaq Global Market Listing

We have applied to list our common stock on the Nasdaq Global Market, subject to notice of issuance, under the symbol “RXDX.”

Determination of Offering Price

Prior to this offering, there has been no public market for our common stock. The initial public offering price for our common stock will be determined through negotiations between us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:

 

   

the valuation multiples of publicly traded companies that the representatives believe to be comparable to us;

 

   

our financial information;

 

   

the history of, and the prospects for, our company and the industry in which we compete;

 

   

an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues;

 

   

the present state of our development; and

 

   

the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also possible that after this offering, our common stock will not trade in the public market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

Price Stabilization, Short Positions and Penalty Bids

Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with this offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. “Covered” short sales are sales made in an amount not

 

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greater than the underwriters’ over-allotment option described above. The underwriters may close out any covered short position by either exercising their over-allotment option or purchasing shares in the open market. In determining the source of shares to close out the covered 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 granted to them under the underwriting agreement described above. “Naked” short sales are sales in excess of such over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in this offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the closing of this offering.

The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Similar to other purchase transactions, the underwriters’ purchases to cover the syndicate short sales 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 our 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. The underwriters may conduct these transactions on the Nasdaq Global Market, in the over-the-counter market or otherwise.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

Electronic Distribution

In connection with this offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.

Other Relationships

The underwriters and certain of their affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Some of the underwriters and certain of their affiliates may in the future engage in investment banking and other commercial dealings in the ordinary course of business with us and our affiliates, for which they may in the future receive customary fees, commissions and expenses.

In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

 

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Selling Restrictions

Notice to Prospective Investors in the European Economic Area

The Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the European Economic Area (“EEA”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or (ii) a customer within the meaning of Directive (EU) 2016/97 (as amended, the “Insurance Distribution Directive”), where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; or (iii) not a qualified investor as defined in Regulation (EU) 2017/1129 (the “Prospectus Regulation”). Consequently no key information document required by Regulation (EU) No 1286/2014 (as amended, the “PRIIPs Regulation”) for offering or selling the Notes or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the Notes or otherwise making them available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation.

Notice to Prospective Investors in the United Kingdom

The Notes are not intended to be offered, sold or otherwise made available to and should not be offered, sold or otherwise made available to any retail investor in the United Kingdom (“UK”). For these purposes, a retail investor means a person who is one (or more) of: (i) a retail client, as defined in point (8) of Article 2 of Regulation (EU) No 2017/565 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018 (“EUWA”); (ii) a customer within the meaning of the provisions of the Financial Services and Markets Act 2000 (“FSMA”) and any rules or regulations made under the FSMA to implement Directive (EU) 2016/97, where that customer would not qualify as a professional client, as defined in point (8) of Article 2(1) of Regulation (EU) No 600/2014 as it forms part of domestic law by virtue of the EUWA; or (iii) not a qualified investor as defined in Article 2 of Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the EUWA. Consequently no key information document required by Regulation (EU) No 1286/2014 as it forms part of domestic law by virtue of the EUWA (the “UK PRIIPs Regulation”) for offering or selling the Notes or otherwise making them available to retail investors in the UK has been prepared and therefore offering or selling the Notes or otherwise making them available to any retail investor in the UK may be unlawful under the UK PRIIPs Regulation.

Notice to Prospective Investors in Canada

The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (“NI 33-105”), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

 

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Notice to Prospective Investors in Switzerland

This document is not intended to constitute an offer or solicitation to purchase or invest in the shares. The shares may not be publicly offered, directly or indirectly, in Switzerland within the meaning of the Swiss Financial Services Act (“FinSA”) and no application has or will be made to admit the shares to trading on any trading venue (exchange or multilateral trading facility) in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the shares constitutes a prospectus pursuant to the FinSA, and neither this document nor any other offering or marketing material relating to the shares may be publicly distributed or otherwise made publicly available in Switzerland.

Notice to Prospective Investors in Australia

This prospectus is not a disclosure document for the purposes of Australia’s Corporations Act 2001 (Cth) of Australia, or Corporations Act, has not been lodged with the Australian Securities & Investments Commission and is only directed to the categories of exempt persons set out below. Accordingly, if you receive this prospectus in Australia:

You confirm and warrant that you are either:

 

   

a “sophisticated investor” under section 708(8)(a) or (b) of the Corporations Act;

 

   

a “sophisticated investor” under section 708(8)(c) or (d) of the Corporations Act and that you have provided an accountant’s certificate to the Company which complies with the requirements of section 708(8)(c)(i) or (ii) of the Corporations Act and related regulations before the offer has been made; or

 

   

a “professional investor” within the meaning of section 708(11)(a) or (b) of the Corporations Act.

To the extent that you are unable to confirm or warrant that you are an exempt sophisticated investor or professional investor under the Corporations Act any offer made to you under this prospectus is void and incapable of acceptance.

You warrant and agree that you will not offer any of the shares issued to you pursuant to this prospectus for resale in Australia within 12 months of those securities being issued unless any such resale offer is exempt from the requirement to issue a disclosure document under section 708 of the Corporations Act.

Notice to Prospective Investors in the People’s Republic of China (the “PRC”)

This prospectus has not been and will not be circulated or distributed in the PRC, and no securities may be offered or sold, or will be offered or sold, to any person for re-offering or resale, directly or indirectly, to any resident of the PRC except pursuant to applicable laws and regulations of the PRC.

Notice to Prospective Investors in Hong Kong

No securities have been offered or sold, and no securities may be offered or sold, in Hong Kong, by means of any document, other than to persons whose ordinary business is to buy or sell shares or debentures, whether as principal or agent; or to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong (the “SFO”) and any rules made under that Ordinance; or in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong (the “CO”), or which do not constitute an offer to the public for the purpose of the CO or the SFO. No document, invitation or advertisement relating to the securities has been issued or may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted under the securities laws of Hong Kong) other than with respect to securities which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the SFO and any rules made under that Ordinance.

 

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This prospectus has not been registered with the Registrar of Companies in Hong Kong. Accordingly, this prospectus may not be issued, circulated or distributed in Hong Kong, and the securities may not be offered for subscription to members of the public in Hong Kong. Each person acquiring the securities will be required, and is deemed by the acquisition of the securities, to confirm that he is aware of the restriction on offers of the securities described in this prospectus and the relevant offering documents and that he is not acquiring, and has not been offered any securities in circumstances that contravene any such restrictions.

Notice to Prospective Investors in Israel

This document does not constitute a prospectus under the Israeli Securities Law, 5728-1968 (the “Securities Law”), and has not been filed with or approved by the Israel Securities Authority. In the State of Israel, this document is being distributed only to, and is directed only at, and any offer of the shares is directed only at, (i) a limited number of persons in accordance with section 15A of the Securities Law and (ii) investors listed in the first addendum (the “Addendum”), to the Israeli Securities Law, consisting primarily of joint investment in trust funds, provident funds, insurance companies, banks, portfolio managers, investment advisors, members of the Tel Aviv Stock Exchange, underwriters, venture capital funds, entities with equity in excess of NIS 50 million and “qualified individuals,” each as defined in the Addendum (as it may be amended from time to time), collectively referred to as qualified investors (in each case purchasing for their own account or, where permitted under the Addendum, for the accounts of their clients who are investors listed in the Addendum). Qualified investors will be required to submit written confirmation that they fall within the scope of the Addendum, are aware of the meaning of same and agree to it.

Notice to Prospective Investors in Japan

The offering has not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948 of Japan, as amended) (the “FIEL”) and the underwriters will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means, unless otherwise provided herein, any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEL and any other applicable laws, regulations and ministerial guidelines of Japan.

Notice to Prospective Investors in Singapore

This prospectus has not been and will not be lodged or registered with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or the invitation for subscription or purchase of the securities may not be issued, circulated or distributed, nor may the securities be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA) (ii) to a relevant person as defined under Section 275(2), or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions, specified in Section 275 of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of any other applicable provision of the SFA.

Where the securities are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

 

   

a corporation (which is not an accredited investor as defined under Section 4A of the SFA) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

 

   

a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor,

 

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securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares of common stock pursuant to an offer made under Section 275 of the SFA except:

 

   

to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA;

 

   

where no consideration is or will be given for the transfer;

 

   

where the transfer is by operation of law;

 

   

as specified in Section 276(7) of the SFA; or

 

   

as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

 

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LEGAL MATTERS

The validity of the shares of common stock offered hereby will be passed upon for us by Latham & Watkins LLP, San Diego, California. The underwriters are being represented by Davis Polk & Wardwell LLP, New York, New York.

EXPERTS

The consolidated financial statements as of December 31, 2019 and 2020 and for each of the years then ended included in this Prospectus and in the Registration Statement have been so included in reliance on the report of BDO USA, LLP, an independent registered public accounting firm, appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing and accounting.

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 shares of our common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information about us and our common stock offered hereby, we refer you to the registration statement and the exhibits and schedules filed thereto. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. Upon the closing of this offering, we will be required to file periodic reports, proxy statements and other information with the SEC pursuant to the Exchange Act. The SEC maintains an Internet website that contains reports, proxy statements and other information about registrants, like us, that file electronically with the SEC. The address of that site is www.sec.gov.

Upon the closing of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available at the website of the SEC referred to above. We maintain a website at www.prometheusbiosciences.com. Upon the closing of this offering, you may access our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The reference to our website address does not constitute incorporation by reference of the information contained on our website, and you should not consider the contents of our website in making an investment decision with respect to our common stock.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Prometheus Biosciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Prometheus Biosciences, Inc. (the Company) as of December 31, 2019 and 2020, the related consolidated statements of operations, convertible preferred stock and stockholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2020, 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.

Basis for Opinion

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

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

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

Discontinued Operations

As described in Note 6, in December 2020, the Company completed a spin-off of Prometheus Laboratories, Inc., which has been presented as discontinued operations in the accompanying financial statements.

/s/ BDO USA, LLP

We have served as the Company’s auditor since 2018.

San Diego, California

February 19, 2021

 

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Prometheus Biosciences, Inc.

Consolidated Balance Sheets

(in thousands, except share data and par value)

 

    December 31,  
    2019     2020  
             

Assets

   

Current assets

   

Cash and cash equivalents

  $ 4,450     $ 54,201  

Accounts receivable

    —       1,086  

Prepaid expenses and other current assets

    482       2,169  

Current assets of discontinued operations

    32,602       —    
 

 

 

   

 

 

 

Total current assets

    37,534       57,456  

Equipment, net

    321       447  

Deferred financing costs

   
—  
 
    1,730  

Non-current assets of discontinued operations

    12,628       —    
 

 

 

   

 

 

 

Total assets

  $ 50,483     $ 59,633  
 

 

 

   

 

 

 

Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit)

   

Current liabilities

   

Accounts payable

  $ 1,404     $ 958  

Accrued compensation

    984       2,722  

Accrued expenses and other current liabilities

    1,601       2,894  

Amounts due to Nestlé, current—related party

    4,703       5,675  

Payable to PLI.

   
—  
 
    1,130  

Deferred revenue

    1,542       1,876  

Current liabilities of discontinued operations

    21,642       —    
 

 

 

   

 

 

 

Total current liabilities

    31,876       15,255  

Amounts due to Nestlé, non-current—related party

    8,335       —    

Long-term debt, net

    —       7,399  

Deferred revenue, non-current

    —         4,597  

Preferred stock purchase right liability

    —       3,900  

Acquisition-related consideration held in escrow

    3,500       —    
 

 

 

   

 

 

 

Total liabilities

    43,711       31,151  

Commitments and contingencies (Note 9)

   

Convertible preferred stock—$0.0001 par value; 91,645,867 shares and 254,983,985 shares authorized at December 31, 2019 and 2020, respectively; 61,645,867 shares issued at December 31, 2019 and 58,145,867 shares outstanding at December 31, 2019; 160,864,434 shares issued and outstanding at December 31, 2020; liquidation preferences of $43,990 and $130,487 at December 31, 2019 and 2020, respectively

    43,740       126,023  

Stockholders’ equity (deficit):

   

Common stock—$0.0001 par value; 125,000,000 shares and 325,000,000 shares authorized as of December 31, 2019 and 2020, respectively; 15,820,658 shares and 17,683,268 shares issued at December 31, 2019 and 2020, respectively; and 13,513,836 shares and 17,136,289 shares outstanding at December 31, 2019 and 2020, respectively;

    1       2  

Additional-paid in capital

    482       1,603  

Accumulated deficit

    (37,451     (99,146
 

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (36,968     (97,541
 

 

 

   

 

 

 

Total liabilities, convertible preferred stock and stockholders’ equity (deficit)

  $ 50,483     $ 59,633  
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Prometheus Biosciences, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

 

     Years Ended December 31,  
     2019     2020  

Collaboration revenue

   $ 1,118     $ 1,229  

Operating expenses:

    

Research and development

     10,958       19,147  

General and administrative

     6,128       11,089  
  

 

 

   

 

 

 

Total operating expense

     17,086       30,236  
  

 

 

   

 

 

 

Loss from operations

     (15,968     (29,007

Other income (expense), net:

    

Interest income

     9       13  

Interest expense

     (770     (2,130

Other

     —         (15
  

 

 

   

 

 

 

Total other income (expense), net

     (761     (2,132
  

 

 

   

 

 

 

Loss from continuing operations

     (16,729     (31,139

Loss from discontinued operations, net of income taxes

     (12,994     (5,999
  

 

 

   

 

 

 

Net loss

   $ (29,723   $ (37,138
  

 

 

   

 

 

 

Net loss per share, basic and diluted:

    

Continuing operations

   $ (1.49   $ (2.08

Discontinued operations

     (1.16     (0.40
  

 

 

   

 

 

 

Net loss per share, basic and diluted

   $ (2.65   $ (2.48
  

 

 

   

 

 

 

Weighted average shares outstanding, basic and diluted

     11,227,009       14,989,769  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Prometheus Biosciences, Inc.

Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share data)

 

    Convertible
Preferred Stock
    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Total
Stockholders’

Deficit
 
    Shares     Amount     Shares     Amount  

Balance at December 31, 2018

    28,561,076     $ 17,500       9,585,105     $ 1   $ 89     $ (7,728   $ (7,638

Issuance of Series B convertible preferred stock for cash, net of issuance costs of $22

    13,084,791       9,792       —       —       —       —       —  

Issuance of Series C convertible preferred stock in acquisition, net of issuance costs of $52

    16,500,000       16,448       —       —       —       —       —  

Issuance of common stock in exchange for services

    —       —       502,533     —       146     —       146

Vesting of common shares issued to founders

    —       —       1,668,750       —       —       —       —  

Vesting of common shares issued for licensing rights

    —       —         1,116,667       —       1     —       1

Issuance of common stock upon exercise of stock options

    —       —       396,875       —       8     —       8

Vesting of early exercised stock options

    —       —       243,906       —       11     —       11

Stock-based compensation

    —       —       —       —       227     —       227

Net loss

    —       —       —       —       —       (29,723     (29,723
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

    58,145,867       43,740       13,513,836       1       482       (37,451     (36,968

Issuance of Series C convertible preferred stock for cash, net of issuance costs of $74

    28,063,500       27,989       —         —         —         —         —    

Issuance of Series C convertible preferred stock upon release of escrow of acquisition-related contingent consideration

    3,500,000       3,500       —         —         —         —         —    

Issuance of Series C convertible preferred stock for deferred purchase price

    5,000,000       5,000       —         —         —         —         —    

Issuance of Series D convertible preferred stock for cash, net of issuance costs of $305

    61,066,216       41,948       —         —         —         —         —    

Issuance of Series D convertible preferred stock for deferred purchase price

    5,088,851       3,846       —         —         —         —         —    

Issuance of common stock in exchange for services

    —         —         362,000       —         112       —         112  

Vesting of common shares issued to founders

    —         —         487,500       —         1       —         1  

Vesting of common shares issued for licensing rights

    —         —         1,116,666       —         1       —         1  

Issuance of common stock upon exercise of stock options

    —         —         1,309,998       1       155       —         156  

Vesting of early exercised stock options

    —         —         346,289       —         12       —         12  

Impact of spinoff of diagnostic services business

    —         —         —         —         —         (24,557     (24,557

Stock-based compensation

    —         —         —         —         840       —         840  

Net loss

    —         —         —         —         —         (37,138     (37,138
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

    160,864,434     $ 126,023       17,136,289     $ 2     $ 1,603     $ (99,146   $ (97,541
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Prometheus Biosciences, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

     Years Ended December 31,  
     2019     2020  

Cash flows from operating activities

    

Net loss

   $ (29,723   $ (37,138

Loss from continuing operations

     (16,729     (31,139
  

 

 

   

 

 

 

Loss from discontinued operations, net of income taxes

     (12,994     (5,999

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation and amortization

     35       109  

Stock-based compensation expenses

     206       739  

Common stock issued in exchange for services

     146       113  

Noncash interest expense

     770       1,589  

Other

     —         (15

Changes in operating assets and liabilities, net of acquisitions:

    

Accounts receivable

     —         (1,086

Prepaid expenses and other current assets

     (332     (1,802

Accounts payable

     591       (480

Accrued compensation

     781       1,738  

Accrued expenses and other current liabilities

     1,377       1,108  

Payments to PLI

     (4,293     (6,866

Payable to PLI

     —         1,130  

Deferred revenue

     1,542       4,931  
  

 

 

   

 

 

 

Net cash used in operating activities – continuing operations

     (15,906     (29,931

Net cash (used in) provided by operating activities – discontinued operations

     (4,291     1,913  
  

 

 

   

 

 

 

Net cash used in operating activities

     (20,197     (28,018

Cash flows from investing activities

    

Purchase of property and equipment

     (279     (204
  

 

 

   

 

 

 

Net cash used in investing activities – continuing operations

     (279     (204

Net cash provided by (used in) investing activities – discontinued operations

     8,212       (859
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     7,933       (1,063

Cash flows from financing activities

    

Proceeds from issuance of convertible preferred stock, net of issuance costs

     9,792       73,826  

Payments of stock issuance costs

     (75     (23

Proceeds from issuance of long-term debt, net of issuance costs

     —         7,338  

Deferred financing costs

     —         (1,452

Proceeds from issuance of common stock upon stock option exercises

     38       197  
  

 

 

   

 

 

 

Net cash provided by financing activities

     9,755       79,886  
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (2,509     50,805  

Cash and cash equivalents at beginning of year – continuing operations

     10,880       4,450  

Cash and cash equivalents at beginning of year – discontinued operations

     —         3,921  
  

 

 

   

 

 

 

Cash and cash equivalents cash at end of year

     8,371       59,176  

Cash and cash equivalents at end of year – discontinued operations

     3,921       4,975  
  

 

 

   

 

 

 

Cash and cash equivalents at end of year – continuing operations

   $ 4,450     $ 54,201  
  

 

 

   

 

 

 

Supplemental disclosures

    

Cash paid for income taxes

   $ 5     $ 7  
  

 

 

   

 

 

 

Cash paid for interest expense for Oxford debt

   $ —       $ 519  
  

 

 

   

 

 

 

Supplemental schedule of non-cash investing and financing activities

    

Convertible preferred stock issued in acquisition of PLI

   $ 16,500     $ —    

Acquisition-related consideration held in escrow

   $ 3,500     $ (3,500

Deferred purchase price payments related to PLI acquisition

   $ 12,269     $ —    

Net assets acquired in acquisition of PLI

   $ 31,662     $ —    

Issuance of Series C convertible preferred stock for deferred purchase price

   $
—  
 
  $ 5,000  

Issuance of Series D convertible preferred stock for deferred purchase price

   $
—  
 
  $ 3,846  

Preferred stock purchase right liability

   $
—  
 
  $ 3,900  

Vesting of unvested issued common stock

   $ 13     $ 38  

Costs incurred, but not paid, in connection with capital expenditures included in accounts payable

   $ 49     $ 181

See accompanying notes to the consolidated financial statements.

 

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PROMETHEUS BIOSCIENCES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1.

Organization

Prometheus Biosciences, Inc. (the Company) was incorporated in the state of Delaware on October 26, 2016 under the name Precision IBD, Inc. and is headquartered in San Diego, California. The Company changed its name to Prometheus Biosciences, Inc. on October 1, 2019. The Company’s business is focused on the discovery, development and commercialization of therapeutic and companion diagnostic products for the treatment of inflammatory bowel disease (IBD).

In June 2019, the Company acquired Prometheus Laboratories, Inc. (PLI) and the related intangible assets used by PLI. PLI was wholly owned by Nestlé Health Science US Holdings, Inc. and the related intangible assets were owned by Societé Des Produits Nestlé S.A (together, Nestlé) (see Note 6). PLI markets and conducts several laboratory developed tests useful to gastroenterologists in monitoring their IBD patients’ disease state and informing their therapeutic decisions.

On December 31, 2020, the Company completed the spinoff of PLI by making an in-kind distribution of 100% of its interest in PLI to the Company’s stockholders of record on December 30, 2020 (see Note 6).

Liquidity

The Company has incurred net losses since inception, experienced negative cash flows from operations, and as of December 31, 2020, has an accumulated deficit of $99.1 million. The Company has historically financed its operations primarily through private placements of convertible preferred stock. The Company expects operating losses and negative cash flows from operations to continue for the foreseeable future. The Company believes its current capital resources, which include gross proceeds of approximately $73.8 million from the sale of Series D-2 convertible preferred stock in January 2021, will be sufficient for the Company to continue as a going concern for at least one year from the issuance date of these consolidated financial statements.

The Company will be required to raise additional capital, however, there can be no assurance as to whether additional financing will be available on terms acceptable to the Company, if at all. If sufficient funds on acceptable terms are not available when needed, it would have a negative impact on the Company’s financial condition and could force the Company to delay, limit, reduce, or terminate product development or future commercialization efforts or grant rights to develop and market product candidates or testing products that the Company would otherwise plan to develop.

 

2.

Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, and expenses and the disclosure of contingent assets and liabilities in the Company’s consolidated financial statements and accompanying notes. Although these estimates are based on the Company’s knowledge of current events and actions it may undertake in the future, actual results may materially differ from these estimates and assumptions.

On December 31, 2020, the Company completed the spinoff of PLI. The results of operations for all periods presented and the assets and liabilities of PLI at December 31, 2019 have been presented as discontinued operations in the accompanying consolidated financial statements in accordance with ASC 205-20, Presentation of Financial Statements—Discontinued Operations. Unless otherwise noted, discussion within these notes to the

 

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consolidated financial statements relates to continuing operations (see Note 6 for additional information on discontinued operations).

On an ongoing basis, management evaluates its estimates, primarily related to revenue recognition, stock-based compensation, fair value of common stock, fair value of the convertible preferred stock, fair value of the preferred stock purchase right liability, and accrued research and development costs. These estimates are based on historical data and experience, as well as various other factors that management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates relating to the valuation of stock require the selection of appropriate valuation methodologies and models, and significant judgment in evaluating ranges of assumptions and financial inputs.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and until December 31, 2020, the date at which the spinoff was completed, its wholly-owned subsidiary, Prometheus Laboratories, Inc. and have been prepared in conformity with GAAP. All intercompany accounts and transactions have been eliminated in consolidation.

Segment Reporting

The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker (CODM), reviews financial information presented on a consolidated basis, accompanied by information about operating segments for purposes of making operating decisions and assessing financial performance. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance.

Prior to the spinoff of PLI in December 2020, the Company determined its operating segments to be the therapeutics and diagnostic services businesses. The therapeutics business derives substantially all of its revenue from collaboration agreements and devotes all of its efforts to development of product candidates and companion diagnostics in the IBD space. The diagnostic services business, which is recorded as a discontinued operations, derives its revenue from diagnostic services in the IBD space generated from the conduct of laboratory developed tests. Subsequent to the spinoff, the Company operates in one segment. The Company operates solely in the United States.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The cash and cash equivalents balance at December 31, 2019 and 2020 represents cash in readily available checking and money market accounts.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash, cash equivalents, and accounts receivable. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. Management believes that the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.

 

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Equipment, Net

Equipment is stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, which ranges from three to five years. Repairs and maintenance charges that do not increase the useful life of the assets are charged to operating expenses as incurred.

Long-Lived Assets

The Company’s long-lived assets are comprised principally of its equipment.

If the Company identifies a change in the circumstances related to its long-lived assets that indicates the carrying value of any such asset may not be recoverable, the Company will perform an impairment analysis. A long-lived asset is not recoverable when the undiscounted cash flows expected to be generated by the asset (or asset group) are less than the asset’s carrying amount. Any required impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value, and would be recorded as a reduction in the carrying value of the related asset and a charge to operating expense.

Deferred Financing Costs

Financing costs, consisting of legal, accounting, printer and filing fees related to the planned initial public offering (IPO), are deferred and will be offset against proceeds from the IPO upon the completion of the offering. In the event the offering is terminated, all deferred financing costs will be expensed. As of December 31, 2020, $1.7 million of deferred financing costs were recorded in the accompanying consolidated balance sheets. There were no deferred financing costs recorded as of December 31, 2019.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606). In accordance with ASC 606, the Company performs the following steps in determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of these agreements: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company satisfies each performance obligation. At contract inception, once the contract is determined to be within the scope of ASC 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

To date, all of the Company’s collaboration revenue has been derived from its collaboration agreement with Millennium Pharmaceuticals, Inc., a subsidiary of Takeda Pharmaceutical Company Limited (collectively, Takeda) and its collaboration agreement with Dr. Falk Pharma GmbH as described in Note 5. The terms of these arrangements include the following types of payments to the Company: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; payments for research and development services provided by the Company; and royalties on net sales of licensed products. At the initiation of an agreement, the Company analyzes whether each unit of account results in a contract with a customer under ASC 606 or in an arrangement with a collaborator subject to guidance under ASC 808, Collaborative Arrangements (ASC 808).

The Company considers a variety of factors in determining the appropriate estimates and assumptions under these arrangements, such as whether the elements are distinct performance obligations, whether there are

 

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observable stand-alone prices, and whether any licenses are functional or symbolic. The Company evaluates each performance obligation to determine if it can be satisfied and recognized as revenue at a point in time or over time. Typically, license fees, non-refundable upfront fees, and funding of research activities are considered fixed, while milestone payments are identified as variable consideration which must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. The Company estimates the amount of variable consideration using the most likely amount, as milestone payments typically only have two possible outcomes. The Company recognizes revenue for sales-based royalty promised in exchange for the license of intellectual property only when the subsequent sale occurs.

The Company may allocate transaction price using a number of methods including estimating standalone selling price of performance obligations and using the residual approach when the standalone selling price of the license is highly variable or uncertain, and observable standalone selling prices exist for the other goods or services promised in the contract.

The Company receives payments from its collaborators based on terms established in each contract. Upfront payments and other payments may require deferral of revenue recognition to a future period until the Company is unconditional. The Company does not assess whether a contract has a significant financing component if the expectation at contract inception is such that the payment by the customer is akin to a deposit for research and development services.

Research and Development and Clinical Trial Accruals

Research and development costs are charged to expense as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, and allocated overhead, including rent, equipment depreciation and utilities. Advance payments for goods or services for future research and development activities are deferred and expensed as the goods are delivered or the related services are performed.

The Company estimates preclinical studies and clinical trial expenses based on the services performed pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and trials on the Company’s behalf. In addition, clinical study and trial materials are manufactured by contract manufacturing organizations. In accruing for these services, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. These estimates are based on communications with the third-party service providers and the Company’s estimates of accrued expenses and on information available at each balance sheet date. If the actual timing of the performance of services or the level of effort varies from the estimate, the Company will adjust the accrual accordingly.

Patent Costs

Costs related to filing and pursuing patent applications are recorded as general and administrative expense in the accompanying consolidated statements of operations and are expensed as incurred since recoverability of such expenditures is uncertain.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

Stock-Based Compensation

The Company expenses stock-based compensation to employees and non-employees over the requisite service period (usually the vesting period) on a straight-line basis, net of actual forfeitures during the period,

 

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based on the estimated grant-date fair value of the awards. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model, and the assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

For restricted stock awards, the fair value of the award is the estimated fair value of the Company’s common stock on the grant date, as determined by the Company’s board of directors.

Valuation of Common Stock

Given the absence of a public trading market for the Company’s common stock, its board of directors exercised their judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock, such as: contemporaneous valuations performed by independent third-party specialists, its stage of development, including the status of its research and development efforts of its product candidates, the material risks related to its businesses and industry, its results of operations before discontinued operations and financial position, including its levels of capital resources, the prices at which its sold shares of its convertible preferred stock, the rights, preferences and privileges of its convertible preferred stock relative to those of its common stock, the conditions in the biotechnology industry and the economy in general, the stock price performance and volatility of comparable life sciences public companies, as well as recently completed mergers and acquisitions of peer companies, the likelihood of achieving a liquidity event for the holders of its common stock or convertible preferred stock, such as an IPO or a sale of the Company given prevailing market conditions, trends and developments in its industry, external market conditions affecting the life sciences and biotechnology sectors, and the lack of liquidity of its common stock, among other factors.

After the completion of the IPO, the Company’s board of directors will determine the fair value of each share of underlying common stock based on the closing price of the Company’s common stock as reported by the then applicable trading market on the date of the grant. The Company’s board of directors intended all options granted to be exercisable at a price per share not less than the per share fair value of its common stock underlying those options on the grant date.

Preferred Stock Purchase Right Liabilities

From time to time, the Company enters into convertible preferred stock financings where, in addition to the initial closing, investors agree to buy, and the Company agrees to sell, additional shares of that convertible preferred stock at a fixed price in the event that certain conditions are met or agreed upon milestones are achieved. The Company evaluates this purchase right and assesses whether it meets the definition of a freestanding instrument and, if so, determines the fair value of the purchase right liability and records it on the balance sheet with the remainder of the proceeds raised allocated to convertible preferred stock. The preferred stock purchase right liability is revalued at each reporting period with changes in the fair value of the liability recorded as change in fair value of preferred stock purchase right liability in the statements of operations. The preferred stock purchase right liability is revalued at settlement and the resultant fair value, if any, is then reclassified to convertible preferred stock at that time.

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

 

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The Company recognizes net deferred tax assets to the extent that the Company believes these assets are more likely than not to be realized. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If management determines that the Company would be able to realize its deferred tax assets in the future in excess of their net recorded amount, management would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions on the basis of a two-step process whereby (1) management determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, management recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits within income tax expense. Any accrued interest and penalties are included within the related tax liability.

Net Loss Per Share

Basic net loss per share attributable to common stockholders is calculated by dividing the net loss attributable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of common stock equivalents outstanding for the period determined using the treasury-stock method. The Company has excluded 3,585,808 and 1,450,428 weighted-average shares subject to repurchase or forfeiture from the weighted-average number of common shares outstanding for the years ended December 31, 2019 and 2020, respectively. Dilutive common stock equivalents are comprised of convertible preferred stock and options outstanding under the Company’s stock option plan.

Basic and diluted net loss attributable to common holders per share is presented in conformity with the two- class method required for participating securities as the convertible preferred stock are considered participating securities. The Company’s participating securities do not have a contractual obligation to share in the Company’s losses. As such, the net loss was attributed entirely to common stockholders. Accordingly, for the years ended December 31, 2019 and 2020, there is no difference in the number of shares used to calculate basic and diluted shares outstanding.

Potentially dilutive securities not included in the calculation of diluted net loss per share because to do so would be anti-dilutive are as follows (in common stock equivalent shares):

 

     December 31,  
     2019      2020  

Convertible preferred stock outstanding

     58,145,867        160,864,434  

Common stock options issued and outstanding

     13,843,336        29,302,518  

Warrants to purchase convertible preferred stock outstanding

     —          112,500  
  

 

 

    

 

 

 

Total

     71,989,203        190,279,452  
  

 

 

    

 

 

 

Comprehensive Loss

Net loss and comprehensive loss were the same for the period presented; therefore, a separate statement of comprehensive loss is not included in the accompanying consolidated financial statements.

 

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Recent Accounting Standards

From time to time, new accounting standards are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

Adoption of New Accounting Standards

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The primary focus of the standard is to improve the effectiveness of the disclosure requirements for fair value measurements. The Company adopted this guidance on January 1, 2020 with no material impact on its financial statements or related disclosures

New Accounting Pronouncements Not Yet Adopted

In April 2012, the Jump-Start Our Business Startups Act (the JOBS Act) was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company may elect to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later than when public companies must adopt the standards. The Company has elected to take advantage of the extended transition period afforded by the JOBS Act and, as a result, will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for emerging growth companies, which are the dates included below.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The Company anticipates implementing the accounting guidance for leases beginning with the annual reporting period ending December 31, 2022 and interim reporting periods in 2023. The Company is still assessing the impact that the new leasing standard will have on operations and financial position.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses: Measurement of credit Losses on Financial Instruments (ASU 2016-13), which amends the impairment model by requiring entities to use a forward looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available-for sale debt securities. The standard is effective for the company beginning in the first quarter of 2023, with early adoption permitted. The Company is currently evaluating the expected impact of ASU 2016-13 on its consolidated financial statements.

 

3.

Fair Value Measurements and Fair Value of Financial Instruments

The accounting guidance defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use

 

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in pricing an asset or liability. As a basis for considering such assumptions, the accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

 

Level 1   Quoted prices in active markets for identical assets or liabilities.
Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
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.

Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The carrying amounts of cash and cash equivalents, prepaid and other assets, accounts payable and accrued liabilities are considered to be representative of their respective fair values because of the short-term nature of those instruments. Based on the borrowing rates currently available to the Company for loans with similar terms, which is considered a Level 2 input, the Company believes that the fair value of long-term debt approximates its carrying value.

The Company’s financial instruments that are carried at fair value consist of Level 3 liabilities. There were no transfers within the hierarchy during the years ended December 31, 2019 and 2020. Level 3 liabilities that are measured at fair value on a recurring basis consists of the acquisition-related consideration held in escrow issued in connection with the acquisition of PLI, warrants to purchase shares of convertible preferred stock and a preferred stock purchase right liability.

Acquisition-related Consideration Held in Escrow

The fair value of the Acquisition-related consideration held in escrow represents contingent consideration recorded in connection with the acquisition of PLI and consisted of 3,500,000 shares of the Company’s Series C preferred stock and was included in the purchase price consideration. The fair value of the Series C preferred shares was determined based on recent financing transactions involving the same securities. There were no changes to the fair value during the period the obligation remained outstanding (see Note 11).

Convertible Preferred Stock Warrant Liability

The Series C convertible preferred stock warrant liability was recorded at fair value utilizing the Black-Scholes option pricing model using significant unobservable inputs consistent with the inputs used for the Company’s stock-based compensation expense adjusted for the preferred stock warrants’ expected term and the fair value of the underlying preferred stock.

The assumptions used in the Black-Scholes option pricing model to determine the fair value of the Series C convertible preferred stock warrant liability at December 31, 2020 were as follows:

 

Fair value of underlying preferred stock

   $ 0.83  

Risk-free interest rate

     1.70 %

Expected volatility

     70.00

Expected term (in years)

     9.2  

Expected dividend yield

     —  

 

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Preferred Stock Purchase Right Liability

The preferred stock purchase right liability was determined using a valuation model that considered: (i) the risk-free rate commensurate with the expected milestone timing of 0.09%; (ii) the probability of the Series D-2 tranche of 80.0%; (iii) volatility of 80.0%; (iv) consideration received for the Series D-1 preferred stock; (v) the number of shares to be issued to satisfy the preferred stock purchase right and at what price; and (vi) certain implied and provided assumptions needed to calibrate the Series D-1 value and the Series D-2 purchase right. Significant changes in the assumptions could have a material impact on the value of the preferred stock purchase right liability.

 

Activity

of Liabilities Using Fair Value Level 3 Measurements

The following table summarizes the activity of the financial instruments valued using Level 3 inputs (in thousands):

 

     Acquisition-
related
Consideration
Held in Escrow
    Series C Convertible
Preferred Stock
Warrant Liability
    Series D
Convertible
Preferred
Stock Purchase
Right Liability
 

Balance at December 31, 2018

   $ —       $ —       $ —    

Fair value of acquisition-related consideration recorded in connection with acquisition of PLI

     3,500       —         —    
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2019

     3,500       —         —    

Acquisition-related consideration released from escrow

     (3,500     —         —    

Issuance of Series C convertible preferred stock warrants

     —             79           —    

Issuance of Series D convertible preferred stock purchase right liability

     —         —         3,900  

Change in fair value

     —         (15     —    
  

 

 

   

 

 

   

 

 

 

Balance at December 31, 2020

   $ —       $ 64     $ 3,900  
  

 

 

   

 

 

   

 

 

 

 

4.

Balance Sheet Details

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

     December 31,  
        2019           2020    

Deposits

   $   125      $ —    

Prepaid research and development

     168        1,894  

Other prepaid expenses

     189        275  
  

 

 

    

 

 

 

Total

   $ 482      $ 2,169  
  

 

 

    

 

 

 

 

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Equipment, Net

Equipment, net, consist of the following (in thousands):

 

     December 31,  
       2019          2020    

Laboratory equipment

   $   337      $ 572  

Office equipment and furniture

     24        24  
  

 

 

    

 

 

 
     361        596  

Less accumulated depreciation

     (40      (149
  

 

 

    

 

 

 

Total

   $ 321      $ 447  
  

 

 

    

 

 

 

Depreciation expense related to property and equipment was $35,000 and $0.1 million for the years ended December 31, 2019 and 2020, respectively.

Accrued Compensation

Accrued compensation consist of the following (in thousands).

 

     December 31,  
       2019          2020    

Accrued salaries and payroll taxes

   $   172      $ 402  

Accrued vacation

     68        102  

Accrued bonuses

     744        1,556  

Accrued severance

     —          662  
  

 

 

    

 

 

 

Total

   $ 984      $ 2,722  
  

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following (in thousands):

 

     December 31,  
       2019          2020    

Accrued research and development

   $ 1,047      $ 1,940  

Accrued legal expenses

     232        490  

Unvested early exercise liability

     29        67  

Accrued other

     293        397  
  

 

 

    

 

 

 

Total

   $ 1,601      $ 2,894  
  

 

 

    

 

 

 

 

5.

Collaboration and License Agreements

Cedars-Sinai Medical Center

In September 2017, the Company entered into an Exclusive License Agreement (License Agreement) with Cedars-Sinai Medical Center (Cedars-Sinai), a related party. Under the terms of the License Agreement, Cedars-Sinai granted the Company an exclusive, worldwide, royalty bearing license with respect to certain patent rights, information and materials related to therapeutic targets and companion diagnostic products, in each case to conduct research, develop, and commercialize therapeutic and diagnostic products for the diagnosis and treatment of IBD. The licensed technology includes information and materials arising out of Cedars-Sinai’s database and biobank, as well as exclusive access to this database and biobank to develop diagnostic and therapeutic products for human use, which biobank is an integral part of the Company’s Prometheus360 platform.

 

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As consideration for the license rights, in September 2017 the Company issued (i) 2,575,000 shares of fully vested common stock, and (ii) 3,350,000 shares of unvested restricted common stock. The fair value of all of the shares were measured at the date of issuance. The shares of unvested restricted common stock had vesting conditions tied to continuing services required of certain Cedars-Sinai employees pursuant to consulting agreements with the Company. One third of the restricted shares were released from restriction annually on the anniversary of the Agreement over a three-year period. Additionally, the Company is obligated to pay Cedars-Sinai low- to mid-single digit percentage royalties on net sales of products covered under the License Agreement. The term of, and the Company’s royalty obligations under, the License Agreement expires on a licensed product-by-product and country-by-country basis on the later of ten years from the date of first commercial sale or when there is no longer a valid patent claim covering such licensed product in such country.

In 2017, the Company and Cedars-Sinai also entered into Research agreements, under which the parties can provide research services to each other at pricing specified in individual statements of work. During the years ended December 31, 2019 and 2020, no services were provided under the agreements.

Collaboration Agreement with Millennium Pharmaceuticals, Inc., a subsidiary of Takeda Pharmaceutical Company Limited

In March 2019, the Company entered into a Companion Diagnostics Development and Collaboration Agreement (the Takeda Collaboration Agreement) with Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda. Pursuant to this agreement, the Company established a strategic collaboration under which it will develop a companion diagnostic product (Diagnostic Product) for one selected drug target, with the option for Takeda to select an additional drug target (each, a Collaboration Target). Under the Takeda Agreement, Takeda is responsible for the development and commercialization of any therapeutic clinical candidates that it develops directed against a Collaboration Target for the treatment of IBD (Takeda Drugs), and we are responsible for development and commercialization of the Diagnostic Product(s).

In consideration of the rights granted to Takeda under the agreement, the Company received a one-time upfront payment of $1.5 million and is eligible to receive future development and regulatory milestone payments of up to $47.9 million for each Collaboration Target, commercial milestone payments of up to $25.0 million in connection with each Collaboration Target for successful commercialization of the applicable Takeda Drug and the associated Diagnostic Product, and sales milestone payments of up to $75.0 million in connection with each Collaboration Target, provided that regulatory approval for the applicable Takeda Drug includes use of the associated Diagnostic Product. In addition, the Company is eligible to receive low-single digit percentage royalties on net sales of all Takeda Drugs. In addition, Takeda is obligated to pay the Company for certain research expenses incurred under the agreement up to $1.8 million. The term of, and the royalty obligations under, the Takeda Agreement expires on a Takeda Drug-by-Takeda Drug and country-by-country basis on the later of (i) ten years from the date of first commercial sale, (ii) when there is no longer a valid patent claim covering a Takeda Drug in such country, and (iii) expiration of any applicable regulatory exclusivity for such Takeda Drug.

At inception and through December 31, 2020, the Company has identified one performance obligation per each target for all the deliverables under the agreement since the delivered elements are not distinct within the context of the contract. Accordingly, the Company will recognize revenue for the transaction price in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the three-year period over which it expects to satisfy its performance obligations. The Company included one milestone in the transaction price as it was deemed not probable of significant reversal at the inception of the agreement. Due to the uncertainty in the achievement of the developmental and commercial milestones, the variable consideration associated with these future milestone payments has been fully constrained (excluded) from the transaction price until such time that the Company concludes that it is probable that a significant reversal of previously recognized revenue will not occur. These estimates will be re-assessed at each reporting period. In connection with the Takeda Collaboration Agreement, the Company recognized revenue of $1.1 million and

 

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$0.8 million for the years ended December 31, 2019 and 2020, respectively, and had deferred revenue of $1.5 million and $1.7 million as of December 31, 2019 and 2020, respectively.

A reconciliation of deferred revenue related to the Takeda Collaboration Agreement is as follows (in thousands):

 

Balance at December 31, 2018

   $ —    

Amounts received in 2019

     2,660  

Revenue recognized in 2019

     (1,118
  

 

 

 

Balance at December 31, 2019

     1,542  

Amounts received in 2020

     960  

Revenue recognized in 2020

     (792
  

 

 

 

Balance at December 31, 2020

   $ 1,710  
  

 

 

 

The Company expects to recognize $0.9 million of the deferred revenue balance in 2021.

Dr. Falk Pharma GmbH Collaboration Agreement

In July 2020, the Company entered into a Co-Development and Manufacturing Agreement (the Co-Development Agreement) with Dr. Falk Pharma GMBH (Falk), pursuant to which the parties will co-develop and commercialize, exclusively in their respective territories, therapeutic product candidates targeting members of the TNF super family for the treatment of UC and CD under the Company’s PR600 program. The Company is responsible for regulatory approvals and commercialization of any products in the United States and the rest of the world, other than the Falk territory. Falk is responsible for regulatory approvals and commercialization of any products in the European Union, United Kingdom, Switzerland, the countries of the European Economic Area (excluding Malta and the Republic of Cyprus), Australia and New Zealand (Falk territory).

In consideration of the rights granted to Falk under the Co-Development Agreement, the Company received two upfront payments of $2.5 million each. The first upfront payment was paid upon execution of the Co-Development Agreement and the second was paid when the underlying development plan was finalized, which occurred in December 2020. All non-internal development costs through both the pre-clinical and clinical phases will be funded 25% by Falk and 75% by the Company. In addition, the Co-Development Agreement includes two pre-clinical milestone payments totaling $15.0 million and the Company is eligible to receive low-single to low-double digit percentage royalties on net sales of all products incorporating antibodies covered by the agreement in the Falk territory. The Company agreed to pay Falk a low-single digit royalty on net sales for such products in the Company’s territory. The term of, and the royalty obligations under, the Falk Agreement expires on a country-by-country basis on the later of (i) ten years from the date of first commercial sale, (ii) when there is no longer a valid patent claim covering a Falk Drug in such country, and (iii) expiration of any applicable regulatory exclusivity for such Falk Drug.

At inception and through December 31, 2020, the Company has identified one performance obligation for all the deliverables under the Co-Development Agreement. Accordingly, the Company is recognizing revenue for the transaction price allocated to the performance obligation in an amount proportional to the collaboration expenses incurred and the total estimated collaboration expenses over the seven year period over which it expects to satisfy its performance obligation. The Company included both milestone payments in the transaction price as it was deemed not probable of significant reversal at the inception of the agreement. In connection with the Co-Development Agreement, the Company recognized revenue of $0.4 million for the year ended December 31, 2020 and had deferred revenue of $4.8 million as of December 31, 2020. This deferred revenue balance is expected to be recognized proportionally as expenses are incurred over the estimated seven year term.

 

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A reconciliation of deferred revenue related to the Falk Agreement for the year ended December 31, 2020 is as follows (in thousands):

 

Balance at December 31, 2019

   $ —    

Amounts received in 2020

     5,200  

Revenue recognized in 2020

     (437
  

 

 

 

Balance at December 31, 2020

   $ 4,763  
  

 

 

 

The Company expects to recognize $1.0 million of the deferred revenue balance in 2021.

 

6.

Discontinued Operations

On June 30, 2019 (the Closing Date), the Company acquired 100% of the common stock of PLI and the related intangible assets used by PLI for total consideration of approximately $31.7 million, consisting of the issuance of 16.5 million shares of the Company’s Series C convertible preferred stock with a fair value of $16.5 million, the present value of $15.0 million in deferred cash payments due as follows: $5.0 million due on June 30, 2020 and $10.0 million due on June 30, 2021, and acquisition-related contingent consideration consisting of 3.5 million shares of the of the Company’s Series C convertible preferred stock with a fair value of $3.5 million. The deferred cash payments totaling $15.0 million are not contingent upon any event and to reflect the interest component were discounted at 12%. On June 30, 2020, $5.0 million of deferred cash payments were converted to 5,000,000 Series C convertible preferred stock and in October 2020, $3.8 million of deferred cash payments were converted to 5,088,851 shares of Series D convertible preferred stock. As of December 31, 2020, a total of $5.7 million is recorded as Amounts due to Nestlé, current—related party in the accompanying consolidated balance sheets. The acquisition-related contingent consideration stipulated certain revenue thresholds for the Anser® test during the first calendar year following the acquisition. The shares were released from escrow on June 30, 2020. As part of the acquisition, the Company acquired PLI’s Clinical Laboratory Improvement Amendments (CLIA) laboratory.

Total transaction costs incurred in connection with this acquisition totaled $0.5 million in the year ended December 31, 2019 and are included in general and administrative expenses in the accompanying consolidated statements of operations.

Consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their fair values as of the acquisition date. Management estimated the fair value of tangible and intangible assets and liabilities in accordance with the applicable accounting guidance for business combinations and utilized the assistance of third-party valuation specialists. The significant assumptions used to estimate the fair value of the acquired intangible assets included projected cash flows, discount rates, net working capital and long-term growth rate.

 

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The allocation of the purchase price was as follows (in thousands):

 

     Fair Value  

Cash

   $ 8,917  

Accounts receivable

     11,989  

Indemnification receivable from Nestlé—related party

     6,975  

Receivables from Nestlé—related party

     4,318  

Assets related to divested therapeutic product

     22,473  

Diagnostic testing supplies

     2,852  

Other current assets

     1,666  

Property and equipment

     6,910  

Intangible assets

     5,900  

Goodwill

     724  

Current liabilities

     (10,891

Payable to Nestlé—related party

     (400

Liabilities associated with terminated compensation plans

     (2,040

Liabilities associated with divested therapeutic product

     (27,225

Deferred income tax liabilities

     (506
  

 

 

 

Total estimated purchase price allocation

   $ 31,662  
  

 

 

 

The sales and purchase agreement, as amended, contained an indemnification clause in which Nestlé agreed to reimburse the Company certain amounts for certain claims that existed at the Closing Date. Included in the allocation of the purchase price was a liability of approximately $9.0 million related to state government rebates for pharmaceutical products previously divested by PLI. In addition, the initial allocation of the purchase price included an indemnification asset of approximately $7.0 million for the expected reimbursement the Company expected to receive from Nestlé as these rebates were settled by the Company, in accordance with the purchase agreements, as amended.

In addition, the Company recorded a receivable from Nestlé totaling approximately $4.3 million related to liabilities resulting from the termination of certain Nestlé compensation plans at the time of the acquisition. Pursuant to the terms of the acquisition, Nestlé was obligated to reimburse the Company for these costs. During the years ended December 31, 2019 and 2020, the Company received and settled $3.3 million and $1.0 million, respectively, related to this arrangement.

Additionally, the Company recorded acquired assets and liabilities related to pharmaceutical products divested by PLI prior to the acquisition by the Company. All these assets and liabilities were settled prior to December 31, 2019, other than the liabilities related to accrued rebates and sales returns.

The Company acquired intangible assets that consisted of developed technology, trademarks and tradenames and customer relationships, which had an estimated fair value in total of $5.9 million. The fair values of these assets were determined using a multi-period income approach, which was based on the present value of projected cash flows. The intangible asset recorded for developed technology was amortized on a straight-line basis over its estimated useful lives. The intangible assets recorded for customer relationships and trademarks and tradenames were amortized using an accelerated method of amortization representing the expected pattern of economic benefit.

 

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The intangible assets acquired and included in Non-current assets of discontinued operations as of December 31, 2019 consist of the following (in thousands, except years):

 

     Weighted
Average
Amortization
Period

(in years)
     Gross
Amount
     Accumulated
Amortization
     Intangible
assets, net
 

Intangible assets subject to amortization:

           

Developed technology

     10.0      $ 2,600      $ 130      $ 2,470  

Trademarks and tradenames

     6.0        800        108        692  

Customer relationships

     7.0        2,500        250        2,250  
     

 

 

    

 

 

    

 

 

 

Total intangibles subject to amortization

     7.3      $ 5,900      $ 488      $ 5,412  
     

 

 

    

 

 

    

 

 

 

Amortization expense related to intangible assets was $0.5 million and $1.2 million for the years ended December 31, 2019 and 2020, respectively, and is included in Loss from discontinued operations.

The excess of the fair value of the total purchase price consideration over the fair value of the net assets acquired was recorded as goodwill. The goodwill reflects the Company’s expectations to leverage the acquired intellectual property and related know-how to help the Company develop companion diagnostics for multiple therapeutic product candidates for the treatment of IBD. The goodwill associated with the acquisition of PLI is not deductible for tax purposes. During the year ended December 31, 2020, as a result of the annual impairment analysis, Management concluded that goodwill was impaired and recognized a goodwill impairment charge of $0.7 million, which is included as a component of discontinued operations.

In December 2020, in order to achieve the Company’s strategic objectives, the Company’s board of directors approved the spinoff of PLI by making an in-kind distribution of 100% of its interest in PLI to the Company’s stockholders of record on December 30, 2020.

In connection with the spinoff, which was effected on December 31, 2020, the Company assigned PLI specific intellectual property to PLI; entered into a transition services agreement whereby the Company agreed to provide PLI with certain transition services including general and administrative, finance and clinical operations support; and entered into a sublease agreement under which the Company will continue to occupy approximately 40,000 square feet in the PLI facility for a term of one year.

Post spinoff, the Company retained obligations under the Oxford loan and for the deferred cash payments to Nestlé.

The following is a summary of the assets and liabilities included in the spinoff (in thousands):

 

Cash and cash equivalents

   $ 4,975  

Other current assets

     17,324  

Property and equipment, net

     6,025  

Intangible assets, net

     4,233  

Current liabilities

     (8,000

Cancellation of intercompany balances

     (11,281
  

 

 

 

Total

   $ 13,276  
  

 

 

 

 

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The major line items constituting the loss of PLI, which are reflected in the accompanying consolidated statements of operations as discontinued operations, are as follows:

 

     Years Ended
December 31,
 
     2019      2020  

Diagnostic services revenue

   $ 22,674      $ 36,593  

Operating expenses:

     

Cost of diagnostic services revenue

     8,864        12,625  

Research and development

     3,479        4,956  

Sales and marketing

     10,036        10,993  

General and administrative

     7,847        9,885  

Restructuring

     5,484        2,260  

Amortization of intangible assets

     488        1,179  

Goodwill impairment charge

     —          724  
  

 

 

    

 

 

 

Total operating expenses

     36,198        42,622  
  

 

 

    

 

 

 

Loss from operations of discontinued operations

     (13,524      (6,029

Interest income

     29        30  

Income tax benefit

     (501      —    
  

 

 

    

 

 

 

Loss from discontinued operations, net of taxes

   $ (12,994    $ (5,999
  

 

 

    

 

 

 

The assets and liabilities of PLI that were classified as discontinued operations in the consolidated balance sheet as of December 31, 2019 are as follows (in thousands):

 

Cash and cash equivalents

   $ 3,921  

Accounts receivable, net

     11,947  

Amounts due from Nestle, a related party

     11,292  

Diagnostic testing supplies

     1,934  

Prepaid expenses and other current assets

     3,508  
  

 

 

 

Current assets of discontinued operations

   $ 32,602  
  

 

 

 

Property and equipment, net

   $ 6,492  

Intangible assets, net

     5,412  

Goodwill

     724  
  

 

 

 

Non-current assets of discontinued operations

   $ 12,628  
  

 

 

 

Accounts payable

   $ 3,004  

Accrued compensation

     3,813  

Accrued expenses and other current liabilities

     1,730  

Accrued rebates and sales returns

     12,618  

Amounts due Nestlé, a related party

     27  

Deferred revenue

     450  
  

 

 

 

Current liabilities of discontinued operations

   $ 21,642  
  

 

 

 

The following accounting policies and disclosures relate to the discontinued operations.

Prior to the spinoff, PLI revenues were derived from its diagnostic services and its Master Services Agreement with Takeda Pharmaceutical Company Limited.

 

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Diagnostic Services Revenue

The diagnostic services business, provided clinical testing services to gastroenterologists. This service was a single performance obligation that was satisfied and recognized as revenue upon completion of the testing process, when results are reported. The customers that paid for these services consisted of the following groups: client payors (i.e., hospitals, other laboratories, etc.), healthcare insurers, government payors (primarily Medicare and Medicaid), and patient self-pay. The healthcare professionals who ordered the Company’s testing products and to whom test results were reported were generally not responsible for payment for these products. The portfolio approach was utilized to estimate the amount of consideration PLI expected to be entitled to receive from each customer group in exchange for providing services. These estimates included the impact of contractual allowances, including payor denials, and price concessions, as discussed below. There was no significant financing component due to the period of time between performance of services and collection of consideration.

The process for estimating revenue and the ultimate collection of accounts receivable involved significant judgment and estimation, including historical denial and collection experience and other factors (including the period the receivables have been outstanding).

The following were PLI’s diagnostic services business’ portfolios:

Client Payors

Client payors include hospitals and commercial laboratories and were billed based on negotiated fee schedules. Credit risk and ability to pay were more of a consideration for these payors than healthcare insurers and government payors. Collection of consideration expected to be received generally occured within 60 to 90 days of billing. In establishing the allowances for doubtful accounts, specific account reviews, historical collection experience and other factors were considered in addition to the period the receivables were outstanding.

Healthcare Insurers and Government Payors

Healthcare insurers and government payors were billed at PLI’s list price. Net revenue recognized consisted of amounts billed net of allowances for differences between amounts billed and the estimated consideration expected to be received from such payors. The process for estimating revenue and the ultimate collection of accounts receivable involved significant judgment and estimation. Consideration was given to historical denial and collection experience, insurance reimbursement policies and other factors, in order to estimate allowances and implicit price concessions. The transaction price was estimated using an expected value method on a portfolio basis. The portfolios were grouped per payor (i.e. each individual third-party insurance, Medicare, patient self-pay, etc.) and per test basis. Collection of net revenue from healthcare insurers and government payors was normally a function of providing complete and correct billing information to the healthcare insurers and government payors and generally occured within 30 to 150 days of billing.

As of December 31, 2019, unbilled receivables totaled $0.8 million and is included in Current assets of discontinued operations. The unbilled receivables are amounts that will become due for which an unconditional right to consideration exists.

Master Services Agreement with Takeda Pharmaceutical Company Limited

The Master Service Agreement with Takeda was entered into in December 2019 and provides Takeda a license to commercialize one of PLI’s diagnostic products, as well as an obligation by PLI to administer the diagnostic tests and report the results of tests performed, including customer service support, logistics and quality assurance activities.

 

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Pursuant to the terms of the agreement, payments to be received were based on the number of tests performed and reimbursement for defined expenses, including set up fees and annual maintenance fees. Additionally, two milestone payments, each for $0.5 million, were to be received upon the achievement of defined results in 2020. As of December 31, 2019, activities under the agreement had not commenced, no consideration had been received, and no revenue was recognized during the year ended December 31, 2019.

The Agreement included two performance obligations, one related to the pre-commercialization phase and one related to the post-commercialization phase, since the delivered elements were distinct. The total transaction price of the arrangement was allocated based on the relative fair values of each. Revenue recognized for the transaction price allocated to each performance obligation was based on the level of efforts expended as each performance obligation is satisfied. During the year ended December 31, 2020, $1.4 million of the transaction price allocated to the pre-commercialization phase performance obligation was recognized as revenue and is included in the Loss from discontinued operations.

Restructuring Costs

During the year ended December 31, 2019, restructuring charges of $5.5 million were recognized related to PLI. The charges were primarily for severance and other personnel costs resulting from workforce reduction initiatives associated with the integration and restructuring activities of PLI after the acquisition. The $5.5 million accrued was paid as of December 31, 2019.

During the year ended December 31, 2020, restructuring charges of $2.3 million were recognized related to PLI. The charges were primarily for severance and other personnel costs resulting from workforce reduction initiatives associated with the impact of COVID-19 on the diagnostic business operations. The restructuring liability amount was fully paid in 2020.

Accrued Rebates and Sales Returns

At December 31, 2019, accrued rebates and sales returns included in Current liabilities of discontinued operations consisted of the following (in thousands):

 

Accrued rebates

   $ 10,381  

Accrued sales returns

     2,237  
  

 

 

 

Total

   $ 12,618  
  

 

 

 

Included in the fair value of the PLI assets acquired and liabilities assumed upon the acquisition of PLI was a liability of approximately $9.0 million related to state government rebates for pharmaceutical products previously divested by PLI and recorded a corresponding indemnification asset of approximately $7.0 million for the expected reimbursement to be received from Nestlé as rebates are settled. No payments were made or reimbursements received during the year ended December 31, 2019 related to this liability and asset. PLI plans to dispute a portion of this liability with state governments; however, it is uncertain that it will be successful. If PLI is successful, no material impact is expected on the consolidated statements of operations in the future. Also included in the December 31, 2019 balance of Current liabilities of discontinued operations is approximately $1.4 million related to accrued rebate amounts that full reimbursement from the entity that acquired the pharmaceutical products divested by PLI was expected. A corresponding receivable was included in Current assets of discontinued operations in the consolidated balance sheet as of December 31, 2019.

There were also liabilities assumed related to returns of previously divested pharmaceutical products. The return window for the product returns ended on October 31, 2020. The expected returns were estimated using historical sales and returns information.

The accrued rebates and returns liabilities remained with PLI post spinoff on December 31, 2020.

 

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Commitments and Contingencies

At the acquisition date, PLI was involved with several legal proceedings and claims against it. All claims against PLI remained obligations of PLI and effective upon the spinoff, the Company has no remaining obligations with respect to these claims.

 

7.

Long Term Debt

As of December 31, 2020, long-term debt consists of the following (in thousands):

 

Long-term debt

   $ 7,500  

Final payment

     300  
  

 

 

 
     7,800  

Less debt discount

     (461
  

 

 

 

Long-term debt, net

   $ 7,399  
  

 

 

 

In January 2020, the Company entered into a Loan and Security Agreement with Oxford Finance LLC and its affiliates (Oxford) (the Oxford Loan) which provides for total borrowings of up to $25.0 million, of which $7.5 million was drawn upon execution of the agreement. Interest accrues at an annual rate at the greater of (a) the 30-day U.S. LIBOR rate reported the last business day of the month that immediately precedes the month in which the interest will accrue, or (b) 2.01%, plus 5.98%, with a minimum annual rate of 7.99%. From March 1, 2020, through February 28, 2023, the Company is required to make interest only payments. Beginning March 1, 2023, in addition to interest payments, the monthly payments will include an amount equal to the outstanding principal divided by 24 months. At maturity (or earlier prepayment), the Company is also required to make a final payment equal to 4.0% of the original principal amount borrowed and 3% of the future amount to be funded. At December 31, 2020, no amounts remain available for borrowing under the Oxford Loan due to the expiration of the provision that allowed for additional borrowings.

The Oxford Loan is collateralized by a first priority security interest in substantially all of the Company’s current and future assets, other than its intellectual property, and contains customary conditions of borrowing, events of default and covenants, including covenants that restrict the Company’s ability to dispose of assets, merge with or acquire other entities, incur indebtedness and make distributions to holders of the Company’s capital stock. Should an event of default occur, including the occurrence of a material adverse change, the Company could be liable for immediate repayment of all obligations under the Oxford Loan. In December 2020, the Oxford Loan Agreement was amended to allow the PLI spinoff and to release PLI from all obligations pursuant to the Oxford Loan.

In addition, warrants to purchase 112,500 shares of Series C convertible preferred stock were issued to Oxford in conjunction with the execution of the agreement at an exercise price of $1.00 per share. The warrants have a ten-year life and are exercisable immediately. The warrants contain anti-dilution protection in the event an issuance of common stock is lower than the if converted Series C convertible preferred stock, subject to customary exceptions as set forth in the Company’s Certificate of Incorporation. The fair value of the warrant, the debt issuance costs and the final payment totaling approximately $0.6 million are being amortized to interest expense using the effective interest method over the term of the debt.

 

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Future minimum principal and interest payments under the Oxford Loan including the final payment, as of December 31, 2020, are as follows (in thousands):

 

2021

   $ 608  

2022

     608  

2023

     3,637  

2024

     3,966  

2025

     931  
  

 

 

 
     9,750  

Less interest and final payment

     (2,250
  

 

 

 

Long-term debt

   $ 7,500  
  

 

 

 

 

8.

Stockholders’ Equity (Deficit)

Amended Articles of Incorporation

In March 2020, the Company amended its Certificate of Incorporation to authorize 138,630,900 shares of common stock and 101,645,867 shares of convertible preferred stock, designated as 14,979,200 shares of Series A, 26,666,667 shares of Series B and 60,000,000 shares of Series C.

In October 2020, the Company amended its Certificate of Incorporation to authorize 325,000,000 shares of common stock and 254,983,985 shares of convertible preferred stock, reducing the authorized number of shares designated as Series C to 53,176,000 and creating two new series of convertible preferred designated as Series D-1 and Series D-2 with total authorized shares of 66,155,067 and 94,007,051, respectively.

Convertible Preferred Stock

During 2019, the Company issued an additional 13,084,791 shares of Series B convertible preferred stock at a purchase price of $0.75 per share, raising net cash proceeds of $9.8 million.

Also during 2019, the Company issued 16,500,000 shares of Series C convertible preferred stock at a price of $1.00 per share in connection with the acquisition of PLI.

In March 2020, the Company sold 28,063,500 shares of Series C convertible preferred stock and received net cash proceeds totaling $28.0 million.

Series D Convertible Preferred Stock

In October 2020, the Company entered into a Series D convertible preferred stock purchase agreement (Series D SPA) under which it issued 61,066,216 shares of Series D-1 convertible preferred stock, for cash, at a price of $0.7558 per share, for net proceeds of $46.2 million (the Initial Series D Closing). In addition, 5,088,851 shares of Series D-1 convertible preferred stock were issued to Nestlé in satisfaction of a deferred purchase price obligation of $3.8 million. The Series D SPA contained provisions that potentially obligates the Company to issue an additional 94,007,051 shares of Series D-2 convertible preferred stock at $0.8510 per share in an additional closing, 7,231,311 of which is issuable to Nestlé for satisfaction of deferred purchase price obligations of $6.2 million, upon the approval by the Company’s Board of Directors, or at the option of the investors who participated in the Initial Series D Closing, or upon the achievement of certain milestones as defined in the Series D SPA, which purchase right terminates upon certain specified events, including an initial public offering of the Company, if any. In the event that an Initial Series D Closing purchaser failed to purchase all of their required shares in the subsequent Series D closing, each of the Series D convertible preferred shares held by such purchaser automatically converted into one-tenth of a share of common stock.

The Company determined its obligation to issue additional shares of the Company’s Series D-2 convertible preferred stock in the Initial Series D Closing represented a freestanding financial instrument that required

 

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liability accounting. This freestanding preferred stock purchase right liability for the additional closing was recorded at fair value, with fair value changes recognized in the statements of operations. As of the Initial Series D Closing, the estimated fair value of the preferred stock purchase right liability was $2.9 million. The Company will record any changes in the fair value of the Series D convertible preferred stock purchase right liability as changes in the fair value of convertible preferred stock purchase right liability in the accompanying statements of operations. Shares of Series D-2 convertible preferred stock pursuant to this arrangement were issued in January 2021 (see Note 14).

The authorized, issued and outstanding shares of convertible preferred stock as of December 31, 2019 consist of the following (in thousands, except share and per share amounts):

 

     Shares
Authorized
     Shares
Issued and
Outstanding
     Per Share
Original Issue
Price
     Liquidation
Preference
     Carrying
Value
 

Series A

     14,979,200        14,979,200      $ 0.50      $ 7,490      $ 7,391  

Series B

     26,666,667        26,666,667        0.75        20,000        19,901  

Series C

     50,000,000        16,500,000        1.00        16,500        16,448  
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     91,645,867        58,145,867         $ 43,990      $ 43,740  
  

 

 

    

 

 

       

 

 

    

 

 

 

The authorized, issued and outstanding shares of convertible preferred stock as of December 31, 2020 consist of the following (in thousands, except share and per share amounts):

 

     Shares
Authorized
     Shares
Issued and
Outstanding
     Per Share
Original Issue
Price
     Liquidation
Value
     Carrying
Value
 

Series A

     14,979,200        14,979,200      $ 0.50      $ 7,490      $ 7,391  

Series B

     26,666,667        26,666,667        0.75        20,000        19,901  

Series C

     53,176,000        53,063,500        1.00        53,064        52,937  

Series D-1

     66,155,067        66,155,067        0.76        49,933        50,831  

Series D-2

     94,007,051        —          —          —          —    
  

 

 

    

 

 

       

 

 

    

 

 

 

Total

     254,983,985        160,864,434         $ 130,487      $ 131,060  
  

 

 

    

 

 

       

 

 

    

 

 

 

The rights, preferences and privileges of the convertible preferred stock as of December 31, 2020 were as follows:

Dividends

The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock unless the holders of Series A , B, C, and D convertible preferred stock (collectively referred to as Preferred Stock) shall first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock in an amount equal to (on an as-if-converted to Common Stock basis) the amount paid or set aside for each share of Common Stock. There have been no dividends declared by the board as of December 31, 2020.

Liquidation

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation Event, as defined, each holder Series D Preferred Stock is entitled to receive, prior and in preference to any distributions to the holders of Series A preferred stock, Series B preferred stock, Series C preferred stock and common stock, an amount equal to the greater of (i) the Original Issue Price per share, plus any declared but unpaid dividends thereon or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event. Subject to the prior payment of all amounts due to holders of Series D preferred stock, each holder of of Series C Preferred Stock is entitled to receive, prior and in preference to any distributions to the holders of Series A preferred stock, Series B preferred

 

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stock and common stock, an amount equal to the greater of (i) the Original Issue Price per share, plus any declared but unpaid dividends thereon or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event. Subject to the prior payment of all amounts due to holders of Series C preferred stock, each holder of Series A and Series B preferred stock is entitled to receive, prior and in preference to any distributions to the common stockholders, an amount equal to the greater of (i) the Original Issue Price per share, plus any declared but unpaid dividends thereon or (ii) the amount such holder would have received if such holder had converted its shares into common stock immediately prior to such liquidation event. In the event that the assets available for distribution to the holders of preferred stock are insufficient to pay such holders the full amounts to which they are entitled, the assets available for distribution will be distributed on a pro rata basis among the holders of the preferred stock in proportion to the respective amounts that would otherwise be payable in respect of such stock. After all preferential payments have been made to the holders of preferred stock, the remaining amounts would be distributed among the holders of the Preferred Stock and common stock, pro rata based on the number of shares held by each holder. The maximum aggregate amount the holders of Series A, B, C, D-1, and D-2 preferred stock are entitled to receive is $1.50, $2.25, $3.00 $2.2674, and $2.553 per share, respectively.

Conversion

The shares of Preferred Stock are convertible into an equal number of shares of common stock, at the option of the holder, subject to certain anti-dilution adjustments. Each share of preferred stock is automatically converted into common stock, (A) at any time upon the affirmative election of the holders of at least a majority of the outstanding shares of the Preferred Stock, or (B) immediately upon the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of common stock for the account of the Company in which the pre-money valuation of the Company is at least $330.0 million and the aggregate gross proceeds, net of underwriting discount and commissions, to the Company is at least $75.0 million.

Voting

The holders of Preferred stock are entitled to one vote for each share of common stock into which it would convert and to vote as one class with the common stockholders on all matters. Also, the preferred stockholders have been granted certain rights with regard to the election of members of the Company’s Board of Directors.

Presentation of Convertible Preferred Stock

The Company’s Preferred Stock have been classified as temporary equity in the accompanying balance sheets in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities whose redemption is based upon certain change in control events outside of the Company’s control, including liquidation, sale or transfer of control of the Company. The Company has determined not to adjust the carrying values of the convertible preferred stock to the liquidation preferences of such shares because the occurrence of any such change of control event is not probable.

Common Stock

Founder Stock

During 2016 and 2017, in connection with the founding of the Company, shares of common stock were sold to certain founders (the Founder Stock) at a price of $0.001 per share, of which 7,425,000 shares remain outstanding for all periods presented and which are subject to vesting, generally over a period of four years. The repurchase liability for the Founder Stock was nominal for all periods presented. For accounting purposes, the unvested shares are not considered to be outstanding.

 

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The following table summarizes the activity of the unvested founder stock:

 

     December 31,  
     2019      2020  

Unvested at beginning of year

     2,156,250        487,500  

Vested

     (1,668,750      (487,500
  

 

 

    

 

 

 

Unvested at end of year

     487,500        —    
  

 

 

    

 

 

 

Restricted Shares Issued to Cedars-Sinai

As previously described in Note 5, in 2017, as consideration for a license agreement, the Company granted 3,350,000 shares of restricted common stock to Cedars-Sinai that vest on the anniversary date of the grant date over a three-year period.

The following table summarizes the activity of the unvested stock issued to Cedars-Sinai:

 

     December 31,  
     2019      2020  

Unvested at beginning of year

     2,233,333        1,116,666  

Vested

     (1,116,667      (1.116.666
  

 

 

    

 

 

 

Unvested at end of year

     1,116,666        —    
  

 

 

    

 

 

 

Chief Executive Officer Stock Option Award

In connection with the employment of the Company’s Chief Executive Officer and President, the Company committed to grant options to purchase additional shares of the Company’s common stock under the 2017 Equity Incentive Plan upon the achievement of specified performance conditions involving the consummation of additional equity financings. As of December 31, 2019, the performance conditions were not achieved and no expense was recorded in connection with this commitment, as the achievement of the performance conditions was not considered probable. In connection with the sale of 28,063,500 shares of Series C convertible preferred stock in March 2020, an option to purchase 1,327,440 shares of the Company’s common stock at $0.17 per share was granted to this officer to satisfy this commitment, for which $0.1 million of stock-based compensation expense is being recognized over the four-year vesting period. In addition, during August 2020, the Company granted the officer an option to purchase an additional 200,000 shares of common stock at $0.31 per share in connection with the issuance of additional shares of Series C convertible preferred stock. No remaining obligation to grant additional stock options exists pursuant to this agreement after the August 2020 grant.

2017 Equity Incentive Plan

In 2017, the Company adopted the 2017 Equity Incentive Plan (the Plan), which as amended, has 17,500,000 shares of common stock reserved for issuance. In March 2020, the common stock reserved for issuance increased by 5,000,000 shares to 22,500,000 shares. In October 2020, concurrent with the close of the Series D convertible preferred stock financing, the 2017 Plan was amended to increase the number of shares of common stock available for issuance by 13,489,096 shares to a total of 35,989,096 shares. Under the Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units and other awards to individuals who are employees, non-employee directors or consultants of the Company or its subsidiaries. The maximum term of the options granted under the Plan is no more than ten years. Grants generally vest at 25% one year from the vesting commencement date and ratably each month thereafter for a period of 36 months, subject to continuous service. The Plan allows for the early exercise of all stock options granted if authorized by the board of directors at the time of grant. At December 31, 2019 and 2020, 2,208,539 shares and 3,737,843, respectively, remain available for future grant under the Plan.

 

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The Company’s stock option activity for the year ended December 31, 2020 is summarized in the following table:

 

     Number     Weighted-
Average

Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
(in Years)
     Weighted-
Average
Grant Date
(Fair Value)
     Aggregate
Intrinsic
Value

(in thousands)
 

Outstanding at December 31, 2019

     13,843,336     $ 0.21        9.4         $ 1,104  

Granted

     18,780,472     $ 0.34         $ 0.21     

Exercised

     (1,545,415   $ 0.14           

Cancelled/forfeited

     (1,775,875   $ 0.28           
  

 

 

            

Outstanding at December 31, 2020

     29,302,518     $ 0.29        9.3         $ 2,290  
  

 

 

            

Vested or expected to vest at December 31, 2020

     29,302,518     $ 0.29        9.3         $ 2,290  
  

 

 

            

Exercisable at December 31, 2020

     6,703,908     $ 0.16        8.0         $ 1,404  
  

 

 

            

The total intrinsic value of options exercised during the years ended December 31, 2019 and 2020 was $0.2 million and $0.3 million, respectively. The total intrinsic value of options vested during the years ended December 31, 2019 and 2020 was $0.5 million and $0.9 million, respectively.

The grant date fair value of stock options was determined using the Black-Scholes option pricing model with the following assumptions:

 

     Years Ended December 31,  
     2019     2020  

Risk-free interest rate

     1.6–2.6     0.2–1.4

Expected volatility

     61.5–70.0     61.5–71.8

Expected term (in years)

     5.0–6.1       6.1  

Expected dividend yield

     —       —  

Expected Term—The expected term of options granted represents the period of time that the options are expected to be outstanding. Due to the lack of historical exercise history, the expected term of the Company’s employee stock options has been determined utilizing the simplified method for awards that qualify as plain-vanilla options.

Expected Volatility—The estimated volatility was based on the historical volatility of the common stock of a group of publicly traded companies deemed comparable to the Company.

Risk-Free Interest Rate—The risk-free interest rate is the implied yield in effect at the time of the option grant based on U.S. Treasury securities with contract maturities similar to the expected term of the Company’s stock options.

Dividend Rate—The Company has not paid any cash dividends on common stock since inception and does not anticipate paying any dividends in the foreseeable future. Consequently, an expected dividend yield of zero was used.

Early Exercise Liability

The unvested shares of the early-exercised options are held in escrow until the stock option becomes fully vested or until the employee’s termination, whichever occurs first. The right to repurchase these shares lapses over the four-year vesting period. As of December 31, 2019 and 2020, the early exercise liability was approximately $29,000 and $0.1 million, respectively. For accounting purposes, the early exercise of options is not considered to be a substantive exercise until the underlying awards vest.

 

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The following table summarizes the activity of the unvested common stock issued pursuant to an early exercise of stock option awards:

 

     Years Ended December 31,  
     2019      2020  

Unvested at beginning of year

     195,312        702,656  

Early exercised stock options during the period

     751,250        235,417  

Early exercised stock options repurchased during the period

     —          (44,805

Vested or cancelled

     (243,906      (346,289
  

 

 

    

 

 

 

Unvested at end of year

       702,656        546,979  
  

 

 

    

 

 

 

Stock-Based Compensation Expense

The following table summarizes the components of stock-based compensation expense recognized in the accompanying statements of operations (in thousands):

 

     Years Ended December 31,  
     2019      2020  

Research and development

   $ 39      $         144  

General and administrative

     167        595  

Discontinued operations

     21        101  
  

 

 

    

 

 

 

Total stock-based compensation

   $         227      $ 840  
  

 

 

    

 

 

 

The total unrecognized compensation cost related to unvested stock-based awards as of December 31, 2020 was $4.0 million and is expected to be recognized over a weighted average period of 3.6 years.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following:

 

     December 31,  
     2019      2020  

Conversion of convertible preferred stock issued

     61,645,867        160,864,434  

Common stock options issued and outstanding

     13,843,336        29,302,518  

Conversion of convertible preferred stock in future issuance (D-2)

     —          94,007,051  

Warrants to purchase convertible preferred stock

     —          112,500  

Equity awards available for future issuance

     2,208,539        3,737,843  
  

 

 

    

 

 

 

Total

     77,697,742        288,024,346  
  

 

 

    

 

 

 

 

9.

Commitments and Contingencies

Leases

Through August 2019, the Company rented office and lab space under a monthly operating rental agreement. The Company recorded $0.2 million for the year ended December 31, 2019 related to this arrangement. As a result of the acquisition of PLI, the Company shares office and laboratory space with PLI under a non-cancellable operating lease agreement, as amended (PLI Lease), that expires in December 2022. Rent expense allocated to the Company totaled zero and $0.9 million for the years ended December 31, 2019 and 2020, respectively.

 

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As a result of the PLI spinoff on December 31, 2020, the Company entered into a sublease agreement with PLI for approximately 40,000 square feet currently occupied in the PLI facility. The sublease agreement is for one year with an option to renew for an additional year. The monthly payment is $80,000 and total remaining payment obligations at December 31, 2020 are $1.0 million.

Litigation

From time to time, the Company may become involved in legal proceedings or be subject to claims arising in the ordinary course of its business. Regardless of outcome, legal proceedings or claims can have an adverse impact on the company because of defense and settlement costs, diversion of resources and other factors, and there can be no assurances that favorable outcomes will be obtained.

Indemnification Agreements

In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners and other parties with respect to certain matters including, but not limited to, losses arising out of breech of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with officers and members of its board of directors that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnifications. At December 31, 2020, no claims exist under indemnification arrangements and accordingly, no amounts have been accrued in its consolidated financial statements as of December 31, 2020.

 

10.

Income Taxes

For the year ended December 31, 2020, the income tax expense from continuing operations was $7,000 and is recorded in general and administrative expense in the accompanying statements of operations. For the year ended December 31, 2019, the income tax benefit was $0.5 million, all of which was related to the discontinued operations and is recorded in Loss from discontinued operations in the accompanying statements of operations.

A reconciliation of the Company’s effective tax rate and federal statutory tax rate related to continuing operations is summarized as follows (in thousands):

 

     Years Ended December 31,  
     2019      2020  

Income tax expense (benefit) at statutory rates

   $ (3,513    $ (6,538

State income tax, net of federal benefit

     (726      (586

Permanent items

     189        (14

Change in valuation allowance

     5,216        7,373  

Forfeiture of state operating losses

     —          521  

Stock-based compensation

     —          82  

Purchase price accretion

     —          311  

Return to provision adjustment

     (51      293  

Research and development tax credits

     (1,115      (1,442
  

 

 

    

 

 

 
   $ —        $ —    
  

 

 

    

 

 

 

Deferred income taxes reflect the net tax effects of loss and credit carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for

 

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income tax purposes. Significant components of the Company’s deferred tax assets and liabilities related to continuing operations for federal and state income taxes are follows (in thousands):

 

     December 31,  
     2019      2020  

Deferred tax assets:

     

Net operating loss carryforward

   $ 6,002      $ 11,333  

Research tax credits

     1,067        2,509  

Accrued and other

     20        543  

Stock-based compensation

     29        121  
  

 

 

    

 

 

 

Total deferred tax assets

     7,118        14,506  

Less valuation allowance

     (7,104      (14,477
  

 

 

    

 

 

 

Net deferred tax assets

     14        29  

Deferred tax liabilities:

     

Property and equipment

     (14      (29
  

 

 

    

 

 

 

Total deferred tax liabilities

     (14      (29
  

 

 

    

 

 

 

Net deferred tax assets

   $ —        $ —    
  

 

 

    

 

 

 

A valuation allowance is required to be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain. A full review of all positive and negative evidence needs to be considered. The Company has established a full valuation allowance against the net deferred tax assets as of December 31, 2020. The valuation allowance increased by $5.2 million and $7.4 million between December 31, 2018 and December 31, 2019 and between December 31, 2019 and December 31, 2020, respectively, due primarily to the generation of current year operating losses.

As of December 31, 2020, the Company has net operating loss carryforwards for federal and state income tax purposes of $50.1 million and $9.8 million, respectively. The federal net operating loss carryforwards generated prior to 2018 and state net operating loss carryforwards, if not utilized, will expire beginning in 2036. Federal net operating losses generated in 2018 and after carryover indefinitely and may generally be used to fully offset future taxable income through December 31, 2020 and 80% of future taxable income thereafter.

The Company has research credit carryforwards for federal and state income tax purposes of approximately $1.8 million and $1.7 million, respectively, as of December 31, 2020. The federal credits begin to expire in 2030 and the state credits can be carried forward indefinitely.

Utilization of some of the federal and state net operating loss and credit carryforwards may be subject to annual limitations due to the change in ownership provisions of the Internal Revenue Code of 1986 (Internal Revenue Code) and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. The Company has not performed a study under Section 382 of the Internal Revenue Code to determine if a change in control did occur and, as such, is not able to determine the impact on the net operating loss carryforwards, if any, as of the date of the financial statements.

The Company recognizes a tax benefit from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Due to the existence of the full valuation allowance, future changes in unrecognized tax benefits will not impact the Company’s effective tax rate. The Company does not foresee material changes to its liability for uncertain tax benefits within the next 12 months.

 

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The following table summarizes the activity in the Company’s gross unrecognized tax benefits (in thousands):

 

     December 31,  
     2019      2020  

Balance at beginning of period

   $ —        $ 300  

Increase (decrease) related to prior year positions

     49        —    

Increase related to current year positions

     251        397  
  

 

 

    

 

 

 

Balance at the end of the year

   $         300      $         697  
  

 

 

    

 

 

 

During the years ended December 31, 2019 and 2020, no interest or penalties were required to be recognized relating for unrecognized tax benefits.

The Company files tax returns in the United States and California. The Company is not currently under examination in any of these jurisdictions and all of the Company’s tax years remain effectively open to examination due to net operating loss carryforwards.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The Cares Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. Due to the loss position of the U.S. entities, many provisions of the CARES Act do not impact the Company and the CARES Act did not have an impact on the Company’s income tax provision for the years ended December 31, 2019 or 2020.

 

11.

Related Party Transactions

As discussed in Note 5, in September 2017, the Company entered into the Agreement with Cedars-Sinai. As consideration for the license rights, the Company issued (i) 2,575,000 common stock shares at par value of $0.0001 per share, and (ii) 3,350,000 unvested restricted common stock shares at par value of $0.0001 per share. The parties also entered into additional license agreements as well as research agreements, under which the parties can provide research services to each other at pricing specified in the individual statements of work. During the years ended December 31, 2019 and 2020, no services were provided under the research agreements. During the year ended December 31, 2019, the Company purchased data from Cedars-Sinai for $0.3 million and this is recorded in research and development expenses in the accompanying consolidated statements of operations.

Additionally, PLI has provided laboratory services to Cedars-Sinai since May 2018. During the years ended December 31, 2019 and 2020, Cedars-Sinai paid approximately $0.2 million and $0.4 million, respectively, for such services. At December 31, 2019, the Company had a receivable of $0.1 million from Cedars-Sinai included Current assets from discontinued operations, in the accompanying consolidated balance sheets. Two members of the Company’s board of directors are employees of Cedars-Sinai.

During the years ended December 31, 2019 and 2020, the Company incurred compensation related expenses for two employees, each of whom is an immediate family member of a different member of the Company’s board of directors. These expenses totaled $0.4 million for the year ended December 31, 2019, of which $0.1 million is included in general and administrative expenses in the accompanying consolidated statement of operations and $0.3 million is included in research and development expenses. These expenses totaled $0.8

 

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million for the year ended December 31, 2020, of which $0.2 million is included in general and administrative expenses in the accompanying consolidated statement of operations and $0.6 million is included in research and development expenses.

During the year ended December 31, 2019, the Company exchanged various payments with Nestlé pursuant to the terms of the PLI acquisition agreement. At the time of the acquisition, the Company assumed liabilities in the amount of $4.3 million related to Nestlé compensation plans terminated at the time of the acquisition. Pursuant to the purchase agreement, Nestlé was contractually obligated to settle these liabilities and the Company recorded a corresponding receivable for the same amount in the initial purchase price allocation. During the year ended December 31, 2019, the Company received and settled $3.3 million related to this arrangement. At December 31, 2019, $0.7 million remained as an accrual and a receivable due from Nestlé related to this item included in Current assets from discontinued operations and Current liabilities from discontinued operations in the accompanying consolidated balance sheets. Additionally, at December 31, 2019, the Company recorded an accrual of $0.3 related to payments due to Nestlé for cash not distributed to the former PLI employees in accordance with the purchase agreement. All liabilities and receivables recorded at December 31, 2019 for amounts between Nestlé and the Company were settled in 2020.

During the year ended December 31, 2019, the Company paid Nestlé $0.4 million related to a deposit made by Nestlé on behalf of the Company at the time of the PLI acquisition.

As of December 31, 2020, the Company has a $5.7 million liability recorded within Amounts due to Nestlé, current—related party in the consolidated balance sheet. As disclosed in Note 6, this amount relates to deferred consideration for the acquisition of PLI.

As a result of the PLI acquisition, the Company entered into a transition services arrangement with ProciseDx, a wholly owned subsidiary of Nestlé. During the year ended December 31, 2019, both companies provided administrative and research related services to one another. As a result of this arrangement, during the year ended December 31, 2019, the Company received payments of $1.8 million from ProciseDx and paid $23,000 to ProciseDx. At December 31, 2019, the Company had a receivable for $1.3 million from ProciseDx included in the Current assets from discontinued operations and a payable of $27,000 included in the Current liabilities from discontinued operations in the accompanying consolidated balance sheets.

The Company has an ongoing collaboration with Regents of the University of California, where a member of its Board of Directors is employed. During the years ended December 31, 2019 and 2020, the Company incurred $0.2 million and $0.4 million, respectively, in expense related to this collaboration that was recorded in Loss from discontinued operations in the accompanying consolidated statements of operations.

As a result of the PLI spinoff on December 31, 2020, the Company entered into a transition services agreement under which it assumed a $1.1 million liability related to the payout of the PLI bonus for the year ended December 31, 2020. This amount is included in the amount payable to PLI in the accompanying consolidated balance sheets. Additionally, pursuant to this agreement, the Company will be providing PLI certain transitional services, including general and administrative, finance and clinical operations support, and PLI is providing the Company with certain transitional services, including providing for the use of facilities under a sublease, in each case for specified monthly service fees. The initial term of the agreement is for one year, subject to earlier termination and extension thereafter. Nothing has been recognized under this agreement during the year ended December 31, 2020.

 

12.

401(K) Plan

Effective January 1, 2018, the Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary and are determined on an individual basis, limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain

 

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contributions to the 401(k) plan. Company contributions made during each of the years ended December 31, 2019 and 2020 were $45,000.

 

13.

COVID-19 Outbreak

The current COVID-19 pandemic, which is impacting worldwide economic activity, poses the risk that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. During the year ended December 31, 2020, the Company has not experienced significant impact from the pandemic. The extent to which the COVID-19 pandemic will impact the Company’s business will depend on future developments that are highly uncertain and cannot be predicted at this time.

 

14.

Subsequent Events

The Company has evaluated subsequent events for financial statement purposes occurring through February 19, 2021, the date when these financial statements are available to be issued.

Sale of Series D-2 Preferred Stock

In January 2021, the Company sold 86,775,740 shares of Series D-2 convertible preferred stock and received gross proceeds totaling $73.8 million. In addition, 7,219,560 shares of Series D-2 convertible preferred stock were issued to Nestlé in satisfaction of a deferred purchase price obligation of $6.2 million.

2020 Stock Option Grants

In January 2021, the common stock reserved for issuance under the 2017 Equity Incentive Plan increased by 35,989,096 shares to 55,243,552 shares. Through February 19, 2021, the Company granted options to purchase 21,168,757 shares of common stock to employees and consultants at exercise prices ranging from $0.37 to $0.67 per share.

 

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            Shares

LOGO

Common Stock

 

 

SVB Leerink

Credit Suisse

Stifel

Guggenheim Securities

 

 

Through and including                , 2021 (the 25th day after the date of this prospectus) all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 


Table of Contents

Part II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13.

Other Expenses of Issuance and Distribution.

The following table indicates the expenses to be incurred in connection with the offering described in this registration statement, other than underwriting discounts and commissions, all of which will be paid by us. All amounts are estimated except the SEC registration fee, the Financial Industry Regulatory Authority, Inc., or FINRA, filing fee and the Nasdaq Global Market listing fee.

 

     Amount paid or
to be paid
 

SEC registration fee

   $ 13,637.50  

FINRA filing fee

     *  

Nasdaq Global Market listing fee

     *  

Accountants’ fees and expenses

     *  

Legal fees and expenses

     *  

Transfer Agent’s fees and expenses

     *  

Printing and engraving expenses

     *  

Miscellaneous

     *  
  

 

 

 

Total expenses

   $ *  
  

 

 

 

 

*

To be provided by amendment.

 

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 where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Our certificate of incorporation provides that no director of the Registrant shall be personally liable to it or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability, except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty.

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, or a person serving at the request of the corporation for another corporation, partnership, joint venture, trust or other enterprise in related capacities against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with an action, suit or proceeding to which he was or is a party or is threatened to be made a party to any threatened, ending or completed action, suit or proceeding by reason of such position, if such person acted in good faith and in a manner he 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 conduct was unlawful, except that, in the case of actions brought by or in the right of the corporation, 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.

Our amended and restated certificate of incorporation, which will become effective immediately prior to the closing of this offering, provides that we will indemnify each person who was or is a party or threatened to be


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made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of us) by reason of the fact that he or she is or was, or has agreed to become, a director or officer, or is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding and any appeal therefrom, if such Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Our amended and restated certificate of incorporation provides that we will indemnify any Indemnitee who was or is a party to an action or suit by or in the right of us to procure a judgment in our favor by reason of the fact that the Indemnitee is or was, or has agreed to become, a director or officer, or is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding, and any appeal therefrom, if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, except that 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 us, unless a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that any Indemnitee has been successful, on the merits or otherwise, he or she will be indemnified by us against all expenses (including attorneys’ fees) actually and reasonably incurred in connection therewith. Expenses must be advanced to an Indemnitee under certain circumstances.

We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements may require us, among other things, to indemnify our directors and officers for some expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

We maintain a general liability insurance policy that covers certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.

In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act, against certain liabilities.

 

Item 15.

Recent Sales of Unregistered Securities.

Set forth below is information regarding unregistered securities issued by us since January 1, 2017. Also included is the consideration received by us for such securities and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.

 

  (a)

Issuances of Securities

 

  1.

From September to October 2017 we issued an aggregate of 14,979,200 shares of Series A convertible preferred stock to investors at a purchase price of $0.50 per share, for aggregate consideration of approximately $7.5 million.

 

  2.

From November 2018 to May 2019 we issued an aggregate of 26,666,667 shares of Series B convertible preferred stock to investors at a purchase price of $0.75 per share, for aggregate consideration of approximately $20 million.

 

  3.

In June 2019 and June 2020, as partial consideration for our acquisition of Prometheus Laboratories, Inc., we issued an aggregate of 25,000,000 shares of Series C convertible preferred stock.


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  4.

In March 2020 we issued an aggregate of 28,063,500 shares of Series C convertible preferred stock to investors at a purchase price of $1.00 per share, for aggregate consideration of approximately $28.1 million.

 

  5.

In January 2020, we issued to a lender a warrant to purchase 112,500 shares of Series C convertible preferred stock at an exercise price of $1.00 per share in connection with our entry into a loan and security agreement.

 

  6.

In October 2020, we issued an aggregate of 66,155,067 shares of Series D-1 convertible preferred stock to investors at a purchase price of $0.7558 per share, for aggregate consideration of approximately $46.2 million, and as partial consideration for our acquisition of Prometheus Laboratories, Inc.

 

  7.

In January 2021, we issued an aggregate of 93,995,300 shares of Series D-2 convertible preferred stock to investors at a purchase price of $0.8510 per share, for aggregate consideration of approximately $73.8 million, and as partial consideration for our acquisition of Prometheus Laboratories, Inc.

No underwriters were involved in the foregoing issuances of securities. The securities described in this section (a) of Item 15 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering, to the extent an exemption from such registration was required. All holders of securities described above represented to us in connection with their purchase or issuance that they were accredited investors and were acquiring the securities for their own account for investment purposes only and not with a view to, or for sale in connection with, any distribution thereof and that they could bear the risks of the investment and could hold the securities for an indefinite period of time. The holders received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration statement or an available exemption from such registration.    

 

  (b)

Grants of Stock Options

 

  1.

From January 2017 through February 15, 2021, we granted stock options to purchase an aggregate of 55,480,690 shares of our common stock at a weighted-average exercise price of $0.41 per share, to certain of our employees, consultants and directors in connection with services provided to us by such persons. 3,362,068 of these options have been exercised and 2,158,326 have been cancelled through February 15, 2021.

The stock options and common stock issuable upon exercise of such options as described in this section (b) of Item 15 were issued pursuant to written compensatory plans or arrangements with our employees and directors, in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 701 promulgated under the Securities Act or the exemption set forth in Section 4(a)(2) under the Securities Act and Regulation D promulgated thereunder relative to transactions by an issuer not involving any public offering. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of capital stock described in this Item 15 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

Item 16.

Exhibits and Financial Statement Schedules.

 

  (c)

Exhibits. See Exhibit Index attached to this registration statement, which is incorporated by reference herein.

 

  (d)

Financial Statement Schedules. Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.


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Item 17.

Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities 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 Securities Act and will be governed by the final adjudication of such issue.

The undersigned 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.


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Exhibit Index

 

Exhibit
Number

  

Description of Exhibit

  1.1*    Form of Underwriting Agreement
  3.1    Amended and Restated Certificate of Incorporation (currently in effect)
  3.2    Bylaws (currently in effect)
  3.3    Form of Amended and Restated Certificate of Incorporation (to be effective immediately prior to the closing of this offering)
  3.4    Form of Amended and Restated Bylaws (to be effective immediately prior to the closing of this offering)
  4.1*    Specimen stock certificate evidencing the shares of common stock
  4.2    Amended and Restated Investors’ Rights Agreement, dated October 30, 2020, by and among the Registrant and certain of its stockholders
  4.3    Warrant issued to Oxford Finance LLC, dated January 24, 2020
  5.1*    Opinion of Latham & Watkins LLP
10.1#    Prometheus Biosciences, Inc. 2017 Equity Incentive Plan, as amended, including form of stock option agreement thereunder
10.2#*    Prometheus Biosciences, Inc. 2021 Incentive Award Plan and form of stock option grant notice and stock option agreement thereunder
10.3#*    Prometheus Biosciences, Inc. 2021 Employee Stock Purchase Plan
10.4#*    Non-Employee Director Compensation Program
10.5#    Amended and Restated Employment Letter Agreement, dated February 17, 2021, by and between Mark C. McKenna and the Registrant
10.6#    Amended and Restated Employment Letter Agreement, dated February 17, 2021, by and between Keith W. Marshall, Ph.D. and the Registrant
10.7#    Amended and Restated Employment Letter Agreement, dated February 17, 2021, by and between Allison Luo, M.D. and the Registrant
10.8#    Amended and Restated Employment Letter Agreement, dated February 17, 2021, by and between Timothy K. Andrews and the Registrant
10.9#    Form of Indemnification Agreement for Directors and Officers
10.10    Loan and Security Agreement, dated January 24, 2020, by and among Oxford Finance LLC, Prometheus Laboratories, Inc. and the Registrant, as amended
10.11    Sublease Agreement, dated December 31, 2020, by and between Prometheus Laboratories Inc. and the Registrant
10.12†    Exclusive License Agreement, dated September 1, 2017, by and between Cedars-Sinai Medical Center and the Registrant, as amended
10.13†    Exclusive License Agreement, dated March 22, 2019, by and between Cedars-Sinai Medical Center and the Registrant
10.14†    Exclusive License Agreement, dated March 22, 2019, by and between Cedars-Sinai Medical Center and the Registrant
10.15†    Companion Diagnostics Development and Collaboration Agreement, dated as of March 25, 2019, by and between Millennium Pharmaceuticals, Inc. and the Registrant
10.16†    License Agreement, dated March 18, 2020, by and between Alloy Therapeutics, LLC and the Registrant


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Exhibit
Number

  

Description of Exhibit

10.17†    Co-development and Manufacturing Agreement, dated as of July 30, 2020, by and between Dr. Falk Pharma GmbH and the Registrant
23.1    Consent of BDO USA, LLP, independent registered public accounting firm
23.2*    Consent of Latham & Watkins LLP (included in Exhibit 5.1)
24.1    Power of Attorney (included on signature page)

 

*

To be filed by amendment.

#

Indicates management contract or compensatory plan.

Portions of this exhibit have been omitted for confidentiality purposes.


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SIGNATURES

Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Diego, State of California, on this 19th day of February, 2021.

 

PROMETHEUS BIOSCIENCES, INC.
By:   

/s/ Mark C. McKenna

 

Mark C. McKenna

President, Chief Executive Officer and Director

SIGNATURES AND POWER OF ATTORNEY

We, the undersigned officers and directors of Prometheus Biosciences, Inc., hereby severally constitute and appoint Mark C. McKenna and Timothy K. Andrews, and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him or her and in his or her name, place and stead, and in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), 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 or necessary to be done in and about the premises, as full to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his 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 held on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Mark C. McKenna

Mark C. McKenna

   President, Chief Executive Officer and Director (principal executive officer)   February 19, 2021

/s/ Keith W. Marshall, Ph.D.

Keith W. Marshall, Ph.D.

  

Chief Financial Officer

(principal financial and accounting officer)

  February 19, 2021

/s/ Tadataka Yamada, M.D.

Tadataka Yamada, M.D.

   Chairman of the Board   February 19, 2021

/s/ James Laur

James Laur

   Director   February 19, 2021

/s/ Helen C. Adams

Helen C. Adams

   Director   February 19, 2021

/s/ Martin Hendrix, Ph.D.

Martin Hendrix, Ph.D.

   Director   February 19, 2021


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Signature

  

Title

 

Date

/s/ Jospeh C. Papa

Jospeh C. Papa

  

Director

 

February 19, 2021

/s/ Judith L. Swain, M.D.

Judith L. Swain, M.D.

  

Director

  February 19, 2021

/s/ Mary Szela

Mary Szela

  

Director

  February 19, 2021
EX-3.1 2 d14529dex31.htm EX-3.1 EX-3.1

Exhibit 3.1

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

PROMETHEUS BIOSCIENCES, INC.

(Pursuant to Sections 242 and 245 of the

General Corporation Law of the State of Delaware)

Prometheus Biosciences, Inc., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”),

DOES HEREBY CERTIFY:

1.    That the name of this corporation is Prometheus Biosciences, Inc., and that this corporation was originally incorporated pursuant to the General Corporation Law on October 26, 2016 under the name Precision IBD, Inc.

2.    That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended and restated in its entirety to read as follows:

FIRST: The name of this corporation is Prometheus Biosciences, Inc. (the “Corporation”).

SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.

THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.

FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 325,000,000 shares of Common Stock, par value $0.0001 per share (“Common Stock”) and (ii) 254,983,985 shares of Preferred Stock, par value $0.0001 per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.


A.    COMMON STOCK

1.    General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.

2.    Voting. The holders of the Common Stock are entitled to one (1) vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings); provided, however, that, except as otherwise required by law, holders of Common Stock, as such, shall not be entitled to vote on any amendment to this Amended and Restated Certificate of Incorporation (the “Restated Certificate”) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to the Restated Certificate or pursuant to the General Corporation Law. There shall be no cumulative voting. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by (in addition to any vote of the holders of one or more series of Preferred Stock that may be required by the terms of the Restated Certificate) the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law.

B.    PREFERRED STOCK

14,979,200 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated as a series known as Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), 26,666,667 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated as a series known as Series B Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), 53,176,000 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated as a series known as Series C Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”), 66,155,067 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated as a series known as Series D-1 Preferred Stock, par value $0.0001 per share (the “Series D-1 Preferred Stock”), and 94,007,051 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated as a series known as Series D-2 Preferred Stock, par value $0.0001 per share (the “Series D-2 Preferred Stock,” and together with the Series D-1 Preferred Stock, the “Series D Preferred Stock,” and together with the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock and the Series D-1 Preferred Stock, the “Preferred Stock”), with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “sections” or “subsections” in this Part B of this Article Fourth refer to sections and subsections of Part B of this Article Fourth.

1.    Dividends.

The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents

 

2


required elsewhere in this Restated Certificate) the holders of the Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Preferred Stock in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (B) multiplying such fraction by an amount equal to the applicable Original Issue Price (as defined below); provided that, if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Preferred Stock pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Preferred Stock dividend. The “Series A Original Issue Price” shall mean $0.50 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock. The “Series B Original Issue Price” shall mean $0.75 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock. The “Series C Original Issue Price” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series C Preferred Stock. The “Series D-1 Original Issue Price” shall mean $0.7558 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series D-1 Preferred Stock. The “Series D-2 Original Issue Price” shall mean $0.8510 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series D-2 Preferred Stock. Each of the Series A Original Issue Price, Series B Original Issue Price, Series C Original Issue Price, Series D-1 Original Issue Price and Series D-2 Original Issue Price are sometimes referred to herein as the “Original Issue Price.”

2.    Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.

2.1    Preferential Payments to Holders of Series D Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the holders of shares of Series D Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to the applicable Original Issue Price, plus any dividends declared but unpaid thereon. If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series D Preferred Stock the

 

3


full amount to which they shall be entitled under this Section 2.1, the holders of shares of Series D Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.2    Preferential Payments to Holders of Series C Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series D Preferred Stock, the holders of shares of Series C Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Series A Preferred Stock, Series B Preferred Stock or Common Stock by reason of their ownership thereof, an amount per share equal to the Series C Original Issue Price, plus any dividends declared but unpaid thereon. If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series C Preferred Stock the full amount to which they shall be entitled under this Section 2.2, the holders of shares of Series C Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.3    Preferential Payments to Holders of Series A and Series B Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Series D Preferred Stock and Series C Preferred Stock, the holders of shares of Series A Preferred Stock and Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to the applicable Original Issue Price, plus any dividends declared but unpaid thereon. If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock and Series B Preferred Stock the full amount to which they shall be entitled under this Section 2.3, the holders of shares of Series A Preferred Stock and Series B Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.4    Distribution of Remaining Assets. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment of all preferential amounts required to be paid to the holders of shares of Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders shall be distributed among the holders of shares of Preferred Stock and Common Stock, pro rata based on the number of shares held by each such holder, treating for this purpose all such securities as if they had been converted to Common Stock pursuant to the terms of the

 

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Restated Certificate immediately prior to such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event; provided, however, that if the aggregate amount which the holders of Series A Preferred Stock are entitled to receive under Sections 2.3 and 2.4 shall exceed $1.50 per share (subject to appropriate adjustment in the event of a stock split, stock dividend, combination, reclassification, or similar event affecting the Series A Preferred Stock) (the “Series A Maximum Participation Amount”), each holder of Series A Preferred Stock shall be entitled to receive only up to the Series A Maximum Participation Amount pursuant to Sections 2.3 and 2.4. The aggregate amount which a holder of a share of Series A Preferred Stock is entitled to receive under Sections 2.3 and 2.4 is hereinafter referred to as the “Series A Liquidation Amount.” Provided further, that if the aggregate amount which the holders of Series B Preferred Stock are entitled to receive under Sections 2.3 and 2.4 shall exceed $2.25 per share (subject to appropriate adjustment in the event of a stock split, stock dividend, combination, reclassification, or similar event affecting the Series B Preferred Stock) (the “Series B Maximum Participation Amount”), each holder of Series B Preferred Stock shall be entitled to receive only up to the Series B Maximum Participation Amount pursuant to Sections 2.3 and 2.4. The aggregate amount which a holder of a share of Series B Preferred Stock is entitled to receive under Sections 2.3 and 2.4 is hereinafter referred to as the “Series B Liquidation Amount.” Provided further, that if the aggregate amount which the holders of Series C Preferred Stock are entitled to receive under Sections 2.2 and 2.4 shall exceed $3.00 per share (subject to appropriate adjustment in the event of a stock split, stock dividend, combination, reclassification, or similar event affecting the Series C Preferred Stock) (the “Series C Maximum Participation Amount”), each holder of Series C Preferred Stock shall be entitled to receive only up to the Series C Maximum Participation Amount pursuant to Sections 2.2 and 2.4. The aggregate amount which a holder of a share of Series C Preferred Stock is entitled to receive under Sections 2.2 and 2.4 is hereinafter referred to as the “Series C Liquidation Amount.” Provided further, that if the aggregate amount which the holders of Series D-1 Preferred Stock are entitled to receive under Sections 2.1 and 2.4 shall exceed $2.2674 per share (subject to appropriate adjustment in the event of a stock split, stock dividend, combination, reclassification, or similar event affecting the Series D-1 Preferred Stock) (the “Series D-1 Maximum Participation Amount”), each holder of Series D-1 Preferred Stock shall be entitled to receive only up to the Series D-1 Maximum Participation Amount pursuant to Sections 2.1 and 2.4. The aggregate amount which a holder of a share of Series D-1 Preferred Stock is entitled to receive under Sections 2.1 and 2.4 is hereinafter referred to as the “Series D-1 Liquidation Amount.” Provided further, that if the aggregate amount which the holders of Series D-2 Preferred Stock are entitled to receive under Sections 2.1 and 2.4 shall exceed $2.553 per share (subject to appropriate adjustment in the event of a stock split, stock dividend, combination, reclassification, or similar event affecting the Series D-2 Preferred Stock) (the “Series D-2 Maximum Participation Amount”), each holder of Series D-2 Preferred Stock shall be entitled to receive only up to the Series D-2 Maximum Participation Amount pursuant to Sections 2.1 and 2.4. The aggregate amount which a holder of a share of Series D-2 Preferred Stock is entitled to receive under Sections 2.1 and 2.4 is hereinafter referred to as the “Series D-2 Liquidation Amount.”

2.5    Deemed Conversion. Notwithstanding Sections 2.1, 2.2, 2.3 and 2.4 above, for purposes of determining the amount each holder of shares of Preferred Stock is entitled to receive in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, each holder of shares of Preferred Stock shall be deemed to have converted (regardless of whether such holder actually converted) such holder’s

 

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shares of Preferred Stock into shares of Common Stock immediately prior to the Liquidation Event if, as a result of an actual conversion, such holder would receive, in the aggregate, an amount greater than the amount that would be distributed to such holder if such holder did not convert such Preferred Stock into shares of Common Stock. If any such holder shall be deemed to have converted shares of Preferred Stock into Common Stock pursuant to this Section 2.5, then such holder shall not be entitled to receive any distribution that would otherwise be made to holders of Preferred Stock pursuant to Sections 2.1, 2.2, 2.3 and 2.4 above.

2.6    Deemed Liquidation Events.

2.6.1    Definition. Each of the following events shall be considered a “Deemed Liquidation Event” unless the holders of a majority of the outstanding shares of Preferred Stock (voting together as a single class, on an as-converted to Common Stock basis), including the holders of a majority of the outstanding shares of Series D Preferred Stock (voting together as a single class, on an as-converted to Common Stock basis) (collectively, the “Requisite Holders”), elect otherwise:

(a)    a merger or consolidation in which:

(i)    the Corporation is a constituent party, or

(ii)    a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation,

except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation; or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or

(b)    the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or the sale or disposition (whether by merger, consolidation or otherwise) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation.

2.6.2    Effecting a Deemed Liquidation Event.

(a)    The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Section 2.6.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the “Merger Agreement”) provides that the consideration payable to the stockholders of the Corporation shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1, 2.2, 2.3, 2.4 and 2.5 hereof.

 

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(b)    In the event of a Deemed Liquidation Event referred to in Section 2.6.1(a)(ii) or 2.6.1(b), if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within ninety (90) days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Preferred Stock no later than the ninetieth (90th) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause (ii) to require the redemption of such shares of Preferred Stock, and (ii) if the Requisite Holders so request in a written instrument delivered to the Corporation not later than one hundred twenty (120) days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or licensed, as determined in good faith by the Board of Directors), together with any other assets of the Corporation available for distribution to its stockholders, all to the extent permitted by Delaware law governing distributions to stockholders (the “Available Proceeds”), on the one hundred fiftieth (150th) day after such Deemed Liquidation Event (the “Redemption Date”), to redeem all outstanding shares of Preferred Stock at a price per share equal to the Series A Liquidation Amount, Series B Liquidation Amount, Series C Liquidation Amount, Series D-1 Liquidation Amount or Series D-2 Liquidation Amount, as applicable (the “Redemption Price”). Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall ratably redeem each holder’s shares of Preferred Stock to the fullest extent of such Available Proceeds, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. Prior to the distribution or redemption provided for in this Section 2.6.2(b), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.

(c)    Redemption Notice. In connection with the redemption of Preferred Stock as set forth in this Section 2.6.2, the Corporation shall send written notice of such redemption (the “Redemption Notice”) to each holder of record of Preferred Stock not less than forty (40) days prior to the Redemption Date. Each Redemption Notice shall state: (i) the number of shares of Preferred Stock held by the holder that the Corporation shall redeem on the Redemption Date; (ii) the Redemption Date and the Redemption Price; (iii) the date upon which the holder’s right to convert such shares terminates (as determined in accordance with Section 4.1); and (iv) for holders of shares in certificated form, that the holder is to surrender to the Corporation, in the manner and at the place designated, his, her or its certificate or certificates representing the shares of Preferred Stock to be redeemed.

(d)    Surrender of Certificates; Payment. On or before the Redemption Date, each holder of shares of Preferred Stock to be redeemed, unless such holder has exercised his, her or its right to convert such shares as provided in Section 4, shall, if a holder of shares in certificated form, surrender the certificate or certificates representing such shares (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the

 

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Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof. In the event less than all of the shares of Preferred Stock represented by a certificate are redeemed, a new certificate, instrument, or book entry representing the unredeemed shares of Preferred Stock shall promptly be issued to such holder.

(e)    Rights Subsequent to Redemption. If the Redemption Notice shall have been duly given, and if on the Redemption Date the Redemption Price payable upon redemption of the shares of Preferred Stock to be redeemed on the Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that any certificates evidencing any of the shares of Preferred Stock so called for redemption shall not have been surrendered, dividends with respect to such shares of Preferred Stock shall cease to be owed by the Corporation after such Redemption Date and all rights with respect to such shares shall forthwith after the Redemption Date terminate, except only the right of the holders to receive the Redemption Price without interest upon surrender of any such certificate or certificates therefor.

2.6.3    Amount Deemed Paid or Distributed. The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the Board of Directors, including at least one of the Series D Directors.

2.6.4    Allocation of Escrow and Contingent Consideration. In the event of a Deemed Liquidation Event pursuant to Section 2.6.1(a)(i), if any portion of the consideration payable to the stockholders of the Corporation is payable only upon satisfaction of contingencies (the “Additional Consideration”), the Merger Agreement shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the “Initial Consideration”) shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1, 2.2, 2.3, 2.4 and 2.5 as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event; and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon satisfaction of such contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Sections 2.1, 2.2, 2.3, 2.4 and 2.5 after taking into account the previous payment of the Initial Consideration as part of the same transaction. For the purposes of this Section 2.6.4, consideration placed into escrow or retained as a holdback to be available for satisfaction of indemnification or similar obligations in connection with such Deemed Liquidation Event shall be deemed to be Additional Consideration.

3.    Voting.

3.1    General. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or

 

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by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Restated Certificate, holders of Preferred Stock shall vote together with the holders of Common Stock as a single class.

3.2    Election of Directors. The holders of record of the shares of Series D Preferred Stock, exclusively and as a separate class, shall be entitled to elect two (2) directors of the Corporation (together, the “Series D Directors”), holders of record of the shares of Series C Preferred Stock, Series B Preferred Stock and Series A Preferred Stock, exclusively and voting together as a single class, shall be entitled to elect two (2) directors of the Corporation, and the holders of record of the shares of Common Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. Any director elected as provided in the preceding sentence 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. If the holders of shares of Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock, Series A Preferred Stock or Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting exclusively and as a separate class, pursuant to the first sentence of this Section 3.2, then any directorship not so filled shall remain vacant until such time as the holders of the Series D Preferred Stock, Series C Preferred Stock, Series B Preferred Stock, Series A Preferred Stock or Common Stock, as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship, voting exclusively and as a separate class. The holders of record of the shares of Common Stock and of any other class or series of voting stock (including the Preferred Stock voting on an as-converted to Common Stock basis), exclusively and voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this Section 3.2, 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 pursuant to this Section 3.2.

3.3    Preferred Stock Protective Provisions. At any time when shares of Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Restated Certificate) the written consent or affirmative vote of the Requisite Holders, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:

 

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3.3.1    declare or pay any dividends or make any distributions on any capital stock of the Corporation;

3.3.2    redeem or repurchase capital stock of the Corporation except in connection with the repurchase of shares of Common Stock issued to or held by employees, consultants, officers and directors upon termination of their employment or services pursuant to agreements providing for the right of said repurchase, which agreements were authorized by the Board of Directors;

3.3.3    take any action which would result in a Liquidation Event or a Deemed Liquidation Event;

3.3.4    increase or decrease the total number of authorized members of the Board of Directors;

3.3.5    authorize, create or issue (whether by merger, consolidation, reclassification, amendment of this Restated Certificate, sale or otherwise) shares of any class or series of stock not authorized herein having rights, preferences or privileges superior to or on parity with any series of Preferred Stock;

3.3.6    take any action (whether by merger, consolidation, reclassification, amendment or waiver of this Restated Certificate, sale or otherwise) which would change the rights, preferences or privileges expressly afforded any series of Preferred Stock;

3.3.7    increase or decrease the total number of authorized shares of the Corporation’s Common Stock or any series of Preferred Stock;

3.3.8    take any action which would result in the incurrence of indebtedness for borrowed money in excess of $1,000,000, either individually or cumulatively for all such indebtedness, unless such action is approved by the Board of Directors; or

3.3.9    enter into any agreement to do any of the foregoing.

3.4    Series D Preferred Stock Protective Provisions. Notwithstanding anything herein to the contrary, at any time when shares of Series D Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Restated Certificate) the written consent or affirmative vote of the holders of a majority of the outstanding shares of Series D Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class (the “Requisite Series D Holders”), and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:

3.4.1    authorize, create or issue (whether by merger, consolidation, reclassification, amendment of this Restated Certificate, sale or otherwise) shares of any class or series of stock not authorized herein having rights, preferences or privileges superior to or on parity with the Series D Preferred Stock;

 

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3.4.2    take any action (whether by merger, consolidation, reclassification, amendment or waiver of this Restated Certificate, sale or otherwise) which would adversely change the rights, preferences or privileges expressly afforded the Series D Preferred Stock;

3.4.3    increase or decrease the total number of authorized shares of Series D Preferred Stock; or

3.4.4    enter into any agreement to do any of the foregoing.

4.    Optional Conversion.

The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

4.1    Right to Convert.

4.1.1    Conversion Ratio. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the applicable Original Issue Price by the applicable Conversion Price (as defined below) in effect at the time of conversion. The Conversion Price per share for the Series A Preferred Stock shall initially be equal to $0.50, the Conversion Price per share for the Series B Preferred Stock shall initially be equal to $0.75, the Conversion Price per share for the Series C Preferred Stock shall initially be equal to $1.00, the Conversion Price per share for the Series D-1 Preferred Stock shall initially be equal to $0.7558 (the “Series D-1 Conversion Price”) and the Conversion Price per share for the Series D-2 Preferred Stock shall initially be equal to $0.8510 (as applicable, the “Conversion Price”). Such initial Conversion Prices, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.

4.1.2    Termination of Conversion Rights. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock.

4.2    Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.

 

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4.3    Mechanics of Conversion.

4.3.1    Notice of Conversion. In order for a holder of Preferred Stock to voluntarily convert shares of Preferred Stock into shares of Common Stock, such holder shall (a) provide written notice to the Corporation’s transfer agent at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent) that such holder elects to convert all or any number of such holder’s shares of Preferred Stock and, if applicable, any event on which such conversion is contingent and (b), if such holder’s shares are certificated, surrender the certificate or certificates for such shares of Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent). Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the shares of Common Stock to be issued. If required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such notice and, if applicable, certificates (or lost certificate affidavit and agreement) shall be the time of conversion (the “Conversion Time”), and the shares of Common Stock issuable upon conversion of the specified shares shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time (i) issue and deliver to such holder of Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion in accordance with the provisions hereof and a certificate for the number (if any) of the shares of Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, (ii) pay in cash such amount as provided in Section 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and (iii) pay all declared but unpaid dividends on the shares of Preferred Stock converted.

4.3.2    Reservation of Shares. The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to the Restated Certificate. Before taking any action which would cause an adjustment reducing the applicable Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted applicable Conversion Price.

 

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4.3.3    Effect of Conversion. All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Section 4.2 and to receive payment of any dividends declared but unpaid thereon. Any shares of Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.

4.3.4    No Further Adjustment. Upon any such conversion, no adjustment to the Conversion Price shall be made for any declared but unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.

4.3.5    Taxes. The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

4.4    Adjustments to Conversion Price for Diluting Issues.

4.4.1    Special Definitions. For purposes of this Article Fourth, the following definitions shall apply:

(a)    “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(b)    “Series D Original Issue Date” shall mean the date on which the first share of Series D Preferred Stock was issued.

(c)    “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.

(d)    “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section 4.4.3 below, deemed to be issued) by the Corporation after the Series D Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “Exempted Securities”):

 

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(i)    shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Preferred Stock;

(ii)    shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Section 4.5, 4.6, 4.7 or 4.8;

(iii)    shares of Common Stock, Options or Convertible Securities issued to employees, officers, directors, outside consultants or contractors of the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors;

(iv)    shares of Common Stock or Convertible Securities actually issued upon the exercise of Options outstanding as of the date hereof or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities outstanding as of the date hereof;

(v)    shares of Common Stock, Options or Convertible Securities issued in connection with the Corporation obtaining lease financing, whether issued to a lessor, guarantor or other person, provided that such issuance is pursuant to an agreement or arrangement duly approved by the Board of Directors;

(vi)    shares of Common Stock, Options or Convertible Securities issued in connection with any borrowings, direct or indirect, from a bank or other financial institution by the Corporation, provided that such issuance is pursuant to an agreement or arrangement duly approved by the Board of Directors;

(vii)    shares of Common Stock, Options or Convertible Securities issued in connection with the acquisition of all or a substantial portion of the assets or the business of another entity by the Corporation, provided that such issuance is pursuant to an agreement or arrangement duly approved by the Board of Directors, including at least one of the Series D Directors;

(viii)    shares of Common Stock, Options or Convertible Securities issued in connection with any corporate partnering transaction or collaboration, strategic alliance, license, technology transfer or similar transaction between the Corporation and any other person, provided that such issuance is pursuant to an agreement or arrangement duly approved by the Board of Directors, including at least one of the Series D Directors; or

(ix)    shares of Series D Preferred Stock issued pursuant to that certain Series D Preferred Stock Purchase Agreement, dated on or after the filing date of this Restated Certificate, among the Corporation and the Investors named therein, or shares of Common Stock issued on conversion thereof (the “Purchase Agreement”).

4.4.2    No Adjustment of Conversion Price. No adjustment in the applicable Conversion Price shall be made as the result of the issuance or deemed issuance of

 

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Additional Shares of Common Stock if the Corporation receives written notice from the Requisite Holders agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock. Notwithstanding the foregoing, no adjustment to the applicable Conversion Price of the Series D-1 Preferred Stock or Series D-2 Preferred Stock shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the Requisite Series D Holders agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

4.4.3    Deemed Issue of Additional Shares of Common Stock.

(a)    If the Corporation at any time or from time to time after the Series D Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(b)    If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the applicable Conversion Price pursuant to the terms of Section 4.4.4, are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the applicable Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such applicable Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the applicable Conversion Price to an amount which exceeds the lower of (i) the applicable Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the applicable Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

(c)    If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the

 

15


issuance of which did not result in an adjustment to the applicable Conversion Price pursuant to the terms of Section 4.4.4 (either because the consideration per share (determined pursuant to Section 4.4.5) of the Additional Shares of Common Stock subject thereto was equal to or greater than the applicable Conversion Price then in effect, or because such Option or Convertible Security was issued before the Series D Original Issue Date), are revised after the Series D Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Section 4.4.3(a) shall be deemed to have been issued effective upon such increase or decrease becoming effective.

(d)    Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the applicable Conversion Price pursuant to the terms of Section 4.4.4, the applicable Conversion Price shall be readjusted to such applicable Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

(e)    If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the applicable Conversion Price provided for in this Section 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (b) and (c) of this Section 4.4.3). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the applicable Conversion Price that would result under the terms of this Section 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the applicable Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

4.4.4    Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Series D Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4.4.3), without consideration or for a consideration per share less than the Series D-1 Conversion Price in effect immediately prior to such issue, then the applicable Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:

 

16


CP2 = CP1* (A + B) ÷ (A + C).

For purposes of the foregoing formula, the following definitions shall apply:

(a)    “CP2” shall mean the applicable Conversion Price in effect immediately after such issue of Additional Shares of Common Stock

(b)    “CP1” shall mean the applicable Conversion Price in effect immediately prior to such issue of Additional Shares of Common Stock;

(c)    “A” shall mean the number of shares of Common Stock outstanding immediately prior to such issue of Additional Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Preferred Stock) outstanding (assuming exercise of any outstanding Options therefor) immediately prior to such issue);

(d)    “B” shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP1); and

(e)    “C” shall mean the number of such Additional Shares of Common Stock issued in such transaction.

4.4.5    Determination of Consideration. For purposes of this Section 4.4, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(a)    Cash and Property: Such consideration shall:

(i)    insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest;

(ii)    insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

(iii)    in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors.

 

17


(b)    Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4.4.3, relating to Options and Convertible Securities, shall be determined by dividing:

(i)    The total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by

(ii)    the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities.

4.4.6    Multiple Closing Dates. In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the applicable Conversion Price pursuant to the terms of Section 4.4.4, and such issuance dates occur within a period of no more than ninety (90) days from the first such issuance to the final such issuance, then, upon the final such issuance, the applicable Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).

4.5    Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Series D Original Issue Date effect a subdivision of the outstanding Common Stock, the applicable Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Series D Original Issue Date combine the outstanding shares of Common Stock, the applicable Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this Section 4.5 shall become effective at the close of business on the date the subdivision or combination becomes effective.

4.6    Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Series D Original Issue Date shall make

 

18


or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the applicable Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the applicable Conversion Price then in effect by a fraction:

(1)    the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(2)    the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

Notwithstanding the foregoing (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the applicable Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the applicable Conversion Price shall be adjusted pursuant to this Section 4.6 as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

4.7    Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Series D Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.

4.8    Adjustment for Merger or Reorganization, etc. Subject to the provisions of Section 2.5, if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Sections 4.4, 4.6 or 4.7), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Preferred

 

19


Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the applicable Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Preferred Stock. For the avoidance of doubt, nothing in this Subsection 4.8 shall be construed as preventing the holders of Preferred Stock from seeking any appraisal rights to which they are otherwise entitled under the General Corporation Law in connection with a merger triggering an adjustment hereunder, nor shall this Subsection 4.8 be deemed conclusive evidence of the fair value of the shares of Preferred Stock in any such appraisal proceeding.

4.9    Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the applicable Conversion Price pursuant to this Section 4, the Corporation at its expense shall, as promptly as reasonably practicable (but in any event not later than ten (10) days thereafter), compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Preferred Stock (but in any event not later than ten (10) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the applicable Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of Preferred Stock.

4.10    Notice of Record Date. In the event:

(a)    the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or

(b)    of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or

(c)    of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation, then, and in each such case, the Corporation will send or cause to be sent to the holders of the Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the

 

20


Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding up, and the amount per share and character of such exchange applicable to the Preferred Stock and the Common Stock. Such notice shall be sent at least ten (10) days prior to the record date or effective date for the event specified in such notice; provided that, in either case, such notice may be shortened and/or notice may be waived upon the Corporation’s receipt of written consent of the Requisite Holders.

5.    Mandatory Conversion.

5.1    Trigger Events. Upon either (a) the closing of the sale of shares of Common Stock to the public at a price per share representing a pre-money valuation of the Corporation of at least $330,000,000 (calculated on a fully diluted basis) in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $75,000,000 of gross proceeds to the Corporation (a “Qualified IPO”) or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the Requisite Holders (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), then (i) all outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate as calculated pursuant to Section 4.1.1 and (ii) such shares may not be reissued by the Corporation.

5.2    Procedural Requirements. All holders of record of shares of Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to this Section 5. Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Preferred Stock in certificated form shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Preferred Stock converted pursuant to Section 5.1, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender any certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of any certificate or certificates of such holders (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Section 5.2. As soon as practicable after the Mandatory Conversion Time and, if applicable, the surrender of any certificate or certificates (or lost certificate affidavit and agreement) for Preferred Stock, the Corporation shall (a) issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and (b) pay cash as provided in Section 4.2 in lieu of any fraction of a share

 

21


of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Preferred Stock converted. Such converted Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.

5.3    Special Mandatory Conversion.

(i)    Trigger Event. In the event that any holder of Series D-1 Preferred Stock is deemed to be a Defaulting Purchaser (as defined in the Purchase Agreement) pursuant to the terms and conditions of the Purchase Agreement, then each share of Preferred Stock held by such Defaulting Purchaser and its Affiliates (as defined in the Purchase Agreement) (or each share of Common Stock issued upon conversion of any share of Series D-1 Preferred Stock pursuant to Section 4) shall automatically, and without any further action on the part of such Defaulting Purchaser, its Affiliates, or the Corporation, be converted into 0.1 shares of Common Stock. Such conversion is referred to as a “Special Mandatory Conversion.”

(ii)    Procedural Requirements. Upon a Special Mandatory Conversion, each holder of shares of Series D-1 Preferred Stock converted pursuant to Section 5.3(i) shall be sent written notice of such Special Mandatory Conversion and the place designated for mandatory conversion of all such shares of Series D-1 Preferred Stock pursuant to this Section 5.3(ii). Upon receipt of such notice, each holder of such shares of Series D-1 Preferred Stock in certificated form shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that any such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Series D-1 Preferred Stock converted pursuant to Section 5.3(i), including the rights, if any, to receive notices, elect directors and vote (other than as a holder of Common Stock), will terminate at the time of the Special Mandatory Conversion (notwithstanding the failure of the holder or holders thereof to surrender any certificates for such shares at or prior to such time), except only the rights of the holders thereof, upon surrender of any certificate or certificates of such holders therefor (or lost certificate affidavit and agreement), to receive the items provided for in the next sentence of this Section 5.3(ii). As soon as practicable after the Special Mandatory Conversion and, if applicable, the surrender of any certificate or certificates (or lost certificate affidavit and agreement) for Series D-1 Preferred Stock so converted, the Corporation shall (a) issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and (b) pay cash as provided in Section 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Series D-1 Preferred Stock converted. Such converted Series D-1 Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Series D-1 Preferred Stock accordingly.

 

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6.    Redemption. The shares of Preferred Stock are not redeemable except in accordance with Section 2.6.2.

7.    Redeemed or Otherwise Acquired Shares. Any shares of Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following redemption.

8.    Waiver. Except as otherwise set forth herein, any of the rights, powers, preferences and other terms of the Preferred Stock set forth herein may be waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of the Requisite Holders.

9.    Notices. Any notice required or permitted by the provisions of this Article Fourth to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

FIFTH: Subject to any additional vote required by the Restated Certificate or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.

SIXTH: Subject to any additional vote required by the Restated Certificate, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation.

SEVENTH: Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

NINTH: To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article Ninth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.

 

23


Any repeal or modification of the foregoing provisions of this Article Ninth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

TENTH: To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents of the Corporation (and any other persons to which the General Corporation Law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law.

Any amendment, repeal or modification of the foregoing provisions of this Article Tenth shall not (a) adversely affect any right or protection of any director, officer or other agent of the Corporation existing at the time of such amendment, repeal or modification, or (b) increase the liability of any director of the Corporation with respect to any acts or omissions of such director, officer or agent occurring prior to, such amendment, repeal or modification.

ELEVENTH: The Corporation renounces, to the fullest extent permitted by law, any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any partner, member, director, stockholder, employee or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.

TWELFTH: Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the State of Delaware shall be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers or employees arising pursuant to any provision of the Delaware General Corporation Law or the Corporation’s Restated Certificate or Bylaws or (iv) any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten (10) days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction; provided that, the provisions of this Article

 

24


Twelfth will not apply to suits brought to enforce any liability or duty created by the Securities Act of 1933, as amended, the Securities and Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended. If any provision or provisions of this Article Twelfth shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article Twelfth (including, without limitation, each portion of any sentence of this Article Twelfth containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby.

THIRTEENTH: For purposes of Section 500 of the California Corporations Code (to the extent applicable), in connection with any repurchase of shares of Common Stock permitted under this Restated Certificate from employees, officers, directors, advisors, consultants or other persons performing services for the Corporation in connection with a termination of employment or services pursuant to agreements or arrangements approved by the Board of Directors (in addition to any other consent required under this Restated Certificate), such repurchase may be made without regard to any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined in Section 500 of the California Corporations Code). Accordingly, for purposes of making any calculation under California Corporations Code Section 500 in connection with such repurchase, the amount of any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined therein) shall be deemed to be zero (0).

*    *    *

3.    That the foregoing amendment and restatement was approved by the holders of the requisite number of shares of this corporation in accordance with Section 228 of the General Corporation Law.

4.    That this Restated Certificate, which restates and integrates and further amends the provisions of this Corporation’s Amended and Restated Certificate of Incorporation, has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation on this 30th day of October, 2020.

 

By:  

/s/ Mark McKenna

Name: Mark McKenna
Title: President and Chief Executive Officer
EX-3.2 3 d14529dex32.htm EX-3.2 EX-3.2

Exhibit 3.2

BYLAWS

OF

PROMETHEUS BIOSCIENCES, INC.


BYLAWS

OF

PROMETHEUS BIOSCIENCES, INC.

TABLE OF CONTENTS

 

     Page  

ARTICLE I - OFFICES

     1

Section 1. REGISTERED OFFICES

     1

Section 2. OTHER OFFICES

     1

ARTICLE II - MEETINGS OF STOCKHOLDERS

     1

Section 1. PLACE OF MEETINGS

     1

Section 2. ANNUAL MEETING OF STOCKHOLDERS

     1

Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF

     1

Section 4. VOTING

     2

Section 5. PROXIES

     2

Section 6. SPECIAL MEETINGS

     2

Section 7. NOTICE OF STOCKHOLDERS’ MEETINGS

     2

Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST

     2

Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

     3

ARTICLE III - DIRECTORS

     3

Section 1. THE NUMBER OF DIRECTORS

     3

Section 2. VACANCIES

     4

Section 3. POWERS

     4

Section 4. PLACE OF DIRECTORS’ MEETINGS

     4

Section 5. REGULAR MEETINGS

     4

Section 6. SPECIAL MEETINGS

     4

Section 7. QUORUM

     4

Section 8. ACTION WITHOUT MEETING

     5

Section 9. TELEPHONIC MEETINGS

     5

Section 10. COMMITTEES OF DIRECTORS

     5

Section 11. MINUTES OF COMMITTEE MEETINGS

     5

Section 12. CHAIRMAN OF THE BOARD

     5

Section 13. COMPENSATION OF DIRECTORS

     5

ARTICLE IV - OFFICERS

     6

Section 1. OFFICERS

     6

Section 2. ELECTION OF OFFICERS

     6

Section 3. SUBORDINATE OFFICERS

     6

Section 4. COMPENSATION OF OFFICERS

     6

 

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Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES

     6

Section 6. PRESIDENT

     6

Section 7. VICE PRESIDENTS

     6

Section 8. SECRETARY

     7

Section 9. ASSISTANT SECRETARY

     7

Section 10. CHIEF FINANCIAL OFFICER OR TREASURER

     7

Section 11. ASSISTANT TREASURER

     7

ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS

     7

ARTICLE VI - INDEMNIFICATION OF EMPLOYEES AND AGENTS

     9

ARTICLE VII - CERTIFICATES OF STOCK

     10

Section 1. CERTIFICATES

     10

Section 2. SIGNATURES ON CERTIFICATES

     10

Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES

     10

Section 4. LOST CERTIFICATES

     10

Section 5. TRANSFERS OF STOCK

     10

Section 6. FIXED RECORD DATE

     10

Section 7. REGISTERED STOCKHOLDERS

     11

ARTICLE VIII - GENERAL PROVISIONS

     11

Section 1. DIVIDENDS

     11

Section 2. PAYMENT OF DIVIDENDS; DIRECTORS’ DUTIES

     11

Section 3. CHECKS

     11

Section 4. FISCAL YEAR

     11

Section 5. MANNER OF GIVING NOTICE

     11

Section 6. WAIVER OF NOTICE

     11

Section 7. ANNUAL STATEMENT

     12

Section 8. FORUM

     12

ARTICLE IX - AMENDMENTS

     12

Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS

     12

ARTICLE X – RIGHT OF FIRST REFUSAL

     12

Section 1. RESTRICTION ON TRANSFER

     12

Section 2. NOTICE REQUIREMENT

     12

Section 3. OPTION OF THE CORPORATION

     13

Section 4. SPECIAL PROVISIONS REGARDING EXCHANGES

     13

Section 5. EFFECT OF PURCHASE

     13

Section 6. CERTAIN TRANSFERS EXEMPT

     13

Section 7. LIMITATIONS ON RIGHT OF FIRST REFUSAL

     14

Section 8. WAIVER

     14

Section 9. ASSIGNMENT; ALTERNATIVE RIGHTS

     14

Section 10. LEGEND

     14

 

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BYLAWS

OF

PROMETHEUS BIOSCIENCES, INC.

ARTICLE I

OFFICES

Section 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 2. OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held at any place within or outside the State of Delaware designated by the Board of Directors. In the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the corporation.

Section 2. ANNUAL MEETING OF STOCKHOLDERS. The annual meeting of stockholders shall be held each year on a date and a time designated by the Board of Directors. At each annual meeting directors shall be elected in the manner provided in the certificate of incorporation of the corporation (the “Certificate of Incorporation”) and in the Bylaws, and any other proper business may be transacted.

Section 3. QUORUM; ADJOURNED MEETINGS AND NOTICE THEREOF. A majority of the stock issued and outstanding and entitled to vote at any meeting of stockholders, the holders of which are present in person or represented by proxy, shall constitute a quorum for the transaction of business except as otherwise provided by law, by the Certificate of Incorporation, or by these Bylaws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. If, however, such quorum shall not be present or represented at any meeting of the stockholders, a majority of the voting stock represented in person or by proxy may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote thereat.

 

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Section 4. VOTING. When a quorum is present at any meeting, in all matters other than the election of directors, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes, or the Certificate of Incorporation, or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors.

Section 5. PROXIES. At each meeting of the stockholders, each stockholder having the right to vote may vote in person or may authorize another person or persons to act for him or her by proxy appointed by an instrument in writing subscribed by such stockholder and bearing a date not more than three (3) years prior to said meeting, unless said instrument provides for a longer period. All proxies must be filed with the Secretary of the corporation at the beginning of each meeting in order to be counted in any vote at the meeting. Except as may be otherwise provided in the Certificate of Incorporation, each stockholder shall have one vote for each share of stock having voting power, registered in his or her name on the books of the corporation on the record date set by the Board of Directors as provided in Article VII, Section 6 hereof.

Section 6. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board or the President and shall be called by the Chairman of the Board, President or the Secretary at the request in writing of a majority of the Board of Directors, or at the request in writing of stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding, and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

Section 7. NOTICE OF STOCKHOLDERS’ MEETINGS. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which notice shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. The written notice of any meeting shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the corporation. If electronically transmitted, then notice is deemed given when transmitted and directed to a facsimile number or electronic mail address at which the stockholder has consented to receive notice. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

Section 8. MAINTENANCE AND INSPECTION OF STOCKHOLDER LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

 

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Section 9. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Except with respect to any telegram, cablegram or other electronic transmission, delivery made to a corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section 9 to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation by delivery to its registered office in Delaware, its principal place of business or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded.

A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this Section 9, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (i) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder or proxyholder and (ii) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. Consents given by telegram, cablegram or other electronic transmission shall be deemed delivered if transmitted to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded, and the telegram, cablegram or other electronic transmission is reproduced in paper form and filed with the book in which proceedings of meetings of stockholders are recorded.

Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE III

DIRECTORS

Section 1. THE NUMBER OF DIRECTORS. Unless otherwise provided by law, the number of directors which shall constitute the whole Board of Directors shall be determined from time to time solely by resolution adopted by the affirmative vote of a majority of the directors. The directors need not be stockholders. The directors shall be elected at the annual meeting of the stockholders, except

 

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as provided in Section 2 of this Article, and each director elected shall hold office until his or her successor is elected and qualified; provided, however, that unless otherwise restricted by the Certificate of Incorporation or by law, any director or the entire Board of Directors may be removed, either with or without cause, from the Board of Directors at any meeting of stockholders by a majority of the stock represented and entitled to vote thereat.

Section 2. VACANCIES. Vacancies on the Board of Directors by reason of death, resignation, retirement, disqualification, removal from office, or otherwise, and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. The directors so chosen shall hold office until the next annual election of directors and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board of Directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office.

Section 3. POWERS. The property and business of the corporation shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders.

Section 4. PLACE OF DIRECTORS’ MEETINGS. The directors may hold their meetings and have one or more offices, and keep the books of the corporation outside of the State of Delaware.

Section 5. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place as shall from time to time be determined by the Board of Directors.

Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President on forty-eight (48) hours notice to each director, either personally or by mail, e-mail or by telegram; special meetings shall be called by the Chairman of the Board, President or the Secretary in like manner and on like notice on the written request of two directors unless the Board of Directors consists of only one director; in which case special meetings shall be called by the Chairman of the Board, President or Secretary in like manner or on like notice on the written request of the sole director.

Section 7. QUORUM. At all meetings of the Board of Directors a majority of the authorized number of directors shall be necessary and sufficient to constitute a quorum for the transaction of business, and the vote of a majority of the directors present at any meeting at which there is a quorum, shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute, by the Certificate of Incorporation or by these Bylaws. If a quorum shall not be present at any meeting of the Board of Directors, the directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. If only one director is authorized, such sole director shall constitute a quorum.

 

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Section 8. ACTION WITHOUT MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee.

Section 9. TELEPHONIC MEETINGS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

Section 10. COMMITTEES OF DIRECTORS. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, designate one or more committees, each such committee to consist of one or more of the directors of the corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation’s property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the Bylaws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock.

Section 11. MINUTES OF COMMITTEE MEETINGS. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

Section 12. CHAIRMAN OF THE BOARD. The Board of Directors may designate one of its members to serve as Chairman of the Board, and if so, the Chairman of the Board shall, if present, preside at all meetings of the Board of Directors and stockholders, and exercise and perform such other powers and duties as may be from time to time assigned to him or her by the Board of Directors or prescribed by these Bylaws.

Section 13. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings.

 

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ARTICLE IV

OFFICERS

Section 1. OFFICERS. The officers of this corporation shall be chosen by the Board of Directors and shall include a President and a Secretary. The corporation may also have at the discretion of the Board of Directors such other officers as are desired, including a Vice-Chairman of the Board of Directors, a Chief Executive Officer, a Chief Financial Officer or Treasurer, one or more Vice Presidents, one or more Assistant Secretaries and Assistant Treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 hereof. In the event there are two or more Vice Presidents, then one or more may be designated as Executive Vice President, Senior Vice President, or other similar or dissimilar title. At the time of the election of officers, the directors may by resolution determine the order of their rank. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide.

Section 2. ELECTION OF OFFICERS. The Board of Directors, at its first meeting after each annual meeting of stockholders, shall choose the officers of the corporation.

Section 3. SUBORDINATE OFFICERS. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

Section 4. COMPENSATION OF OFFICERS. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors.

Section 5. TERM OF OFFICE; REMOVAL AND VACANCIES. The officers of the corporation shall hold office until their successors are chosen and qualify in their stead. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. If the office of any officer or officers becomes vacant for any reason, the vacancy shall be filled by the Board of Directors.

Section 6. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. In the absence of the Chairman of the Board, the President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors. He or she shall be an ex-officio member of all committees and shall have the general powers and duties of management usually vested in the office of President and Chief Executive Officer of corporations, and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws.

Section 7. VICE PRESIDENTS. In the absence or disability of the President, the Vice Presidents in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of and be subject to all the restrictions upon the President. The Vice Presidents shall have such other duties as from time to time may be prescribed for them, respectively, by the Board of Directors.

 

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Section 8. SECRETARY. The Secretary shall attend all sessions of the Board of Directors and all meetings of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; and shall perform like duties for the standing committees when required by the Board of Directors. He or she shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or these Bylaws.

Section 9. ASSISTANT SECRETARY. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order determined by the Board of Directors, or if there be no such determination, the Assistant Secretary designated by the Board of Directors, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

Section 10. CHIEF FINANCIAL OFFICER OR TREASURER. The Chief Financial Officer or Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys, and other valuable effects in the name and to the credit of the corporation, in such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Chief Financial Officer or Treasurer and of the financial condition of the corporation. If required by the Board of Directors, he or she shall give the corporation a bond, in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of the duties of his or her office and for the restoration to the corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under his or her control belonging to the corporation.

Section 11. ASSISTANT TREASURER. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors, or if there be no such determination, the Assistant Treasurer designated by the Board of Directors, shall, in the absence or disability of the Chief Financial Officer or Treasurer, perform the duties and exercise the powers of the Chief Financial Officer or Treasurer and shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe.

ARTICLE V

INDEMNIFICATION OF DIRECTORS AND OFFICERS

(a) The corporation shall indemnify to the maximum extent permitted by law any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if he or she 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, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a

 

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plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

(b) The corporation shall indemnify to the maximum extent permitted by law any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he or she is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection with the defense or settlement of such action or suit if he or she 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 except that no such indemnification shall be made in respect of 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 of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which such Court of Chancery or such other court shall deem proper.

(c) To the extent that a director or officer of the corporation shall be successful on the merits or otherwise in defense of any action, suit or proceeding referred to in paragraphs (a) and (b), or in defense of any claim, issue or matter therein, he or she shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by him or her in connection therewith.

(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because he or she has met the applicable standard of conduct set forth in paragraphs (a) and (b). Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. The corporation, acting through its Board of Directors or otherwise, shall cause such determination to be made if so requested by any person who is indemnifiable under this Article V.

(e) Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation as authorized in this Article V.

(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other paragraphs of this Article V shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office.

(g) The Board of Directors may authorize, by a vote of a majority of a quorum of the Board of Directors, the corporation to purchase and maintain insurance on behalf of any person who is or

 

8


was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of this Article V.

(h) For the purposes of this Article V, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers so that any person who is or was a director or officer of such constituent corporation, or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article V with respect to the resulting or surviving corporation as he or she would have with respect to such constituent corporation if its separate existence had continued.

(i) For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include service as a director or officer of the corporation which imposes duties on, or involves services by, such director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this Article V shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

(k) The corporation shall be required to indemnify a person in connection with an action, suit or proceeding (or part thereof) initiated by such person only if the action, suit or proceeding (or part thereof) was authorized by the Board of Directors of the corporation.

ARTICLE VI

INDEMNIFICATION OF EMPLOYEES AND AGENTS

The corporation may indemnify every person who was or is a party or is or was threatened to be made a party to any action, suit, or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was an employee or agent of the corporation or, while an employee or agent of the corporation, is or was serving at the request of the corporation as an employee or agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding, to the extent permitted by applicable law.

 

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ARTICLE VII

CERTIFICATES OF STOCK

Section 1. CERTIFICATES. The shares of the Corporation shall be represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, signed in a manner that complies with Section 158 of the Delaware General Corporation Law, representing the number of shares held by such holder registered in certificate form. Any or all the signatures on the certificate may be a facsimile or pdf.

Section 2. SIGNATURES ON CERTIFICATES. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue.

Section 3. STATEMENT OF STOCK RIGHTS, PREFERENCES, PRIVILEGES. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

Section 4. LOST CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed.

Section 5. TRANSFERS OF STOCK. Upon surrender to the corporation, or the transfer agent of the corporation, of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

Section 6. FIXED RECORD DATE. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the

 

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purpose of any other lawful action, the Board of Directors may fix a record date which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten (10) days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date which shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors.

Section 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly shall not be bound to recognize any equitable or other claim or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, save as expressly provided by the laws of the State of Delaware.

ARTICLE VIII

GENERAL PROVISIONS

Section 1. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to and subject to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation.

Section 2. PAYMENT OF DIVIDENDS; DIRECTORS’ DUTIES. Before payment of any dividend there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interests of the corporation, and the directors may abolish any such reserve.

Section 3. CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers as the Board of Directors may from time to time designate.

Section 4. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

Section 5. MANNER OF GIVING NOTICE. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram.

Section 6. WAIVER OF NOTICE. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these Bylaws, a waiver thereof in writing or by electronic transmission to the extent permitted by the General Corporation Law of the State of Delaware, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto.

 

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Section 7. ANNUAL STATEMENT. The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation.

Section 8. FORUM. Unless the corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of the corporation to the corporation or the corporation’s stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, or (iv) any action asserting a claim governed by the internal affairs doctrine. Any person or entity purchasing or otherwise acquiring any interest in shares of capital stock of the corporation shall be deemed to have notice of and consented to the provisions of this Section 8.

ARTICLE IX

AMENDMENTS

Section 1. AMENDMENT BY DIRECTORS OR STOCKHOLDERS. These Bylaws may be altered, amended or repealed or new Bylaws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation, at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such special meeting. If the power to adopt, amend or repeal Bylaws is conferred upon the Board of Directors by the Certificate of Incorporation it shall not divest or limit the power of the stockholders to adopt, amend or repeal Bylaws.

ARTICLE X

RIGHT OF FIRST REFUSAL

Section 1. RESTRICTION ON TRANSFER. No stockholder of the corporation shall transfer, assign, hypothecate, encumber, pledge or otherwise alienate (hereinafter “Transfer”) any shares of Common Stock of the corporation (the “Common Stock”) owned by such stockholder unless such stockholder previously complied with all provisions of this Article X. Any Transfer not made in accordance with this Article X shall be void, and the corporation shall not treat the transferee in such transaction as a stockholder for any purpose.

Section 2. NOTICE REQUIREMENT. If a stockholder seeks to Transfer any Common Stock, whether voluntarily or involuntarily, such stockholder (the “Offering Stockholder”) shall first give simultaneous written notice of such intention (“Notice of Transfer”) to the Secretary of the corporation. The Notice of Transfer shall specify the number of shares of Common Stock to be transferred (the “Offered Shares”), and state the price and all other terms of the proposed transaction. The Notice of Transfer shall constitute an irrevocable offer to sell the Offered Shares during the periods described below.

 

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Section 3. OPTION OF THE CORPORATION. For twenty-five (25) days following the delivery of a Notice of Transfer (the “Option Period”), the corporation shall have an irrevocable right to purchase all or a portion of the Offered Shares in accordance with the terms stated in the Notice of Transfer. The right may be exercised by a written notice, signed by the President of the corporation (the “Corporation Notice”), stating that the corporation desires to purchase the Offered Shares and tendering the purchase price therefor. Such notice and the purchase price for the Offered Shares shall be delivered to the Offering Stockholder before expiration of the Option Period. Failure to so respond within the Option Period to the Notice of Transfer shall be deemed an irrevocable waiver by the corporation of its right to acquire the Offered Shares. The corporation shall effect the purchase of the Offered Shares, including payment of the purchase price, not more than five (5) business days after delivery of the Corporation Notice, and at such time the Offering Stockholder shall deliver to the corporation the certificate(s) representing the Offered Shares to be purchased by the corporation, each certificate to be properly endorsed for transfer. Any Common Stock so purchased by the corporation shall thereupon be cancelled and cease to be issued and outstanding shares of the corporation’s Common Stock.

Section 4. SPECIAL PROVISIONS REGARDING EXCHANGES. If the Notice of Transfer specifies consideration other than cash, then the Offered Shares may be purchased in cash for the fair market value of such property, as determined in good faith by the Board of Directors. In the event that the Board of Directors decides to hire an independent appraiser in connection with such determination, all expenses for such independent appraiser shall be borne by the Offering Stockholder.

Section 5. EFFECT OF PURCHASE. For purposes of Section 3 of this Article X, the purchase price for Offered Shares shall be deemed tendered, and said Offered Shares shall be deemed purchased, at such time as the Offering Stockholder receives written notice enclosing a cashier’s check for the purchase price or stating that the purchase price has been delivered to a third party (such as counsel to the corporation) with instructions to deliver such amount to the Offering Stockholder upon surrender of certificates representing the Offered Shares, duly endorsed with signatures guaranteed. All rights accorded the Offering Stockholder with respect to the Offered Shares, other than the right to payment therefor, shall cease at that time. If payment is tendered directly to the Offering Stockholder, the Offering Stockholder shall promptly, but in no event later than five (5) business days, cause to be delivered certificate(s) representing the Offered Shares, duly endorsed with signatures guaranteed, to the corporation’s transfer agent for cancellation or transfer.

Section 6. CERTAIN TRANSFERS EXEMPT. Notwithstanding anything else contained in this Article X to the contrary, an Offering Stockholder shall be permitted to make Transfers of certain shares of Common Stock held by such Offering Stockholder without complying with the provisions of Sections 1 through 5 of this Article X above if such Transfer is:

(a) to the Offering Stockholder’s spouse, parents, children, or siblings or other members of the Offering Stockholder’s family (including relatives by marriage), or to a trust for the benefit of the Offering Stockholder or any of the foregoing members of his or her family, or to a custodian, trustee or other fiduciary for the account of the Offering Stockholder or any of the foregoing members of his or her family in connection with a bona fide estate planning transaction; provided, however, that this Section shall not permit any Transfer to be made by the Offering Stockholder in connection with the dissolution of the Offering Stockholder’s marriage or the legal separation of the Offering Stockholder and Offering Stockholder’s spouse to such spouse on the account of any settlement of any community property or other marital property rights such spouse may have in such shares;

(b) by way of bequest or inheritance upon death;

 

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(c) to any person, association or entity that, directly or indirectly, through one or more intermediaries, has voting control or has its voting controlled by, or is under common voting control with, such Offering Stockholder;

(d) by way of a bona fide gift;

(e) in connection with a Change of Control (as defined in Section 7 of this Article X below); or

(f) subject to an alternative right of first refusal or similar right granted by the Offering Stockholder to the corporation, including in certain circumstances, but not limited to, restricted stock purchase agreements, co-sale agreements and equity incentive award plans.

Any Transfer set forth in clauses (a) through (f) of this Section 6 may be referred to herein as a “Permitted Transfer.”

Section 7. LIMITATIONS ON RIGHT OF FIRST REFUSAL. The restrictions imposed by this Article X shall not apply to and shall terminate upon (i) the closing of a firmly underwritten public offering of Common Stock or (ii) the closing of any transaction or series of related transactions constituting (a) a reorganization, merger, consolidation or sale of all or substantially all of the corporation’s stock, as a result of which transaction or series of related transactions the corporation’s stockholders of record as constituted immediately prior to such transaction or series of related transactions hold less than a majority of the outstanding voting power of the surviving or acquiring entity after the consummation of such transaction or series of related transactions; or (b) a sale of all or substantially all of the assets of the corporation (each of clauses (a) and (b) a “Change of Control”).

Section 8. WAIVER. The provisions of this Article X may be waived with respect to any Transfer only in writing signed by the corporation.

Section 9. ASSIGNMENT; ALTERNATIVE RIGHTS. The corporation may assign its rights under this Article X or grant alternative rights of first refusal or similar rights to a third party or parties.

Section 10. LEGEND. Any and all certificates representing any shares of Common Stock shall bear a legend referring to the restrictions imposed by this Article X in substantially the form below:

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION, A COPY OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION.”

[Remainder of page intentionally left blank]

 

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EX-3.3 4 d14529dex33.htm EX-3.3 EX-3.3

Exhibit 3.3

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

OF

PROMETHEUS BIOSCIENCES, INC.

(originally incorporated on October 26, 2016 under the name Precision IBD, Inc.)

FIRST: The name of the Corporation is Prometheus Biosciences, Inc.

SECOND: The address of the Corporation’s registered office in the State of Delaware is 251 Little Falls Drive, City of Wilmington, County of New Castle, State of Delaware 19808. The name of its registered agent at that address is Corporation Service Company.

THIRD: The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 440,000,000 shares, consisting of (a) 400,000,000 shares of Common Stock, $0.0001 par value per share (“Common Stock”), and (b) 40,000,000 shares of Preferred Stock, $0.0001 par value per share (“Preferred Stock”).

The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.

A. COMMON STOCK.

1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights of the holders of the Preferred Stock of any series as may be designated by the Board of Directors upon any issuance of the Preferred Stock of any series.

2. Voting. The holders of the Common Stock shall have voting rights at all meetings of stockholders, each such holder being entitled to one vote for each share thereof held by such holder; provided, however, that, except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Certificate of Incorporation (which, as used herein, shall mean the certificate of incorporation of the Corporation, as amended from time to time, including the terms of any certificate of designations of any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together as a class with the holders of one


or more other such series, to vote thereon pursuant to this Certificate of Incorporation or the General Corporation Law of the State of Delaware. There shall be no cumulative voting.

The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

3. Dividends. Dividends may be declared and paid on the Common Stock if, as and when determined by the Board of Directors subject to any preferential dividend or other rights of any then outstanding Preferred Stock and to the requirements of applicable law.

4. Liquidation. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive all assets of the Corporation available for distribution to its stockholders, subject to any preferential or other rights of any then outstanding Preferred Stock.

B. PREFERRED STOCK.

Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided.

Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by adopting a resolution or resolutions providing for the issuance of the shares thereof and by filing a certificate of designations relating thereto in accordance with the General Corporation Law of the State of Delaware, to determine and fix the number of shares of such series and such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the fullest extent now or hereafter permitted by the General Corporation Law of the State of Delaware. The powers, preferences and relative, participating, optional and other special rights of each such series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. Without limiting the generality of the foregoing, the resolution or resolutions providing for the issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to any other series of Preferred Stock to the extent permitted by law.

Subject to the rights of the holders of any series of Preferred Stock pursuant to the terms of this Certificate of Incorporation or any resolution or resolutions providing for the issuance of such series of stock adopted by the Board of Directors, the number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then

 

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outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of the State of Delaware.

FIFTH: Except as otherwise provided herein, the Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Certificate of Incorporation, and all rights conferred upon stockholders, directors or any other persons herein are granted subject to this reservation.

SIXTH: In furtherance and not in limitation of the powers conferred upon it by the General Corporation Law of the State of Delaware, and subject to the terms of any series of Preferred Stock, the Board of Directors shall have the power to adopt, amend, alter or repeal the Bylaws of the Corporation. The stockholders may not adopt, amend, alter or repeal the Bylaws of the Corporation, or adopt any provision inconsistent therewith, unless such action is approved, in addition to any other vote required by this Certificate of Incorporation, by the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article SIXTH.

SEVENTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the General Corporation Law of the State of Delaware is amended to permit further elimination or limitation of the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware as so amended.

EIGHTH: This Article EIGHTH is inserted for the management of the business and for the conduct of the affairs of the Corporation.

1. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

2. Number of Directors; Election of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the number of directors of the Corporation shall be

 

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established from time to time by the Board of Directors. Election of directors need not be by written ballot, except as and to the extent provided in the Bylaws of the Corporation.

3. Classes of Directors. Subject to the rights of holders of any series of Preferred Stock to elect directors, the Board of Directors shall be and is divided into three classes, designated as Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The Board of Directors is authorized to assign members of the Board of Directors to Class I, Class II or Class III.

4. Terms of Office. Subject to the rights of holders of any series of Preferred Stock to elect directors, each director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting of stockholders at which such director was elected; provided that each director initially assigned to Class I shall serve for a term expiring at the Corporation’s first annual meeting of stockholders held after the effectiveness of this Certificate of Incorporation; each director initially assigned to Class II shall serve for a term expiring at the Corporation’s second annual meeting of stockholders held after the effectiveness of this Certificate of Incorporation; and each director initially assigned to Class III shall serve for a term expiring at the Corporation’s third annual meeting of stockholders held after the effectiveness of this Certificate of Incorporation; provided further, that the term of each director shall continue until the election and qualification of his or her successor and be subject to his or her earlier death, resignation or removal.

5. Quorum. The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors fixed pursuant to Section 2 of this Article EIGHTH shall constitute a quorum of the Board of Directors. If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present.

6. Action at Meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law or by this Certificate of Incorporation.

7. Removal. Subject to the rights of holders of any series of Preferred Stock, directors of the Corporation may be removed but only for cause and only by the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote at an election of directors.

8. Vacancies. Subject to the rights of holders of any series of Preferred Stock, any vacancy or newly created directorship in the Board of Directors, however occurring, shall be filled only by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director and shall not be filled by the stockholders, unless the Board of Directors determines by resolution that any such vacancy or newly created directorship shall be

 

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filled by the stockholders. A director elected to fill a vacancy shall hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of a successor and to such director’s earlier death, resignation or removal.

9. Stockholder Nominations and Introduction of Business, Etc. Advance notice of stockholder nominations for election of directors and other business to be brought by stockholders before a meeting of stockholders shall be given in the manner provided by the Bylaws of the Corporation.

10. Amendments to Article. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article EIGHTH.

NINTH: No action that is required or permitted to be taken by the stockholders of the Corporation at any annual or special meeting of stockholders may be effected by written consent of stockholders in lieu of a meeting. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article NINTH.

TENTH: Special meetings of stockholders for any purpose or purposes may be called at any time only by the Board of Directors, the chairperson of the Board of Directors, the chief executive officer or the president (in the absence of a chief executive officer), and may not be called by any other person or persons. Business transacted at any special meeting of stockholders shall be limited to the purpose or purposes stated in the notice of meeting. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article TENTH.

ELEVENTH: Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of fiduciary duty owed by any director, officer, employee, agent or stockholder of the Corporation to the Corporation or the Corporation’s stockholders, creditors or other constituents, (c) any action asserting a claim arising pursuant to any provision of the General Corporation Law of the State of Delaware or this Certificate of Incorporation or the Bylaws of the Corporation, or (d) any action asserting a claim governed by the internal affairs doctrine, in each case subject to said

 

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Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein; provided that, the provisions of this Article ELEVENTH will not apply to suits brought to enforce any liability or duty created by the Securities Act of 1933, as amended, the Securities and Exchange Act of 1934, as amended, or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Unless the Corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause or causes of action arising under the Securities Act of 1933, as amended, including all causes of action asserted against any defendant to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by the Corporation, its officers and directors, the underwriters to any offering giving rise to such complaint, and any other professional or entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering. To the fullest extent permitted by applicable law, any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Article ELEVENTH. Notwithstanding any other provisions of law, this Certificate of Incorporation or the Bylaws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article ELEVENTH. If any provision or provisions of this Article ELEVENTH shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article ELEVENTH (including, without limitation, each portion of any sentence of this Article ELEVENTH containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby.

 

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IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation, which restates, integrates and amends the certificate of incorporation of the Corporation, and which has been duly adopted in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and has been executed by its duly authorized officer this                day of                , 2021.

 

PROMETHEUS BIOSCIENCES, INC.
By:  

 

  Name: Mark McKenna
  Title: President and Chief Executive Officer

 

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EX-3.4 5 d14529dex34.htm EX-3.4 EX-3.4

Exhibit 3.4

AMENDED AND RESTATED

BYLAWS

OF

PROMETHEUS BIOSCIENCES, INC.

(a Delaware corporation)


TABLE OF CONTENTS

 

            Page  

ARTICLE I - CORPORATE OFFICES

     1  

1.1

     REGISTERED OFFICE      1  

1.2

     OTHER OFFICES      1  

ARTICLE II - MEETINGS OF STOCKHOLDERS

     1  

2.1

     PLACE OF MEETINGS      1  

2.2

     ANNUAL MEETING      1  

2.3

     SPECIAL MEETING      1  

2.4

     ADVANCE NOTICE PROCEDURES FOR BUSINESS BROUGHT BEFORE A MEETING      2  

2.5

     ADVANCE NOTICE PROCEDURES FOR NOMINATIONS OF DIRECTORS      8  

2.6

     NOTICE OF STOCKHOLDERS’ MEETINGS      12  

2.7

     MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE      12  

2.8

     QUORUM      12  

2.9

     ADJOURNED MEETING; NOTICE      13  

2.10

     CONDUCT OF BUSINESS      13  

2.11

     VOTING      14  

2.12

     STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING      14  

2.13

     RECORD DATE FOR STOCKHOLDER NOTICE; VOTING      14  

2.14

     PROXIES      15  

2.15

     LIST OF STOCKHOLDERS ENTITLED TO VOTE      15  

2.16

     POSTPONEMENT, ADJOURNMENT AND CANCELLATION OF MEETING      16  

2.17

     INSPECTORS OF ELECTION      16  

ARTICLE III - DIRECTORS

     17  

3.1

     POWERS      17  

3.2

     NUMBER OF DIRECTORS      17  

3.3

     ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS      17  

3.4

     RESIGNATION AND VACANCIES      17  

3.5

     PLACE OF MEETINGS; MEETINGS BY TELEPHONE      18  

3.6

     REGULAR MEETINGS      18  

3.7

     SPECIAL MEETINGS; NOTICE      18  

3.8

     QUORUM      19  

3.9

     BOARD ACTION BY CONSENT WITHOUT A MEETING      19  

3.10

     FEES AND COMPENSATION OF DIRECTORS      19  

3.11

     REMOVAL OF DIRECTORS      19  

ARTICLE IV - COMMITTEES

     19  

4.1

     COMMITTEES OF DIRECTORS      19  

4.2

     COMMITTEE MINUTES      20  

4.3

     MEETINGS AND ACTION OF COMMITTEES      20  

 

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TABLE OF CONTENTS

(continued)

 

         Page  

ARTICLE V - OFFICERS

     21  

5.1

  OFFICERS      21  

5.2

  APPOINTMENT OF OFFICERS      21  

5.3

  SUBORDINATE OFFICERS      21  

5.4

  REMOVAL AND RESIGNATION OF OFFICERS      21  

5.5

  VACANCIES IN OFFICES      22  

5.6

  REPRESENTATION OF SHARES OF OTHER ENTITIES      22  

5.7

  AUTHORITY AND DUTIES OF OFFICERS      22  

ARTICLE VI - RECORDS AND REPORTS

     22  

6.1

  MAINTENANCE OF RECORDS      22  

ARTICLE VII - GENERAL MATTERS

     22  

7.1

  EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS      22  

7.2

  STOCK CERTIFICATES; PARTLY PAID SHARES      23  

7.3

  MULTIPLES CLASSES OR SERIES OF STOCK      23  

7.4

  LOST CERTIFICATES      24  

7.5

  CONSTRUCTION; DEFINITIONS      24  

7.6

  DIVIDENDS      24  

7.7

  FISCAL YEAR      24  

7.8

  SEAL      24  

7.9

  TRANSFER OF STOCK      24  

7.10

  STOCK TRANSFER AGREEMENTS      25  

7.11

  REGISTERED STOCKHOLDERS      25  

7.12

  WAIVER OF NOTICE      25  

ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION

     26  

8.1

  NOTICE BY ELECTRONIC TRANSMISSION      26  

8.2

  DEFINITION OF ELECTRONIC TRANSMISSION      26  

ARTICLE IX - INDEMNIFICATION AND ADVANCEMENT

     27  

9.1

  ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION      27  

9.2

  ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION      27  

9.3

  INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY      28  

9.4

  NOTIFICATION AND DEFENSE OF CLAIM      28  

9.5

  ADVANCE OF EXPENSES      29  

9.6

  PROCEDURE FOR INDEMNIFICATION AND ADVANCEMENT OF EXPENSES      29  

9.7

  REMEDIES      30  

9.8

  LIMITATIONS      30  

9.9

  SUBSEQUENT AMENDMENT      31  

9.10

  OTHER RIGHTS      31  

 

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TABLE OF CONTENTS

(continued)

 

         Page  

9.11

  PARTIAL INDEMNIFICATION      31  

9.12

  INSURANCE      31  

9.13

  SAVINGS CLAUSE      32  

9.14

  DEFINITIONS      32  

ARTICLE X - AMENDMENTS

     32  

 

 

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AMENDED AND RESTATED BYLAWS

OF

PROMETHEUS BIOSCIENCES, INC.

 

 

ARTICLE I - CORPORATE OFFICES

1.1 REGISTERED OFFICE.

The registered office of Prometheus Biosciences, Inc. (the “Corporation”) shall be fixed in the Corporation’s certificate of incorporation, as the same may be amended and/or restated from time to time (the “certificate of incorporation”).

1.2 OTHER OFFICES

The Corporation may have other offices at any place or places, either within or outside the State of Delaware, as the Corporation’s board of directors (the “Board”) shall from time to time determine or the business of the Corporation may from time to time require.

ARTICLE II - MEETINGS OF STOCKHOLDERS

2.1 PLACE OF MEETINGS.

Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board. The Board may, in its sole discretion, determine that a meeting of stockholders shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a) of the General Corporation Law of the State of Delaware (the “DGCL”). In the absence of any such designation or determination, stockholders’ meetings shall be held at the Corporation’s principal executive office.

2.2 ANNUAL MEETING.

The Board shall designate the date and time of the annual meeting. At the annual meeting, directors shall be elected and other proper business properly brought before the meeting in accordance with Section 2.4 of these bylaws may be transacted.

2.3 SPECIAL MEETING.

A special meeting of the stockholders may be called at any time by the Board, chairperson of the Board, chief executive officer or president (in the absence of a chief executive officer) of the Corporation, but such special meetings may not be called by any other person or persons.


No business may be transacted at such special meeting other than the business specified in such notice to stockholders. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board may be held.

2.4 ADVANCE NOTICE PROCEDURES FOR BUSINESS BROUGHT BEFORE A MEETING.

(a) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) brought before the meeting by the Corporation and specified in a notice of meeting given by or at the direction of the Board, (ii) brought before the meeting by or at the direction of the Board (or a committee thereof) or (iii) otherwise properly brought before the meeting by a stockholder who (A) was a stockholder of record of the Corporation (and, with respect to any beneficial owner, if different, on whose behalf such business is proposed, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at the time of giving the notice provided for in this Section 2.4 and at the time of the meeting, (B) is entitled to vote at the meeting and (C) has complied with this Section 2.4 as to such business. Except for proposals properly made in accordance with Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (as so amended and inclusive of such rules and regulations, the “Exchange Act”), and included in the notice of meeting given by or at the direction of the Board, the foregoing clause (iii) shall be the exclusive means for a stockholder to propose business to be brought before an annual meeting of the stockholders. Stockholders shall not be permitted to propose business to be brought before a special meeting of the stockholders, and the only matters that may be brought before a special meeting are the matters specified in the notice of meeting given by or at the direction of the person calling the meeting pursuant to Section 2.3 of these bylaws. Stockholders seeking to nominate persons for election to the Board must comply with Section 2.5 of these bylaws, and this Section 2.4 shall not be applicable to nominations except as expressly provided in Section 2.5 of these bylaws.

(b) Without qualification, for business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of the second sentence of Section 2.4(a) of these bylaws, the stockholder must (i) provide Timely Notice (as defined below) thereof in writing and in proper form to the secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.4. To be timely, a stockholder’s notice must be delivered to, or mailed and received by the secretary at, the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that (x) if the date of the annual meeting is more than thirty (30) days before or more than sixty (60) days after such anniversary date or (y) with respect to the first annual meeting held after the Company’s initial public offering of its shares pursuant to a registration statement on Form S-1, notice by the stockholder to be timely must be so delivered, or mailed and received, not earlier

 

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than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the later of the close of business on the ninetieth (90th) day prior to such annual meeting and the close of business on the tenth (10th) day following the day on which public disclosure of the date of such annual meeting was first made (such notice within such time periods, “Timely Notice”). In no event shall any adjournment or postponement of an annual meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of Timely Notice as described above.

(c) To be in proper form for purposes of this Section 2.4, a stockholder’s notice to the secretary of the Corporation shall set forth:

(i) As to each Proposing Person (as defined below), (A) the name and address of such Proposing Person (including, without limitation, if applicable, the name and address that appear on the Corporation’s books and records) and (B) the class or series and number of shares of the Corporation that are, directly or indirectly, owned of record or beneficially owned (within the meaning of Rule 13d-3 under the Exchange Act) by such Proposing Person, except that such Proposing Person shall in all events be deemed to beneficially own any shares of any class or series of the Corporation as to which such Proposing Person has a right to acquire beneficial ownership at any time in the future (the disclosures to be made pursuant to the foregoing clauses (A) and (B) are referred to as “Stockholder Information”);

(ii) As to each Proposing Person, (A) any derivative, swap or other transaction or series of transactions engaged in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to give such Proposing Person economic risk similar to ownership of shares of any class or series of the Corporation, including, without limitation, due to the fact that the value of such derivative, swap or other transactions are determined by reference to the price, value or volatility of any shares of any class or series of the Corporation, or which derivative, swap or other transactions provide, directly or indirectly, the opportunity to profit from any increase in the price or value of shares of any class or series of the Corporation (“Synthetic Equity Interests”), which Synthetic Equity Interests shall be disclosed without regard to whether (x) the derivative, swap or other transactions convey any voting rights in such shares to such Proposing Person, (y) the derivative, swap or other transactions are required to be, or are capable of being, settled through delivery of such shares or (z) such Proposing Person may have entered into other transactions that hedge or mitigate the economic effect of such derivative, swap or other transactions, (B) any proxy (other than a revocable proxy or consent given in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act by way of a solicitation statement filed on Schedule 14A), agreement, arrangement, understanding or relationship pursuant to which such Proposing Person has or shares a right to vote any shares of any class or series of the Corporation, (C) any agreement,

 

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arrangement, understanding or relationship, including, without limitation, any repurchase or similar so-called “stock borrowing” agreement or arrangement, engaged in, directly or indirectly, by such Proposing Person, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of shares of any class or series of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such Proposing Person with respect to the shares of any class or series of the Corporation, or which provides, directly or indirectly, the opportunity to profit from any decrease in the price or value of the shares of any class or series of the Corporation (“Short Interests”), (D) any rights to dividends on the shares of any class or series of the Corporation owned beneficially by such Proposing Person that are separated or separable from the underlying shares of the Corporation, (E) any performance related fees (other than an asset based fee) that such Proposing Person is entitled to based on any increase or decrease in the price or value of shares of any class or series of the Corporation, or any Synthetic Equity Interests or Short Interests, if any, (F)(x) if such Proposing Person is not a natural person, the identity of the natural person or persons associated with such Proposing Person responsible for the formulation of and decision to propose the business to be brought before the meeting (such person or persons, the “Responsible Person”), the manner in which such Responsible Person was selected, any fiduciary duties owed by such Responsible Person to the equity holders or other beneficiaries of such Proposing Person, the qualifications and background of such Responsible Person and any material interests or relationships of such Responsible Person that are not shared generally by any other record or beneficial holder of the shares of any class or series of the Corporation and that reasonably could have influenced the decision of such Proposing Person to propose such business to be brought before the meeting, and (y) if such Proposing Person is a natural person, the qualifications and background of such natural person and any material interests or relationships of such natural person that are not shared generally by any other record or beneficial holder of the shares of any class or series of the Corporation and that reasonably could have influenced the decision of such Proposing Person to propose such business to be brought before the meeting, (G) any significant equity interests or any Synthetic Equity Interests or Short Interests in any principal competitor of the Corporation held by such Proposing Persons, (H) any direct or indirect interest of such Proposing Person in any contract with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, without limitation, in any such case, any employment agreement, collective bargaining agreement or consulting agreement), (I) any pending or threatened litigation in which such Proposing Person is a party or material participant involving the Corporation or any of its officers or directors, or any affiliate of the Corporation, (J) any material transaction occurring during the prior twelve months between such Proposing Person, on the one hand, and the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation, on the other hand, (K)

 

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a summary of any material discussions regarding the business proposed to be brought before the meeting (x) between or among any of the Proposing Persons or (y) between or among any Proposing Person and any other record or beneficial holder of the shares of any class or series of the Corporation (including, without limitation, their names) and (L) any other information relating to such Proposing Person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies or consents by such Proposing Person in support of the business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act (the disclosures to be made pursuant to the foregoing clauses (A) through (L) are referred to as “Disclosable Interests”); provided, however, that Disclosable Interests shall not include any such disclosures with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these bylaws on behalf of a beneficial owner; and

(iii) As to each item of business that the stockholder proposes to bring before the annual meeting, (A) a reasonably brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest in such business of each Proposing Person, (B) the text of the proposal or business (including, without limitation, the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the bylaws of the Corporation, the language of the proposed amendment), (C) a reasonably detailed description of all agreements, arrangements and understandings between or among any of the Proposing Persons or between or among any Proposing Person and any other person or entity (including, without limitation, their names) in connection with the proposal of such business by such stockholder, (D) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, (E) a representation whether the Proposing Person intends or is part of a group which intends (1) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve or adopt the proposal and/or (2) otherwise to solicit proxies or votes from stockholders in support of such proposal and (F) any other information relating to such item of business that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies in support of the business proposed to be brought before the meeting pursuant to Section 14(a) of the Exchange Act; provided, however, that the disclosures required by this paragraph (c)(iii) shall not include any disclosures with respect to any broker, dealer, commercial bank, trust company or other nominee who is a Proposing Person solely as a result of being the stockholder directed to prepare and submit the notice required by these bylaws on behalf of a beneficial owner.

 

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(d) For purposes of this Section 2.4, the term “Proposing Person shall mean (i) the stockholder providing the notice of business proposed to be brought before an annual meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the business proposed to be brought before the annual meeting is made, (iii) any affiliate or associate (each within the meaning of Rule 12b-2 under the Exchange Act for the purposes of these bylaws) of such stockholder or beneficial owner and (iv) any other person with whom such stockholder or beneficial owner (or any of their respective affiliates or associates) is Acting in Concert (as defined below).

(e) A person shall be deemed to be “Acting in Concert” with another person for purposes of these bylaws if such person knowingly acts (whether or not pursuant to an express agreement, arrangement or understanding) in concert with, or towards a common goal relating to the management, governance or control of the Corporation in parallel with, such other person where (i) each person is conscious of the other person’s conduct or intent and this awareness is an element in their decision-making processes and (ii) at least one additional factor suggests that such persons intend to act in concert or in parallel, which such additional factors may include, without limitation, exchanging information (whether publicly or privately), attending meetings, conducting discussions, or making or soliciting invitations to act in concert or in parallel; provided, that a person shall not be deemed to be Acting in Concert with any other person solely as a result of the solicitation or receipt of revocable proxies or consents from such other person in response to a solicitation made pursuant to, and in accordance with, Section 14(a) of the Exchange Act by way of a proxy or consent solicitation statement filed on Schedule 14A. A person Acting in Concert with another person shall be deemed to be Acting in Concert with any third party who is also Acting in Concert with such other person.

(f) A stockholder providing notice of business proposed to be brought before an annual meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 2.4 shall be true and correct as of the record date for determining stockholders entitled to notice of the annual meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining stockholders entitled to notice of the annual meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof).

(g) Notwithstanding anything in these bylaws to the contrary and except as otherwise expressly provided in any applicable rule or regulation promulgated under the Exchange Act, no business shall be conducted at an annual meeting except in accordance with this Section

 

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2.4. The presiding officer of an annual meeting of stockholders shall have the power and duty (a) to determine that any business was not properly brought before the meeting in accordance with this Section 2.4 (including whether the stockholder or beneficial owner, if any, on whose behalf the business proposed to be brought before the annual meeting is made, solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s business in compliance with such stockholder’s representation as required by clause (c)(iii)(E) of this Section 2.4); and (b) if any proposed business was not proposed in compliance with this Section 2.4 to declare to the meeting that any such business not properly brought before the meeting shall not be transacted.

(h) The foregoing notice requirements of this Section 2.4 shall be deemed satisfied by a stockholder with respect to business other than a nomination if the stockholder has notified the Corporation of his, her or its intention to present a proposal at an annual meeting in compliance with applicable rules and regulations promulgated under the Exchange Act and such stockholder’s proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such annual meeting. Nothing in this Section 2.4 shall be deemed to affect the rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

(i) For purposes of these bylaws, “public disclosure” shall mean disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.

(j) Notwithstanding the foregoing provisions of this Section 2.4, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual meeting to present proposed business, such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 2.4, except as provided under Rule 14a-8 under the Exchange Act, to be considered a qualified representative of the stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the annual meeting and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the annual meeting.

(k) Notwithstanding the foregoing provisions of this Section 2.4, a stockholder shall also comply with all applicable requirements of the Exchange Act with respect to the matters set forth in this Section 2.4; provided however, that any references in these bylaws to the Exchange Act are not intended to and shall not limit any requirements applicable to proposals as to any business to be considered pursuant to this Section 2.4 (including paragraph (a)(iii) hereof), and compliance with paragraph (a)(iii) of this Section 2.4 shall be the exclusive means for a stockholder to submit business (other than, as provided in the first sentence of paragraph (h) of this Section

 

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2.4, business brought properly under and in compliance with Rule 14a-8 of the Exchange Act, as may be amended from time to time).

2.5 ADVANCE NOTICE PROCEDURES FOR NOMINATIONS OF DIRECTORS.

(a) Nominations of any person for election to the Board at an annual meeting or at a special meeting (but, in the case of a special meeting, only if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting) may be made at such meeting only (i) by or at the direction of the Board or any committee thereof, or (ii) by a stockholder who (A) was a stockholder of record of the Corporation (and, with respect to any beneficial owner, if different, on whose behalf such nomination is proposed to be made, only if such beneficial owner was the beneficial owner of shares of the Corporation) both at the time of giving the notice provided for in this Section 2.5 and at the time of the meeting, (B) is entitled to vote at the meeting and (C) has complied with this Section 2.5 as to such nomination. The foregoing clause (ii) shall be the exclusive means for a stockholder to make any nomination of a person or persons for election to the Board to be considered by the stockholders at an annual meeting or special meeting.

(b) Without qualification, for a stockholder to make any nomination of a person or persons for election to the Board at an annual meeting, the stockholder must (i) provide Timely Notice (as defined in Section 2.4(b) of these bylaws) thereof in writing and in proper form to the secretary of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.5. Notwithstanding anything in this paragraph to the contrary, in the event that the number of directors to be elected to the Board at an annual meeting is increased effective after the time period for which nominations would otherwise by due under this paragraph (b) and there is no public announcement by the Corporation naming the nominees for the additional directorships at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by paragraph (b) of this Section 2.5 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation. Without qualification, if the election of directors is a matter specified in the notice of meeting given by or at the direction of the person calling such special meeting, then for a stockholder to make any nomination of a person or persons for election to such position(s) as specified in the notice of the special meeting, the stockholder must (i) provide timely notice thereof in writing and in proper form to the secretary of the Corporation at the principal executive offices of the Corporation and (ii) provide any updates or supplements to such notice at the times and in the forms required by this Section 2.5. To be timely, a stockholder’s notice for nominations to be made at a special meeting must be delivered to, or mailed and received at, the principal executive offices of the Corporation not earlier than the close of business on the one hundred twentieth (120th) day prior to such special meeting and not later than the later of the close of business on the ninetieth (90th) day prior to such special meeting and the close of business on the tenth (10th) day following the day on which public disclosure (as

 

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defined in Section 2.4(i) of these bylaws) of the date of such special meeting was first made. In no event shall any adjournment or postponement of an annual meeting or special meeting or the announcement thereof commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(c) To be in proper form for purposes of this Section 2.5, a stockholder’s notice to the secretary of the Corporation shall set forth:

(i) As to each Nominating Person (as defined below), the Stockholder Information (as defined in Section 2.4(c)(i) of these bylaws) except that for purposes of this Section 2.5, the term “Nominating Person” shall be substituted for the term “Proposing Person” in all places it appears in Section 2.4(c)(i);

(ii) As to each Nominating Person, any Disclosable Interests (as defined in Section 2.4(c)(ii), except that for purposes of this Section 2.5 the term “Nominating Person” shall be substituted for the term “Proposing Person” in all places it appears in Section 2.4(c)(ii) and the disclosure in clause (L) of Section 2.4(c)(ii) shall be made with respect to the election of directors at the meeting) provided, however, that Disclosable Interests shall not include any such disclosures with respect to the ordinary course business activities of any broker, dealer, commercial bank, trust company or other nominee who is a Nominating Person solely as a result of being the stockholder directed to prepare and submit the notice required by these bylaws on behalf of a beneficial owner; and;

(iii) As to each person whom a Nominating Person proposes to nominate for election as a director, (A) all information with respect to such proposed nominee that would be required to be set forth in a stockholder’s notice pursuant to this Section 2.5 if such proposed nominee were a Nominating Person, (B) all information relating to such proposed nominee that is required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14(a) under the Exchange Act (including, without limitation, such proposed nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (C) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three (3) years, and any other material relationships, between or among any Nominating Person, on the one hand, and each proposed nominee, his or her respective affiliates and associates and any other persons with whom such proposed nominee (or any of his or her respective affiliates and associates) is Acting in Concert (as defined in Section 2.4(e) of these bylaws), on the other hand, including, without limitation, all information that would be required to be disclosed pursuant to Item 404 under Regulation S-K if such Nominating Person were the “registrant” for purposes of such rule and the proposed nominee were a director or executive

 

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officer of such registrant (the disclosures to be made pursuant to the foregoing clauses (A) through (C) are referred to as “Nominee Information”), (D) a representation that the Nominating Person is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination, (E) a representation whether the Nominating Person intends or is part of a group which intends (1) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to elect the nominee and/or (2) otherwise to solicit proxies or votes from stockholders in support of such nomination and (F) a completed and signed questionnaire, representation and agreement as provided in Section 2.5(g); and

(iv) The Corporation may require any proposed nominee to furnish such other information (A) as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation in accordance with the Corporation’s Corporate Governance Guidelines or (B) that could be material to a reasonable stockholder’s understanding of the independence or lack of independence of such proposed nominee.

(d) For purposes of this Section 2.5, the term “Nominating Person shall mean (i) the stockholder providing the notice of the nomination proposed to be made at the meeting, (ii) the beneficial owner or beneficial owners, if different, on whose behalf the notice of the nomination proposed to be made at the meeting is made, (iii) any affiliate or associate of such stockholder or beneficial owner and (iv) any other person with whom such stockholder or such beneficial owner (or any of their respective affiliates or associates) is Acting in Concert.

(e) A stockholder providing notice of any nomination proposed to be made at a meeting shall further update and supplement such notice, if necessary, so that the information provided or required to be provided in such notice pursuant to this Section 2.5 shall be true and correct as of the record date for determining stockholders entitled to notice of the meeting and as of the date that is ten (10) business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to, or mailed and received by, the secretary of the Corporation at the principal executive offices of the Corporation not later than five (5) business days after the record date for determining stockholders entitled to notice of the meeting (in the case of the update and supplement required to be made as of the record date), and not later than eight (8) business days prior to the date for the meeting or, if practicable, any adjournment or postponement thereof (and, if not practicable, on the first practicable date prior to the date to which the meeting has been adjourned or postponed) (in the case of the update and supplement required to be made as of ten (10) business days prior to the meeting or any adjournment or postponement thereof).

 

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(f) Notwithstanding anything in these bylaws to the contrary, no person shall be eligible for election as a director of the Corporation unless nominated in accordance with this Section 2.5, except as otherwise expressly provided in any applicable rule or regulation promulgated under the Exchange Act. The presiding officer at any meeting of stockholders shall have the power and duty to (a) determine that a nomination was not properly made in accordance with this Section 2.5 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination was made, solicited or is part of a group which solicited) or did not so solicit, as the case may be, proxies or votes in support of such stockholder’s nomination in compliance with such stockholder’s representation as required by clause (c)(iii)(E) of this Section 2.5); and (b) if any proposed nomination was not made in compliance with this Section 2.5 to declare such determination to the meeting that the defective nomination shall be disregarded.

(g) To be eligible to be a nominee for election as a director of the Corporation, the proposed nominee must deliver (in accordance with the time periods prescribed for delivery of notice under this Section 2.5) to the secretary of the Corporation at the principal executive offices of the Corporation a written questionnaire with respect to the background and qualification of such proposed nominee (which questionnaire shall be provided by the secretary upon written request) and a written representation and agreement (in form provided by the secretary upon written request) that such proposed nominee (i) is not and will not become a party to (A) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such proposed nominee, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed to the Corporation or (B) any Voting Commitment that could limit or interfere with such proposed nominee’s ability to comply, if elected as a director of the Corporation, with such proposed nominee’s fiduciary duties under applicable law, (ii) is not, and will not become a party to, any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with candidacy, service or action as a director that has not been disclosed to the Corporation and (iii) in such proposed nominee’s individual capacity and on behalf of the stockholder (and the beneficial owner, if different, on whose behalf the nomination is made) would be in compliance, if elected as a director of the Corporation, and will comply with applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation.

(h) In addition to the requirements of this Section 2.5 with respect to any nomination proposed to be made at a meeting, each Nominating Person shall comply with all applicable requirements of the Exchange Act with respect to any such nominations.

(i) Notwithstanding the foregoing provisions of this Section 2.5, unless otherwise required by law, if the stockholder (or a qualified representative of the stockholder) does not appear at the meeting to present the proposed nomination, such proposed nomination shall not be considered, notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 2.5, to be considered a qualified representative of the

 

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stockholder, a person must be a duly authorized officer, manager or partner of such stockholder or must be authorized by a writing executed by such stockholder or an electronic transmission delivered by such stockholder to act for such stockholder as proxy at the meeting of stockholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting.

2.6 NOTICE OF STOCKHOLDERS’ MEETINGS.

Unless otherwise provided by law, the certificate of incorporation or these bylaws, the notice of any meeting of stockholders shall be given in accordance with either Section 2.7 or Section 8.1 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting. The notice shall specify the place, if any, date and hour of the meeting, the record date for determining the stockholders entitled to vote at the meeting (if such date is different from the record date for stockholders entitled to notice of the meeting), the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called.

2.7 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.

Notice of any meeting of stockholders shall be deemed given:

(a) if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the Corporation’s records; or

(b) if electronically transmitted, as provided in Section 8.1 of these bylaws.

An affidavit of the secretary or an assistant secretary of the Corporation or of the transfer agent or any other agent of the Corporation that the notice has been given by mail or by a form of electronic transmission, as applicable, shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

2.8 QUORUM.

Unless otherwise provided by law, the certificate of incorporation or these bylaws, the holders of a majority in voting power of the capital stock issued and outstanding and entitled to vote, present in person, or by remote communication, if applicable, or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. A quorum, once established at a meeting, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, a quorum is not present or represented at any meeting of the stockholders, then either (a) the chairperson of the meeting or (b) a majority in voting power of the stockholders entitled to vote thereon, present in person, or by remote communication, if

 

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applicable, or represented by proxy, shall have power to adjourn the meeting from time to time in the manner provided in Section 2.9 of these bylaws until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed.

2.9 ADJOURNED MEETING; NOTICE.

When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date for determining the stockholders entitled to vote is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting as of the record date for determining the stockholders entitled to notice of the adjourned meeting.

2.10 CONDUCT OF BUSINESS.

The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the person presiding over the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the person presiding over any meeting of stockholders shall have the right and authority to convene and (for any or no reason) to recess and/or adjourn the meeting, to prescribe such rules, regulations and procedures (which need not be in writing) and to do all such acts as, in the judgment of such presiding person, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the presiding person of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present (including, without limitation, rules and procedures for removal of disruptive persons from the meeting); (c) limitations on attendance at or participation in the meeting to stockholders entitled to vote at the meeting, their duly authorized and constituted proxies or such other persons as the presiding person of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. The presiding person at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting (including, without limitation, determinations with respect to the administration and/or interpretation of any of the rules, regulations or procedures of the meeting, whether adopted by the Board or prescribed by the person presiding over the meeting), shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and if such presiding person

 

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should so determine, such presiding person shall so declare to the meeting and any such matter or business not properly brought before the meeting shall not be transacted or considered. Unless and to the extent determined by the Board or the person presiding over the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

2.11 VOTING.

The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.13 of these bylaws, subject to Section 217 (relating to voting rights of fiduciaries, pledgors and joint owners of stock) and Section 218 (relating to voting trusts and other voting agreements) of the DGCL.

Except as may be otherwise provided in the certificate of incorporation or these bylaws, each stockholder shall be entitled to one (1) vote for each share of capital stock held by such stockholder.

At all duly called or convened meetings of stockholders, at which a quorum is present, for the election of directors, a plurality of the votes cast shall be sufficient to elect a director. All other elections and questions presented to the stockholders at a duly called or convened meeting, at which a quorum is present, shall, unless a different or minimum vote is required by the certificate of incorporation, these bylaws, the rules or regulations of any stock exchange applicable to the Corporation, or any law or regulation applicable to the Corporation or its securities, in which case such different or minimum vote shall be the applicable vote on the matter, be decided by the affirmative vote of the holders of a majority in voting power of the votes cast affirmatively or negatively (excluding abstentions) at the meeting by the holders entitled to vote thereon.

2.12 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.

2.13 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING.

In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If the Board so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the

 

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Board, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix as the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance herewith at the adjourned meeting.

In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which shall not be more than sixty (60) days prior to such other action. If no such record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto.

2.14 PROXIES.

Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212 of the DGCL. A proxy may be in the form of a telegram, cablegram or other means of electronic transmission which sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other means of electronic transmission was authorized by the stockholder.

2.15 LIST OF STOCKHOLDERS ENTITLED TO VOTE.

The Corporation shall prepare, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting (provided, however, if the record date for determining the stockholders entitled to vote is less than ten (10) days before the date of the meeting, the list shall reflect the stockholders entitled to vote as of the tenth day before the date of the meeting), arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. The Corporation shall not be required to include electronic mail addresses or other electronic contact information on such list. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least ten (10) days prior to the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the Corporation’s principal executive office. In the event that the Corporation determines to make the list available on an

 

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electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. Except as otherwise provided by law, the stock ledger shall be the only evidence as to the identity of the stockholders entitled to vote in person or by proxy and the number of shares held by each of them, and as to the stockholders entitled to examine the list of stockholders.

2.16 POSTPONEMENT, ADJOURNMENT AND CANCELLATION OF MEETING.

Any previously scheduled annual or special meeting of the stockholders may be postponed or adjourned, and any previously scheduled annual or special meeting of the stockholders may be canceled, by resolution of the Board.

2.17 INSPECTORS OF ELECTION.

Before any meeting of stockholders, the Board shall appoint an inspector or inspectors of election to act at the meeting or its adjournment or postponement and make a written report thereof. The number of inspectors shall be either one (1) or three (3). If any person appointed as inspector fails to appear or fails or refuses to act, then the chairperson of the meeting may, and upon the request of any stockholder or a stockholder’s proxy shall, appoint a person to fill that vacancy. Unless otherwise required by law, inspectors may be officers, employees or agents of the Corporation. Such inspectors shall have the duties prescribed by law. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath to execute faithfully the duties of inspector with strict impartiality and according to the best of his or her ability. If there are three (3) inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein.

 

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ARTICLE III - DIRECTORS

3.1 POWERS.

Subject to the provisions of the DGCL and any limitations in the certificate of incorporation, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board.

3.2 NUMBER OF DIRECTORS.

The authorized number of directors shall be determined from time to time by resolution of the Board, provided the Board shall consist of at least one (1) member. No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.

3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS.

Except as provided in Section 3.4 of these bylaws, each director, including, without limitation, a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until such director’s successor is elected and qualified or until such director’s earlier death, resignation or removal. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws. The Corporation may also have, at the discretion of the Board, a chairperson of the Board and a vice chairperson of the Board. The certificate of incorporation or these bylaws may prescribe other qualifications for directors.

3.4 RESIGNATION AND VACANCIES.

Any director may resign at any time upon notice given in writing or by electronic transmission to the chairperson of the Board or the Corporation’s chief executive officer, president or secretary. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies.

Unless otherwise provided in the certificate of incorporation or these bylaws, vacancies and newly created directorships resulting from any increase in the authorized number of directors shall, unless the Board determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified. A vacancy in the Board shall be deemed to exist under these bylaws in the case of the death, removal or resignation of any director.

 

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3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.

The Board may hold meetings, both regular and special, either within or outside the State of Delaware.

Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the Board, or any committee designated by the Board, may participate in a meeting of the Board, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting pursuant to this bylaw shall constitute presence in person at the meeting.

3.6 REGULAR MEETINGS.

Regular meetings of the Board may be held without notice at such time and at such place as shall from time to time be determined by the Board; provided that any director who is absent when such determination is made shall be given notice of the determination. A regular meeting of the Board may be held without notice immediately after and at the same place as the annual meeting of stockholders.

3.7 SPECIAL MEETINGS; NOTICE.

Special meetings of the Board for any purpose or purposes may be called at any time by the chairperson of the Board, the chief executive officer, the president, the secretary or a majority of the authorized number of directors.

Notice of the time and place of special meetings shall be:

(a) delivered personally by hand, by courier or by telephone;

(b) sent by United States first-class mail, postage prepaid;

(c) sent by facsimile; or

(d) sent by electronic mail, electronic transmission or other similar means, directed to each director at that director’s address, telephone number, facsimile number or electronic mail or other electronic address, as the case may be, as shown on the Corporation’s records.

If the notice is (a) delivered personally by hand, by courier or by telephone, (b) sent by facsimile or (c) sent by electronic mail or electronic transmission, it shall be delivered or sent at least twenty-four (24) hours before the time of the holding of the meeting. If the notice is sent by United States mail, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. Any oral notice may be communicated to the director. The

 

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notice need not specify the place of the meeting (if the meeting is to be held at the Corporation’s principal executive office) nor the purpose of the meeting.

3.8 QUORUM.

The greater of (a) a majority of the directors at any time in office and (b) one-third of the number of directors established by the Board pursuant to Section 3.2 of these bylaws shall constitute a quorum of the Board for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board, except as may be otherwise specifically provided by statute, the certificate of incorporation or these bylaws. If a quorum is not present at any meeting of the Board, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

3.9 BOARD ACTION BY CONSENT WITHOUT A MEETING.

Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the Board, or of any committee thereof, may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

3.10 FEES AND COMPENSATION OF DIRECTORS.

Unless otherwise restricted by the certificate of incorporation or these bylaws, the Board shall have the authority to fix the compensation of directors.

3.11 REMOVAL OF DIRECTORS.

Subject to the rights of the holders of the shares of any series of preferred stock of the Corporation, the Board or any individual director may be removed from office only for cause and only by the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon.

ARTICLE IV - COMMITTEES

4.1 COMMITTEES OF DIRECTORS.

The Board may designate one (1) or more committees, each committee to consist of one (1) or more of the directors of the Corporation. The Board may designate one (1) or more directors as alternate members of any committee, who may replace any absent or disqualified member at

 

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any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board or in these bylaws, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) approve or adopt, or recommend to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval, or (b) adopt, amend or repeal any bylaw of the Corporation.

4.2 COMMITTEE MINUTES.

Each committee shall keep regular minutes of its meetings and report the same to the Board when required.

4.3 MEETINGS AND ACTION OF COMMITTEES.

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of:

(a) Section 3.5 of these bylaws (place of meetings and meetings by telephone);

(b) Section 3.6 of these bylaws (regular meetings);

(c) Section 3.7 of these bylaws (special meetings and notice);

(d) Section 3.8 of these bylaws (quorum);

(e) Section 7.12 of these bylaws (waiver of notice); and

(f) Section 3.9 of these bylaws (action without a meeting),

with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members. However:

(i) the time of regular meetings of committees may be determined either by resolution of the Board or by resolution of the committee;

(ii) special meetings of committees may also be called by resolution of the Board; and

 

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(iii) notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the governance of any committee not inconsistent with the provisions (or any part thereof) of these bylaws.

ARTICLE V - OFFICERS

5.1 OFFICERS.

The officers of the Corporation shall be a president and a secretary. The Corporation may also have, at the discretion of the Board, a chief executive officer, a chief financial officer or treasurer, one (1) or more vice presidents, one (1) or more assistant vice presidents, one (1) or more assistant treasurers, one (1) or more assistant secretaries, and any such other officers as may be appointed in accordance with the provisions of these bylaws. Any number of offices may be held by the same person.

5.2 APPOINTMENT OF OFFICERS.

The Board shall appoint the officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws, subject to the rights, if any, of an officer under any contract of employment.

5.3 SUBORDINATE OFFICERS.

The Board may appoint, or empower the chief executive officer or, in the absence of a chief executive officer, the president, to appoint, such other officers and agents as the business of the Corporation may require. Each of such officers shall hold office for such period, as is provided in these bylaws or as the Board may from time to time determine.

5.4 REMOVAL AND RESIGNATION OF OFFICERS.

Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board at any regular or special meeting of the Board or, except in the case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board.

Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice. Unless otherwise specified in the notice of resignation, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party.

 

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5.5 VACANCIES IN OFFICES.

Any vacancy occurring in any office of the Corporation shall be filled by the Board or as provided in Section 5.3 of these bylaws.

5.6 REPRESENTATION OF SHARES OF OTHER ENTITIES.

The chairperson of the Board, the president, any vice president, the treasurer, the secretary or assistant secretary of this Corporation, or any other person authorized by the Board or the president or a vice president, is authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all securities of any other entity or entities standing in the name of this Corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

5.7 AUTHORITY AND DUTIES OF OFFICERS.

All officers of the Corporation shall respectively have such authority and perform such duties in the management of the business of the Corporation as may be designated from time to time by the Board and, to the extent not so provided, as generally pertain to their respective offices, subject to the control of the Board.

ARTICLE VI - RECORDS AND REPORTS

6.1 MAINTENANCE OF RECORDS.

Subject to applicable law, the Corporation shall, either at its principal executive office or at such place or places as designated by the Board, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these bylaws as amended to date, accounting books and other records.

ARTICLE VII - GENERAL MATTERS

7.1 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.

The Board, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

 

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7.2 STOCK CERTIFICATES; PARTLY PAID SHARES.

The shares of the Corporation shall be represented by certificates provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of stock shall be uncertificated shares. Certificates for the shares of stock, if any, shall be in such form as is consistent with the certificate of incorporation and applicable law. Every holder of stock represented by a certificate shall be entitled to have a certificate signed by, or in the name of the Corporation by any two authorized officers of the Corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue.

The Corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, or upon the books and records of the Corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the Corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon.

7.3 MULTIPLES CLASSES OR SERIES OF STOCK.

If the Corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the DGCL, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate that the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to the DGCL or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

 

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7.4 LOST CERTIFICATES.

Except as provided in this Section 7.4, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the Corporation in accordance with applicable law. The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owner’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.

7.5 CONSTRUCTION; DEFINITIONS.

Unless the context requires otherwise, the general provisions, rules of construction and definitions in the DGCL shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

7.6 DIVIDENDS.

The Board, subject to any restrictions contained in either (a) the DGCL or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property or in shares of the Corporation’s capital stock.

The Board may set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the Corporation, and meeting contingencies.

7.7 FISCAL YEAR.

The fiscal year of the Corporation shall be fixed by resolution of the Board and may be changed by the Board.

7.8 SEAL.

The Corporation may adopt a corporate seal, which shall be adopted and which may be altered by the Board. The Corporation may use the corporate seal by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

7.9 TRANSFER OF STOCK.

Shares of the Corporation shall be transferable in the manner prescribed by law and in these bylaws. Shares of stock of the Corporation shall be transferred on the books of the Corporation

 

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only by the holder of record thereof or by such holder’s attorney duly authorized in writing, upon surrender to the Corporation of the certificate or certificates representing such shares endorsed by the appropriate person or persons (or by delivery of duly executed instructions with respect to uncertificated shares), with such evidence of the authenticity of such endorsement or execution, transfer, authorization and other matters as the Corporation may reasonably require, and accompanied by all necessary stock transfer stamps. To the fullest extent permitted by law, no transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing the names of the persons from and to whom it was transferred.

7.10 STOCK TRANSFER AGREEMENTS.

The Corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the Corporation to restrict the transfer of shares of stock of the Corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.

7.11 REGISTERED STOCKHOLDERS.

The Corporation, to the fullest extent permitted by law,:

(a) shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner;

(b) shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares; and

(c) shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

7.12 WAIVER OF NOTICE.

Whenever notice is required to be given under any provision of the DGCL, the certificate of incorporation or these bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws.

 

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ARTICLE VIII - NOTICE BY ELECTRONIC TRANSMISSION

8.1 NOTICE BY ELECTRONIC TRANSMISSION.

Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the DGCL, the certificate of incorporation or these bylaws, any notice to stockholders given by the Corporation under any provision of the DGCL, the certificate of incorporation or these bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked if:

(a) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices given by the Corporation in accordance with such consent; and

(b) such inability becomes known to the secretary or an assistant secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice.

However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

Any notice given pursuant to the preceding paragraph shall be deemed given:

 

  (a)

if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice;

 

  (b)

if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice;

 

  (c)

if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (i) such posting and (ii) the giving of such separate notice; and

 

  (d)

if by any other form of electronic transmission, when directed to the stockholder.

An affidavit of the secretary or an assistant secretary of the Corporation or of the transfer agent or other agent of the Corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

8.2 DEFINITION OF ELECTRONIC TRANSMISSION.

For the purposes of these bylaws, an “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that

 

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may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

ARTICLE IX - INDEMNIFICATION AND ADVANCEMENT

9.1 ACTIONS, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION.

The Corporation shall indemnify each person who was or is a party or threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) (all such persons being referred to hereafter as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including, without limitation, attorneys’ fees), liabilities, losses, judgments, fines (including, without limitation, excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974), and amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.

9.2 ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION.

The Corporation shall indemnify any Indemnitee who was or is a party to or threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that Indemnitee is or was, or has agreed to become, a director or officer of the Corporation, or, while a director or officer of the Corporation, is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including, without limitation, attorneys’ fees) actually and reasonably

 

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incurred by or on behalf of Indemnitee in connection with such action, suit or proceeding and any appeal therefrom, if Indemnitee acted in good faith and in a manner which Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made under this Section 9.2 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation, unless, and only to the extent, that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses (including, without limitation, attorneys’ fees) which the Court of Chancery of Delaware or such other court shall deem proper.

9.3 INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY.

Notwithstanding any other provisions of this Article IX, to the extent that an Indemnitee has been successful, on the merits or otherwise, in defense of any action, suit or proceeding referred to in Sections 9.1 and 9.2 of these bylaws, or in defense of any claim, issue or matter therein, or on appeal from any such action, suit or proceeding, Indemnitee shall be indemnified to the fullest extent permitted by law against all expenses (including, without limitation, attorneys’ fees) actually and reasonably incurred by or on behalf of Indemnitee in connection therewith.

9.4 NOTIFICATION AND DEFENSE OF CLAIM.

As a condition precedent to an Indemnitee’s right to be indemnified, such Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to Indemnitee. After notice from the Corporation to Indemnitee of its election so to assume such defense, the Corporation shall not be liable to Indemnitee for any legal or other expenses subsequently incurred by Indemnitee in connection with such action, suit, proceeding or investigation, other than as provided below in this Section 9.4. Indemnitee shall have the right to employ his or her own counsel in connection with such action, suit, proceeding or investigation, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of Indemnitee unless (a) the employment of counsel by Indemnitee has been authorized by the Corporation, (b) counsel to Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and Indemnitee in the conduct of the defense of such action, suit, proceeding or investigation or (c) the Corporation shall not in fact have employed counsel to assume the defense of such action, suit, proceeding or investigation, in each of which cases the fees and expenses of counsel for Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article IX. The Corporation shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for Indemnitee shall

 

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have reasonably made the conclusion provided for in clause (b) above. The Corporation shall not be required to indemnify Indemnitee under this Article IX for any amounts paid in settlement of any action, suit, proceeding or investigation effected without its written consent. The Corporation shall not settle any action, suit, proceeding or investigation in any manner which would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. Neither the Corporation nor Indemnitee will unreasonably withhold or delay its consent to any proposed settlement.

9.5 ADVANCE OF EXPENSES.

Subject to the provisions of Sections 9.4 and 9.6 of these bylaws, in the event of any threatened or pending action, suit, proceeding or investigation of which the Corporation receives notice under this Article IX, any expenses (including, without limitation, attorneys’ fees) incurred by or on behalf of Indemnitee in defending an action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter to the fullest extent permitted by law; provided, however, that, to the extent required by law, the payment of such expenses incurred by or on behalf of Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article IX or otherwise; and provided further that no such advancement of expenses shall be made under this Article IX if it is determined (in the manner described in Section 9.6 of these bylaws) that (a) Indemnitee did not act 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, or (b) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe his or her conduct was unlawful. Such undertaking shall be accepted without reference to the financial ability of Indemnitee to make such repayment.

9.6 PROCEDURE FOR INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.

In order to obtain indemnification or advancement of expenses pursuant to Section 9.1, 9.2, 9.3 or 9.5 of these bylaws, an Indemnitee shall submit to the Corporation a written request. Any such advancement of expenses shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of Indemnitee, unless (a) the Corporation has assumed the defense pursuant to Section 9.4 of these bylaws (and none of the circumstances described in Section 9.4 of these bylaws that would nonetheless entitle the Indemnitee to indemnification for the fees and expenses of separate counsel have occurred) or (b) the Corporation determines within such 60-day period that Indemnitee did not meet the applicable standard of conduct set forth in Section 9.1, 9.2 or 9.5 of these bylaws, as the case may be. Any such indemnification, unless ordered by a court, shall be made with respect to requests under Section 9.1 or 9.2 of these bylaws only as authorized in the specific case upon a determination by the Corporation that the indemnification of Indemnitee is proper because Indemnitee has met the

 

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applicable standard of conduct set forth in Section 9.1 or 9.2 of these bylaws, as the case may be. Such determination shall be made in each instance (a) by a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the action, suit or proceeding in question (“disinterested directors”), whether or not a quorum, (b) by a committee of disinterested directors designated by majority vote of disinterested directors, whether or not a quorum, (c) if there are no disinterested directors, or if the disinterested directors so direct, by independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation) in a written opinion or (d) by the stockholders of the Corporation.

9.7 REMEDIES.

To the fullest extent permitted by law, the right to indemnification or advancement of expenses as granted by this Article IX shall be enforceable by Indemnitee in any court of competent jurisdiction. Neither the failure of the Corporation to have made a determination prior to the commencement of such action that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 9.6 of these bylaws that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct. In any suit brought by Indemnitee to enforce a right to indemnification or advancement, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall have the burden of proving that Indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article IX. Indemnitee’s expenses (including, without limitation, attorneys’ fees) reasonably incurred in connection with successfully establishing Indemnitee’s right to indemnification or advancement, in whole or in part, in any such proceeding shall also be indemnified by the Corporation to the fullest extent permitted by law. Notwithstanding the foregoing, in any suit brought by Indemnitee to enforce a right to indemnification hereunder it shall be a defense that the Indemnitee has not met any applicable standard for indemnification set forth in the DGCL.

9.8 LIMITATIONS.

Notwithstanding anything to the contrary in this Article IX, except as set forth in Section 9.7 of these bylaws, the Corporation shall not indemnify an Indemnitee pursuant to this Article IX in connection with a proceeding (or part thereof) initiated by such Indemnitee unless the initiation thereof was approved by the Board. Notwithstanding anything to the contrary in this Article IX, the Corporation shall not indemnify (or advance expenses to) an Indemnitee to the extent such Indemnitee is reimbursed (or advanced expenses) from the proceeds of insurance, and in the event the Corporation makes any indemnification (or advancement) payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund indemnification (or advancement) payments to the Corporation to the extent of such insurance reimbursement.

 

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9.9 SUBSEQUENT AMENDMENT.

No amendment, termination or repeal of this Article IX or of the relevant provisions of the DGCL or any other applicable laws shall adversely affect or diminish in any way the rights of any Indemnitee to indemnification or advancement of expenses under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal.

9.10 OTHER RIGHTS.

The indemnification and advancement of expenses provided by this Article IX shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or disinterested directors or otherwise, both as to action in Indemnitee’s official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a director or officer, and shall inure to the benefit of the estate, heirs, executors and administrators of Indemnitee. Nothing contained in this Article IX shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers and directors providing indemnification and advancement rights and procedures different from those set forth in this Article IX. In addition, the Corporation may, to the extent authorized from time to time by the Board, grant indemnification and advancement rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article IX.

9.11 PARTIAL INDEMNIFICATION.

If an Indemnitee is entitled under any provision of this Article IX to indemnification by the Corporation for some or a portion of the expenses (including, without limitation, attorneys’ fees), liabilities, losses, judgments, fines (including, without limitation, excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974, as amended) or amounts paid in settlement actually and reasonably incurred by or on behalf of Indemnitee in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify Indemnitee for the portion of such expenses (including, without limitation, attorneys’ fees), liabilities, losses, judgments, fines (including, without limitation, excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974, as amended) or amounts paid in settlement to which Indemnitee is entitled.

9.12 INSURANCE.

The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) against any expense, liability or loss incurred by him or her in any such capacity, or arising out of

 

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his or her status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.

9.13 SAVINGS CLAUSE.

If this Article IX or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including, without limitation, attorneys’ fees), liabilities, losses, judgments, fines (including, without limitation, excise taxes and penalties arising under the Employee Retirement Income Security Act of 1974, as amended) and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article IX that shall not have been invalidated and to the fullest extent permitted by applicable law.

9.14 DEFINITIONS.

Terms used in this Article IX and defined in Section 145(h) and Section 145(i) of the DGCL shall have the respective meanings assigned to such terms in such Section 145(h) and Section 145(i).

ARTICLE X - AMENDMENTS

Subject to the limitations set forth in Section 9.9 of these bylaws or the provisions of the certificate of incorporation, the Board is expressly empowered to adopt, amend or repeal the bylaws of the Corporation. The stockholders also shall have power to adopt, amend or repeal the bylaws of the Corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the Corporation required by law or by the certificate of incorporation, such action by stockholders shall require the affirmative vote of the holders of at least two-thirds in voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon.

 

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EX-4.2 6 d14529dex42.htm EX-4.2 EX-4.2

Exhibit 4.2

AMENDED AND RESTATED

INVESTORS’ RIGHTS AGREEMENT

THIS AMENDED AND RESTATED INVESTORS’ RIGHTS AGREEMENT is made as of October 30, 2020 by and among Prometheus Biosciences, Inc., a Delaware corporation formerly known as Precision IBD, Inc. (the “Company”), and each of the investors listed on SCHEDULE A hereto, each of which is referred to in this Agreement as an “Investor.”

RECITALS

A.    Certain of the Investors (the “Existing Investors”) hold shares of the Company’s Series A Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), Series B Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”) and/or Series C Preferred Stock, par value $0.0001 per share (the “Series C Preferred Stock”) and possess registration rights, information rights, rights of first offer, and other rights pursuant to that certain Amended and Restated Investors’ Rights Agreement dated as of March 27, 2020, by and among the Company and such Existing Investors (the “Prior Agreement”).

B.    The Existing Investors are holders of a majority of the Registrable Securities of the Company (as defined in the Prior Agreement), and desire to amend and restate the Prior Agreement in its entirety and to accept the rights created pursuant to this Agreement in lieu of the rights granted to them under the Prior Agreement.

C.    Certain of the Investors are parties to that certain Series D Preferred Stock Purchase Agreement dated as of even date herewith, by and among the Company and such Investors (as the same may be amended from time to time, the “Purchase Agreement”), under which certain of the Company’s and such Investors’ obligations are conditioned upon the execution and delivery of this Agreement.

NOW, THEREFORE, the parties, intending to be legally bound, hereby agree as follows:

1.    Definitions. For purposes of this Agreement:

1.1    Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including, without limitation, any general partner, managing member, director, officer or trustee of such Person, or any venture capital fund, investment fund or registered investment company now or hereafter existing that is controlled by one or more general partners, managing members, investment advisers or investment advisers directly or indirectly owned or controlled by such Person, or shares the same management company or investment adviser with such Person.

1.2    Certificate of Incorporation” means the Company’s Amended and Restated Certificate of Incorporation, as amended and/or restated from time to time.

1.3    Common Stock” means shares of the Company’s common stock, par value $0.0001 per share.

1.4    Competitor” means a Person engaged, directly or indirectly (including through


any partnership, limited liability company, corporation, joint venture or similar arrangement (whether now existing or formed hereafter)), in pharmaceutical research, development or commercialization, but shall not include (i) Cedars-Sinai Medical Center, (ii) Nestlé Health Science US Holdings, Inc., Société des Produits Nestlé S.A., (iii) Point72 Asset Management, (iv) RTW Investments, LP (“RTW”), or, in the case of (i)(iv), any of their respective Affiliates or (v) any financial investment firm or collective investment vehicle that, together with its Affiliates, (a) holds less than thirty percent (30%) of the outstanding equity of any Competitor or, (b) holds more than thirty percent (30%) of the outstanding equity of any Competitor but does not (either directly or through any of its Affiliates) have a right to designate any members of the board of directors of such Competitor.

1.5    Damages” means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof) arises out of or is based upon (a) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (b) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (c) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.

1.6    “Derivative Securities” means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Common Stock, including options and warrants.

1.7    Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.8    Excluded Registration” means (a) a registration relating to the sale of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, or similar plan; (b) a registration relating to an SEC Rule 145 transaction; (c) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (d) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.

1.9    Form S-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

1.10    Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.11    GAAP” means generally accepted accounting principles in the United States.

1.12    Holder” means any Investor owning Registrable Securities.

1.13    Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, of a natural person referred to herein.

 

2


1.14    Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.

1.15    IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act.

1.16    Major Investor” means any Investor that, individually or together with such Investor’s Affiliates, holds at least 9,000,000 shares of Common Stock issuable or issued upon conversion of the Preferred Stock (as adjusted for any stock split, stock dividend, combination or other recapitalization or reclassification effected after the date hereof).

1.17    New Securities” means, collectively, equity securities of the Company or its subsidiaries, whether or not currently authorized, as well as rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible or exchangeable into or exercisable for such equity securities.

1.18    Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.

1.19    Preferred Stock” means collectively, Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock.

1.20    Registrable Securities” means (a) the Common Stock issuable or issued upon conversion of the Preferred Stock; (b) any Common Stock, or any Common Stock issued or issuable (directly or indirectly) upon conversion and/or exercise of any other securities of the Company, held by the Investors; (c) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (a) and (b) above; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Section 6.1, and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Section 2.13 of this Agreement.

1.21    Registrable Securities then outstanding” means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.

1.22    Restricted Securities” means the securities of the Company required to bear the legend set forth in Section 2.12 hereof.

1.23    SEC” means the Securities and Exchange Commission.

1.24    SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.

1.25    SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.

1.26    Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

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1.27    Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Section 2.6.

1.28    Series A Preferred Stock” means shares of the Company’s Series A Preferred Stock, par value $0.0001 per share.

1.29    Series B Preferred Stock” means shares of the Company’s Series B Preferred Stock, par value $0.0001 per share.

1.30    Series C Preferred Stock” means shares of the Company’s Series C Preferred Stock, par value $0.0001 per share.

1.31    Series D Preferred Director means any director of the Company that the holders of record of Series D Preferred Stock are entitled to elect, exclusively and as a separate class, pursuant to the Certificate of Incorporation.

1.32    Series D Preferred Stock” means collectively, shares of the Company’s Series D-1 Preferred Stock, par value $0.0001 per share, and shares of the Company’s Series D-2 Preferred Stock, par value $0.0001 per share.

2.    Registration Rights. The Company covenants and agrees as follows:

2.1    Demand Registration.

(a)    Form S-1 Demand. If at any time after the date that is five (5) years after the date of this Agreement, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $10,000,000, then the Company shall (i) within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3.

(b)    Form S-3 Demand. If at any time when it is eligible to use a Form S-3 registration statement, the Company receives from any Holder or Holders a request that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holder or Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $5,000,000, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Section 2.1(c) and Section 2.3.

 

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(c)    Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Section 2.1 a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Company’s Board of Directors (the “Board”) it would be materially detrimental to the Company and its stockholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing, and any time periods with respect to filing or effectiveness thereof shall be tolled correspondingly, for a period of not more than ninety (90) days after the request of the Initiating Holders is given for any registration pursuant to Section 2.1(a) or 2.1(b); provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other stockholder during such ninety-day period, other than an Excluded Registration.

(d)    The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(a): (i) during the period starting with the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided, that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected two (2) registrations pursuant to Section 2.1(a); or (iii) if within thirty (30) days of receipt of a request from any Holder or Holders pursuant to Section 2.1(a), the Company gives notice to such Holder or Holders of the Company’s intention to make a public offering within one hundred twenty (120) days. The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Section 2.1(b): (i) if within thirty (30) days of receipt of a request from any Holder or Holders pursuant to Section 2.1(b), the Company gives notice to such Holder or Holders of the Company’s intention to make a public offering within ninety (90) days; or (ii) if the Company has effected two (2) registrations pursuant to Section 2.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Section 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Section 2.6, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Section 2.1(d).

2.2    Company Registration. If the Company proposes to register (including, for this purpose, a registration effected by the Company for stockholders other than the Holders) any of its securities under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Section 2.3, cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Section 2.6

2.3    Underwriting Requirements.

 

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(a)    If, pursuant to Section 2.1, the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 2.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Company and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Section 2.4(e) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Section 2.3, if the underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling Holders; provided, however, that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares.

(b)    In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Section 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be allocated among the selling Holders in proportion (as nearly as practicable to) the number of Registrable Securities owned by each selling Holder or in such other proportions as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering, or (ii) the number of Registrable Securities included in the offering be reduced below twenty percent (20%) of the total number of securities included in such offering, unless such offering is the IPO, in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other stockholder’s securities are included in such offering. For purposes of the provision in this Section 2.3(b) concerning apportionment, for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for

 

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the benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.

(c)    For purposes of Section 2.1, a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Section 2.3(a), fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.

2.4    Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a)    prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that (i) such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such one hundred twenty (120) day period shall be extended for up to one hundred eighty (180) days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;

(b)    prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;

(c)    furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;

(d)    use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(e)    in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;

(f)    use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

 

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(g)    provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

(h)    promptly make available for inspection by the selling Holders, any underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;

(i)    notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and

(j)    after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus.

In addition, the Company shall ensure that, at all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, its insider trading policy shall provide that the Company’s directors may implement a trading program under Rule 10b5-1 of the Exchange Act.

2.5    Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.

2.6    Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2, including all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements, not to exceed $50,000 per registration, of one counsel for the selling Holders (“Selling Holder Counsel”), shall be borne and paid by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Section 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b), as the case may be; provided further that if, at the time of such withdrawal, the Holders shall have learned of a material adverse change in the financial condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information, then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Section 2.1(a) or Section 2.1(b). All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.

 

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2.7    Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.8    Indemnification. If any Registrable Securities are included in a registration statement under this Section 2:

(a)    To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and stockholders of each such Holder; legal counsel and accountants for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.

(b)    To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Sections 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.

(c)    Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by

 

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the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.

(d)    Notwithstanding anything else herein to the contrary, the foregoing indemnity agreements of the Company and the selling Holders are subject to the condition that, insofar as they relate to any Damages arising from any untrue statement or alleged untrue statement of a material fact contained in, or omission or alleged omission of a material fact from, a preliminary prospectus (or necessary to make the statements therein not misleading) that has been corrected in the form of prospectus included in the registration statement at the time it becomes effective, or any amendment or supplement thereto filed with the SEC pursuant to Rule 424(b) under the Securities Act (the “Final Prospectus”), such indemnity agreement shall not inure to the benefit of any Person if a copy of the Final Prospectus was furnished to the indemnified party and such indemnified party failed to deliver, at or before the confirmation of the sale of the shares registered in such offering, a copy of the Final Prospectus to the Person asserting the loss, liability, claim, or damage in any case in which such delivery was required by the Securities Act.

(e)    To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Section 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Section 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Section 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case, (1) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (2) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Section 2.8(d), when combined with the amounts paid or payable by such Holder pursuant to Section 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.

(f)    Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

 

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(g)    Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Section 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2, and otherwise shall survive the termination of this Agreement.

2.9    Reports Under Exchange Act. With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:

(a)    make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO;

(b)    use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and

(c)    furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies) and (ii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).

2.10    Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would (a) allow such holder or prospective holder to include such securities in any registration unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the number of the Registrable Securities of the Holders that are included or (b) allow such holder or prospective holder to initiate a demand for registration of any securities held by such holder or prospective holder; provided that this limitation shall not apply to any additional Investor who becomes a party to this Agreement in accordance with Section 6.9.

2.11    “Market Stand-off” Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the registration by the Company of shares of its Common Stock or any other equity securities under the Securities Act on a registration statement on Form S-1, and ending on the date specified by the Company and the managing underwriter, such period not to exceed one hundred eighty (180) days in the case of the IPO: (a) lend; offer; pledge; sell; contract to sell; sell any option or contract to purchase; purchase any option or contract to sell; grant any option, right, or warrant to purchase; or

 

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otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Stock held immediately before the effective date of the registration statement for such offering or (b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise. The foregoing provisions of this Section 2.11 shall apply only to the IPO, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, shall not apply to transactions relating to securities acquired in the IPO or open market transactions from and after the IPO (provided that no such transaction is required to be, or is, publicly announced during the period described in the preceding sentence), and shall be applicable to the Holders only if all officers and directors and all stockholders individually owning more than one percent (1%) of the Company’s outstanding Common Stock (after giving effect to the conversion into Common Stock of all outstanding Preferred Stock) are subject to the same restrictions. The underwriters in connection with such registration are intended third-party beneficiaries of this Section 2.11 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Section 2.11 or that are necessary to give further effect thereto, in each case, with such modifications as the underwriters and any Holder may mutually agree to. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Holders subject to such agreements, based on the number of shares subject to such agreements

2.12    Restrictions on Transfer.

(a)    The Preferred Stock and the Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize and shall issue stop-transfer instructions to its transfer agent with respect to any such sale, pledge, or transfer, except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Preferred Stock and the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

(b)    Each certificate, instrument or book entry representing (i) the Preferred Stock, (ii) the Registrable Securities, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Section 2.12(c)) be notated with a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

 

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The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Section 2.12.

(c)    The holder of such Restricted Securities, by acceptance of ownership thereof, agrees to comply in all respects with the provisions of this Section 2. Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (1) in any transaction in compliance with SEC Rule 144 or (2) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration; provided that each transferee agrees in writing to be subject to the terms of this Section 2.12. Each certificate, instrument, or book entry representing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Section 2.12(b), except that such certificate, instrument, or book entry shall not bear such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.

2.13    Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Section 2.1 or Section 2.2 shall terminate upon the earliest to occur of: (a) seven (7) years after the effective date of the Company’s Registration Statement filed in connection with the Company’s IPO, (b) at such time as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares without limitation during a three-month period without registration and (c) the closing of a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation.

3.    Information and Observer Rights.

3.1    Delivery of Financial Statements. The Company shall deliver to each Major Investor, provided that the Board has not reasonably determined that such Major Investor is a Competitor:

(a)    as soon as practicable, but in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, (i) an audited balance sheet as of the end of such year, (ii) audited statements of income and of cash flows for such year and (iii) a statement of stockholders’ equity as of the end of such year, all such financial statements shall be prepared in accordance with GAAP, consistently applied, and setting forth in comparative form the figures for the previous fiscal year, in reasonable detail.

 

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(b)    as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, unaudited statements of income and of cash flows for such fiscal quarter, and an unaudited balance sheet and a statement of stockholders’ equity as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP).

(c)    as soon as practicable, but in any event within 45 days after the end of each quarter of each fiscal year of the Company, a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the applicable period, the Common Stock issuable upon conversion or exercise of any outstanding securities convertible or exercisable for Common Stock and the exchange ratio or exercise price applicable thereto, and the number of shares of issued stock options and stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Major Investors to calculate their respective percentage equity ownership in the Company, and certified by the chief financial officer or chief executive officer of the Company as being true, complete, and correct.

(d)    such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Major Investor may from time to time reasonably request; provided, however, that the Company shall not be obligated under this Section 3.1 to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries.    

3.2    Inspection. The Company shall permit each Major Investor, or any of its authorized representatives, at such Major Investor’s expense (provided that the Board has not reasonably determined that such Major Investor is a Competitor), to visit and inspect the Company’s properties; examine its corporate and financial records; and discuss the Company’s affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Section 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

3.3    Observer Rights. As long as Eventide Asset Management, LLC (“Eventide”) or RTW, as the case may be, owns shares of the Series D Preferred Stock it is purchasing under the Purchase Agreement (or an equivalent amount of Common Stock issued upon conversion thereof), the Company shall invite a representative of Eventide and RTW, respectively, to attend all meetings of the Board of Directors in a nonvoting observer capacity and, in this respect, shall give each such representative copies of all notices, minutes, consents, and other materials that it provides to its directors at the same time and in the same manner as provided to such directors; provided, however, that each such representative shall agree to hold in confidence all information so provided; and provided further, that the Company reserves the right to withhold any information and to exclude any such representative from any meeting or portion thereof if

 

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access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or result in disclosure of trade secrets or a conflict of interest, or if such Investor or its representative is a competitor of the Company.

3.4    Termination of Information, Inspection and Observer Rights. The covenants set forth in Section 3.1, Section 3.2 and Section 3.3 shall terminate and be of no further force or effect (a) immediately before the consummation of the IPO; (b) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act; or (c) upon a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

3.5    Confidentiality. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Section 3.5 by such Investor), (b) is or has been independently developed or conceived by the Investor without use of the Company’s confidential information, or (c) is or has been made known or disclosed to the Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company, if such person is bound by an ethical duty to keep such information confidential or such person agrees to be bound by the provisions of this Section 3.5; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions of this Section 3.5; (iii) to any existing or prospective Affiliate, partner, member, stockholder, or wholly owned subsidiary of such Investor in the ordinary course of business, provided that such Investor informs such Person that such information is confidential and directs such Person to maintain the confidentiality of such information; or (iv) as may otherwise be required by law, provided that the Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.

4.    Rights to Future Stock Issuances.

4.1    Right of First Offer. Subject to the terms and conditions of this Section 4 and applicable securities laws, if the Company proposes to offer or sell any New Securities, the Company shall first offer such New Securities to each of the Investors. The Investors shall be entitled to apportion the right of first offer hereby granted to them in such proportions as the Investors deem appropriate, among (a) the Investors, (b) Affiliates of the Investors and (c) the beneficial interest holders, such as limited partners, members or any other Person having “beneficial ownership,” as such term is defined in Rule 13d3 promulgated under the Exchange Act, of any Investor (“Investor Beneficial Owners”); provided that, each such Affiliate or Investor Beneficial Owner (x) is not a Competitor, unless such party’s purchase of New Securities is otherwise consented to by the Board, and (y) agrees to enter into this Agreement and each of the Voting Agreement and Right of First Refusal and Co-Sale Agreement of even date herewith among the Company, the Investors and the other parties named therein, as an “Investor” under each such agreement (provided that any Competitor shall not be entitled to any rights as an Investor under Subsections 3.1, 3.2, and 4.1 hereof).

4.2    Offer Notice. Prior to offering or selling any New Securities, the Company shall

 

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give notice (the “Offer Notice”) to each Investor, stating (a) its bona fide intention to offer such New Securities, (b) the number of such New Securities to be offered, and (c) the price and terms, if any, upon which it proposes to offer such New Securities.

4.3    Election to Purchase. By notification to the Company within twenty (20) days after the Offer Notice is given, each Investor may elect to purchase or otherwise acquire, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the Common Stock then held by such Investor (including all shares of Common Stock then outstanding or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held by such Investor) bears to the total Common Stock of the Company then outstanding, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then outstanding. At the expiration of such twenty (20) day period, the Company shall promptly notify each Investor that elects to purchase or acquire all the shares available to it (each, a “Fully Exercising Investor”) of any other Investor’s failure to do likewise. During the ten (10) day period commencing after the Company has given such notice, each Fully Exercising Investor may, by giving notice to the Company, elect to purchase or acquire, in addition to the number of shares specified above, up to that portion of the New Securities for which Investors were entitled to subscribe but that were not subscribed for by the Investors which is equal to the proportion that the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of Preferred Stock and any other Derivative Securities then held, by such Fully Exercising Investor bears to the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held, by all Fully Exercising Investors who wish to purchase such unsubscribed shares. The closing of any sale pursuant to this Section 4 shall occur within the later of ninety (90) days after the date that the Offer Notice is given and the date of initial sale of New Securities pursuant to this Section 4.

4.4    Failure to Purchase. If all New Securities referred to in the Offer Notice are not elected to be purchased or acquired as provided in this Section 4, the Company may, during the ninety (90) day period following the expiration of the period provided in Section 4.3, offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Investors in accordance with this Section 4.

4.5    Exceptions to Right of First Offer. The right of first offer in this Section 4 shall not be applicable to (a) Exempted Securities (as defined in the Certificate of Incorporation); (b) shares of Common Stock issued in the IPO; and (c) transactions whereby Investors holding a majority of the Preferred Stock (including Investors holding a majority of the Series D Preferred Stock) and shares of Common Stock issued upon conversion of such Preferred Stock then held by the Investors (the “Requisite Investors”) waive the rights granted by this Section 4 with respect to such transaction; provided that no Investor who shall have consented to such waiver shall purchase any securities in such transaction or any related transaction.

4.6    Termination. The covenants set forth in this Section 4 shall terminate and be of no further force or effect (a) immediately before the consummation of the IPO; (b) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act; or (c) upon a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

 

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5.    Additional Covenants.

5.1    Insurance. The Company shall use its commercially reasonable efforts to maintain, from financially sound and reputable insurers, director and officer liability insurance in an amount and on terms and conditions satisfactory to the Board, until such time as the Board determines that such insurance should be discontinued.

5.2    Proprietary Information and Inventions Agreements. Unless otherwise approved by the Board, the Company will cause each former, current or future founder, employee, consultant or officer of the Company to enter into a Confidential Information Agreement (as defined in the Purchase Agreement).

5.3    Employee Stock. Unless otherwise approved by the Board or the compensation committee of the Board all future employees and consultants of the Company who purchase, receive options to purchase, or receive awards of shares of the Company’s capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (i) vesting of shares over a four (4) year period, with the first twenty-five percent (25%) of such shares vesting following twelve (12) months of continued employment or service, and the remaining shares vesting in equal monthly installments over the following thirty-six (36) months, and (ii) a market stand-off provision substantially similar to that in Section 2.11. In addition, unless otherwise approved by the Board, the Company shall retain a “right of first refusal” on employee transfers until the Company’s IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.

5.4    [Reserved.]

5.5    Board Matters. Unless otherwise determined by the vote of a majority of the directors then in office, the Board shall meet at least quarterly in accordance with an agreed-upon schedule. The Company shall reimburse the nonemployee directors for all reasonable out-of-pocket travel expenses incurred (consistent with the Company’s travel policy) in connection with attending meetings of the Board. All non-employee directors will be compensated uniformly for service on the Board, except for any grant of stock options or other equity to the independent director which is approved by the Board or the compensation committee of the Board.    

5.6    Matters Requiring Preferred Director Approval. During such time or times as the holders of Series D Preferred Stock are entitled to elect a Series D Preferred Director and such seat is filled, the Company hereby covenants and agrees with each of the Investors that it shall not, without approval of the Board, which approval must include the affirmative vote of at least one of the Series D Preferred Directors:

(a)    make, or permit any subsidiary to make, any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the Company;

(b)    make, or permit any subsidiary to make, any loan or advance to any Person, including, without limitation, any employee or director of the Company or any subsidiary, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the Board;

 

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(c)    guarantee, directly or indirectly, or permit any subsidiary to guarantee, directly or indirectly, any indebtedness except for trade accounts of the Company or any subsidiary arising in the ordinary course of business;

(d)    make any investment inconsistent with any investment policy approved by the Board;

(e)    incur any aggregate indebtedness in excess of $500,000 that is not already included in the Company’s budget approved by the Board, other than trade credit incurred in the ordinary course of business;

(f)    change the principal business of the Company, enter new lines of business, or exit the current line of business;

(g)    sell, assign, exclusively license, pledge, or encumber material technology or intellectual property of the Company, other than licenses granted in the ordinary course of business; or

(h)    enter into any corporate strategic relationship involving the payment, contribution, or assignment by the Company or to the Company of money or assets greater than one million dollars ($1,000,000).

5.7    Successor Indemnification. If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board as in effect immediately before such transaction, whether such obligations are contained in the Company’s Bylaws, its Certificate of Incorporation, or elsewhere, as the case may be.

5.8    Right to Conduct Activities. The Company hereby agrees and acknowledges that certain Investors are professional investment funds, and as such invest in numerous portfolio companies, some of which may be deemed competitive with the Company’s business (as currently conducted or as currently propose to be conducted). The Company hereby agrees that, to the extent permitted under applicable law, each such Investor shall not be liable to the Company for any claim arising out of, or based upon, (i) the investment by either such Investor in any entity competitive with the Company, or (ii) actions taken by any partner, officer or other representative of such Investor to assist any such competitive company, whether or not such action was taken as a member of the board of directors of such competitive company or otherwise, and whether or not such action has a detrimental effect on the Company; provided, however, that the foregoing shall not relieve (x) any of the Investors from liability associated with the unauthorized disclosure of the Company’s confidential information obtained pursuant to this Agreement, or (y) any director or officer of the Company from any liability associated with his or her fiduciary duties to the Company.

5.9    FCPA. The Company represents that it shall not (and shall not permit any of its subsidiaries or affiliates or any of its or their respective directors, officers, managers, employees, independent contractors, representatives or agents to) promise, authorize or make any payment to, or otherwise contribute any item of value to, directly or indirectly, to any third party, including any Non-U.S. Official (as (as such term is defined in the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”)), in each case, in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. The Company further represents that it shall (and shall cause each of its subsidiaries

 

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and affiliates to) cease all of its or their respective activities, as well as remediate any actions taken by the Company, its subsidiaries or affiliates, or any of their respective directors, officers, managers, employees, independent contractors, representatives or agents in violation of the FCPA, the U.K. Bribery Act, or any other applicable anti-bribery or anti-corruption law. Upon request, the Company agrees to provide responsive information and/or certifications concerning its compliance with applicable anti-corruption laws. The Company shall promptly notify each Investor if the Company becomes aware of any Enforcement Action (as defined in the Purchase Agreement). The Company shall, and shall cause any direct or indirect subsidiary or entity controlled by it, whether now in existence or formed in the future, to comply with the FCPA. The Company shall use its best efforts to cause any direct or indirect subsidiary, whether now in existence or formed in the future, to comply in all material respects with all applicable laws.

5.10    Relinquished Voting Rights. Notwithstanding anything to the contrary set forth in the Certificate of Incorporation, the Company’s Bylaws, applicable law or elsewhere, the Company and the Investors hereby acknowledge and agree that at any time, from time to time, when Nestlé Health Science US Holdings, Inc., Société des Produits Nestlé S.A. and any of their respective Affiliates that is or becomes a Holder (collectively, the “Nestlé Holders”) collectively hold twenty percent (20%) or more of the fully diluted capital stock of the Company, the Nestlé Holders automatically, and without any further action required by any Person, do hereby voluntarily relinquish, and shall not attempt to assert or exercise under any circumstance, any voting rights with respect to any Registrable Securities or other equity securities of the Company held by any Nestlé Holder, in each such case except for any voting rights set forth in Section 3.3 of Article IV(B) of the Certificate of Incorporation (which voting rights, for the avoidance of doubt, are not being relinquished and can be freely exercised by any Nestlé Holder, as and when applicable); provided, however, that (a) for the avoidance of doubt, this Section 5.10 shall have no force or effect during any period in which the Nestlé Holders collectively hold less than twenty percent (20%) of the fully diluted capital stock of the Company and (b) this Section 5.10 shall not apply to any transferee of any Registrable Securities or other equity securities of the Company held by any Nestlé Holder.

5.11    Termination of Covenants. The covenants set forth in this Section 5, except for Section 5.5 and Section 5.10, shall terminate and be of no further force or effect (a) immediately before the consummation of the IPO, (b) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (c) upon a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

6.    Miscellaneous.

6.1    Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (a) is an Affiliate of a Holder; (b) is a Holder’s Immediate Family Member or trust for the benefit of an individual Holder or one or more of such Holder’s Immediate Family Members; or (c) after such transfer, holds at least 1,000,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, stock combinations, and other recapitalizations); provided, however, that (i) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; and (ii) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Section 2.11. For the purposes of determining the number of shares of Registrable Securities held by a transferee, the holdings of a transferee (1) that is an Affiliate or stockholder of a Holder; (2) who is a Holder’s Immediate Family Member; or (3) that is a trust for the benefit of an individual Holder or such Holder’s Immediate Family Member shall be aggregated together and with those of the transferring Holder; provided further that all transferees who would not qualify individually for assignment of rights shall have a single attorney-in-fact for the purpose of exercising any

 

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rights, receiving notices, or taking any action under this Agreement. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.

6.2    Governing Law. This Agreement and any controversy arising out of or relating to this Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the laws of the State of Delaware.

6.3    Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.

6.4    Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.

6.5    Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or: (a) personal delivery to the party to be notified; (b) when sent, if sent by electronic mail or facsimile during the recipient’s normal business hours, and if not sent during normal business hours, then on the recipient’s next business day; (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Section 6.5. If notice is given to the Company, it shall be sent to Prometheus Biosciences, Inc., 9410 Carroll Park Drive, San Diego, CA 92121, Attention: Mark McKenna; and a copy (which shall not constitute notice) shall also be sent to Latham & Watkins LLP, 12670 High Bluff Drive, San Diego, CA 92130, Attention: Cheston J. Larson.

6.6    Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, and either retroactively or prospectively) only with the written consent of (i) the Company and (ii) the Requisite Investors; provided, however that the Company may in its sole discretion waive compliance with Section 2.12(c) (and the Company’s failure to object promptly in writing after notification of a proposed assignment allegedly in violation of Section 2.12(c) shall be deemed to be a waiver); and provided further that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, this Agreement may not be amended or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, termination, or waiver applies to all Investors in the same fashion (provided that, in the event that the provisions of Section 4 are waived with respect to a particular transaction, if any Major Investor exercises its right under Section 4, the other Major Investors shall be entitled to participate in such transaction on a pro rata basis, unless the provisions of Section 4 have

 

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been waived by the holders of a majority of the outstanding shares of Preferred Stock then held by the nonparticipating Major Investors (on an as-converted basis). The Company shall give prompt notice of any amendment or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, termination, or waiver. Any amendment, termination, or waiver effected in accordance with this Section 6.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.

6.7    Severability. In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

6.8    Aggregation of Stock. All shares of Registrable Securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.

6.9    Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company issues additional shares of Series D Preferred Stock after the date hereof, whether pursuant to the Purchase Agreement or otherwise, any purchaser of such shares of Series D Preferred Stock may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement, and thereafter shall be deemed an “Investor” for all purposes hereunder. No action or consent by the Investors shall be required for such joinder to this Agreement by such additional Investor, so long as such additional Investor has agreed in writing to be bound by all of the obligations as an “Investor” hereunder.

6.10    Entire Agreement. This Agreement (including any Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.

6.11    Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of Delaware and to the jurisdiction of the United States District Court for the District of Delaware for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement except in the state courts of Delaware or the United States District Court for the District of Delaware, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.    

6.12    WAIVER OF JURY TRIAL: EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE

 

21


ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

6.13    Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or nondefaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

6.14    Acknowledgment. The Company acknowledges that the Investors are in the business of venture capital investing and therefore review the business plans and related proprietary information of many enterprises, including enterprises which may have products or services which compete directly or indirectly with those of the Company. Nothing in this Agreement shall preclude or in any way restrict the Investors from investing or participating in any particular enterprise whether or not such enterprise has products or services which compete with those of the Company.

6.15    Amendment and Restatement of Prior Agreement; Waiver of Right of First Offer. Upon execution of this Agreement by the Company and Existing Investors holding a majority of the Registrable Securities under the Prior Agreement, the Prior Agreement shall thereafter be of no further force and effect and is hereby amended in its entirety and restated herein, and all provisions of rights granted and covenants made in the Prior Agreement are hereby waived, released and superseded in their entirety and shall have no further force or effect including, without limitation, all rights and any notice period associated therewith otherwise applicable to the transactions contemplated by the Purchase Agreement.

[SIGNATURE PAGES FOLLOW]

 

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

COMPANY:

PROMETHEUS BIOSCIENCES, INC.

 

          By:  

  /s/ Mark McKenna

          Name: Mark McKenna
          Title: President and CEO

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
NESTLÉ HEALTH SCIENCE US HOLDINGS, INC.
By:  

/s/ James Pepin

Name: James Pepin
Title: President

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
SOCIÉTÉ DES PRODUITS NESTLÉ S.A.
By:  

/s/ Claudio Kuoni

Name: Claudio Kuoni
Title: General Counsel NHSc

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
CEDARS-SINAI MEDICAL CENTER
By:  

/s/ James D. Laur

Name: James D. Laur
Title: Vice President, Intellectual Property

 

CEDARS-SINAI MEDICAL CENTER
By:  

/s/ Edward M. Prunchunas

Name: Edward M. Prunchunas
Title: Executive Vice President and CFO

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
LIFE VENTURES 1 LP
By:  

/s/ Douglas F. Wall

Name: Douglas F. Wall
Title: Managing Director

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
LIFE VENTURES II LP
By:  

/s/ Douglas F. Wall

Name: Douglas F. Wall
Title: Managing Director

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
GLENN HOLDINGS, L.P.
By:  

/s/ Scott L. Glenn

Name: Scott L. Glenn
Title: General Partner

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
ROLF J. BENIRSCHKE AND MARY P. BENIRSCHKE FAMILY TRUST DATED JULY 16, 1990
By:  

/s/ Rolf J. Benirschke

Name: Rolf J. Benirschke
Title: Trustee

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
MUTUAL FUND SERIES TRUST, ON BEHALF OF EVENTIDE HEALTHCARE & LIFE SCIENCES FUND
By:  

/s/ Erik Naviloff

Name:   Erik Naviloff
Title:   Officer

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
CORMORANT PRIVATE HEALTHCARE FUND III, LP
By:   Cormorant Private Healthcare GP, LLC
By:  

/s/ Bihua Chen

Name: Bihua Chen
Title:   Managing Member
CORMORANT GLOBAL HEALTHCARE MASTER FUND, LP
By:   Cormorant Global Healthcare GP, LLC
By:  

/s/ Bihua Chen

Name: Bihua Chen
Title:   Managing Member
CRMA SPV, L.P.
By:   Cormorant Asset Management, LP
By:  

/s/ Bihua Chen

Name: Bihua Chen
Title:   Attorney-in-fact

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
COWEN HEALTHCARE INVESTMENTS III LP
By: Cowen Healthcare Investments III GP LLC, its general partner
By:  

/s/ Kevin Raidy

Name:   Kevin Raidy
Title:   Managing Partner
CHI EF III LP
By: Cowen Healthcare Investments III GP LLC, its General Partner
By:  

/s/ Kevin Raidy

Name:   Kevin Raidy
Title:   Managing Partner

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
IRVING INVESTORS PRIVATES OSC XXI, LLC
By:  

/s/ Jeremy Abelson

Name:   Jeremy Abelson
Title:   Manager

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
PERCEPTIVE LIFE SCIENCES MASTER FUND, LTD.
By:  

/s/ James H. Mannix

Name: James H. Mannix
Title: Chief Operating Officer

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
POINT72 BIOTECH PRIVATE INVESTMENTS, LLC
By:  

/s/ Vincent Tortorella

Name: Vincent Tortorella
Title: Authorized Signatory

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
RTW MASTER FUND, LTD.
By:   /s/ Roderick Wong, M.D.
Name: Roderick Wong, M.D.
Title: Director
RTW INNOVATION MASTER FUND, LTD.
By:   /s/ Roderick Wong, M.D.
Name: Roderick Wong, M.D.
Title: Director
RTW VENTURE FUND LIMITED
By: RTW Investments, LP, its Investment Manager
By:   /s/ Roderick Wong, M.D.
Name: Roderick Wong, M.D.
Title: Managing Partner

SIGNATURE PAGE – AMENDED AND RESTATED INVESTORS RIGHTS AGREEMENT


IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

 

INVESTORS:
ASCEND GLOBAL INVESTMENT FUND SPC- STRATEGIC SEGREGATED PORTFOLIO
By:  

/s/ Halim Susanto

Name:   Halim Susanto
Title:   Director

 


SCHEDULE A

INVESTORS

 

NAME

Richard and Donna Baldridge Family Trust dtd Jan 29, 2008
Merepoint Holdings, LLC

Rolf J. Benirschke and Mary P.

Benirschke Family Trust dated July 16, 1990

Cedars-Sinai Medical Center
Mike Dee

IRA Resources, Inc. FBO: Bradley Davis

Foltz IRA 35-37634

Kathy May
Glenn Holdings, L.P.
Harlan and Debra Jacobs Family Trust dated September 17, 1999
Christopher D. Hazuka, J.D., Ph.D.

The Entrust Group FBO Richard Jaffe

IRA 7230004599

Jay S. Johnson Revocable Trust


NAME

Cheston J. Larson

Pensco Trust Company Custodian FBO

Gary Levine Roth IRA

Mahlberg Family Trust

Barry Mahlberg

Mossy Family Trust, UTD 6/30/05, Peter

B. Mossy, TTEE, Sandra M Mossy,

TTEE

Christopher Paben
Kyle Paben
Brian Pidgeon
Life Ventures 1 LP
VP Company Investments 2018, LLC
IRAR Trust: Eric Joseph Zimmer IRA 3537926


NAME

Ascend Global Investment Fund SPC – Strategic Segregated Portfolio
Proehl Investment Ventures LLC
Tadataka Yamada
Life Ventures II, LP
Twomey Family Investments, LLC

Christopher J. Twomey and Rebecca J.

Twomey Family Trust U.T.D. September 20, 2002

WS Investment Company, LLC (2019A)
WS Investment Company, LLC (20A)
Dixon Family Trust


NAME

Nestlé Health Science US Holdings, Inc.
Société des Produits Nestlé S.A.
Lord Wilmore Partners LLC.

Mutual Fund Series Trust, On Behalf Of

Eventide Healthcare & Life Sciences

Fund

RTW Master Fund, Ltd.
RTW Innovation Master Fund, Ltd.
RTW Venture Fund Limited
Perceptive Life Sciences Master Fund, Ltd.
Cowen Healthcare Investments III LP


NAME

CHI EF III LP

Point72 Biotech Private Investments,

LLC

Cormorant Private Healthcare Fund III, LP
Cormorant Global Healthcare Master Fund, LP
CRMA SPV, L.P.
Irving Investors Privates OSC XXI, LLC
EX-4.3 7 d14529dex43.htm EX-4.3 EX-4.3

Exhibit 4.3

THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN SECTIONS 5.3 AND 5.4 BELOW, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE COMPANY, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

WARRANT TO PURCHASE STOCK

 

Company:    PROMETHEUS BIOSCIENCES, INC., a Delaware corporation
Number of Shares:    112,500 (Subject to Section 1.7)
Type/Series of Stock:    Series C Preferred (Subject to Section 1.7)
Warrant Price:    $1.00 per share (Subject to Section 1.7)
Issue Date:    January 24, 2020
Expiration Date:    January 24, 2030 (See also Section 5.1(b))
Credit Facility:    This Warrant to Purchase Stock (“Warrant”) is issued in connection with that certain Loan and Security Agreement of even date herewith among Oxford Finance LLC, as Lender and Collateral Agent, the Lenders from time to time party thereto, and the Company (as modified, amended and/or restated from time to time, the “Loan Agreement”).

THIS WARRANT CERTIFIES THAT, for good and valuable consideration, OXFORD FINANCE LLC (“Oxford” and, together with any successor or permitted assignee or transferee of this Warrant or of any shares issued upon exercise hereof, “Holder”) is entitled to purchase the number of fully paid and non-assessable shares (the “Shares”) of the above-stated Type/Series of Stock (the “Class”) of the above-named company (the “Company”) at the above-stated Warrant Price, all as set forth above and as adjusted pursuant to Section 2 of this Warrant, subject to the provisions and upon the terms and conditions set forth in this Warrant.

SECTION 1.    EXERCISE.

1.1    Method of Exercise. Holder may at any time and from time to time exercise this Warrant, in whole or in part, by delivering to the Company the original of this Warrant together with a duly executed Notice of Exercise in substantially the form attached hereto as Appendix 1 and, unless Holder is exercising this Warrant pursuant to a cashless exercise set forth in Section 1.2, a check, wire transfer of same-day funds (to an account designated by the Company), or other form of payment acceptable to the Company for the aggregate Warrant Price for the Shares being purchased.

1.2    Cashless Exercise. On any exercise of this Warrant, in lieu of payment of the aggregate Warrant Price in the manner as specified in Section 1.1 above, but otherwise in accordance with the requirements of Section 1.1, Holder may elect to receive Shares equal to the value of this Warrant, or portion hereof as to which this Warrant is being exercised. Thereupon, the Company shall issue to the Holder such number of fully paid and non-assessable Shares as are computed using the following formula:

 

X = Y(A-B)/A

where:

 

X =      the number of Shares to be issued to the Holder;
Y =      the number of Shares with respect to which this Warrant is being exercised (inclusive of the Shares surrendered to the Company in payment of the aggregate Warrant Price);

 

1


A =

    

the fair market value (as determined pursuant to Section 1.3 below) of one Share; and

B =      the Warrant Price.

1.3    Fair Market Value. If the Company’s common stock is then traded or quoted on a nationally recognized securities exchange, inter-dealer quotation system or over-the-counter market (a “Trading Market”) and the Class is common stock, the fair market value of a Share shall be the closing price or last sale price of a share of common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company. If the Company’s common stock is then traded in a Trading Market and the Class is a series of the Company’s convertible preferred stock, the fair market value of a Share shall be the closing price or last sale price of a share of the Company’s common stock reported for the Business Day immediately before the date on which Holder delivers this Warrant together with its Notice of Exercise to the Company multiplied by the number of shares of the Company’s common stock into which a Share is then convertible. If the Company’s common stock is not traded in a Trading Market, the Board of Directors of the Company shall determine the fair market value of a Share in its reasonable good faith judgment.

1.4    Delivery of Certificate and New Warrant. Within a reasonable time after Holder exercises this Warrant in the manner set forth in Section 1.1 or 1.2 above, the Company shall deliver to Holder a certificate representing the Shares issued to Holder upon such exercise (or, if such Shares are not certificated, the Company shall reflect Holder’s ownership of such Shares by book entry in the Company’s books and records) and, if this Warrant has not been fully exercised and has not expired, the Company shall deliver to Holder a new warrant of like tenor representing the Shares not so acquired.

1.5    Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form, substance and amount to the Company or, in the case of mutilation, on surrender of this Warrant to the Company for cancellation, the Company shall, within a reasonable time, execute and deliver to Holder, in lieu of this Warrant, a new warrant of like tenor and amount.

1.6    Treatment of Warrant Upon Acquisition of Company.

(a)    Acquisition. For the purpose of this Warrant, “Acquisition” means any transaction or series of related transactions involving: (i) the sale, lease, exclusive license, or other disposition of all or substantially all of the assets of the Company (ii) any merger or consolidation of the Company into or with another person or entity (other than a merger or consolidation effected exclusively to change the Company’s domicile), or any other corporate reorganization, in which the stockholders of the Company in their capacity as such immediately prior to such merger, consolidation or reorganization, own less than a majority of the Company’s (or the surviving or successor entity’s) outstanding voting power immediately after such merger, consolidation or reorganization (or, if such Company stockholders beneficially own a majority of the outstanding voting power of the surviving or successor entity as of immediately after such merger, consolidation or reorganization, such surviving or successor entity is not the Company); or (iii) any sale or other transfer by the stockholders of the Company of shares representing at least a majority of the Company’s then-total outstanding combined voting power (other than a bona fide equity financing exclusively for capital raising purposes in which the Company sells and issues equity securities to institutional investors and is the surviving and continuing entity in such transaction).

(b)    Treatment of Warrant at Acquisition. In the event of an Acquisition in which the consideration to be received by the Company’s stockholders consists solely of cash, solely of Marketable Securities or a combination of cash and Marketable Securities (a “Cash/Public Acquisition”), either (i) Holder shall exercise this Warrant pursuant to Section 1.1 and/or 1.2 and such exercise will be deemed effective immediately prior to and contingent upon the consummation of such Acquisition or (ii) if Holder elects not to exercise the Warrant, this Warrant will expire immediately prior to the consummation of such Acquisition.

(c)    The Company shall provide Holder with written notice of its request relating to the Cash/Public Acquisition (together with such reasonable information as Holder may reasonably require regarding the treatment of this Warrant in connection with such contemplated Cash/Public Acquisition giving rise to such notice),

 

2


which is to be delivered to Holder not less than seven (7) Business Days prior to the closing of the proposed Cash/Public Acquisition. In the event the Company does not provide such notice, then if, immediately prior to the Cash/Public Acquisition, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above would be greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall promptly notify the Holder of the number of Shares (or such other securities) issued upon such exercise to the Holder and Holder shall be deemed to have restated each of the representations and warranties in Section 4 of the Warrant as the date thereof. If, immediately prior to the Cash/Public Acquisition, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above would not be greater than the Warrant Price in effect on such date, then this Warrant shall terminate without exercise or conversion immediately prior to, and subject to, the closing of such Cash/Public Acquisition.

(d)    Upon the closing of any Acquisition other than a Cash/Public Acquisition defined above, the acquiring, surviving or successor entity shall assume the obligations of this Warrant, and this Warrant shall thereafter be exercisable for the same securities and/or other property as would have been paid for the Shares issuable upon exercise of the unexercised portion of this Warrant as if such Shares were outstanding on and as of the closing of such Acquisition, subject to further adjustment from time to time in accordance with the provisions of this Warrant.

(e)    As used in this Warrant, “Marketable Securities” means securities meeting all of the following requirements: (i) the issuer thereof is then subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is then current in its filing of all required reports and other information under the Act and the Exchange Act; (ii) the class and series of shares or other security of the issuer that would be received by Holder in connection with the Acquisition were Holder to exercise this Warrant on or prior to the closing thereof is then traded in a Trading Market, and (iii) following the closing of such Acquisition, Holder would not be restricted from publicly re-selling all of the issuer’s shares and/or other securities that would be received by Holder in such Acquisition were Holder to exercise or convert this Warrant in full on or prior to the closing of such Acquisition, except to the extent that any such restriction (x) arises solely under federal or state securities laws, rules or regulations, or a contractual lock-up provision that is generally applicable to the other former securityholders of the Company receiving such securities, and (y) does not extend beyond six (6) months from the closing of such Acquisition.

1.7    Adjustment to Class of Shares; Number of Shares; Warrant Price; Adjustments Cumulative. If, upon the closing of the Next Equity Financing, the Next Equity Financing Price shall be less than the Warrant Price in effect as of immediately prior thereto, then the “Class” shall be Next Equity Financing Securities from and after such closing, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant and the “Warrant Price” shall be the Next Equity Financing Price from and after such closing, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant; provided, that upon such date, if any, as the “Class” becomes Next Equity Financing Securities pursuant to this sentence, this Warrant shall be exercisable for such number of shares of such Class as shall equal (i) One Hundred Twelve Thousand Five Hundred Dollars ($112,500.00), divided by (ii) the Next Equity Financing Price, subject to adjustment thereafter from time to time in accordance with the provisions of this Warrant. As used herein (i) “Next Equity Financing” means the first sale or issuance by the Company on or after the Issue Date of this Warrant set forth above, in a single transaction or series of related transactions, of shares of its convertible preferred stock or other senior equity securities to one or more investors for cash for financing purposes; (ii) “Next Equity Financing Securities” means the type, class and series of convertible preferred stock or other senior equity security sold or issued by the Company in the Next Equity Financing; and (iii) “Next Equity Financing Price” means the lowest price per share for which Next Equity Financing Securities are sold or issued by the Company in the Next Equity Financing.

SECTION 2.    ADJUSTMENTS TO THE SHARES AND WARRANT PRICE.

2.1    Stock Dividends, Splits, Etc. If the Company declares or pays a dividend or distribution on the outstanding shares of the Class payable in common stock or other securities or property (other than cash), then upon exercise of this Warrant, for each Share acquired, Holder shall receive, without additional cost to Holder,

 

3


the total number and kind of securities and property which Holder would have received had Holder owned the Shares of record as of the date the dividend or distribution occurred. If the Company subdivides the outstanding shares of the Class by reclassification or otherwise into a greater number of shares, the number of Shares purchasable hereunder shall be proportionately increased and the Warrant Price shall be proportionately decreased. If the outstanding shares of the Class are combined or consolidated, by reclassification or otherwise, into a lesser number of shares, the Warrant Price shall be proportionately increased and the number of Shares shall be proportionately decreased.

2.2    Reclassification, Exchange, Combinations or Substitution. Upon any event whereby all of the outstanding shares of the Class are reclassified, exchanged, combined, substituted, or replaced for, into, with or by Company securities of a different class and/or series, then from and after the consummation of such event, this Warrant will be exercisable for the number, class and series of Company securities that Holder would have received had the Shares been outstanding on and as of the consummation of such event, and subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant. The provisions of this Section 2.2 shall similarly apply to successive reclassifications, exchanges, combinations, substitutions, replacements or other similar events.

2.3    Conversion of Preferred Stock. If the Class is a class and series of the Company’s convertible preferred stock, in the event that all outstanding shares of the Class are converted, automatically or by action of the holders thereof, into common stock pursuant to the provisions of the Company’s Amended and Restated Certificate of Incorporation (as the same may be amended and/or restated from time to time, the “Certificate of Incorporation”), including, without limitation, in connection with the Company’s initial, underwritten public offering and sale of its common stock pursuant to an effective registration statement under the Act (the “IPO”), then from and after the date on which all outstanding shares of the Class have been so converted, this Warrant shall be exercisable for such number of shares of common stock into which the Shares would have been converted had the Shares been outstanding on the date of such conversion, and the Warrant Price shall equal the Warrant Price in effect as of immediately prior to such conversion divided by the number of shares of common stock into which one Share would have been converted, all subject to further adjustment thereafter from time to time in accordance with the provisions of this Warrant.

2.4    Adjustments for Diluting Issuances. Without duplication of any adjustment otherwise provided for in this Section 2, the number of shares of common stock issuable upon conversion of the Shares shall be subject to anti-dilution adjustment from time to time in the manner set forth in the Certificate of Incorporation (including giving effect to any waiver of such required adjustment effected in accordance with the terms of the Certificate of Incorporation) as if the Shares were issued and outstanding on and as of the date of any such required adjustment

2.5    No Fractional Share. No fractional Share shall be issuable upon exercise of this Warrant and the number of Shares to be issued shall be rounded down to the nearest whole Share. If a fractional Share interest arises upon any exercise of the Warrant, the Company shall eliminate such fractional Share interest by paying Holder in cash the amount computed by multiplying the fractional interest by (i) the fair market value (as determined in accordance with Section 1.3 above) of a full Share, less (ii) the then-effective Warrant Price.

2.6    Notice/Certificate as to Adjustments. Upon each adjustment of the Warrant Price, Class and/or number of Shares, the Company, at the Company’s expense, shall notify Holder in writing within a reasonable time setting forth the adjustments to the Warrant Price, Class and/or number of Shares and facts upon which such adjustment is based. The Company shall, upon written request from Holder, furnish Holder with a certificate of its Chief Financial Officer, including computations of such adjustment and the Warrant Price, Class and number of Shares in effect upon the date of such adjustment.

 

4


SECTION 3.    REPRESENTATIONS AND COVENANTS OF THE COMPANY.

3.1    Representations and Warranties. The Company represents and warrants to, and agrees with, the Holder as follows as of the Issue Date:

(a)    The initial Warrant Price referenced on the first page of this Warrant is not greater than the price per share at which shares of the Class were last sold and issued prior to the Issue Date hereof in an arms-length transaction in which at least Five Hundred Thousand Dollars ($500,000.00) of such shares were sold.

(b)    All Shares which may be issued upon the exercise of this Warrant, and all securities, if any, issuable upon conversion of the Shares, shall, upon issuance, be duly authorized, validly issued, fully paid and non-assessable, and free of any liens and encumbrances except for restrictions on transfer provided for herein or under applicable federal and state securities laws. The Company covenants that it shall at all times cause to be reserved and kept available out of its authorized and unissued capital stock such number of shares of the Class, common stock and other securities as will be sufficient to permit the exercise in full of this Warrant and the conversion of the Shares into common stock or such other securities.

(c)    The Company’s capitalization table attached hereto as Schedule 1 is true and complete, in all material respects, as of the Issue Date.

3.2    Notice of Certain Events. If the Company proposes at any time to:

(a)    declare any dividend or distribution upon the outstanding shares of the Class or common stock, whether in cash, property, stock, or other securities and whether or not a regular cash dividend;

(b)    offer for subscription or sale pro rata to the holders of the outstanding shares of the Class any additional shares of any class or series of the Company’s stock (other than pursuant to contractual pre-emptive rights);

(c)    effect any reclassification, exchange, combination, substitution, reorganization or recapitalization of the outstanding shares of the Class;

(d)    effect an Acquisition or to liquidate, dissolve or wind up; or

(e)    effect an IPO;

then, in connection with each such event, the Company shall give Holder:

(1)    at least five (5) Business Days prior written notice of the date on which a record will be taken for such dividend, distribution, or subscription rights (and specifying the date on which the holders of outstanding shares of the Class will be entitled thereto) or for determining rights to vote, if any, in respect of the matters referred to in (a) and (b) above;

(2)    in the case of the matters referred to in (c) and (d) above at least five (5) Business Days prior written notice of the date when the same will take place (and specifying the date on which the holders of outstanding shares of the Class will be entitled to exchange their shares for the securities or other property deliverable upon the occurrence of such event); and

(3)    with respect to the IPO, written notice no later than the date on which the Company files its registration statement in connection therewith.

Reference is made to Section 1.6(c) whereby this Warrant will be deemed to be exercised pursuant to Section 1.2 hereof if the Company does not give written notice to Holder of a Cash/Public Acquisition as required by the terms hereof. Company will also provide information requested by Holder that is reasonably necessary to enable Holder to comply with Holder’s accounting or reporting requirements. Holder agrees that in handling any confidential information of the Company, Holder shall handle such information in accordance with the provisions of Section 12.9 of the Loan Agreement (regardless of whether the Obligations (as defined in the Loan Agreement) have been repaid in full).

 

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SECTION 4.    REPRESENTATIONS, WARRANTIES OF THE HOLDER.

The Holder represents and warrants to the Company, as of the Issue Date and as of the date of issuance of any of the Shares issuable upon exercise of this Warrant, as follows:

4.1    Purchase for Own Account. This Warrant and the securities to be acquired upon exercise of this Warrant by Holder are being acquired for investment for Holder’s account, not as a nominee or agent, and not with a view to the public resale or distribution within the meaning of the Act. Holder also represents that it has not been formed for the specific purpose of acquiring this Warrant or the Shares. By executing this Warrant, Holder further represents that as of the Issue Date, Holder does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person with respect to this Warrant, the Shares issuable upon exercise of this Warrant or any shares of common stock issuable upon conversion of such Shares, except for the transfer from Oxford to one or more of Oxford’s affiliates (each an “Oxford Affiliate”), as contemplated and allowed by Section 5.4.

4.2    Disclosure of Information. Holder is aware of the Company’s business affairs and financial condition and has received or has had full access to all the information it considers necessary or appropriate to make an informed investment decision with respect to the acquisition of this Warrant and its underlying securities. Holder further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of this Warrant and its underlying securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Holder or to which Holder has access.

4.3    Investment Experience. Holder understands that the purchase of this Warrant and its underlying securities involves substantial risk. Holder has experience as an investor in securities of companies in the development stage and acknowledges that Holder can bear the economic risk of such Holder’s investment in this Warrant and its underlying securities and has such knowledge and experience in financial or business matters that Holder is capable of evaluating the merits and risks of its investment in this Warrant and its underlying securities and/or has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Holder to be aware of the character, business acumen and financial circumstances of such persons.

4.4    Accredited Investor Status. Holder is an “accredited investor” within the meaning of Regulation D promulgated under the Act.

4.5    The Act. Holder understands that this Warrant and the Shares issuable upon exercise hereof have not been registered under the Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Holder’s investment intent as expressed herein. Holder understands that this Warrant and the Shares issued upon any exercise hereof must be held indefinitely unless subsequently registered under the Act and qualified under applicable state securities laws, or unless exemption from such registration and qualification are otherwise available. Holder understands that this Warrant and the Shares issuable upon exercise of this Warrant are “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such federal securities laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances and absent such circumstances Holder may be required to hold this Warrant and the Shares to be issued upon any exercise hereof indefinitely. Holder is aware of the provisions of Rule 144 promulgated under the Act.

4.6    Market Stand-off Agreement. The Holder agrees that the Shares (or, if the Shares are convertible into shares of common stock of the Company, such shares of common stock) shall be subject to the market stand-off provisions in Section 2.11 of the Amended and Restated Investors’ Rights Agreement, dated as of June 30, 2019, by and among the Company and the investors party thereto, as the same may be amended and/or restated from time to time (the “Investors’ Rights Agreement”), or a similar agreement.

 

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4.7    No Stockholder Rights. Holder, as a Holder of this Warrant, will not have any voting rights, rights to receive dividends, rights to receive notice of meetings, subscription rights or any other stockholder rights until the exercise of this Warrant.

4.8    Company Agreements. If upon exercise or conversion of this Warrant (other than in connection with an Acquisition) Holder continues to hold the Shares, upon the request of the Company, Holder shall execute a counterpart signature page to the investor and stockholder agreements governing the obligations with respect to the shares of the Class.

SECTION 5.    MISCELLANEOUS.

5.1    Term; Automatic Cashless Exercise Upon Expiration.

(a)    Term. Subject to the provisions of Section 1.6 above, this Warrant is exercisable in whole or in part at any time and from time to time on or before 6:00 PM, Eastern time, on the Expiration Date and shall be void thereafter.

(b)    Automatic Cashless Exercise upon Expiration. In the event that, upon the Expiration Date, the fair market value of one Share (or other security issuable upon the exercise hereof) as determined in accordance with Section 1.3 above is greater than the Warrant Price in effect on such date, then this Warrant shall automatically be deemed on and as of such date to be exercised pursuant to Section 1.2 above as to all Shares (or such other securities) for which it shall not previously have been exercised, and the Company shall, within a reasonable time, deliver a certificate representing the Shares (or such other securities) issued upon such exercise to Holder.

5.2    Legends. Each certificate evidencing Shares (and each certificate evidencing the securities issued upon conversion of any Shares, if any) shall be imprinted with a legend in substantially the following form:

THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND, EXCEPT AS SET FORTH IN THAT CERTAIN WARRANT TO PURCHASE STOCK ISSUED BY THE ISSUER TO OXFORD FINANCE LLC DATED JANUARY 24, 2020, MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED UNLESS AND UNTIL REGISTERED UNDER SAID ACT AND LAWS OR, IN THE OPINION OF LEGAL COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER, SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS EXEMPT FROM SUCH REGISTRATION.

5.3    Compliance with Securities Laws on Transfer. This Warrant and the Shares issued upon exercise of this Warrant (and the securities issuable, directly or indirectly, upon conversion of the Shares, if any) may not be transferred or assigned in whole or in part except in compliance with applicable federal and state securities laws by the transferor and the transferee (including, without limitation, the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, as reasonably requested by the Company) and in compliance with the terms of this Warrant. The Company shall not require Holder to provide an opinion of counsel if the transfer is to an affiliate of Holder, provided that any such transferee is an “accredited investor” as defined in Regulation D promulgated under the Act. Additionally, the Company shall also not require an opinion of counsel if there is no material question as to the availability of Rule 144 promulgated under the Act.

5.4    Transfer Procedure. After receipt by Oxford of the executed Warrant, Oxford may transfer all or part of this Warrant to one or more Oxford Affiliates, by execution of an Assignment substantially in the form of Appendix 2. Subject to the provisions of Section 5.3 and upon providing the Company with written notice, Oxford, any such Oxford Affiliate and any subsequent Holder, may transfer all or part of this Warrant or the

 

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Shares issuable upon exercise of this Warrant (or the Shares issuable directly or indirectly, upon conversion of the Shares, if any) to any other transferee, provided, however, in connection with any such transfer, the Oxford Affiliate(s) or any subsequent Holder will give the Company notice of the portion of the Warrant being transferred with the name, address and taxpayer identification number of the transferee and Holder will surrender this Warrant to the Company for reissuance to the transferee(s) (and Holder if applicable). Notwithstanding any contrary provision herein, at all times prior to the IPO, Holder may not, without the Company’s prior written consent, transfer this Warrant or any portion hereof, or any Shares issued upon any exercise hereof, or any shares or other securities issued upon any conversion of any Shares issued upon any exercise hereof, to any person or entity who directly competes with the Company, except in connection with an Acquisition of the Company by such a direct competitor.

5.5    Notices. All notices and other communications hereunder from the Company to the Holder, or vice versa, shall be deemed delivered and effective (i) when given personally, (ii) on the third (3rd) Business Day after being mailed by first-class registered or certified mail, postage prepaid, (iii) upon actual receipt if given by facsimile or electronic mail and such receipt is confirmed in writing by the recipient, or (iv) on the first Business Day following delivery to a reliable overnight courier service, courier fee prepaid, in any case at such address as may have been furnished to the Company or Holder, as the case may be, in writing by the Company or such Holder from time to time in accordance with the provisions of this Section 5.5. All notices to Holder shall be addressed as follows until the Company receives notice of a change of address in connection with a transfer or otherwise:

Oxford Finance LLC

133 N. Fairfax Street

Alexandria, VA 22314

Attn: Legal Department

Notice to the Company shall be addressed as follows until Holder receives notice of a change in address:

PROMETHEUS BIOSCIENCES, INC.

9410 Carroll Park Drive

San Diego, CA 92121

Attn: Vika Brough, VP Finance

With a copy (which shall not constitute notice) to:

LATHAM & WATKINS LLP

12670 High Bluff Drive

San Diego, CA 92130

Attn: Cheston Larson

5.6    Waiver. This Warrant and any term hereof may be changed, waived, discharged or terminated (either generally or in a particular instance and either retroactively or prospectively) only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought.

5.7    Attorneys’ Fees. In the event of any dispute between the parties concerning the terms and provisions of this Warrant, the party prevailing in such dispute shall be entitled to collect from the other party all costs incurred in such dispute, including reasonable attorneys’ fees.

5.8    Counterparts; Facsimile/Electronic Signatures. This Warrant may be executed in counterparts, all of which together shall constitute one and the same agreement. Any signature page delivered electronically or by facsimile shall be binding to the same extent as an original signature page with regards to any agreement subject to the terms hereof or any amendment thereto.

5.9    Governing Law. This Warrant shall be governed by and construed in accordance with the laws of the State of California, without giving effect to its principles regarding conflicts of law.

 

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5.10    Headings. The headings in this Warrant are for purposes of reference only and shall not limit or otherwise affect the meaning of any provision of this Warrant.

5.11    Business Days. “Business Day” is any day that is not a Saturday, Sunday or a day on which banks in California are closed.

[Remainder of page left blank intentionally]

[Signature page follows]

 

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IN WITNESS WHEREOF, the parties have caused this Warrant to Purchase Stock to be executed by their duly authorized representatives effective as of the Issue Date written above.

 

“COMPANY”
PROMETHEUS BIOSCIENCES, INC.
By:  

/s/ Mark McKenna

Name:   Mark McKenna
  (Print)
Title:   President and Chief Executive Officer
“HOLDER”
OXFORD FINANCE LLC
By:  

/s/ Colette H. Featherly

Name:   Colette H. Featherly
  (Print)
Title:   Senior Vice President

 

[Signature Page to Warrant to Purchase Stock]

[Term A Loan]


APPENDIX 1

NOTICE OF EXERCISE

1.    The undersigned Holder hereby exercises its right to purchase                  shares of the Common/Series                      Preferred [circle one] Stock of PROMETHEUS BIOSCIENCES, INC. (the “Company”) in accordance with the attached Warrant To Purchase Stock, and tenders payment of the aggregate Warrant Price for such shares as follows:

☐    check in the amount of $             payable to order of the Company enclosed herewith

☐    Wire transfer of immediately available funds to the Company’s account

☐    Cashless Exercise pursuant to Section 1.2 of the Warrant

☐    Other [Describe]                                                                                                       

2.    Please issue a certificate or certificates representing the Shares in the name specified below:

 

 

 
Holder’s Name  

 

 

 

 
(Address)  

3.    By its execution below and for the benefit of the Company, Holder hereby restates each of the representations and warranties in Section 4 of the Warrant to Purchase Stock as of the date hereof.

 

HOLDER:

                                                             

By:  

                                                                              

Name:  

                                                                              

Title:  

                                                                              

Date:  

                                                             


APPENDIX 2

ASSIGNMENT

For value received, Oxford Finance LLC hereby sells, assigns and transfers unto

 

Name:

  

[OXFORD TRANSFEREE]

Address:                                                                             
Tax ID:                                                                 

that certain Warrant to Purchase Stock issued by PROMETHEUS BIOSCIENCES, INC. (the “Company”), on January     , 2020 (the “Warrant”) together with all rights, title and interest therein.

 

OXFORD FINANCE LLC
By:  

                                                                          

Name:

 

                                                                          

Title:  

                                                                          

Date:                                                                  

By its execution below, and for the benefit of the Company, [OXFORD TRANSFEREE] makes each of the representations and warranties set forth in Article 4 of the Warrant and agrees to all other provisions of the Warrant as of the date hereof.

 

[OXFORD TRANSFEREE]
By:  

                                                                          

Name:  

                                                                          

Title:  

                                                                          

EX-10.1 8 d14529dex101.htm EX-10.1 EX-10.1

Exhibit 10.1

PROMETHEUS BIOSCIENCES, INC.

2017 EQUITY INCENTIVE PLAN

 

  1.

Purpose.

The purpose of the Plan is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and thereby better aligning the interests of such persons with those of the Company’s stockholders. Capitalized terms used in the Plan are defined in Section 11 below.

 

  2.

Eligibility.

Service Providers are eligible to be granted Awards under the Plan, subject to the limitations described herein.

 

  3.

Administration and Delegation.

(a)    Administration. The Plan will be administered by the Administrator. The Administrator shall have authority to determine which Service Providers will receive Awards, to grant Awards and to set all terms and conditions of Awards (including, but not limited to, vesting, exercise and forfeiture provisions). In addition, the Administrator shall have the authority to take all actions and make all determinations contemplated by the Plan and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Administrator may correct any defect or ambiguity, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem necessary or appropriate to carry the Plan and any Awards into effect, as determined by the Administrator. The Administrator shall make all determinations under the Plan in the Administrator’s sole discretion and all such determinations shall be final and binding on all persons having or claiming any interest in the Plan or in any Award.

(b)    Appointment of Committees. To the extent permitted by Applicable Laws, the Board may delegate any or all of its powers under the Plan to one or more Committees. The Board may abolish any Committee at any time and re-vest in itself any previously delegated authority.

 

  4.

Stock Available for Awards.

(a)    Number of Shares. Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 4,000,000 shares of Common Stock. If any Award expires or lapses or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part (including as the result of shares of Common Stock subject to such Award being repurchased by the Company at or below the original issuance price), in any case in a manner that results in any shares of Common Stock covered by such Award not being issued or being so reacquired by the Company, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan. Further, shares of Common Stock delivered (either by actual delivery or attestation) to the Company by a Participant to satisfy the applicable exercise or purchase price of Award and/or to satisfy any applicable tax withholding obligation (including shares retained by the Company from the Award being exercised or purchased and/or creating the tax obligation) shall be added to the number of shares of Common Stock available for the grant of Awards under the Plan. However, in the case of Incentive Stock Options (as hereinafter defined), the foregoing provisions shall be subject to any limitations under the Code. Shares of Common Stock issued under the Plan may consist in whole or in part of authorized but unissued shares, shares purchased on the open market or treasury shares.


(b)    Substitute Awards. In connection with a merger or consolidation of an entity with the Company or the acquisition by the Company of property or stock of an entity, the Administrator may grant Awards in substitution for any options or other stock or stock-based awards granted prior to such merger or consolidation by such entity or an affiliate thereof. Substitute Awards may be granted on such terms as the Administrator deems appropriate in the circumstances, notwithstanding any limitations on Awards contained in the Plan. Substitute Awards shall not count against the overall share limit set forth in Section 4(a) hereof, except as may be required by reason of Section 422 of the Code.

 

  5.

Stock Options.

(a)    General. The Administrator may grant Options to any Service Provider, subject to the limitations on Incentive Stock Options described below. The Administrator shall determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to Applicable Laws, as it considers necessary or advisable.

(b)    Incentive Stock Options. The Administrator may grant Options intended to qualify as Incentive Stock Options only to employees of the Company, any of the Company’s present or future “parent corporations” or “subsidiary corporations” as defined in Sections 424(e) or (f) of the Code, respectively, and any other entities the employees of which are eligible to receive Incentive Stock Options under the Code. All Options intended to qualify as Incentive Stock Options shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. Neither the Company nor the Administrator shall have any liability to a Participant, or any other party, (i) if an Option (or any part thereof) which is intended to qualify as an Incentive Stock Option fails to qualify as an Incentive Stock Option or (ii) for any action or omission by the Administrator that causes an Option not to qualify as an Incentive Stock Option, including without limitation, the conversion of an Incentive Stock Option to a Non-Qualified Stock Option or the grant of an Option intended as an Incentive Stock Option that fails to satisfy the requirements under the Code applicable to an Incentive Stock Option. Any Option that is intended to qualify as an Incentive Stock Option, but fails to so qualify for any reason, including without limitation, the portion of any Option becoming exercisable in excess of the $100,000 limitation described in Treasury Regulation Section 1.422-4, shall be treated as a Non-Qualified Stock Option for all purposes.

(c)    Exercise Price. The Administrator shall establish the exercise price of each Option and specify the exercise price in the applicable Award Agreement. The exercise price shall be not less than 100% of the Fair Market Value on the date the Option is granted. In the case of an Incentive Stock Option granted to an employee who, at the time of grant of the Option, owns (or is treated as owning under Section 424 of the Code) stock representing more than 10% of the voting power of all classes of stock of the Company (or a “parent corporation” or “subsidiary corporation” thereof within the meaning of Sections 424(e) or 424(f) of the Code, respectively), the per share exercise price shall be no less than 110% of the Fair Market Value on the date the Option is granted.

(d)    Duration of Options. Each Option shall be exercisable at such times and subject to such terms and conditions as the Administrator may specify in the applicable Award Agreement, provided that the term of any Option shall not exceed ten years. In the case of an Incentive Stock Option granted to an employee who, at the time of grant of the Option, owns (or is treated as owning under Section 424 of the Code) stock representing more than 10% of the voting power of all classes of stock of the Company (or a “parent corporation” or “subsidiary corporation” thereof within the meaning of Sections 424(e) or 424(f) of the Code, respectively), the term of the Option shall not exceed five years.

 

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(e)    Exercise of Option; Notification of Disposition. Options may be exercised by delivery to the Company of a written notice of exercise, in a form approved by the Administrator (which may be an electronic form), signed by the person authorized to exercise the Option, together with payment in full (i) as specified in Section 5(f) hereof for the number of shares for which the Option is exercised and (ii) as specified in Section 9(e) hereof for any applicable withholding taxes. Unless otherwise determined by the Administrator, an Option may not be exercised for a fraction of a share of Common Stock. If an Option is designated as an Incentive Stock Option, the Participant shall give prompt notice to the Company of any disposition or other transfer of any shares of Common Stock acquired from the Option if such disposition or transfer is made (i) within two years from the grant date with respect to such Option or (ii) within one year after the transfer of such shares to the Participant (other than any such disposition made in connection with a Change in Control). Such notice shall specify the date of such disposition or other transfer and the amount realized, in cash, other property, assumption of indebtedness or other consideration, by the Participant in such disposition or other transfer.

(f)    Payment Upon Exercise. Common Stock purchased upon the exercise of an Option granted under the Plan shall be paid for in cash or by check, payable to the order of the Company, or, to the extent permitted by the Administrator, by:

(i)    (A) delivery of an irrevocable and unconditional undertaking by a broker acceptable to the Company to deliver promptly to the Company sufficient funds to pay the exercise price and any required tax withholding, or (B) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a broker acceptable to the Company to deliver promptly to the Company cash or a check sufficient to pay the exercise price and any required tax withholding;

(ii)    delivery (either by actual delivery or attestation) of shares of Common Stock owned by the Participant valued at their Fair Market Value, provided (A) such method of payment is then permitted under Applicable Laws, (B) such Common Stock, if acquired directly from the Company, was owned by the Participant for such minimum period of time, if any, as may be established by the Company at any time, and (C) such Common Stock is not subject to any repurchase, forfeiture, unfulfilled vesting or other similar requirements;

(iii)    surrendering shares of Common Stock then issuable upon exercise of the Option valued at their Fair Market Value on the date of exercise;

(iv)    delivery of a promissory note of the Participant to the Company on terms determined by the Administrator;

(v)    delivery of property of any other kind which constitutes good and valuable consideration as determined by the Administrator; or

(vi)    any combination of the above permitted forms of payment (including cash or check).

(g)    Early Exercise of Options. The Administrator may provide in the terms of an Award Agreement that the Service Provider may exercise an Option in whole or in part prior to the full vesting of the Option in exchange for unvested shares of Restricted Stock with respect to any unvested portion of the Option so exercised. Shares of Restricted Stock acquired upon the exercise of any unvested portion of an Option shall be subject to such terms and conditions as the Administrator shall determine.

 

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  6.

Restricted Stock; Restricted Stock Units.

(a)    General. The Administrator may grant Restricted Stock, or the right to purchase Restricted Stock, to any Service Provider, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price from the Participant (or to require forfeiture of such shares if issued at no cost) in the event that conditions specified by the Administrator in the applicable Award Agreement are not satisfied prior to the end of the applicable restriction period or periods established by the Administrator for such Award. In addition, the Administrator may grant to Service Providers Restricted Stock Units, which may be subject to vesting and forfeiture conditions during applicable restriction period or periods, as set forth in an applicable Award Agreement.

(b)     Terms and Conditions for All Restricted Stock and Restricted Stock Unit Awards. The Administrator shall determine and set forth in the applicable Award Agreement the terms and conditions applicable to each Restricted Stock and Restricted Stock Unit Award, including the conditions for vesting and repurchase (or forfeiture) and the issue price, in each case, if any.

(c)    Additional Provisions Relating to Restricted Stock.

(i)    Dividends. Participants holding shares of Restricted Stock will be entitled to all ordinary cash dividends paid with respect to such shares, unless otherwise provided by the Administrator in the applicable Award Agreement. In addition, unless otherwise provided by the Administrator, if any dividends or distributions are paid in shares, or consist of a dividend or distribution to holders of Common Stock of property other than an ordinary cash dividend, the shares or other property will be subject to the same restrictions on transferability and forfeitability as the shares of Restricted Stock with respect to which they were paid. Each dividend payment will be made as provided in the applicable Award Agreement, but in no event later than the end of the calendar year in which the dividends are paid to stockholders of that class of stock or, if later, the 15th day of the third month following the later of (A) the date the dividends are paid to stockholders of that class of stock, and (B) the date the dividends are no longer subject to forfeiture.

(ii)    Stock Certificates. The Company may require that any stock certificates issued in respect of shares of Restricted Stock be deposited in escrow by the Participant, together with a stock power endorsed in blank, with the Company (or its designee).

(d)    Additional Provisions Relating to Restricted Stock Units.

(i)    Settlement. Upon the vesting of a Restricted Stock Unit, the Participant shall be entitled to receive from the Company one share of Common Stock or an amount of cash or other property equal to the Fair Market Value of one share of Common Stock on the settlement date, as provided in the applicable Award Agreement. The Administrator may provide that settlement of Restricted Stock Units shall occur upon or as soon as reasonably practicable after the vesting of the Restricted Stock Units or shall instead be deferred, on a mandatory basis or at the election of the Participant, in a manner that complies with Section 409A.

(ii)    Voting Rights. A Participant shall have no voting rights with respect to any Restricted Stock Units unless and until shares are delivered in settlement thereof.

(iii)    Dividend Equivalents. To the extent provided by the Administrator, a grant of Restricted Stock Units may provide a Participant with the right to receive Dividend Equivalents. Dividend Equivalents may be paid currently or credited to an account for the Participant, may be settled in cash and/or shares of Common Stock and may be subject to the same restrictions on transfer and forfeitability as the Restricted Stock Units with respect to which the Dividend Equivalents are paid, as determined by the Administrator, subject, in each case, to such terms and conditions as the Administrator shall establish and set forth in the applicable Award Agreement.

 

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  7.

Other Stock-Based Awards.

Other Stock-Based Awards may be granted hereunder to Participants, including, without limitation, Awards entitling Participants to receive shares of Common Stock to be delivered in the future. Such Other Stock-Based Awards shall also be available as a form of payment in the settlement of other Awards granted under the Plan, as stand-alone payments and/or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may be paid in shares of Common Stock, cash or other property, as the Administrator shall determine. Subject to the provisions of the Plan, the Administrator shall determine the terms and conditions of each Other Stock-Based Award, including any purchase price, transfer restrictions, vesting conditions and other terms and conditions applicable thereto, which shall be set forth in the applicable Award Agreement.

 

  8.

Adjustments for Changes in Common Stock and Certain Other Events.

(a)    In the event that the Administrator determines that any dividend or other distribution (whether in the form of cash, Common Stock, other securities, or other property), reorganization, merger, consolidation, combination, repurchase, recapitalization, liquidation, dissolution, or sale, transfer, exchange or other disposition of all or substantially all of the assets of the Company, or exchange of Common Stock or other securities of the Company, issuance of warrants or other rights to purchase Common Stock or other securities of the Company, or other similar corporate transaction or event, as determined by the Administrator, affects the Common Stock such that an adjustment is determined by the Administrator to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the Plan or with respect to any Award, then the Administrator may, in such manner as it may deem equitable, adjust any or all of:

(i)    the number and kind of shares of Common Stock (or other securities or property) with respect to which Awards may be granted or awarded (including, but not limited to, adjustments of the limitations in Section 3 hereof on the maximum number and kind of shares which may be issued);

(ii)    the number and kind of shares of Common Stock (or other securities or property) subject to outstanding Awards;

(iii)    the grant or exercise price with respect to any Award; and

(iv)    the terms and conditions of any Awards (including, without limitation, any applicable financial or other performance “targets” specified in an Award Agreement).

(b)    In the event of any transaction or event described in Section 8(a) hereof (including without limitation any Change in Control) or any unusual or nonrecurring transaction or event affecting the Company or the financial statements of the Company, or any change in any Applicable Laws or accounting principles, the Administrator, on such terms and conditions as it deems appropriate, either by the terms of the Award or by action taken prior to the occurrence of such transaction or event and either automatically or upon the Participant’s request, is hereby authorized to take any one or more of the following actions whenever the Administrator determines that such action is appropriate in order to (i) prevent dilution or enlargement of the benefits or potential benefits intended by the Company to be made available under the

 

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Plan or with respect to any Award granted or issued under the Plan, (ii) to facilitate such transaction or event or (iii) give effect to such changes in Applicable Laws or accounting principles:

(i)    To provide for the cancellation of any such Award in exchange for either an amount of cash or other property with a value equal to the amount that could have been obtained upon the exercise or settlement of such Award or realization of the Participant’s rights had such Award been currently exercisable, payable and fully vested, as applicable; provided that, if the amount that could have been obtained upon the exercise or settlement of such Award or realization of the Participant’s rights, in any case, is equal to or less than zero, then such Award may be terminated without payment;

(ii)    To provide that such Award shall vest and, to the extent applicable, be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in the Plan or the provisions of such Award;

(iii)    To provide that such Award be assumed by the successor or survivor corporation, or a parent or subsidiary thereof, or shall be substituted for by awards covering the stock of the successor or survivor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and applicable exercise or purchase price, in all cases, as determined by the Administrator;

(iv)    To make adjustments in the number and type of shares of Common Stock (or other securities or property) subject to outstanding Awards, and/or in the terms and conditions of (including the grant or exercise price), and the criteria included in, outstanding Awards which may be granted in the future;

(v)    To replace such Award with other rights or property selected by the Administrator; and/or

(vi)    To provide that the Award will terminate and cannot vest, be exercised or become payable after the applicable event.

(c)    Notwithstanding the provisions of Section 8(b) above, if a Change in Control occurs and a Participant’s Awards are not continued, converted, assumed, or replaced with a substantially similar award by (i) the Company, or (ii) a successor entity or its parent or subsidiary (an “Assumption”), and provided that the Participant has not had a Termination of Service, then the Administrator may provide that, immediately prior to the Change in Control, such Awards shall become fully vested, exercisable and/or payable, as applicable, and all forfeiture, repurchase and other restrictions on such Awards shall lapse, in which case, such Awards shall be canceled upon the consummation of the Change in Control in exchange for the right to receive the Change in Control consideration payable to other holders of Common Stock (A) which may be on such terms and conditions as apply generally to holders of Common Stock under the Change in Control documents (including, without limitation, any escrow, earn-out or other deferred consideration provisions) or such other terms and conditions as the Administrator may provide, and (B) determined by reference to the number of shares subject to such Awards and net of any applicable exercise price; provided that to the extent that any Awards constitute “nonqualified deferred compensation” that may not be paid upon the Change in Control under Section 409A without the imposition of taxes thereon under Section 409A, the timing of such payments shall be governed by the applicable Award Agreement (subject to any deferred consideration provisions applicable under the Change in Control documents); and provided, further, that if the amount to which a Participant would be entitled upon the settlement or exercise of such Award at the time of the Change in Control is equal to or less than zero, then such Award may be terminated without payment. The Administrator shall determine whether an Assumption of an Award has occurred in connection with a Change in Control.

(d)    In connection with the occurrence of any Equity Restructuring, and notwithstanding anything to the contrary in this Section 8, the Administrator will equitably adjust each

 

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outstanding Award, which adjustments may include adjustments to the number and type of securities subject to each outstanding Award and/or the exercise price or grant price thereof, if applicable, the grant of new Awards to Participants, and/or the making of a cash payment to Participants, as the Administrator deems appropriate to reflect such Equity Restructuring. The adjustments provided under this Section 8(e) shall be nondiscretionary and shall be final and binding on the affected Participant and the Company; provided that whether an adjustment is equitable shall be determined by the Administrator.

(e)    In the event of any pending stock dividend, stock split, combination or exchange of shares, merger, consolidation or other distribution (other than normal cash dividends) of Company assets to stockholders, or any other change affecting the shares of Common Stock or the share price of the Common Stock, including any Equity Restructuring, or if necessary to comply with Applicable Laws or the Code, or for reasons of administrative convenience, the Administrator may, in its sole discretion, refuse to permit the exercise of any Award during a period of up to thirty days prior to the consummation of any such transaction; provided, however, that in the event the vested portion of an Award is not exercisable on the date the Award would otherwise expire pursuant to the terms set forth in the Award Agreement governing such Award as a result of the Administrator’s exercise of discretion pursuant to this Section 8(e), then the expiration of the Award shall be extended through the date that is thirty days following the date on which the Administrator first permits the Award to be exercised (but in no event shall the expiration of the Award be extended beyond the tenth anniversary of the date of grant of such Award.

(f)    Except as expressly provided in the Plan or pursuant to action of the Administrator under the Plan, no Participant shall have any rights by reason of any subdivision or consolidation of shares of stock of any class, the payment of any dividend, any increase or decrease in the number of shares of stock of any class or any dissolution, liquidation, merger, or consolidation of the Company or any other corporation. Except as expressly provided in the Plan or pursuant to action of the Administrator under the Plan, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number of shares of Common Stock subject to an Award or the grant or exercise price of any Award. The existence of the Plan, any Award Agreements and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Company to make or authorize (i) any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, (ii) any merger, consolidation dissolution or liquidation of the Company or sale of Company assets or (iii) any sale or issuance of securities, including without limitation, securities with rights superior to those of the Common Stock or which are convertible into or exchangeable for Common Stock. The Administrator may treat Participants and Awards (or portions thereof) differently under this Section 8.

 

  9.

General Provisions Applicable to Awards.

(a)    Transferability of Awards. Except as the Administrator may otherwise determine or provide in an Award Agreement or otherwise, in any case in accordance with Applicable Laws, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees.

(b)    Documentation. Each Award shall be evidenced in an Award Agreement, which may be in such form (written, electronic or otherwise) as the Administrator shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan.

(c)    Discretion. Except as otherwise provided by the Plan, each Award may be made alone or in addition or in relation to any other Award. The terms of each Award to a Participant need not be identical, and the Administrator need not treat Participants or Awards (or portions thereof) uniformly.

 

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(d)    Termination of Status. The Administrator shall determine the effect on an Award of the disability, death, retirement, authorized leave of absence or any other change or purported change in a Participant’s Service Provider status and the extent to which, and the period during which, the Participant, the Participant’s legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award, if applicable.

(e)    Withholding. Each Participant shall pay to the Company, or make provision satisfactory to the Administrator for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Administrator may otherwise determine, all such payments shall be made in cash or by certified check. Notwithstanding the foregoing, to the extent permitted by the Administrator, Participants may satisfy such tax obligations in whole or in part by delivery of shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by Applicable Laws, deduct any such tax obligations from any payment of any kind otherwise due to a Participant.

(f)    Amendment of Award. The Administrator may amend, modify or terminate any outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or settlement, and converting an Incentive Stock Option to a Non-Qualified Stock Option. The Participant’s consent to such action shall be required unless (i) the Administrator determines that the action, taking into account any related action, would not materially and adversely affect the Participant, or (ii) the change is permitted under Section 8 and 10(f) hereof.

(g)    Conditions on Delivery of Stock. The Company will not be obligated to deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company’s counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Administrator deems necessary or appropriate to satisfy the requirements of any Applicable Laws. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is determined by the Administrator to be necessary to the lawful issuance and sale of any securities hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.

(h)    Acceleration. The Administrator may at any time provide that any Award shall become immediately vested and/or exercisable in full or in part, free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be.

 

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  10.

Miscellaneous.

(a)    No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan or any Award, except as expressly provided in an applicable Award Agreement.

(b)    No Rights As Stockholder; Certificates. Subject to the provisions of the applicable Award Agreement, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding any other provision of the Plan, unless otherwise determined by the Administrator or required by any Applicable Laws, the Company shall not be required to deliver to any Participant certificates evidencing shares of Common Stock issued in connection with any Award and instead such shares of Common Stock may be recorded in the books of the Company (or, as applicable, its transfer agent or stock plan administrator). The Company may place legends on stock certificates issued under the Plan deemed necessary or appropriate by the Administrator in order to comply with Applicable Laws.

(c)    Effective Date and Term of Plan. The Plan shall become effective on the date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company’s stockholders, but Awards previously granted may extend beyond that date in accordance with the terms of the Plan.

(d)    Amendment of Plan. The Administrator may amend, suspend or terminate the Plan or any portion thereof at any time; provided that no amendment of the Plan shall materially and adversely affect any Award outstanding at the time of such amendment without the consent of the affected Participant. Awards outstanding under the Plan at the time of any suspension or termination of the Plan shall continue to be governed in accordance with the terms of the Plan and the applicable Award Agreement, as in effect prior to such suspension or termination. The Board shall obtain stockholder approval of any Plan amendment to the extent necessary to comply with Applicable Laws.

(e)    Provisions for Foreign Participants. The Administrator may modify Awards granted to Participants who are foreign nationals or employed outside the United States or establish subplans or procedures under the Plan to address differences in laws, rules, regulations or customs of such foreign jurisdictions with respect to tax, securities, currency, employee benefit or other matters.

(f)    Section 409A.

(i)    General. The Company intends that all Awards be structured in compliance with, or to satisfy an exemption from, Section 409A, such that no adverse tax consequences, interest, or penalties under Section 409A apply in connection with any Awards. Notwithstanding anything herein or in any Award Agreement to the contrary, the Administrator may, without a Participant’s prior consent, amend this Plan and/or Awards, adopt policies and procedures, or take any other actions (including amendments, policies, procedures and actions with retroactive effect) as are necessary or appropriate to preserve the intended tax treatment of Awards under the Plan, including without limitation, any such actions intended to (A) exempt this Plan and/or any Award from the application of Section 409A, and/or (B) comply with the requirements of Section 409A, including without limitation any such regulations, guidance, compliance programs and other interpretative authority that may be issued after the date of grant of any Award.

 

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The Company makes no representations or warranties as to the tax treatment of any Award under Section 409A or otherwise. The Company shall have no obligation under this Section 10(f) or otherwise to take any action (whether or not described herein) to avoid the imposition of taxes, penalties or interest under Section 409A with respect to any Award and shall have no liability to any Participant or any other person if any Award, compensation or other benefits under the Plan are determined to constitute non-compliant, “nonqualified deferred compensation” subject to the imposition of taxes, penalties and/or interest under Section 409A.

(ii)    Separation from Service. With respect to any Award that constitutes “nonqualified deferred compensation” under Section 409A, any payment or settlement of such Award that is to be made upon a termination of a Participant’s Service Provider relationship shall, to the extent necessary to avoid the imposition of taxes under Section 409A, be made only upon the Participant’s “separation from service” (within the meaning of Section 409A), whether such “separation from service” occurs upon or subsequent to the termination of the Participant’s Service Provider relationship. For purposes of any such provision of this Plan or any Award Agreement relating to any such payments or benefits, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.”

(iii)    Payments to Specified Employees. Notwithstanding any contrary provision in the Plan or any Award Agreement, any payment(s) of “nonqualified deferred compensation” that are otherwise required to be made under an Award to a “specified employee” (as defined under Section 409A and determined by the Administrator) as a result of his or her “separation from service” shall, to the extent necessary to avoid the imposition of taxes under Code Section 409A(a)(2)(B)(i), be delayed until the expiration of the six-month period immediately following such “separation from service” (or, if earlier, until the date of death of the specified employee) and shall instead be paid (in a manner set forth in the Award agreement) on the day that immediately follows the end of such six-month period or as soon as administratively practicable thereafter (without interest). Any payments of “nonqualified deferred compensation” under such Award that are, by their terms, payable more than six months following the Participant’s “separation from service” shall be paid at the time or times such payments are otherwise scheduled to be made.

(g)    Limitations on Liability. Notwithstanding any other provisions of the Plan, no individual acting as a director, officer, other employee or agent of the Company will be liable to any Participant, former Participant, spouse, beneficiary, or any other person for any claim, loss, liability, or expense incurred in connection with the Plan or any Award, nor will such individual be personally liable with respect to the Plan because of any contract or other instrument he or she executes in his or her capacity as an Administrator, director, officer, other employee or agent of the Company. The Company will indemnify and hold harmless each director, officer, other employee and agent of the Company to whom any duty or power relating to the administration or interpretation of the Plan has been or will be granted or delegated, against any cost or expense (including attorneys’ fees) or liability (including any sum paid in settlement of a claim with the Administrator’s approval) arising out of any act or omission to act concerning this Plan unless arising out of such person’s own fraud or bad faith.

(h)    Lock-Up Period. The Company may, at the request of any representative of the underwriters (the “Managing Underwriter”) or otherwise, in connection with any registration of the offering of any securities of the Company under the Securities Act, prohibit Participants from, directly or indirectly, selling or otherwise transferring any shares of Common Stock or other securities of the Company during a period of up to one hundred eighty days following the effective date of a registration statement of the Company filed under the Securities Act.

 

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(i)    Right of First Refusal.

(i)    Before any shares of Common Stock held by a Participant or any permitted transferee (each, a “Holder”) may be sold, pledged, assigned, hypothecated, transferred, or otherwise disposed of (each, a “Transfer”), the Company or its assignee(s) shall have a right of first refusal to purchase the shares of Common Stock proposed to be Transferred on the terms and conditions set forth in this Section 10(i) (the “Right of First Refusal”). In the event that the Company’s charter, bylaws and/or a stockholders’ agreement applicable to the shares of Common Stock contain a right of first refusal with respect to the shares of Common Stock, such right of first refusal shall apply to the shares of Common Stock to the extent such provisions are more restrictive than the Right of First Refusal set forth in this Section 10(i) and the Right of First Refusal set forth in this Section 10(i) shall not in any way restrict the operation of the Company’s charter, bylaws or the operation of any applicable stockholders’ agreement.

(ii)    In the event any Holder desires to Transfer any shares of Common Stock, the Holder shall deliver to the Company a written notice (the “Notice”) stating: (A) the Holder’s bona fide intention to sell or otherwise Transfer such shares of Common Stock; (B) the name of each proposed purchaser or other transferee (“Proposed Transferee”); (C) the number of shares of Common Stock to be Transferred to each Proposed Transferee; and (D) the price for which the Holder proposes to Transfer the shares of Common Stock (the “Offered Price”), and the Holder shall offer such shares of Common Stock at the Offered Price to the Company or its assignee(s).

(iii)    Within twenty-five days after receipt of the Notice, the Company and/or its assignee(s) may elect in writing to purchase all, but not less than all, of the shares of Common Stock proposed to be Transferred to any one or more of the Proposed Transferees by delivery of a written exercise notice to the Holder (a “Company Notice”). The purchase price (“Purchase Price”) for the shares of Common Stock repurchased under this Section 10(i) shall be the Offered Price.

(iv)    Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check or wire transfer), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof, within five days after delivery of the Company Notice or in the manner and at the times mutually agreed to by the Company and the Holder. Should the Offered Price specified in the Notice be payable in property other than cash, the Company or its assignee shall have the right to pay the purchase price in the form of cash equal in amount to the value of such property, as determined by the Administrator.

(v)    If all or a portion of the shares of Common Stock proposed in the Notice to be Transferred are not purchased by the Company and/or its assignee(s) as provided in this Section 10(i), then the Holder may sell or otherwise Transfer such shares of Common Stock to that Proposed Transferee at the Offered Price or at a higher price; provided that such sale or other Transfer is consummated within sixty days after the date of the Notice; and provided, further, that any such sale or other Transfer is effected in accordance with any Applicable Laws and the Proposed Transferee agrees in writing that the provisions of this Plan and the applicable Award Agreement and any other applicable agreements governing the shares of Common Stock to be Transferred shall continue to apply to the shares of Common Stock in the hands of such Proposed Transferee. If the shares of Common Stock described in the Notice are not Transferred to the Proposed Transferee within such sixty-day period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal, as provided herein, before any shares of Common Stock held by the Holder may be sold or otherwise Transferred.

 

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(vi)    Anything to the contrary contained in this Section 10(i) notwithstanding and to the extent permitted by the Administrator, the Transfer of any or all of the shares of Common Stock during a Participant’s lifetime or upon a Participant’s death by will or intestacy to the Participant’s Immediate Family or a trust for the benefit of the Participant’s Immediate Family shall be exempt from the Right of First Refusal. As used herein, “Immediate Family” shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister or stepchild (whether or not adopted). In such case, the transferee or other recipient shall receive and hold the shares of Common Stock so Transferred subject to the provisions of this Plan (including the Right of First Refusal), the applicable Award Agreement and any other applicable agreements governing the shares of Common Stock to be Transferred, and there shall be no further Transfer of such shares of Common Stock except in accordance with the terms of this Section 10(i) (or otherwise as expressly provided under the Plan).

(vii)    The Right of First Refusal shall terminate as to all shares of Common Stock if the Company becomes a Publicly Listed Company upon such occurrence.

(j)    Data Privacy. As a condition of receipt of any Award, each Participant explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of personal data as described in this paragraph by and among, as applicable, the Company and its subsidiaries and affiliates for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan. The Company and its subsidiaries and affiliates may hold certain personal information about a Participant, including but not limited to, the Participant’s name, home address and telephone number, date of birth, social security or insurance number or other identification number, salary, nationality, job title(s), any shares of stock held in the Company or any of its subsidiaries and affiliates, details of all Awards, in each case, for the purpose of implementing, managing and administering the Plan and Awards (the “Data”). The Company and its subsidiaries and affiliates may transfer the Data amongst themselves as necessary for the purpose of implementation, administration and management of a Participant’s participation in the Plan, and the Company and its subsidiaries and affiliates may each further transfer the Data to any third parties assisting the Company in the implementation, administration and management of the Plan. These recipients may be located in the Participant’s country, or elsewhere, and the Participant’s country may have different data privacy laws and protections than the recipients’ country. Through acceptance of an Award, each Participant authorizes such recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Company or the Participant may elect to deposit any shares of Common Stock. The Data related to a Participant will be held only as long as is necessary to implement, administer, and manage the Participant’s participation in the Plan. A Participant may, at any time, view the Data held by the Company with respect to such Participant, request additional information about the storage and processing of the Data with respect to such Participant, recommend any necessary corrections to the Data with respect to the Participant or refuse or withdraw the consents herein in writing, in any case without cost, by contacting his or her local human resources representative. The Company may cancel Participant’s ability to participate in the Plan and, in the Administrator’s discretion, the Participant may forfeit any outstanding Awards if the Participant refuses or withdraws his or her consents as described herein. For more information on the consequences of refusal to consent or withdrawal of consent, Participants may contact their local human resources representative.

(k)    Severability. In the event any portion of the Plan or any action taken pursuant thereto shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provisions had not been included, and the illegal or invalid action shall be null and void.

 

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(l)    Governing Documents. In the event of any contradiction between the Plan and any Award Agreement or any other written agreement between a Participant and the Company or any Subsidiary of the Company that has been approved by the Administrator, the terms of the Plan shall govern, unless it is expressly specified in such Award Agreement or other written document that a specific provision of the Plan shall not apply.

(m)    Governing Law. The provisions of the Plan and all Awards made hereunder shall be governed by and interpreted in accordance with the laws of the State of Delaware, disregarding choice-of-law principles of the law of any state that would require the application of the laws of a jurisdiction other than such state.

(n)    Restrictions on Shares; Claw-Back Provisions. Shares of Common Stock acquired in respect of Awards shall be subject to such terms and conditions as the Administrator shall determine, including, without limitation, restrictions on the transferability of shares of Common Stock, the right of the Company to repurchase shares of Common Stock, the right of the Company to require that shares of Common Stock be transferred in the event of certain transactions, tag-along rights, bring-along rights, redemption and co-sale rights and voting requirements. Such terms and conditions may be additional to those contained in the Plan and may, as determined by the Administrator, be contained in the applicable Award Agreement or in an exercise notice, stockholders’ agreement or in such other agreement as the Administrator shall determine, in each case in a form determined by the Administrator. The issuance of such shares of Common Stock shall be conditioned on the Participant’s consent to such terms and conditions and the Participant’s entering into such agreement or agreements. All Awards (including any proceeds, gains or other economic benefit actually or constructively received by Participant upon any receipt or exercise of any Award or upon the receipt or resale of any shares of Common Stock underlying the Award) shall be subject to the provisions of any claw-back policy implemented by the Company, including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, to the extent set forth in such claw-back policy and/or in the applicable Award Agreement. Notwithstanding the foregoing, it shall be a condition to the issuance of any shares of Common Stock pursuant to an Award under this Plan that the Participant shall agree in writing to be bound by the terms and conditions of, and become a party to, any stockholders’ agreement of the Company.

(o)    Titles and Headings. The titles and headings of the Sections in the Plan are for convenience of reference only and, in the event of any conflict, the text of the Plan, rather than such titles or headings, shall control.

(p)    Conformity to Securities Laws. Participant acknowledges that the Plan is intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, and state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan and all Awards granted hereunder shall be administered only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by Applicable Laws, the Plan and all Award Agreements shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.

11.    Definitions. As used in the Plan, the following words and phrases shall have the following meanings:

(a)    “Administrator” means the Board or a Committee to the extent that the Board’s powers or authority under the Plan have been delegated to such Committee.

(b)    “Applicable Laws” means the requirements relating to the administration of equity incentive plans under U.S. federal and state securities, tax and other applicable laws, rules and regulations,

 

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the applicable rules of any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws and rules of any foreign country or other jurisdiction where Awards are granted or issued under the Plan.

(c)    Award” means, individually or collectively, a grant under the Plan of Options, Restricted Stock, Restricted Stock Units or Other Stock-Based Awards.

(d)    Award Agreement” means a written agreement evidencing an Award, which agreements may be in electronic medium and shall contain such terms and conditions with respect to an Award as the Administrator shall determine, consistent with and subject to the terms and conditions of the Plan.

(e)    Board” means the Board of Directors of the Company.

(f)    “Cause,” with respect to a Participant, means “Cause” (or any term of similar effect) as defined in such Participant’s employment agreement with the Company if such an agreement exists and contains a definition of Cause (or term of similar effect), or, if no such agreement exists or such agreement does not contain a definition of Cause (or term of similar effect), then Cause shall include, but not be limited to: (i) the Participant’s unauthorized use or disclosure of confidential information or trade secrets of the Company or any material breach of a written agreement between the Participant and the Company, including without limitation a material breach of any employment, confidentiality, non-compete, non-solicit or similar agreement; (ii) the Participant’s commission of, indictment for or the entry of a plea of guilty or nolo contendere by the Participant to, a felony under the laws of the United States or any state thereof or any crime involving dishonesty or moral turpitude (or any similar crime in any jurisdiction outside the United States); (iii) the Participant’s gross negligence or willful misconduct or the Participant’s willful or repeated failure or refusal to substantially perform assigned duties; (iv) any act of fraud, embezzlement, material misappropriation or dishonesty committed by the Participant against the Company; or (v) any acts, omissions or statements by a Participant which the Company reasonably determines to be materially detrimental or damaging to the reputation, operations, prospects or business relations of the Company.

(g)     “Change in Control” means (i) a merger or consolidation of the Company with or into any other corporation or other entity or person, (ii) a sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Company’s assets, or (iii) any other transaction, including the sale by the Company of new shares of its capital stock or a transfer of existing shares of capital stock of the Company, the result of which is that a third party that is not an affiliate of the Company or its stockholders (or a group of third parties not affiliated with the Company or its stockholders) immediately prior to such transaction acquires or holds capital stock of the Company representing a majority of the Company’s outstanding voting power immediately following such transaction; provided that the following events shall not constitute a “Change in Control”: (A) a transaction (other than a sale of all or substantially all of the Company’s assets) in which the holders of the voting securities of the Company immediately prior to the merger or consolidation hold, directly or indirectly, at least a majority of the voting securities in the successor corporation or its parent immediately after the merger or consolidation; (B) a sale, lease, exchange or other transaction in one transaction or a series of related transactions of all or substantially all of the Company’s assets to an affiliate of the Company; (C) an initial public offering of any of the Company’s securities; (D) a reincorporation of the Company solely to change its jurisdiction; or (E) a transaction undertaken for the primary purpose of creating a holding company that will be owned in substantially the same proportion by the persons who held the Company’s securities immediately before such transaction. Notwithstanding the foregoing, if a Change in Control would give rise to a payment or settlement event with respect to any Award that constitutes “nonqualified deferred compensation,” the transaction or event constituting the Change in Control must also constitute a “change in control event” (as defined in Treasury Regulation §1.409A-3(i)(5)) in order to give rise to the payment or settlement event for such Award, to the extent required by Section 409A.

 

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(h)    Code” means the Internal Revenue Code of 1986, as amended, and the regulations issued thereunder.

(i)    Committee” means one or more committees or subcommittees of the Board, which may be comprised of one or more directors and/or executive officers of the Company, in either case, to the extent permitted in accordance with Applicable Laws.

(j)    Common Stock” means the common stock of the Company.

(k)    Company” means Prometheus Biosciences, Inc., a Delaware corporation, or any successor thereto. Except where the context otherwise requires, the term “Company” includes any of the Company’s present or future parent or subsidiary corporations as defined in Sections 424(e) or (f) of the Code and any other business venture (including, without limitation, joint venture or limited liability company) in which the Company has a significant interest, as determined by the Administrator.

(l)    Consultantmeans any person, including any advisor, engaged by the Company or a parent or subsidiary of the Company to render services to such entity.

(m)    Designated Beneficiarymeans the beneficiary or beneficiaries designated, in a manner determined by the Administrator, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant’s death or incapacity In the absence of an effective designation by a Participant, “Designated Beneficiary” shall mean the Participant’s estate.

(n)    Director means a member of the Board.

(o)    “Disability” means a permanent and total disability within the meaning of Section 22(e)(3) of the Code, as it may be amended from time to time.

(p)    Dividend Equivalents” means a right granted to a Participant pursuant to Section 6(d)(3) hereof to receive the equivalent value (in cash or shares of Common Stock) of dividends paid on shares of Common Stock.

(q)    “Employee” means any person, including officers and Directors, employed by the Company (within the meaning of Section 3401(c) of the Code) or any parent or subsidiary of the Company.

(r)    Equity Restructuring” means, as determined by the Administrator, a non-reciprocal transaction between the Company and its stockholders, such as a stock dividend, stock split, spin-off or recapitalization through a large, nonrecurring cash dividend, that affects the shares of Common Stock (or other securities of the Company) or the share price of Common Stock (or other securities of the Company) and causes a change in the per share value of the Common Stock underlying outstanding Awards.

(s)    Exchange Act means the Securities Exchange Act of 1934, as amended.

(t)    Fair Market Value” means, as of any date, the value of Stock determined as follows: (i) if the Common Stock is listed on any established stock exchange, its Fair Market Value shall be the closing sales price for such Common Stock as quoted on such exchange for such date, or if no sale occurred on such date, the first market trading day immediately prior to such date during which a sale occurred, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) if the Common Stock is not traded on a stock exchange but is quoted on a national market or other

 

15


quotation system, the last sales price on such date, or if no sales occurred on such date, then on the date immediately prior to such date on which sales prices are reported, as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or (iii)    in the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined by the Administrator.

(u)    “Good Reason” shall mean (a) a change in the Participant’s position with the Company (or its subsidiary employing the Participant) that materially reduces the Participant’s authority, duties or responsibilities, (b) a material diminution in the Participant’s level of base compensation, except in connection with a general reduction in the base compensation of the Company’s personnel with similar status and responsibilities or (c) a relocation of the Participant’s place of employment by more than 50 miles, provided that such change, reduction or relocation is effected by the Company (or its subsidiary employing the Participant) without the Participant’s consent. Notwithstanding the foregoing, Good Reason shall only exist if Participant shall have provided the Company with written notice within sixty (60) days of the initial occurrence of any of the foregoing events or conditions, and the Company or any successor or affiliate fails to eliminate the conditions constituting Good Reason within thirty (30) days after receipt of written notice of such event or condition from Participant. Participant’s resignation from employment with the Company for “Good Reason” must occur within six (6) months following the initial occurrence of one of the foregoing events or conditions. Notwithstanding the foregoing, if Participant is a party to a written employment or consulting agreement with the Company (or its subsidiary) in which the term “good reason” is defined, then “Good Reason” shall be as such term is defined in the applicable written employment or consulting agreement.

(v)    Incentive Stock Option” means an “incentive stock option” as defined in Section 422 of the Code.

(w)    Non-Qualified Stock Optionmeans an Option that is not intended to be or otherwise does not qualify as an Incentive Stock Option.

(x)    Option” means an option to purchase Common Stock.

(y)    Other Stock-Based Awards” means other Awards of shares of Common Stock, and other Awards that are valued in whole or in part by reference to, or are otherwise based on, shares of Common Stock or other property.

(z)    Participant means a Service Provider who has been granted an Award under the Plan.

(aa)    Plan” means this 2017 Equity Incentive Plan.

(bb)    “Publicly Listed Company” means that the Company or its successor (i) is required to file periodic reports pursuant to Section 12 of the Exchange Act and (ii) the Common Stock is listed on one or more National Securities Exchanges (within the meaning of the Exchange Act) or is quoted on NASDAQ or a successor quotation system.

(cc)    Restricted Stock” means Common Stock awarded to a Participant pursuant to Section 6 hereof that is subject to certain vesting conditions and other restrictions.

(dd)    Restricted Stock Unit” means an unfunded, unsecured right to receive, on the applicable settlement date, one share of Common Stock or an amount in cash or other consideration determined by the Administrator equal to the value thereof as of such payment date, which right may be subject to certain vesting conditions and other restrictions.

 

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(ee)    Section 409A” means Section 409A of the Code and all regulations, guidance, compliance programs and other interpretative authority thereunder.

(ff)    “Securities Act” means the Securities Act of 1933, as amended from time to time.

(gg)    Service Provider” means an Employee, Consultant or Director.

(hh)    Termination of Service” means the date the Participant ceases to be a Service Provider.

 

17


PROMETHEUS BIOSCIENCES, INC.

2017 EQUITY INCENTIVE PLAN

CALIFORNIA SUPPLEMENT

The Administrator has adopted this supplement for purposes of satisfying the requirements of Section 25102(o) of the California Corporations Code and the regulations issued thereunder (“Section 25102(o)”). Notwithstanding anything to the contrary contained in the Plan and except as otherwise determined by the Administrator, the provisions set forth in this supplement shall apply, to the extent required by applicable California securities laws, to all Awards granted under the Plan to a Participant who is a resident of the State of California on the date of grant (a “California Participant”) and which are intended to be exempt from registration in California pursuant to Section 25102(o). Any Awards granted under the Plan to a California Participant that does not comply with this supplement for any reason as determined by the Administrator shall be automatically be deemed to have been granted pursuant to the Plan or pursuant to a sub-plan separate and apart from the Plan that is not intended to be exempt from registration in California pursuant to Section 25102(o). This supplement shall not apply to Awards granted to California Participants or after the date on which the Company becomes a Publicly Listed Company. Definitions in the Plan are applicable to this supplement.

 

  1.

Additional Limitations On Options.

(a)    Maximum Duration of Options. No Options granted to California Participants will be granted for a term in excess of 10 years.

(b)    Minimum Exercise Period Following Termination. Unless a California Participant’s Service Provider relationship is terminated for Cause, in the event of termination of such Participant’s Service Provider relationship, to the extent required by Applicable Laws, he or she shall have the right to exercise an Option, to the extent that he or she was otherwise entitled to exercise such Option on the date employment terminated, as follows: (i) at least six months from the date of termination, if termination was caused by such Participant’s death or Disability and (ii) at least 30 days from the date of termination, if termination was caused other than by such Participant’s death or Disability.

2.    Additional Limitations For Restricted Stock Awards, Restricted Stock Units and Other Stock-Based Awards. The terms of all Restricted Stock Awards, Restricted Stock Units and Other Stock-Based Awards granted to California Participants shall comply, to the extent applicable, with Section 260.140.41 or Section 260.140.42 of the California Code of Regulations.

3.    Adjustments. The Administrator will make such adjustments to an Award held by a California Participant as may be required by Section 260.140.41 or Section 260.140.42 of the California Code of Regulations.

4.    Additional Requirement To Provide Information To California Participants. To the extent required by Section 260.140.46 of the California Code of Regulations, the Company shall provide to each California Participant and to each California Participant who acquires Common Stock pursuant to the Plan, not less frequently than annually, copies of annual financial statements (which need not be audited). The Company shall not be required to provide such statements to key persons whose duties in connection with the Company assure their access to equivalent information. In addition, this information requirement shall not apply to the Plan to the extent that it complies with all conditions of Rule 701 of the Securities Act (“Rule 701”) as determined by the Administrator; provided that for purposes of determining such compliance, any registered domestic partner shall be considered a “family member” as that term is defined in Rule 701.

 

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5.    Stockholder Approval; Additional Limitations On Timing Of Awards. The Plan will be submitted for the approval of the Company’s stockholders within twelve (12) months after the date of the Board’s adoption of the Plan. Awards may be granted or awarded prior to such stockholder approval; provided that no Award granted to a California Participant shall become exercisable, vested or realizable, as applicable to such Award, unless the Plan has been approved by the Company’s stockholders within twelve months before or after the date the Plan was adopted by the Administrator; and provided, further, that if such approval has not been obtained at the end of said twelve-month period, all Awards previously granted or awarded under the Plan to California Participants shall thereupon be canceled and become null and void.

 

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PROMETHEUS BIOSCIENCES, INC.

2017 EQUITY INCENTIVE PLAN

STOCK OPTION GRANT NOTICE AND

STOCK OPTION AGREEMENT

Prometheus Biosciences, Inc. (the “Company”), pursuant to its 2017 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:    [Insert Participant Name]
Grant Date:    [Insert Grant Date]
Vesting Commencement Date:    [Insert Vesting Commencement Date]
Exercise Price per Share:    $[Insert Exercise Price Per Share]
Total Exercise Price:    $[Insert Aggregate Exercise Price]
Total Number of Shares Subject to Option:    [Insert Number of Shares]
Expiration Date:    [Insert Tenth Anniversary of Grant Date]
Type of Option:        Incentive Stock Option                    Non-Qualified Stock Option
Vesting Schedule:    [To be specified in individual agreements.]

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator of the Plan upon any questions arising under the Plan or the Agreement.

 

PROMETHEUS BIOSCIENCES, INC.                    PARTICIPANT
By:  

 

      By:  

 

Print Name:   Scott L. Glenn       Print Name:  

 

Title:   President and CEO       State of  
        Residence:  

 


EXHIBIT A

TO STOCK OPTION GRANT NOTICE

STOCK OPTION AGREEMENT

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

1. Grant of Option. In consideration of Participant’s past and/or continued employment with or service to the Company and for other good and valuable consideration, effective as of the Grant Date set forth in the Grant Notice, the Company irrevocably grants to Participant an Option to purchase any part or all of an aggregate of the number of Shares set forth in the Grant Notice at the Exercise Price per Share set forth in the Grant Notice, upon the terms and conditions set forth in the Plan and this Agreement.

2. Vesting. The Option shall become vested in such amounts and at such times as are set forth in the vesting schedule in the Grant Notice, except that any Share as to which the Option would be fractionally vested will be accumulated and will vest and become exercisable only when a whole Share has accumulated. The installments provided for in the vesting schedule are cumulative. No portion of the Option which has not become vested at the date Participant incurs a Termination of Service shall thereafter become vested, except as may be otherwise provided by the Administrator or as set forth in another written agreement between the Company and Participant.

3. Exercise.

(a) Duration of Exercisability. Any vested portion of the Option may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 4.

(b) Person Eligible to Exercise. During the lifetime of Participant, only Participant may exercise the Option or any portion thereof. After the death of Participant, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 4, be exercised by Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then Applicable Laws of descent and distribution.

(c) Manner of Exercise. The Option, or any portion thereof, may be exercised solely by delivery to the Secretary of the Company or the Secretary’s office, or such other place as may be determined by the Administrator, of all of the following prior to the time when the Option or such portion thereof becomes unexercisable under Section 4:

(i) A written exercise notice in substantially in the form attached as Exhibit B to the Grant Notice (or such other form as is prescribed by the Administrator, which may be an electronic form) (the “Exercise Notice”) signed by Participant or any other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such Exercise Notice complying with all applicable rules established by the Administrator; and

(ii) Subject to Section 5(f) of the Plan, full payment for the Shares with respect to which the Option or portion thereof is exercised by:

 

A-1


(A) Cash or check, payable to the order of the Company; or

(B) With the consent of the Administrator, surrendering shares of Common Stock then issuable upon exercise of the Option valued at their Fair Market Value on the date of exercise; or

(C) On and after the date the Company becomes a Publicly Listed Company, through the (A) delivery by Participant to the Company of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price or (B) delivery by Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or

(D) With the consent of the Administrator, any other form of payment permitted under Section 5(f) of the Plan; or

(E) any combination of the above permitted forms of payment; and

(iii) Subject to Section 9(e) of the Plan, full payment for any applicable withholding taxes in cash or by check or in the form of consideration permitted by the Administrator for the payment of the exercise price pursuant to Section 3(c)(ii) above or pursuant to Section 3(d) below, which, following the date the Company becomes a Publicly Listed Company shall include the method provided for in Section 3(c)(ii)(C) above; and

(iv) In the event the Option or portion thereof shall be exercised pursuant to Section 3(b) by any person or persons other than Participant, appropriate proof of the right of such person or persons to exercise the Option.

(d) Tax Withholding. The Company shall have the authority and the right to deduct or withhold, or require Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including Participant’s employment tax obligation) required by law to be withheld with respect to any taxable event concerning Participant arising as a result of the Option or otherwise under this Agreement, including, without limitation, the authority to deduct such amounts from other compensation payable to Participant by the Company.

(e) Fractional Shares. The Option may only be exercised for whole shares of Common Stock. Any fractional Shares shall be rounded down to the nearest whole share.

4. Expiration of Option. The Option may not be exercised to any extent by anyone after the first to occur of the following events:

(a) The Expiration Date set forth in the Grant Notice;

(b) The expiration of three months following the date of Participant’s Termination of Service, unless such Termination of Service occurs by reason of Participant’s death or Disability or Participant’s discharge by the Company for Cause;

(c) The expiration of one year following the date of Participant’s Termination of Service by reason of Participant’s death or Disability;

 

A-2


(d) The date of Participant’s Termination of Service as a result of Participant’s discharge by the Company for Cause; or

(e) With respect to any unvested portion of the Option, the date that is thirty days following Participant’s Termination of Service for any reason other than as a result of Participant’s discharge by the Company for Cause, or such shorter period as may be determined by the Administrator.

Participant acknowledges that an Incentive Stock Option exercised more than three months after Participant’s termination of status as an Employee, other than by reason of death or Disability, will be taxed as a Non-Qualified Stock Option.

5. Transferability. The Option shall not be sold, assigned, transferred, pledged or otherwise encumbered by Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, the Option shall be exercisable only by the Participant.

6. Restrictive Legends and Stop-Transfer Orders.

(a) Legends. Participant understands and agrees that the Company shall cause any certificates issued evidencing the Shares to have the legends set forth below or legends substantially equivalent thereto, together with any other legends that may be required by Applicable Laws:

THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), NOR HAVE THEY BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER OF SUCH SECURITIES WILL BE PERMITTED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER, THE TRANSFER IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR IN THE OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REGISTRATION UNDER THE ACT IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT AND WITH APPLICABLE STATE SECURITIES LAWS.

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. SUCH TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.

(b) Stop Transfer Orders. Participant agrees that, in order to ensure compliance with the restrictions referred to in the Plan and this Agreement, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(c) Impermissible Transfers Void. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

 

A-3


7. Taxes. Participant understands that Participant may suffer adverse tax consequences as a result of Participant’s purchase or disposition of the Shares. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of the Shares and that Participant is not relying on the Company for any tax advice. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participant’s tax liability that may arise as a result of the transactions contemplated by this Agreement.

8. Miscellaneous.

(a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan or this Agreement.

(b) Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office or to the then-current email address for the Secretary of the Company, and any notice to be given to Participant shall be addressed to Participant at the most-recent physical or email address for Participant listed in the Company’s personnel records. By a notice given pursuant to this Section 8(b), either party may hereafter designate a different address for notices to be given to that party. Any notice which is required to be given to Participant shall, if Participant is then deceased, be given to the person entitled to exercise his or her Option by written notice under this Section 8(b). Any notice shall be deemed duly given when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

(c) Successors and Assigns. The Company may assign any of its rights under this Agreement and the Exercise Notice to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Participant and his or her heirs, executors, administrators, successors and assigns.

(d) Severability. In the event any portion of the Plan or this Agreement or any action taken pursuant thereto shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan and this Agreement, and the Plan and this Agreement shall be construed and enforced as if the illegal or invalid provisions had not been included, and the illegal or invalid action shall be null and void.

(e) Entire Agreement; Governing Documents. The Plan, the Grant Notice and this Agreement (including all Exhibits thereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof. In the event of any contradiction between the Plan and any Award Agreement or any other written agreement between a Participant and the Company that has been approved by the Administrator, the terms of the Plan shall govern, unless it is expressly specified in such Award Agreement or other written document that a specific provision of the Plan shall not apply.

 

A-4


(f) Governing Law. The provisions of the Plan and all Awards made thereunder, including the Option, shall be governed by and interpreted in accordance with the laws of the State of Delaware, disregarding choice-of-law principles of the law of any state that would require the application of the laws of a jurisdiction other than such state.

(g) Titles and Headings. The titles and headings of the Sections in this Agreement are for convenience of reference only and, in the event of any conflict, the text of this Agreement, rather than such titles or headings, shall control.

 

A-5


EXHIBIT B

TO STOCK OPTION GRANT NOTICE

FORM OF EXERCISE NOTICE

Effective as of today,                 ,                 , the undersigned (Participant”) hereby elects to exercise Participant’s option to purchase                  Shares of Prometheus Biosciences, Inc. (the “Company”) under and pursuant to the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”) and the Stock Option Grant Notice and Stock Option Agreement dated                 , ____ (the “Agreement”). Capitalized terms used herein without definition shall have the meanings given in the Agreement.

 

Grant Date:   
  

 

Number of Shares as to which Option is Exercised:                                                                                                  
  

 

Exercise Price per Share:    $____________
Total Exercise Price:    $____________
Certificate to be issued in name of:   
  

 

Cash Payment delivered herewith:    $______________ (Representing the full Exercise Price
for the Shares, as well as any applicable withholding tax)

Type of Option:         ☐    Incentive Stock Option                ☐    Non-Qualified Stock Option

1. Representations of Participant. Participant acknowledges that Participant has received, read and understood the Plan and the Agreement. Participant agrees to abide by and be bound by their terms and conditions. Participant further acknowledges that it is a condition to the issuance of the Shares to Participant upon exercise of the Option listed above that Participant agree to be bound by the terms and conditions of, and become a party to, any stockholders’ agreement of the Company. Participant hereby agrees to be so bound and to execute any additional documents as may be deemed necessary or advisable by the Company in order to effectuate the foregoing agreement.

2. Tax Consultation. Participant understands that Participant may suffer adverse tax consequences as a result of Participant’s purchase or disposition of the Shares. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of the Shares and that Participant is not relying on the Company for any tax advice. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participant’s tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

3. Participant Representations. Participant hereby makes the following certifications and representations with respect to the Shares listed above:

(a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Participant is acquiring these Shares for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act.

 

B-1


(b) Participant acknowledges and understands that the Shares constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. Participant understands that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Shares. Participant understands that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under Applicable Laws.

(c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to Participant, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, ninety days thereafter (or such longer period as any market stand-off agreement may require) the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144.

(d) In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the securities may be resold in certain limited circumstances subject to the provisions of Rule 144.

(e) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption will be available in such event.

4. Notices. Any notice required or permitted hereunder shall be given in accordance with the provisions set forth in Section 8(b) of the Agreement.

5. Entire Agreement. The Plan and Agreement are incorporated herein by reference. This Notice, the Plan and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof.

 

ACCEPTED BY:

PROMETHEUS BIOSCIENCES, INC.

    

SUBMITTED BY

PARTICIPANT:

By:  

 

                      By:  

 

Print Name:  

 

     Print Name:  

 

Title:  

 

      

 

B-2


PROMETHEUS BIOSCIENCES, INC.

2017 EQUITY INCENTIVE PLAN

STOCK OPTION GRANT NOTICE AND

STOCK OPTION AGREEMENT

Prometheus Biosciences, Inc. (the “Company”), pursuant to its 2017 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:    [Insert Participant Name]
Grant Date:    [Insert Grant Date]
Vesting Commencement Date:    [Insert Vesting Commencement Date]
Exercise Price per Share:    $[Insert Exercise Price Per Share]
Total Exercise Price:    $[Insert Aggregate Exercise Price]
Total Number of Shares Subject to Option:    [Insert Number of Shares]
Expiration Date:    [Insert tenth anniversary of Grant Date]

Type of Option:         ☐    Incentive Stock Option                ☐    Non-Qualified Stock Option

Exercise Schedule:    ☒ Early Exercise Permitted

 

Vesting Schedule:    This Option is exercisable immediately, in whole or in part, at such times as are established by the Administrator, conditioned upon Participant entering into a Restricted Stock Purchase Agreement with respect to any unvested shares of Stock. The shares subject to this Option shall vest and/or be released from the Company Repurchase Right, as set forth in Section 5 of the Agreement, according to the following schedule:
   [To be specified in individual agreements.]

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Administrator of the Plan upon any questions arising under the Plan or the Agreement.

 

PROMETHEUS BIOSCIENCES, INC.    PARTICIPANT:
By:   

 

      By:   

 

Print Name:    Scott L. Glenn       Print Name:   
Title:    President and CEO       State of Residence:   


EXHIBIT A

TO STOCK OPTION GRANT NOTICE

STOCK OPTION AGREEMENT

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

1. Grant of Option. In consideration of Participant’s past and/or continued employment with or service to the Company and for other good and valuable consideration, effective as of the Grant Date set forth in the Grant Notice, the Company irrevocably grants to Participant an Option to purchase any part or all of an aggregate of the number of Shares set forth in the Grant Notice at the Exercise Price per Share set forth in the Grant Notice, upon the terms and conditions set forth in the Plan and this Agreement.

2. Vesting. The Option shall become vested in such amounts and at such times as are set forth in the vesting schedule in the Grant Notice, except that any Share as to which the Option would be fractionally vested will be accumulated and will vest and become exercisable only when a whole Share has accumulated. The installments provided for in the vesting schedule are cumulative. No portion of the Option which has not become vested at the date Participant incurs a Termination of Service shall thereafter become vested, except as may be otherwise provided by the Administrator or as set forth in another written agreement between the Company and Participant.

3. Exercise.

(a) Exercisability. Any portion of the Option or the entire Option may be exercised in whole or in part at any time prior to the time when the Option or portion thereof becomes unexercisable under Section 4, provided that each unvested Share with respect to which the Option is exercised (each a “Restricted Share”) shall be subject to the Company Repurchase Right (as defined in Section 5 below) for so long as the Option shall remain unvested with respect to such Share under the terms of this Agreement. The Restricted Shares shall be released from the Company Repurchase Right as set forth in Section 5. For the avoidance of doubt, all Shares with respect to which the Option is exercised shall at all times be assumed to be Restricted Shares to the fullest extent possible under the terms of this Agreement, unless otherwise provided by the Administrator.

(b) Person Eligible to Exercise. During the lifetime of Participant, only Participant may exercise the Option or any portion thereof. After the death of Participant, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 4, be exercised by Participant’s personal representative or by any person empowered to do so under the deceased Participant’s will or under the then Applicable Laws of descent and distribution.

(c) Manner of Exercise. The Option, or any portion thereof, may be exercised solely by delivery to the Secretary of the Company or the Secretary’s office, or such other place as may be determined by the Administrator, of all of the following prior to the time when the Option or such portion thereof becomes unexercisable under Section 4:

(i) A written exercise notice in substantially in the form attached as Exhibit B to the Grant Notice (or such other form as is prescribed by the Administrator, which may be an electronic form) (the “Exercise Notice”) signed by Participant or any other person then entitled to exercise the Option or portion thereof, stating that the Option or portion thereof is thereby exercised, such Exercise Notice complying with all applicable rules established by the Administrator; and

 

A-1


(ii) Subject to Section 5(f) of the Plan, full payment for the Shares with respect to which the Option or portion thereof is exercised by:

(A) Cash or check, payable to the order of the Company; or

(B) With the consent of the Administrator, surrendering shares of Common Stock then issuable upon exercise of the Option valued at their Fair Market Value on the date of exercise; or

(C) On and after the date the Company becomes a Publicly Listed Company, through the (A) delivery by Participant to the Company of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price or (B) delivery by Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; or

(D) With the consent of the Administrator, any other form of payment permitted under Section 5(f) of the Plan; or

(E) any combination of the above permitted forms of payment; and

(iii) Subject to Section 9(e) of the Plan, full payment for any applicable withholding taxes in cash or by check or in the form of consideration permitted by the Administrator for the payment of the exercise price pursuant to Section 3(c)(ii) above or pursuant to Section 3(d) below, which, following the date the Company becomes a Publicly Listed Company shall include the method provided for in Section 3(c)(ii)(C) above; and

(iv) In the event the Option or portion thereof shall be exercised pursuant to Section 3(b) by any person or persons other than Participant, appropriate proof of the right of such person or persons to exercise the Option; and

(v) In the event the Option or portion thereof shall be exercised as to Restricted Shares, the following (collectively, the “Additional Documents”):

(A) the stock assignment duly endorsed in blank, attached as Exhibit C to the Grant Notice (the “Stock Assignment”), executed by Participant; and

(B) if Participant has a spouse of Participant, the Consent of Spouse attached as Exhibit D to the Grant Notice, executed by Participant’s spouse.

(d) Tax Withholding. The Company shall have the authority and the right to deduct or withhold, or require Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including Participant’s employment tax obligation) required by law to be withheld with respect to any taxable event concerning Participant arising as a result of the Option or otherwise under this Agreement, including, without limitation, the authority to deduct such amounts from other compensation payable to Participant by the Company.

 

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(e) Fractional Shares. The Option may only be exercised for whole shares of Common Stock. Any fractional Shares shall be rounded down to the nearest whole share.

4. Expiration of Option. The Option may not be exercised to any extent by anyone after the first to occur of the following events:

(a) The Expiration Date set forth in the Grant Notice;

(b) The expiration of three months following the date of Participant’s Termination of Service, unless such Termination of Service occurs by reason of Participant’s death or Disability or Participant’s discharge by the Company for Cause;

(c) The expiration of one year following the date of Participant’s Termination of Service by reason of Participant’s death or Disability;

(d) The date of Participant’s Termination of Service as a result of Participant’s discharge by the Company for Cause; or

(e) With respect to any unvested portion of the Option, the date that is thirty days following Participant’s Termination of Service for any reason other than as a result of Participant’s discharge by the Company for Cause, or such shorter period as may be determined by the Administrator.

Participant acknowledges that an Incentive Stock Option exercised more than three months after Participant’s termination of status as an Employee, other than by reason of death or Disability, will be taxed as a Non-Qualified Stock Option.

5. Company Repurchase Right.

(a) Company Repurchase Right. Upon Participant’s Termination of Service for any reason, the Company shall have the right and option to repurchase all of the Restricted Shares from Participant, or Participant’s transferee or legal representative, as the case may be, for a purchase price equal to the price per Share paid for such Restricted Shares (the “Company Repurchase Right”).

(b) Exercise of Company Repurchase Right. The Company may exercise the Company Repurchase Right by delivering to Participant (or his or her transferee or legal representative, as the case may be), within ninety days of the date of Participant’s Termination of Service, a written notice indicating the Company’s intention to exercise the Company Repurchase Right and setting forth a date for closing not later than thirty days from the issuance of such notice. The closing shall take place at the Company’s office. At the closing, the holder of the certificates for the Restricted Shares shall deliver the stock certificate or certificates evidencing the Restricted Shares, and the Company shall deliver the purchase price therefore. At its option, the Company may elect to make payment for the Restricted Shares to a bank selected by the Company. The Company shall avail itself of this option by a written notice to Participant stating the name and address of the bank, date of closing, and waiving the closing at the Company’s office. If the Company does not elect to exercise the Company Repurchase Right by giving the requisite notice within ninety days following the date of Participant’s Termination of Service, the Company Repurchase Right shall terminate.

(c) Release of Restricted Shares. The Restricted Shares shall be released from the Company Repurchase Right upon vesting of the Option with respect to such Shares in accordance with the terms of this Agreement. For the avoidance of doubt, all Shares with respect to which the Option is exercised shall at all times be assumed to be Restricted Shares to the fullest extent possible under the terms of this Agreement, unless otherwise provided by the Administrator. Fractional Shares shall be rounded down to the nearest whole share.

 

A-3


6. Escrow. To insure the availability for delivery of the Restricted Shares upon repurchase by the Company pursuant to the Company Repurchase Right, Participant appoints the Secretary of the Company, or such other person designated by the Administrator from time to time as escrow agent, as its attorney-in-fact to sell, assign and transfer unto the Company, such Restricted Shares, if any, repurchased by the Company pursuant to the Company Repurchase Right and shall, upon execution of the applicable Exercise Notice, deliver and deposit with the Secretary of the Company, or such other person designated by the Administrator from time to time, the share certificate(s) representing the Restricted Shares, together with the Stock Assignment. The Restricted Shares and Stock Assignment shall be held by the Secretary, or such other person designated by the Administrator from time to time, in escrow, until the Company exercises the Company Repurchase Right, until such Restricted Shares are released from the Company Repurchase Right as set forth in Section 5 or until such time as this Agreement no longer is in effect. Upon release of the Restricted Shares from the Company’s Repurchase Right, the escrow agent shall as soon as reasonably practicable deliver to Participant the certificate or certificates representing such Shares in the escrow agent’s possession belonging to Participant, and the escrow agent shall be discharged of all further obligations hereunder. The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Restricted Shares in escrow and while acting in good faith and in the exercise of its judgment.

7. Transferability.

(a) Transferability of Option and Restricted Shares. Neither the Option nor the Restricted Shares shall be sold, assigned, transferred, pledged or otherwise encumbered by Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, the Option shall be exercisable only by the Participant.

(b) Transferees Subject to Restrictions. Any transferee of the Shares shall hold such Shares subject to all of the provisions hereof and the Plan and the Exercise Notice and Additional Documents executed by Purchaser with respect to such Shares.

8. Rights as a Stockholder. Except as otherwise provided herein, upon exercise of the Option and the issuance of the Shares to Participant (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), Participant shall have all the rights of a stockholder with respect to the Restricted Shares, including the right to receive any cash or stock dividends or other distributions paid to or made with respect to the Restricted Shares, subject to the restrictions described in the following sentence, which restrictions shall lapse when the Restricted Shares are released from the Company Repurchase Right as set forth in Section 5. Unless otherwise provided by the Administrator, if any dividends or distributions are paid in shares, or consist of a dividend or distribution to holders of Common Stock of property other than an ordinary cash dividend, the shares or other property will be subject to same restrictions on transferability as the Restricted Shares with respect to which they were paid and shall automatically be forfeited to the Company for no consideration in the event the Company exercises the Company Repurchase Right for the Restricted Shares with respect to which they were paid. In no event shall a dividend or distribution be paid with respect to Restricted Shares later than the end of the calendar year in which the dividends are paid to holders of Common Stock or, if later, the 15th day of the third month following the later of (a) the date the dividends are paid to holders of Common Stock and (b) the date the Restricted Shares with respect to which the dividends are paid vest. Participant shall enjoy rights as a stockholder until such time as Participant disposes of the Shares or the Company and/or its assignee(s) exercises the Right of First Refusal hereunder. Upon such exercise, Participant shall have no further rights as a holder of the Shares so purchased except the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and Participant shall forthwith cause the certificate(s), if any issued, evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation.

 

A-4


9. Restrictive Legends and Stop-Transfer Orders.

(a) Legends. Participant understands and agrees that the Company shall cause any certificates issued evidencing the Shares to have the legends set forth below or legends substantially equivalent thereto, together with any other legends that may be required by Applicable Laws:

THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (“ACT”), NOR HAVE THEY BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES LAWS OF ANY STATE. NO TRANSFER OF SUCH SECURITIES WILL BE PERMITTED UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS IN EFFECT AS TO SUCH TRANSFER, THE TRANSFER IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR IN THE OPINION OF COUNSEL (WHICH MAY BE COUNSEL FOR THE COMPANY) REGISTRATION UNDER THE ACT IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE ACT AND WITH APPLICABLE STATE SECURITIES LAWS.

THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO REPURCHASE PURSUANT TO, AND MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH, THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. SUCH REPURCHASE AND/OR TRANSFER RESTRICTIONS ARE BINDING ON TRANSFEREES OF THESE SHARES.

(b) Stop Transfer Orders. Participant agrees that, in order to ensure compliance with the restrictions referred to in the Plan and this Agreement, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.

(c) Impermissible Transfers Void. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred. Any transfer or attempted transfer of the Option or any of the Restricted Shares not in accordance with the terms of this Agreement shall be void

10. Taxes.

(a) Tax Consequences of Award. Participant understands that Participant may suffer adverse tax consequences as a result of Participant’s purchase or disposition of the Shares. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of the Shares and that Participant is not relying on the Company for any tax advice. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participant’s tax liability that may arise as a result of the transactions contemplated by this Agreement.

 

A-5


(b) Section 83(b) Election for Restricted Shares Purchased Pursuant to a Non-Qualified Stock Option. Participant acknowledges that, with respect to the exercise of a Non-Qualified Stock Option for Restricted Shares, unless an election is filed by Participant with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within thirty days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase, there will be a recognition of taxable income to the Purchaser, measured by the excess, if any, of the Fair Market Value of the Shares, at the time the Company Repurchase Right lapses over the purchase price for the Shares. Participant represents that Participant has consulted any tax consultant(s) Participant deems advisable in connection with the purchase of the Shares or the filing of the election under Section 83(b) of the Code and similar tax provisions.

(c) Section 83(b) Election for Restricted Shares Purchased Pursuant to an Incentive Stock Option. Participant hereby acknowledges that he or she has been informed that, with respect to the exercise of an Incentive Stock Option for Restricted Shares, unless an election is filed by Participant with the Internal Revenue Service and, if necessary, the proper state taxing authorities, within thirty days of the purchase of the Shares, electing pursuant to Section 83(b) of the Code (and similar state tax provisions if applicable) to be taxed currently on any difference between the purchase price of the Shares and their Fair Market Value on the date of purchase, there will be a recognition of income to the Participant, for alternative minimum tax purposes measured by the excess, if any, of the Fair Market Value of the Shares at the time the Company’s Repurchase Option lapses over the purchase price for the Shares. Participant further acknowledges that if an election is filed under Section 83(b) of the Code for the Unvested Shares and such shares are sold or transferred prior to the date two years following the Grant Date and one year following the purchase date of such shares, there will be a recognition of income to the Participant, for ordinary income, measured by the excess, if any, of the Fair Market Value of the Shares at the time the Company’s Repurchase Option lapses over the purchase price for the Shares. Participant represents that Participant has consulted any tax consultant(s) Participant deems advisable in connection with the purchase of the Shares or the filing of the election under Section 83(b) and similar tax provisions.

PARTICIPANT ACKNOWLEDGES THAT IT IS PARTICIPANT’S SOLE RESPONSIBILITY AND NOT THE COMPANY’S TO FILE TIMELY THE ELECTION UNDER SECTION 83(B) OF THE CODE, EVEN IF PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON PARTICIPANT’S BEHALF.

11. Miscellaneous.

(a) No Right To Employment or Other Status. No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan or this Agreement.

(b) Notices. Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office or to the then-current email address for the Secretary of the Company, and any notice to be given to Participant shall be addressed to Participant at the most-recent physical or email address for

 

A-6


Participant listed in the Company’s personnel records. By a notice given pursuant to this Section 11(b), either party may hereafter designate a different address for notices to be given to that party. Any notice which is required to be given to Participant shall, if Participant is then deceased, be given to the person entitled to exercise his or her Option by written notice under this Section 11(b). Any notice shall be deemed duly given when sent via email or when sent by certified mail (return receipt requested) and deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service.

(c) Successors and Assigns. The Company may assign any of its rights under this Agreement and the Exercise Notice to single or multiple assignees, and this Agreement shall inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Agreement shall be binding upon Participant and his or her heirs, executors, administrators, successors and assigns.

(d) Severability. In the event any portion of the Plan or this Agreement or any action taken pursuant thereto shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan and this Agreement, and the Plan and this Agreement shall be construed and enforced as if the illegal or invalid provisions had not been included, and the illegal or invalid action shall be null and void.

(e) Entire Agreement; Governing Documents. The Plan, the Grant Notice and this Agreement (including all Exhibits thereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof. In the event of any contradiction between the Plan and any Award Agreement or any other written agreement between a Participant and the Company that has been approved by the Administrator, the terms of the Plan shall govern, unless it is expressly specified in such Award Agreement or other written document that a specific provision of the Plan shall not apply.

(f) Governing Law. The provisions of the Plan and all Awards made thereunder, including the Option, shall be governed by and interpreted in accordance with the laws of the State of Delaware, disregarding choice-of-law principles of the law of any state that would require the application of the laws of a jurisdiction other than such state.

(g) Titles and Headings. The titles and headings of the Sections in this Agreement are for convenience of reference only and, in the event of any conflict, the text of this Agreement, rather than such titles or headings, shall control.

 

A-7


EXHIBIT B

TO STOCK OPTION GRANT NOTICE

FORM OF EXERCISE NOTICE

Effective as of today,                 ,                 , the undersigned (Participant”) hereby elects to exercise Participant’s option to purchase                  Shares of Prometheus Biosciences, Inc. (the “Company”) under and pursuant to the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”) and the Stock Option Grant Notice and Stock Option Agreement dated ________, 20___ (the “Agreement”). Capitalized terms used herein without definition shall have the meanings given in the Agreement.

 

Grant Date:   
                                                                                          
Number of Shares as to which Option is Exercised:                                                                                              
Exercise Price per Share:    $                                                                                       
Total Exercise Price:    $                                                                                      
Certificate to be issued in name of:                                                                                              
Cash Payment delivered herewith:    $                          (Representing the full Exercise Price
for the Shares, as well as any applicable withholding
tax)

Type of Option:         ☐    Incentive Stock Option                ☐    Non-Qualified Stock Option

1. Representations of Participant. Participant acknowledges that Participant has received, read and understood the Plan and the Agreement. Participant agrees to abide by and be bound by their terms and conditions.

2. Tax Consultation. Participant understands that Participant may suffer adverse tax consequences as a result of Participant’s purchase or disposition of the Shares. Participant represents that Participant has consulted with any tax consultants Participant deems advisable in connection with the purchase or disposition of the Shares and that Participant is not relying on the Company for any tax advice. Participant is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. Participant understands that Participant (and not the Company) shall be responsible for Participant’s tax liability that may arise as a result of this investment or the transactions contemplated by this Agreement.

3. Participant Representations. Participant hereby makes the following certifications and representations with respect to the Shares listed above:

(a) Participant is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Shares. Participant is acquiring these Shares for investment for Participant’s own account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act.

 

B-1


(b) Participant acknowledges and understands that the Shares constitute “restricted securities” under the Securities Act and have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of Participant’s investment intent as expressed herein. Participant understands that the Shares must be held indefinitely unless they are subsequently registered under the Securities Act or an exemption from such registration is available. Participant further acknowledges and understands that the Company is under no obligation to register the Shares. Participant understands that the certificate evidencing the Shares will be imprinted with a legend which prohibits the transfer of the Shares unless they are registered or such registration is not required in the opinion of counsel satisfactory to the Company and any other legend required under Applicable Laws.

(c) Participant is familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of “restricted securities” acquired, directly or indirectly from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of the grant of the Option to Participant, the exercise will be exempt from registration under the Securities Act. In the event the Company becomes subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, ninety days thereafter (or such longer period as any market stand-off agreement may require) the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144.

(d) In the event that the Company does not qualify under Rule 701 at the time of grant of the Option, then the securities may be resold in certain limited circumstances subject to the provisions of Rule 144.

(e) Participant further understands that in the event all of the applicable requirements of Rule 701 or 144 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and Exchange Commission has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rules 144 or 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. Participant understands that no assurances can be given that any such other registration exemption will be available in such event.

4. Notices. Any notice required or permitted hereunder shall be given in accordance with the provisions set forth in Section 11(b) of the Agreement.

5. Entire Agreement. The Plan and Agreement are incorporated herein by reference. This Notice, the Plan and the Agreement constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and Participant with respect to the subject matter hereof.

 

ACCEPTED BY:

PROMETHEUS BIOSCIENCES, INC.

                  

SUBMITTED BY

PARTICIPANT:

By:  

 

      By:  

 

Print Name:  

 

      Print Name:  

 

Title:  

 

       
         

 

B-2


EXHIBIT C

TO STOCK OPTION GRANT NOTICE

STOCK ASSIGNMENT

[See instructions below]

FOR VALUE RECEIVED I, _____________, hereby sell, assign and transfer unto                __________ the shares of the Common Stock of Prometheus Biosciences, Inc. registered in my name on the books of said corporation represented by Certificate No. _____ and do hereby irrevocably constitute and appoint      to transfer the said stock on the books of the within named corporation with full power of substitution in the premises.

This Assignment Separate from Certificate may be used only in accordance with the Stock Option Grant Notice and Stock Option Agreement between Prometheus Biosciences, Inc. and the undersigned dated

_______________, 20__.

Dated: _______________, __

Signature:                                                                                           

INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this assignment is to enable the Company to exercise the Company Repurchase Right, as set forth in the Stock Option Grant Notice and Stock Option Agreement, without requiring additional signatures on the part of Purchaser.

 

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EXHIBIT D

TO STOCK OPTION GRANT NOTICE

CONSENT OF SPOUSE

I,                      , spouse of ______________, have read and approve the Stock Option Grant Notice and Stock Option Agreement dated __________, 20__, between my spouse and Prometheus Biosciences, Inc. In consideration of granting of the right to my spouse to purchase shares of Prometheus Biosciences, Inc. set forth in the Stock Option Grant Notice and Stock Option Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Stock Option Grant Notice and Stock Option Agreement and agree to be bound by the provisions of the Stock Option Grant Notice and Stock Option Agreement insofar as I may have any rights in said Stock Option Grant Notice and Stock Option Agreement or any shares issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the Stock Option Grant Notice and Stock Option Agreement or the exercise of the option granted thereunder.

Dated: _______________, __

 

                                                                                      

Signature of Spouse                                                     

 

D-1


FORM OF 83(B) ELECTION AND INSTRUCTIONS

These instructions are provided to assist you if you choose to make an election under Section 83(b) of the Internal Revenue Code, as amended, with respect to the shares of common stock of Prometheus Biosciences, Inc. transferred to you. Please consult with your personal tax advisor as to whether an election of this nature will be in your best interests in light of your personal tax situation.

The executed original of the Section 83(b) election must be filed with the Internal Revenue Service not later than 30 days after the date the shares were transferred to you. There is no remedy for failure to file on time. The steps outlined below should be followed to ensure the election is mailed and filed correctly and in a timely manner. If you make the Section 83(b) election, the election is irrevocable.

Complete the Section 83(b) election form (attached as Attachment 1) and make four (4) copies of the signed election form. Your spouse, if any, should sign the Section 83(b) election form as well.

Prepare the cover letter to the Internal Revenue Service (sample letter attached as Attachment 2).

Send the cover letter with the originally executed Section 83(b) election form and one (1) copy via certified mail, return receipt requested to the Internal Revenue Service at the address of the Internal Revenue Service where you file your personal tax returns. We suggest that you have the package date-stamped at the post office. The post office will provide you with a certified receipt that includes a dated postmark. Enclose a self-addressed, stamped envelope so that the Internal Revenue Service may return a date-stamped copy to you. However, your postmarked receipt is your proof of having timely filed the Section 83(b) election if you do not receive confirmation from the Internal Revenue Service.

One (1) copy must be sent to Prometheus Biosciences, Inc. for its records.

Retain the Internal Revenue Service file stamped copy (when returned) for your records.

Please consult your personal tax advisor for the address of the office of the Internal Revenue Service to which you should mail your election form.


ATTACHMENT 1

ELECTION UNDER INTERNAL REVENUE CODE SECTION 83(B)

The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in taxpayer’s gross income for the current taxable year the amount of any compensation taxable to taxpayer in connection with taxpayer’s receipt of shares (the “Shares”) of Common Stock of Prometheus Biosciences, Inc., a Delaware corporation (the “Company”).

The name, address and taxpayer identification number of the undersigned taxpayer are:

 

                                             

                                             

 

                                             

SSN:                                                  

The name, address and taxpayer identification number of the Taxpayer’s spouse are (complete if applicable):

 

                                             

                                             

 

                                             

SSN:                                                  

 

Description of the property with respect to which the election is being made:

__________________ shares of Common Stock of the Company.

The date on which the property was transferred was ______________. The taxable year to which this election relates is calendar year ____.

Nature of restrictions to which the property is subject:

The Shares are subject to repurchase by the Company or its assignee upon the occurrence of certain events. This repurchase right lapses based upon the continued performance of services by the taxpayer over time.

The fair market value at the time of transfer (determined without regard to any lapse restrictions, as defined in Treasury Regulation Section 1.83-3(i)) of the Shares was $___________ per Share.

The amount paid by the taxpayer for the Shares was per share.

A copy of this statement has been furnished to the Company.

 

Dated:  

 

                      Taxpayer Signature:   

 

The undersigned spouse of Taxpayer joins in this election. (Complete if applicable).
Dated:  

 

     Spouse’s Signature:   

 


ATTACHMENT 2

SAMPLE COVER LETTER TO INTERNAL REVENUE SERVICE

__________________, ____

VIA CERTIFIED MAIL

RETURN RECEIPT REQUESTED

Internal Revenue Service

[Address where taxpayer files returns]

 

Re:

Election under Section 83(b) of the Internal Revenue Code of 1986

Taxpayer:                                                                                                                                                                              

Taxpayer’s Social Security Number:                                                                                                                                  

Taxpayer’s Spouse:                                                                                                                                                             

Taxpayer’s Spouse’s Social Security Number:                                                                                                                 

Ladies and Gentlemen:

Enclosed please find an original and one copy of an Election under Section 83(b) of the Internal Revenue Code of 1986, as amended, being made by the taxpayer referenced above. Please acknowledge receipt of the enclosed materials by stamping the enclosed copy of the Election and returning it to me in the self-addressed stamped envelope provided herewith.

 

Very truly yours,

 

Enclosures

 

cc:

Prometheus Biosciences, Inc.


AMENDMENT NO. 1

TO THE

PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN

THIS AMENDMENT NO. 1 TO THE PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN (this “Amendment”), dated as of May 23, 2018, is made and adopted by PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan (as defined below).

RECITALS

WHEREAS, the Company has adopted the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”);

WHEREAS, the Company desires to amend the Plan as set forth below;

WHEREAS, pursuant to Section 10(d) of the Plan, the Plan may be amended by the Board of Directors of the Company; and

WHEREAS, the Board of Directors of the Company has approved this Amendment pursuant to resolutions adopted on May 23, 2018, and the stockholders of the Company have approved this Amendment pursuant to resolutions adopted on June 7, 2018.

NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the Plan as follows:

1. The first sentence of Section 4 of the Plan is hereby amended to read as follows:

“Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 6,000,000 shares of Common Stock.”

2. This Amendment shall be and is hereby incorporated in and forms a part of the Plan. All other terms and provisions of the Plan shall remain unchanged except as specifically modified herein. The Plan, as amended by this Amendment, is hereby ratified and confirmed.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


I hereby certify that the foregoing Amendment was duly adopted by the Board of Directors of Prometheus Biosciences, Inc. on May 23, 2018, and duly approved by the stockholders of Prometheus Biosciences, Inc. on June 7 2018.

 

By:  

/s/ Scott L. Glenn

Name: Scott L. Glenn
Title:   President and CEO

[Signature Page – Amendment No. 1 to the 2017 Equity Incentive Plan]


AMENDMENT NO. 2

TO THE

PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN

THIS AMENDMENT NO. 2 TO THE PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN (this “Amendment”), dated as of October 24, 2018, is made and adopted by PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan (as defined below).

RECITALS

WHEREAS, the Company has adopted the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”);

WHEREAS, the Company desires to amend the Plan as set forth below;

WHEREAS, pursuant to Section 10(d) of the Plan, the Plan may be amended by the Board of Directors of the Company; and

WHEREAS, the Board of Directors of the Company has approved this Amendment pursuant to resolutions adopted on October 24, 2018, and the stockholders of the Company have approved this Amendment pursuant to resolutions adopted on November 14, 2018.

NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the Plan as follows:

1. The first sentence of Section 4 of the Plan is hereby amended to read as follows:

“Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 10,000,000 shares of Common Stock.”

2. This Amendment shall be and is hereby incorporated in and forms a part of the Plan. All other terms and provisions of the Plan shall remain unchanged except as specifically modified herein. The Plan, as amended by this Amendment, is hereby ratified and confirmed.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


I hereby certify that the foregoing Amendment was duly adopted by the Board of Directors of Prometheus Biosciences, Inc. on October 24, 2018, and duly approved by the stockholders of Prometheus Biosciences, Inc. on November 14, 2018.

 

By:   /s/ Scott L. Glenn

Name: Scott L. Glenn

Title:   President and CEO

[Signature Page – Amendment No. 2 to the 2017 Equity Incentive Plan]


AMENDMENT NO. 3

TO THE

PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN

THIS AMENDMENT NO. 3 TO THE PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN (this “Amendment”), dated as of June 30, 2019, is made and adopted by PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan (as defined below).

RECITALS

WHEREAS, the Company has adopted the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”);

WHEREAS, the Company desires to amend the Plan as set forth below;

WHEREAS, pursuant to Section 10(d) of the Plan, the Plan may be amended by the Board of Directors of the Company; and

WHEREAS, the Board of Directors of the Company has approved this Amendment pursuant to resolutions adopted on June 28, 2019, and the stockholders of the Company have approved this Amendment pursuant to resolutions adopted on June 28, 2019.

NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the Plan as follows:

1. The first sentence of Section 4 of the Plan is hereby amended to read as follows:

“Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 17,500,000 shares of Common Stock.”

2. This Amendment shall be and is hereby incorporated in and forms a part of the Plan. All other terms and provisions of the Plan shall remain unchanged except as specifically modified herein. The Plan, as amended by this Amendment, is hereby ratified and confirmed.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


I hereby certify that the foregoing Amendment was duly adopted by the Board of Directors of Prometheus Biosciences, Inc. on June 28, 2019, and duly approved by the stockholders of Prometheus Biosciences, Inc. on June 28, 2019.

 

By:  

/s/ Scott L. Glenn

Name: Scott L. Glenn
Title:   President and CEO

[Signature Page – Amendment No. 3 to the 2017 Equity Incentive Plan]


AMENDMENT NO. 4

TO THE

PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN

THIS AMENDMENT NO. 4 TO THE PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN (this “Amendment”), dated as of March 27, 2020, is made and adopted by PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan (as defined below).

RECITALS

WHEREAS, the Company has adopted the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”);

WHEREAS, the Company desires to amend the Plan as set forth below;

WHEREAS, pursuant to Section 10(d) of the Plan, the Plan may be amended by the Board of Directors of the Company; and

WHEREAS, the Board of Directors of the Company has approved this Amendment pursuant to resolutions adopted on March 27, 2020, and the stockholders of the Company have approved this Amendment pursuant to resolutions adopted on March 27, 2020.

NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the Plan as follows:

1. The first sentence of Section 4 of the Plan is hereby amended to read as follows:

“Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 22,500,000 shares of Common Stock.”

2. This Amendment shall be and is hereby incorporated in and forms a part of the Plan. All other terms and provisions of the Plan shall remain unchanged except as specifically modified herein. The Plan, as amended by this Amendment, is hereby ratified and confirmed.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


I hereby certify that the foregoing Amendment was duly adopted by the Board of Directors of Prometheus Biosciences, Inc. on March 27, 2020, and duly approved by the stockholders of Prometheus Biosciences, Inc. on March 27, 2020.

 

By:  

/s/ Mark McKenna

Name: Mark McKenna
Title:   President and CEO

[Signature Page – Amendment No. 4 to the 2017 Equity Incentive Plan]


AMENDMENT NO. 5

TO THE

PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN

THIS AMENDMENT NO. 5 TO THE PROMETHEUS BIOSCIENCES, INC. 2017 EQUITY INCENTIVE PLAN (this “Amendment”), dated as of October 30, 2020, is made and adopted by PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Plan (as defined below).

RECITALS

WHEREAS, the Company has adopted the Prometheus Biosciences, Inc. 2017 Equity Incentive Plan (the “Plan”);

WHEREAS, the Company desires to amend the Plan as set forth below;

WHEREAS, pursuant to Section 10(d) of the Plan, the Plan may be amended by the Board of Directors of the Company; and

WHEREAS, the Board of Directors of the Company has approved this Amendment pursuant to resolutions adopted on October 30, 2020, and the stockholders of the Company have approved this Amendment pursuant to resolutions adopted on October 30, 2020.

NOW, THEREFORE, in consideration of the foregoing, the Company hereby amends the Plan as follows:

 

  1.

The first sentence of Section 4 of the Plan is hereby amended to read as follows:

“Subject to adjustment under Section 8 hereof, Awards may be made under the Plan covering up to 35,989,096 shares of Common Stock.”

 

  2.

This Amendment shall be and is hereby incorporated in and forms a part of the Plan. All other terms and provisions of the Plan shall remain unchanged except as specifically modified herein. The Plan, as amended by this Amendment, is hereby ratified and confirmed.

[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]


I hereby certify that the foregoing Amendment was duly adopted by the Board of Directors of Prometheus Biosciences, Inc. on October 30, 2020, and duly approved by the stockholders of Prometheus Biosciences, Inc. on October 30, 2020.

 

By:  

/s/ Mark McKenna

Name:   Mark McKenna
Title:   President and Chief Executive Officer

 

[Signature Page – Amendment No. 5 to the 2017 Equity Incentive Plan]

EX-10.5 9 d14529dex105.htm EX-10.5 EX-10.5

Exhibit 10.5

 

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February 17, 2021

Mark McKenna

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, CA 92121

Dear Mark:

Prometheus Biosciences, Inc. (the “Company”) and you entered into that certain letter agreement dated August 7, 2019 (the “Original Agreement”). The Company and you desire to amend and restate the Original Agreement on the terms and conditions set forth in this letter agreement (this “Agreement”), effective immediately.

You will continue to be an employee of the Company in the position of President and Chief Executive Officer. You will report to the Company’s Board of Directors (the “Board”). You will perform your duties at the Company’s headquarters. This is an exempt position. During the term of your employment, you shall devote your full working time and attention to the business affairs of the Company.

Associated with this opportunity, the Company offers the following compensation and benefits:

 

  1.

Salary: Effective immediately, you will receive a base salary of USD $575,000.00 on an annualized basis (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Your Base Salary will be subject to annual review by the Board or its Compensation Committee and may be increased but not decreased.

 

  2.

Annual Bonus Plan: You will be eligible to receive an annual performance bonus. Your bonus target (your “Target Bonus”) shall be 55% of your Base Salary actually paid for the year to which such annual bonus relates. Actual bonus payments are based on your continuous performance of services to the Company, the achievement of individual and corporate goals, and the approval of the Board or its Compensation Committee. Bonus payouts may be more or less than the targeted amount based on the before mentioned criteria. Your annual bonus will be paid between January 1 and March 15 of the calendar year following the year to which such bonus relates.

 

  3.

Transaction Bonus: You shall be eligible to receive a cash bonus of one million dollars (USD $1,000,000) with an initial public offering (the “IPO”) of the Company


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before March 9, 2022, which bonus shall be payable within 30 days following the closing of the IPO. To the extent that the Company becomes publicly-traded through comparable alternative means (i.e., reverse merger), such activity will trigger the payment of such bonus as dictated by the circumstances.

 

  4.

Employee Benefits: As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits. In addition, you will be entitled to paid time off in accordance with the Company’s paid time off policy, as in effect from time to time. Terms and conditions of each plan or program are subject to applicable laws, regulations and policies. Should there be a conflict between a plan document and this information, the plan document will always govern. The Company reserves the right to change, alter, or terminate any benefit plan at its sole discretion.

 

  5.

Withholding: All amounts payable to you will be subject to appropriate payroll deductions and all required withholdings.

Additional Information Regarding Employment at the Company:

 

  1.

Qualifications: Your continued employment with the Company is contingent on your obtaining and keeping the licenses, credentials, permits, certifications and such similar authorizations necessary to perform your job. By signing this Agreement, you are acknowledging that you have never been and are not currently debarred, excluded or banned from any federal healthcare program. You agree to immediately notify the Company should you become debarred, excluded or banned from any federal healthcare program or should you be convicted of a felony involving fraud or deceit.

 

  2.

At-Will Employment; Severance: Your employment with the Company is at-will. This at-will employment relationship cannot be changed except in writing signed by an executive officer of the Company. You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever, with or without Cause (as defined below) or advance written notice.

In the event that your employment is terminated by the Company (a) for any reason other than for Cause, death or Disability (as defined below), or (b) by you for Good Reason (as defined below) (each, a “Qualifying Termination”), subject to your continued compliance with the Employee Confidential Information and Inventions Agreement, as described below, and the effectiveness of your Release (as defined below), you will be entitled to receive, in addition to the Accrued Obligations (as defined below), the following severance benefits:

 

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Prometheus Biosciences | 9410 Carroll Park Drive, San Diego, CA 92121 | main 858.824.0895 | fax 858.332.3306 | prometheusbiosciences.com


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  (i)

an amount equal to 100% of your annualized Base Salary, as then in effect on the date of your termination (the “Separation Date”) and prior to any reduction in such Base Salary that would permit you to voluntarily terminate employment for Good Reason (the “Severance Payment”), to be paid in substantially equal installments over the 12 month period following the Separation Date in accordance with the Company’s regular payroll schedule, with the first such installment commencing on the 30th day following the Separation Date (which first installment will include any installments that would have occurred prior to such date in accordance with the Company’s regular payroll schedule); provided, however, in the event your Qualifying Termination occurs within 24 months following a Change in Control, the foregoing reference to 12 months shall be increased to 18 months;

 

  (ii)

an amount equal to 100% of your Target Bonus for the calendar year in which the Separation Date occurs, to be paid in a single lump sum on the 30th day following the Separation Date (which Target Bonus to be calculated based on the Base Salary used for purposes of determining the Severance Payment in clause (i) above);

 

  (iii)

the right to continued health care benefits under the Company’s health insurance plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), for you and your eligible dependents who were covered under the Company’s health insurance plans as of the Separation Date paid by the Company for a period commencing on the Separation Date and ending until the earlier of (a) the date that is 12 months following the Separation Date or (b) the date on which you become eligible for healthcare insurance with a subsequent employer or (c) the date on which the applicable continuation period under COBRA expires (provided that, if any of the Company’s health benefits are self-funded as of the Separation Date, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the payments or reimbursements as set forth above, the Company shall instead pay to you the foregoing monthly amount as a taxable monthly payment for the foregoing period (or any remaining portion thereof)). You shall be solely responsible for all matters relating to continuation of coverage pursuant to COBRA, including, without limitation, the election of such coverage and the timely payment of premiums. You shall notify the Company immediately if you become eligible to receive the equivalent or increased healthcare coverage by means of subsequent employment or self-employment; provided, however, in the event your Qualifying Termination occurs within 24

 

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Prometheus Biosciences | 9410 Carroll Park Drive, San Diego, CA 92121 | main 858.824.0895 | fax 858.332.3306 | prometheusbiosciences.com


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months following a Change in Control, the foregoing reference to 12 months shall be increased to 18 months; and

 

  (iv)

accelerated vesting of all of the Company’s equity awards that are subject to time vesting conditions effective as of the Separation Date.

As a condition to your receipt of any post-termination payments and benefits pursuant to the preceding paragraphs, you shall execute and not revoke a general release of all claims in favor of the Company (the “Release”) in a form reasonably acceptable to the Company. In the event the Release does not become effective within the 30-day period following the date of your termination of employment, you will not be entitled to the aforesaid payments and benefits.

“Accrued Obligations” means (i) any Base Salary that had accrued but had not been paid (including accrued and unpaid vacation time or paid time off) on or before the Separation Date; (ii) any incentive bonus payable to you (to the extent not previously paid) with respect to the calendar year of the Company preceding the calendar year in which the Separation Date occurs; (iii) all other amounts or benefits to which you are entitled under any compensation, retirement or benefit plan of the Company as of the Separation Date in accordance with the terms of such plans; and (iv) any reimbursement due to you for expenses reasonably incurred by you on or before the Separation Date.

“Cause” is defined as your (i) conviction of a felony, plea of guilty or “no contest” to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to the Company or its prospects, including, but not limited to (A) dishonesty or a breach of fiduciary duty to the Company or the Company’s stockholders, or (B) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of the Board determined in good faith, any material duty or responsibility assigned to you, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by the Board, setting forth in reasonable detail the nature of such failure of performance; or (iv) the material breach of any of the provisions of this Agreement or any other written agreement between you and the Company.

“Change in Control” shall have the same meaning as Change in Control as defined in the Company’s 2017 Equity Incentive Plan; provided, however, that effective upon the date of the IPO, “Change in Control” shall have the meaning given to such term in the Company’s 2021 Incentive Award Plan adopted in connection with the IPO. Notwithstanding the foregoing, if a Change in Control would give rise to a payment or settlement event with respect to any payment or benefit that constitutes “nonqualified deferred compensation,” the transaction or event constituting the Change in Control must also constitute a “change in control event” (as defined in

 

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Prometheus Biosciences | 9410 Carroll Park Drive, San Diego, CA 92121 | main 858.824.0895 | fax 858.332.3306 | prometheusbiosciences.com


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Treasury Regulation Section 1.409A-3(i)(5)) in order to give rise to the payment or settlement event for such payment or benefit, to the extent required by Section 409A.

“Disability” is defined as your inability, due to physical or mental illness or disease, to perform the functions then performed by you for 180 consecutive days, accompanied by the likelihood, in the opinion of a physician chosen by the Company and reasonably acceptable to you, that you will be unable to perform such functions within the reasonably foreseeable future.

“Good Reason” is defined as a resignation that occurs following the occurrence of any of the following without your written consent: (i) a material change in the geographic location at which you must perform your duties (and you and the Company agree that a relocation of the geographic location at which you must perform your duties to a location outside a 35-mile radius of your principal place of employment prior to such relocation shall be considered material for this purpose); (ii) a material reduction of your base compensation, Target Bonus and/or benefits; (iii) any action or inaction that constitutes a material breach of this Agreement by the Company; or (iv) a material reduction in your authority, duties or responsibilities (including a requirement to report to any person or entity other than the Board, or following a Change in Control, the board of directors (or similar governing body) of the ultimate parent company of the surviving entity in such Change in Control that has at least one class of publicly traded securities listed on a national stock exchange). You must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without your written consent within 30 days of the occurrence of such event. The Company or any successor or affiliate shall have a period of 30 days to cure such event or condition after receipt of written notice of such event from you. Your termination of employment by reason of resignation from employment with the Company for Good Reason must occur within 30 days following the expiration of the foregoing 30-day cure period.

The Company will take any steps available to it to mitigate tax liabilities to you if adversely impacted by Section 409A of the Code or Section 280G of the Code. You will cooperate to the extent necessary with any mitigation strategies, but in the event that you incur additional liability under 409A or 280G, the Company will pay any additional amount equal to the sum of any applicable excise tax payable by you, plus the amount necessary to put you in the same after-tax position (taking into account any and all applicable federal, state, and local excise, income, or other taxes at the highest applicable rates on such payments and on any payments under this paragraph or otherwise) as if no excise tax had been imposed. Any tax gross-up pursuant to this paragraph shall be paid in accordance with Treasury Regulation Section 1.409A-3(i)(1)(v).

 

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Prometheus Biosciences | 9410 Carroll Park Drive, San Diego, CA 92121 | main 858.824.0895 | fax 858.332.3306 | prometheusbiosciences.com


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The intent of the parties is that payments and benefits under this Agreement comply with, or be exempt from Section 409A of the Code and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance with such intention. To the extent that any provision in this Agreement is ambiguous as to its compliance with or exemption from Section 409A of the Code, the provision shall be read in such a manner that no payments payable under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code. For purposes of Section 409A of the Code, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments. For purposes of this Agreement, all references to your “termination of employment” shall mean your “separation from service” (as defined in Treasury Regulation Section 1.409A-1(h)) (“Separation from Service”). If you are a “specified employee” (as defined in Section 409A of the Code), as determined by the Company in accordance with Section 409A of the Code, on the date of your Separation from Service, to the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which you are entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this paragraph shall be paid or distributed to you in a lump sum on the earlier of (a) the date that is 6 months and one day following your Separation from Service, (b) the date of your death or (c) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under this Agreement shall be paid as otherwise provided herein.

To the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code, if the period during which you may deliver the Release required hereunder spans two calendar years, the payment of your post-termination benefits shall occur (or commence) on the later of (a) January 1 of the second calendar year, or (b) the first regularly-scheduled payroll date following the date your Release becomes effective.

Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of your taxable year following the taxable year in which you incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable in one year shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of yours, and your right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

 

  3.

Policies and Procedures: As a Company employee, you will be expected to abide by Company rules, policies, and regulations as they may be interpreted, adopted, revised or deleted from time to time in the Company’s sole discretion. You have

 

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Prometheus Biosciences | 9410 Carroll Park Drive, San Diego, CA 92121 | main 858.824.0895 | fax 858.332.3306 | prometheusbiosciences.com


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previously signed an acknowledgement that you have read and understand the Company’s policies and procedures that govern the terms and conditions of your employment, including, but not limited to, the Employee Handbook and the Code of Ethical Business Conduct.

 

  4.

Confidential Information: You have previously executed the Company’s standard form of Employee Confidential Information and Inventions Agreement. A copy of this agreement is attached hereto as Exhibit A. We understand that you may have signed similar agreements with prior employers, and wish to impress upon you that you are prohibited from using or disclosing the confidential or proprietary information of others during your employment by the Company. You agree not to bring to the Company or use in the performance of your responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless you have obtained express written authorization from the former employer for the possession and use of such materials or documents.

 

  5.

Indemnification: The Company agrees that it will maintain director and officer insurance liability in order to protect you from exposure or liability incurred as a result of your role as an officer and director. In some instances, such liability insurance coverage available to the Company may be inadequate to cover all possible exposure for which indemnitee should be protected. The Company believes that the interests of the Company and its stakeholders would best be served by a combination of insurance and the indemnification by the Company of the directors and officers of the Company. Therefore, the Company agrees to indemnify you to the fullest extent permitted by the law of the state of incorporation. Said indemnity may not extend to matters outside the scope of your employment or liability incurred as a direct result of your intentional misconduct or gross negligence.

 

  6.

Arbitration: The Company has a policy of arbitration for settlement of any dispute between employees or former employees and the Company. You have previously executed the Arbitration Agreement, attached hereto as Exhibit B.

 

  7.

Complete Agreement: This Agreement, together with the Employee Confidential Information and Inventions Agreement and the Arbitration Agreement, contains the complete understanding and agreement regarding the terms of your employment by the Company. There are no other, different or prior agreements or understandings, written or oral, on this or related subjects, and this Agreement supersedes any such prior agreements or understandings, including, without limitation, the Original Agreement. Changes to the terms of your employment can be made only in a writing signed by you and an executive officer of the Company, although it is understood that the Company may, from time to time, in its sole discretion, adjust the salaries, incentive compensation and benefits paid to you and

 

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its other employees, as well as job titles, locations, duties, responsibilities, assignments and reporting relationships. This Agreement shall be construed in accordance with the laws of the State of California, without regard to conflicts-of-law principles.

If you accept the terms of this Agreement, kindly sign and date this Agreement below.

 

Best Regards,

/s/ Tadataka Yamada, M.D.

Tadataka Yamada, M.D.

Chairman

 

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ACCEPTANCE OF AGREEMENT:

I accept the terms described in this Agreement.

Signature: /s/ Mark McKenna                            

Date: February 17, 2021

 

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EX-10.6 10 d14529dex106.htm EX-10.6 EX-10.6

Exhibit 10.6

 

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February 17, 2021

Keith W. Marshall

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, CA 92121

Dear Keith:

Prometheus Biosciences, Inc. (the “Company”) and you entered into that certain letter agreement dated July 24, 2020 (the “Original Agreement”). The Company and you desire to amend and restate the Original Agreement on the terms and conditions set forth in this letter agreement (this “Agreement”), effective immediately.

You will continue to be an employee of the Company in the position of Chief Financial Officer performing such duties as are normally associated with this position and such other duties as are assigned to you from time to time. You will report to Mark McKenna, President and Chief Executive Officer. You will perform your duties at the Company’s headquarters. This is an exempt position.

During the term of your employment, you shall devote your full working time and attention to the business affairs of the Company. Subject to the terms of the Company’s Employee Confidential Information and Inventions Agreement, as described below, this shall not preclude you from (a) devoting time to personal and family investments, (b) participating in industry associations, or (c) serving on community and civic boards, provided such activities do not interfere with your duties to the Company, as determined in good faith by the President and Chief Executive Officer. You agree that you will not join any boards, other than community and civic boards (which do not interfere with your duties to the Company), without the prior approval of the President and Chief Executive Officer, which approval shall not be unreasonably withheld.

Associated with this opportunity, the Company offers the following compensation and benefits:

 

  1.

Salary: Effective immediately, you will receive a base salary of USD $425,000.00 on an annualized basis (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Your Base Salary will be subject to annual review by the Board of Directors of the Company (the “Board”) or its Compensation Committee and may be increased but not decreased.

 

  2.

Annual Bonus Plan: You will be eligible to receive an annual performance bonus. Your bonus target (your “Target Bonus”) shall be 40% of your Base Salary actually

 

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paid for the year to which such annual bonus relates. Actual bonus payments are based on your continuous performance of services to the Company, the achievement of individual and corporate goals, and the approval of the Board or its Compensation Committee. Bonus payouts may be more or less than the targeted amount based on the before mentioned criteria. Your annual bonus will be paid between January 1 and March 15 of the calendar year following the year to which such bonus relates.

 

  3.

Transaction Bonus: You shall be eligible to receive a one-time cash bonus of two hundred thousand dollars (USD $200,000) for the completion of an initial public offering (the “IPO”) of the Company on or before June 30, 2021 (the “IPO Bonus”), which IPO Bonus shall be payable within 30 days following the closing of the IPO. The IPO bonus is payable only in the event the IPO achieves greater than a 1.4x step up from the crossover round. Your continued employment through the dates of the IPO is required in order for you to remain eligible to receive the IPO Bonus.

 

  4.

Employee Benefits: As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits. In addition, you will be entitled to paid time off in accordance with the Company’s paid time off policy, as in effect from time to time. Terms and conditions of each plan or program are subject to applicable laws, regulations and policies. Should there be a conflict between a plan document and this information, the plan document will always govern. The Company reserves the right to change, alter, or terminate any benefit plan at its sole discretion.

 

  5.

Withholding: All amounts payable to you will be subject to appropriate payroll deductions and all required withholdings.

Additional Information Regarding Employment at the Company:

 

  1.

Qualifications: Your continued employment with the Company is contingent on your obtaining and keeping the licenses, credentials, permits, certifications and such similar authorizations necessary to perform your job. By signing this Agreement, you are acknowledging that you have never been and are not currently debarred, excluded or banned from any federal healthcare program. You agree to immediately notify the Company should you become debarred, excluded or banned from any federal healthcare program or should you be convicted of a felony involving fraud or deceit.

 

  2.

At-Will Employment; Severance: Your employment with the Company is at-will. This at-will employment relationship cannot be changed except in writing signed by an executive officer of the Company. You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time

 

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and for any reason whatsoever, with or without Cause (as defined below) or advance written notice.

In the event that your employment is terminated by the Company (a) for any reason other than for Cause, death or Disability (as defined below), or (b) by you for Good Reason (as defined below), subject to your continued compliance with the Employee Confidential Information and Inventions Agreement, as described below, and the effectiveness of your Release (as defined below), you will be entitled to receive, in addition to the Accrued Obligations (as defined below), the following severance benefits:

 

  (i)

an amount equal to 100% of your annualized Base Salary, as then in effect on the date of your termination (the “Separation Date”) and prior to any reduction in such Base Salary that would permit you to voluntarily terminate employment for Good Reason (the “Severance Payment”), to be paid in substantially equal installments over the 12 month period following the Separation Date in accordance with the Company’s regular payroll schedule, with the first such installment commencing on the first regularly scheduled payroll date following the date your Release becomes effective (which first installment will include any installments that would have occurred prior to such date in accordance with the Company’s regular payroll schedule);

 

  (ii)

an amount equal to 100% of your Target Bonus for the calendar year in which the Separation Date occurs, to be paid in a single lump sum on the first regularly scheduled payroll date following the date your Release becomes effective, but in no event more than 75 days following the Separation Date (which Target Bonus to be calculated based on the Base Salary used for purposes of determining the Severance Payment in clause (i) above);

 

  (iii)

the right to continued health care benefits under the Company’s health insurance plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), for you and your eligible dependents who were covered under the Company’s health insurance plans as of the Separation Date paid by the Company for a period commencing on the Separation Date and ending until the earlier of (a) the date that is 12 months following the Separation Date or (b) the date on which you become eligible for healthcare insurance with a subsequent employer or (c) the date on which the applicable continuation period under COBRA expires (provided that, if any of the Company’s health benefits are self-funded as of the Separation Date, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), or that is

 

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otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the payments or reimbursements as set forth above, the Company shall instead pay to you the foregoing monthly amount as a taxable monthly payment for the foregoing period (or any remaining portion thereof)). You shall be solely responsible for all matters relating to continuation of coverage pursuant to COBRA, including, without limitation, the election of such coverage and the timely payment of premiums. You shall notify the Company immediately if you become eligible to receive the equivalent or increased healthcare coverage by means of subsequent employment or self-employment; and

 

  (iv)

accelerated vesting of all of the Company’s equity awards that are subject to time vesting conditions effective as of the Separation Date.

As a condition to your receipt of any post-termination payments and benefits pursuant to the preceding paragraphs, you shall execute and not revoke a general release of all claims in favor of the Company (the “Release”) in a form reasonably acceptable to the Company. In the event the Release does not become effective within the 60-day period following the date of your termination of employment, you will not be entitled to the aforesaid payments and benefits.

“Accrued Obligations” means (i) any Base Salary that had accrued but had not been paid (including accrued and unpaid vacation time or paid time off) on or before the Separation Date; (ii) any incentive bonus payable to you (to the extent not previously paid) with respect to the calendar year of the Company preceding the calendar year in which the Separation Date occurs; (iii) all other amounts or benefits to which you are entitled under any compensation, retirement or benefit plan of the Company as of the Separation Date in accordance with the terms of such plans; and (iv) any reimbursement due to you for expenses reasonably incurred by you on or before the Separation Date.

“Cause” is defined as your (i) conviction of a felony, plea of guilty or “no contest” to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to the Company or its prospects, including, but not limited to (A) dishonesty or a breach of fiduciary duty to the Company or the Company’s stockholders, or (B) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of the Board determined in good faith, any material duty or responsibility assigned to you, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by the Board, setting forth in reasonable detail the nature of such failure of performance; or (iv) material breach of any of the provisions of this Agreement or any other written agreement between you and the Company.

 

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“Change in Control” shall have the same meaning as Change in Control as defined in the Company’s 2017 Equity Incentive Plan; provided, however, that effective upon the date of the IPO, “Change in Control” shall have the meaning given to such term in the Company’s 2021 Incentive Award Plan adopted in connection with the IPO. Notwithstanding the foregoing, if a Change in Control would give rise to a payment or settlement event with respect to any payment or benefit that constitutes “nonqualified deferred compensation,” the transaction or event constituting the Change in Control must also constitute a “change in control event” (as defined in Treasury Regulation Section 1.409A-3(i)(5)) in order to give rise to the payment or settlement event for such payment or benefit, to the extent required by Section 409A.

“Disability” is defined as your inability, due to physical or mental illness or disease, to perform the functions then performed by you for 180 consecutive days, accompanied by the likelihood, in the opinion of a physician chosen by the Company and reasonably acceptable to you, that you will be unable to perform such functions within the reasonably foreseeable future.

“Good Reason” is defined as a resignation that occurs following the occurrence of any of the following without your written consent: (i) a material change in the geographic location at which you must perform your duties (and you and the Company agree that a relocation of the geographic location at which you must perform your duties to a location outside a 35-mile radius of your principal place of employment prior to such relocation shall be considered material for this purpose); (ii) a material reduction in your base compensation or Target Bonus; (iii) any action or inaction that constitutes a material breach of this Agreement by the Company; or (iv) a material reduction in your authority, duties or responsibilities (including a requirement to report to any person or entity other than the President and Chief Executive Officer of the Company, or following a Change in Control, the chief executive officer of the ultimate parent company of the surviving entity in such Change in Control that has at least one class of publicly traded securities listed on a national stock exchange). You must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without your written consent within 30 days of the occurrence of such event. The Company or any successor or affiliate shall have a period of 30 days to cure such event or condition after receipt of written notice of such event from you. Your termination of employment by reason of resignation from employment with the Company for Good Reason must occur within 30 days following the expiration of the foregoing 30-day cure period.

The intent of the parties is that payments and benefits under this Agreement comply with, or be exempt from Section 409A of the Code and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance

 

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with such intention. To the extent that any provision in this Agreement is ambiguous as to its compliance with or exemption from Section 409A of the Code, the provision shall be read in such a manner that no payments payable under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code. For purposes of Section 409A of the Code, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments. For purposes of this Agreement, all references to your “termination of employment” shall mean your “separation from service” (as defined in Treasury Regulation Section 1.409A-1(h)) (“Separation from Service”). If you are a “specified employee” (as defined in Section 409A of the Code), as determined by the Company in accordance with Section 409A of the Code, on the date of your Separation from Service, to the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which you are entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this paragraph shall be paid or distributed to you in a lump sum on the earlier of (a) the date that is 6 months and one day following your Separation from Service, (b) the date of your death or (c) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under this Agreement shall be paid as otherwise provided herein.

To the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code, if the period during which you may deliver the Release required hereunder spans two calendar years, the payment of your post-termination benefits shall occur (or commence) on the later of (a) January 1 of the second calendar year, or (b) the first regularly-scheduled payroll date following the date your Release becomes effective.

Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of your taxable year following the taxable year in which you incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable in one year shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of yours, and your right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

 

  3.

Policies and Procedures: As a Company employee, you will be expected to abide by Company rules, policies, and regulations as they may be interpreted, adopted, revised or deleted from time to time in the Company’s sole discretion. You have previously signed an acknowledgement that you have read and understand the Company’s policies and procedures that govern the terms and conditions of your

 

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employment, including, but not limited to, the Employee Handbook and the Code of Ethical Business Conduct.

 

  4.

Confidential Information: You have previously executed the Company’s standard form of Employee Confidential Information and Inventions Agreement. A copy of this agreement is attached hereto as Exhibit A. We understand that you may have signed similar agreements with prior employers, and wish to impress upon you that you are prohibited from using or disclosing the confidential or proprietary information of others during your employment by the Company. You agree not to bring to the Company or use in the performance of your responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless you have obtained express written authorization from the former employer for the possession and use of such materials or documents.

 

  5.

Arbitration: The Company has a policy of arbitration for settlement of any dispute between employees or former employees and the Company. You have previously executed the Arbitration Agreement, attached hereto as Exhibit B.

 

  6.

Complete Agreement: This Agreement, together with the Employee Confidential Information and Inventions Agreement and the Arbitration Agreement, contains the complete understanding and agreement regarding the terms of your employment by the Company. There are no other, different or prior agreements or understandings, written or oral, on this or related subjects, and this Agreement supersedes any such prior agreements or understandings, including, without limitation, the Original Agreement. Changes to the terms of your employment can be made only in a writing signed by you and an executive officer of the Company, although it is understood that the Company may, from time to time, in its sole discretion, adjust the salaries, incentive compensation and benefits paid to you and its other employees, as well as job titles, locations, duties, responsibilities, assignments and reporting relationships. This Agreement shall be construed in accordance with the laws of the State of California, without regard to conflicts-of-law principles.

If you accept the terms of this Agreement, kindly sign and date this Agreement below.

 

Best Regards,

/s/ Mark McKenna

Mark McKenna

President and Chief Executive Officer

 

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ACCEPTANCE OF AGREEMENT:

I accept the terms described in this Agreement.

Signature:       /s/ Keith W. Marshall                

Date:   February 17, 2021                            

 

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EX-10.7 11 d14529dex107.htm EX-10.7 EX-10.7

Exhibit 10.7

 

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February 17, 2021

Allison Luo

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, CA 92121

Dear Allison:

Prometheus Biosciences, Inc. (the “Company”) and you entered into that certain letter agreement dated June 27, 2018 (the “Original Agreement”). The Company and you desire to amend and restate the Original Agreement on the terms and conditions set forth in this letter agreement (this “Agreement”), effective immediately.

You will continue to be an employee of the Company in the position of Chief Medical Officer performing such duties as are normally associated with this position and such other duties as are assigned to you from time to time. You will report to Mark McKenna, President and Chief Executive Officer. You will perform your duties at the Company’s headquarters. This is an exempt position.

During the term of your employment, you shall devote your full working time and attention to the business affairs of the Company. Subject to the terms of the Company’s Employee Confidential Information and Inventions Agreement, as described below, this shall not preclude you from (a) devoting time to personal and family investments, (b) participating in industry associations, or (c) serving on community and civic boards, provided such activities do not interfere with your duties to the Company, as determined in good faith by the President and Chief Executive Officer. You agree that you will not join any boards, other than community and civic boards (which do not interfere with your duties to the Company), without the prior approval of the President and Chief Executive Officer, which approval shall not be unreasonably withheld.

Associated with this opportunity, the Company offers the following compensation and benefits:

 

  1.

Salary: Effective immediately, you will receive a base salary of USD $456,000.00 on an annualized basis (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Your Base Salary will be subject to annual review by the Board of Directors of the Company (the “Board”) or its Compensation Committee and may be increased but not decreased.

 

  2.

Annual Bonus Plan: You will be eligible to receive an annual performance bonus.

 


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Your bonus target (your “Target Bonus”) shall be 40% of your Base Salary actually paid for the year to which such annual bonus relates. Actual bonus payments are based on your continuous performance of services to the Company, the achievement of individual and corporate goals, and the approval of the Board or its Compensation Committee. Bonus payouts may be more or less than the targeted amount based on the before mentioned criteria. Your annual bonus will be paid between January 1 and March 15 of the calendar year following the year to which such bonus relates.

 

  3.

Employee Benefits: As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits. In addition, you will be entitled to paid time off in accordance with the Company’s paid time off policy, as in effect from time to time. Terms and conditions of each plan or program are subject to applicable laws, regulations and policies. Should there be a conflict between a plan document and this information, the plan document will always govern. The Company reserves the right to change, alter, or terminate any benefit plan at its sole discretion.

 

  4.

Withholding: All amounts payable to you will be subject to appropriate payroll deductions and all required withholdings.

Additional Information Regarding Employment at the Company:

 

  1.

Qualifications: Your continued employment with the Company is contingent on your obtaining and keeping the licenses, credentials, permits, certifications and such similar authorizations necessary to perform your job. By signing this Agreement, you are acknowledging that you have never been and are not currently debarred, excluded or banned from any federal healthcare program. You agree to immediately notify the Company should you become debarred, excluded or banned from any federal healthcare program or should you be convicted of a felony involving fraud or deceit.

 

  2.

At-Will Employment; Severance: Your employment with the Company is at-will. This at-will employment relationship cannot be changed except in writing signed by an executive officer of the Company. You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever, with or without Cause (as defined below) or advance written notice.

In the event that your employment is terminated by the Company (a) for any reason other than for Cause, death or Disability (as defined below), or (b) by you for Good Reason (as defined below), subject to your continued compliance with the Employee Confidential Information and Inventions Agreement, as described

 

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below, and the effectiveness of your Release (as defined below), you will be entitled to receive, in addition to the Accrued Obligations (as defined below), the following severance benefits:

 

  (i)

an amount equal to 100% of your annualized Base Salary, as then in effect on the date of your termination (the “Separation Date”) and prior to any reduction in such Base Salary that would permit you to voluntarily terminate employment for Good Reason (the “Severance Payment”), to be paid in substantially equal installments over the 12 month period following the Separation Date in accordance with the Company’s regular payroll schedule, with the first such installment commencing on the 30th day following the Separation Date (which first installment will include any installments that would have occurred prior to such date in accordance with the Company’s regular payroll schedule);

 

  (ii)

an amount equal to 100% of your Target Bonus for the calendar year in which the Separation Date occurs, to be paid in a single lump sum on the 30th day following the Separation Date (which Target Bonus to be calculated based on the Base Salary used for purposes of determining the Severance Payment in clause (i) above);

 

  (iii)

the right to continued health care benefits under the Company’s health insurance plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), for you and your eligible dependents who were covered under the Company’s health insurance plans as of the Separation Date paid by the Company for a period commencing on the Separation Date and ending until the earlier of (a) the date that is 12 months following the Separation Date or (b) the date on which you become eligible for healthcare insurance with a subsequent employer or (c) the date on which the applicable continuation period under COBRA expires (provided that, if any of the Company’s health benefits are self-funded as of the Separation Date, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the payments or reimbursements as set forth above, the Company shall instead pay to you the foregoing monthly amount as a taxable monthly payment for the foregoing period (or any remaining portion thereof)). You shall be solely responsible for all matters relating to continuation of coverage pursuant to COBRA, including, without limitation, the election of such coverage and the timely payment of premiums. You shall notify the Company immediately if you become eligible to receive the equivalent or increased healthcare coverage by means of subsequent employment or self-employment; and

 

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  (iv)

accelerated vesting of all of the Company’s equity awards that are subject to time vesting conditions effective as of the Separation Date.

As a condition to your receipt of any post-termination payments and benefits pursuant to the preceding paragraphs, you shall execute and not revoke a general release of all claims in favor of the Company (the “Release”) in a form reasonably acceptable to the Company. In the event the Release does not become effective within the 30-day period following the date of your termination of employment, you will not be entitled to the aforesaid payments and benefits.

“Accrued Obligations” means (i) any Base Salary that had accrued but had not been paid (including accrued and unpaid vacation time or paid time off) on or before the Separation Date; (ii) any incentive bonus payable to you (to the extent not previously paid) with respect to the calendar year of the Company preceding the calendar year in which the Separation Date occurs; (iii) all other amounts or benefits to which you are entitled under any compensation, retirement or benefit plan of the Company as of the Separation Date in accordance with the terms of such plans; and (iv) any reimbursement due to you for expenses reasonably incurred by you on or before the Separation Date.

“Cause” is defined as your (i) conviction of a felony, plea of guilty or “no contest” to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to the Company or its prospects, including, but not limited to (A) dishonesty or a breach of fiduciary duty to the Company or the Company’s stockholders, or (B) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of the Board determined in good faith, any material duty or responsibility assigned to you, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by the Board, setting forth in reasonable detail the nature of such failure of performance; or (iv) the material breach of any of the provisions of this Agreement or any other written agreement between you and the Company.

“Disability” is defined as your inability, due to physical or mental illness or disease, to perform the functions then performed by you for 180 consecutive days, accompanied by the likelihood, in the opinion of a physician chosen by the Company and reasonably acceptable to you, that you will be unable to perform such functions within the reasonably foreseeable future.

“Good Reason” is defined as a resignation that occurs following the occurrence of any of the following without your written consent: (i) a material change in the geographic location at which you must perform your duties (and you and the Company agree that a relocation of the geographic location at which you must

 

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perform your duties to a location outside a 35-mile radius of your principal place of employment prior to such relocation shall be considered material for this purpose); (ii) a material reduction of your base compensation, Target Bonus and/or benefits; (iii) any action or inaction that constitutes a material breach of this Agreement by the Company; or (iv) a material reduction in your authority, duties or responsibilities. You must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without your written consent within 30 days of the occurrence of such event. The Company or any successor or affiliate shall have a period of 30 days to cure such event or condition after receipt of written notice of such event from you. Your termination of employment by reason of resignation from employment with the Company for Good Reason must occur within 30 days following the expiration of the foregoing 30-day cure period.

The intent of the parties is that payments and benefits under this Agreement comply with, or be exempt from Section 409A of the Code and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance with such intention. To the extent that any provision in this Agreement is ambiguous as to its compliance with or exemption from Section 409A of the Code, the provision shall be read in such a manner that no payments payable under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code. For purposes of Section 409A of the Code, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments. For purposes of this Agreement, all references to your “termination of employment” shall mean your “separation from service” (as defined in Treasury Regulation Section 1.409A-1(h)) (“Separation from Service”). If you are a “specified employee” (as defined in Section 409A of the Code), as determined by the Company in accordance with Section 409A of the Code, on the date of your Separation from Service, to the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which you are entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this paragraph shall be paid or distributed to you in a lump sum on the earlier of (a) the date that is 6 months and one day following your Separation from Service, (b) the date of your death or (c) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under this Agreement shall be paid as otherwise provided herein.

To the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code, if the period during which you may deliver the Release required hereunder spans two calendar years, the payment of your post-termination benefits shall occur (or commence) on the later of (a) January 1 of the second calendar year, or (b) the first regularly-

 

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scheduled payroll date following the date your Release becomes effective.

Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of your taxable year following the taxable year in which you incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable in one year shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of yours, and your right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

 

  3.

Policies and Procedures: As a Company employee, you will be expected to abide by Company rules, policies, and regulations as they may be interpreted, adopted, revised or deleted from time to time in the Company’s sole discretion. You have previously signed an acknowledgement that you have read and understand the Company’s policies and procedures that govern the terms and conditions of your employment, including, but not limited to, the Employee Handbook and the Code of Ethical Business Conduct.

 

  4.

Confidential Information: You have previously executed the Company’s standard form of Employee Confidential Information and Inventions Agreement. A copy of this agreement is attached hereto as Exhibit A. We understand that you may have signed similar agreements with prior employers, and wish to impress upon you that you are prohibited from using or disclosing the confidential or proprietary information of others during your employment by the Company. You agree not to bring to the Company or use in the performance of your responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless you have obtained express written authorization from the former employer for the possession and use of such materials or documents.

 

  5.

Arbitration: The Company has a policy of arbitration for settlement of any dispute between employees or former employees and the Company. You have previously executed the Arbitration Agreement, attached hereto as Exhibit B.

 

  6.

Complete Agreement: This Agreement, together with the Employee Confidential Information and Inventions Agreement and the Arbitration Agreement, contains the complete understanding and agreement regarding the terms of your employment by the Company. There are no other, different or prior agreements or understandings, written or oral, on this or related subjects, and this Agreement supersedes any such prior agreements or understandings, including, without limitation, the Original Agreement. Changes to the terms of your employment can be made only in a writing signed by you and an executive officer of the Company, although it is understood that the Company may, from time to time, in its sole

 

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discretion, adjust the salaries, incentive compensation and benefits paid to you and its other employees, as well as job titles, locations, duties, responsibilities, assignments and reporting relationships. This Agreement shall be construed in accordance with the laws of the State of California, without regard to conflicts-of-law principles.

If you accept the terms of this Agreement, kindly sign and date this Agreement below.

 

Best Regards,

/s/ Mark McKenna

Mark McKenna

President and Chief Executive Officer

 

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ACCEPTANCE OF AGREEMENT:

I accept the terms described in this Agreement.

Signature: /s/ Allison Luo                                 

Date:     February 17, 2021

 

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EX-10.8 12 d14529dex108.htm EX-10.8 EX-10.8

Exhibit 10.8

 

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February 17, 2021

Tim Andrews

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

San Diego, CA 92121

Dear Tim:

Prometheus Biosciences, Inc. (the “Company”) and you entered into that certain letter agreement dated November 4, 2020 (the “Original Agreement”). The Company and you desire to amend and restate the Original Agreement on the terms and conditions set forth in this letter agreement (this “Agreement”), effective immediately.

You will continue to be an employee of the Company in the position of General Counsel performing such duties as are normally associated with this position and such other duties as are assigned to you from time to time. You will report to Mark McKenna, President and Chief Executive Officer. You will perform your duties at the Company’s headquarters. This is an exempt position.

During the term of your employment, you shall devote your full working time and attention to the business affairs of the Company. Subject to the terms of the Company’s Employee Confidential Information and Inventions Agreement, as described below, this shall not preclude you from (a) devoting time to personal and family investments, (b) participating in industry associations, or (c) serving on community and civic boards, provided such activities do not interfere with your duties to the Company, as determined in good faith by the President and Chief Executive Officer. You agree that you will not join any boards, other than community and civic boards (which do not interfere with your duties to the Company), without the prior approval of the President and Chief Executive Officer, which approval shall not be unreasonably withheld.

Associated with this opportunity, the Company offers the following compensation and benefits:

 

  1.

Salary: Effective immediately, you will receive a base salary of USD $403,000 on an annualized basis (the “Base Salary”), to be paid in accordance with the Company’s customary payroll practices. Your Base Salary will be subject to annual review by the Board of Directors of the Company (the “Board”) or its Compensation Committee and may be increased but not decreased.

 

  2.

Annual Bonus Plan: You will be eligible to receive an annual performance bonus.


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Your bonus target (your “Target Bonus”) shall be 40% of your Base Salary actually paid for the year to which such annual bonus relates. Actual bonus payments are based on your continuous performance of services to the Company, the achievement of individual and corporate goals, and the approval of the Board and its Compensation Committee. Bonus payouts may be more or less than the targeted amount based on the before mentioned criteria. Your annual bonus will be paid between January 1 and March 15 of the calendar year following the year to which such bonus relates.

 

  3.

Employee Benefits: As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits. In addition, you will be entitled to paid time off in accordance with the Company’s paid time off policy, as in effect from time to time. Terms and conditions of each plan or program are subject to applicable laws, regulations and policies. Should there be a conflict between a plan document and this information, the plan document will always govern. The Company reserves the right to change, alter, or terminate any benefit plan at its sole discretion.

 

  4.

Withholding: All amounts payable to you will be subject to appropriate payroll deductions and all required withholdings.

Additional Information Regarding Employment at the Company:

 

  1.

Qualifications: Your continued employment with the Company is contingent on your obtaining and keeping the licenses, credentials, permits, certifications and such similar authorizations necessary to perform your job. By signing this Agreement, you are acknowledging that you have never been and are not currently debarred, excluded or banned from any federal healthcare program. You agree to immediately notify the Company should you become debarred, excluded or banned from any federal healthcare program or should you be convicted of a felony involving fraud or deceit.

 

  2.

At-Will Employment; Severance: Your employment with the Company is at-will. This at-will employment relationship cannot be changed except in writing signed by an executive officer of the Company. You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time and for any reason whatsoever, with or without Cause (as defined below) or advance written notice.

In the event that your employment is terminated by the Company (a) for any reason other than for Cause, death or Disability (as defined below), or (b) by you for Good Reason (as defined below) (a termination described in (a) or (b), a “Qualifying Termination”), subject to your continued compliance with the Employee Confidential Information and Inventions Agreement, as described below, and the

 

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effectiveness of your Release (as defined below), you will be entitled to receive, in addition to the Accrued Obligations (as defined below), the following severance benefits:

 

  (i)

an amount equal to your monthly Base Salary as then in effect on the date of your termination (the “Separation Date”) and prior to any reduction in such Base Salary that would permit you to voluntarily terminate employment for Good Reason for the number of months in the Severance Period (as defined below) (the “Severance Payment”), to be paid in substantially equal installments over the Severance Period in accordance with the Company’s regular payroll schedule, with the first such installment commencing on the first regularly scheduled payroll date following the date your Release becomes effective (which first installment will include any installments that would have occurred prior to such date in accordance with the Company’s regular payroll schedule);

 

  (ii)

an amount equal to (A) your Target Bonus for the calendar year in which the Separation Date occurs, multiplied by (B) (1) 50% if your Qualifying Termination occurs prior to November 30, 2021, (2) 100% in the event your Qualifying Termination occurs on or after November 30, 2021, to be paid in a single lump sum on the first regularly scheduled payroll date following the date your Release becomes effective, but in no event more than 75 days following the Separation Date (which Target Bonus to be calculated based on your annualized Base Salary rate as then in effect on the Separation Date and prior to any reduction in such Base Salary that would permit you to voluntarily terminate employment for Good Reason);

 

  (iii)

the right to continued health care benefits under the Company’s health insurance plans pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”), for you and your eligible dependents who were covered under the Company’s health insurance plans as of the Separation Date paid by the Company for a period commencing on the Separation Date and ending on the earlier of (a) the last day of the Severance Period or (b) the date on which you become eligible for healthcare insurance with a subsequent employer or (c) the date on which the applicable continuation period under COBRA expires (provided that, if any of the Company’s health benefits are self-funded as of the Separation Date, or if the Company cannot provide the foregoing benefits in a manner that is exempt from Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), or that is otherwise compliant with applicable law (including, without limitation, Section 2716 of the Public Health Service Act), instead of providing the payments or reimbursements as set forth above, the Company shall instead pay to you the foregoing monthly amount as a taxable monthly payment for the

 

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foregoing period (or any remaining portion thereof)). You shall be solely responsible for all matters relating to continuation of coverage pursuant to COBRA, including, without limitation, the election of such coverage and the timely payment of premiums. You shall notify the Company immediately if you become eligible to receive the equivalent or increased healthcare coverage by means of subsequent employment or self-employment; and

 

  (iv)

accelerated vesting of all of the Company’s equity awards that are subject to time vesting conditions effective as of the Separation Date.

As a condition to your receipt of any post-termination payments and benefits pursuant to the preceding paragraphs, you shall execute and not revoke a general release of all claims in favor of the Company (the “Release”) in a form reasonably acceptable to the Company. In the event the Release does not become effective within the 60-day period following the date of your termination of employment, you will not be entitled to the aforesaid payments and benefits.

“Accrued Obligations” means (i) any Base Salary that had accrued but had not been paid (including accrued and unpaid vacation time or paid time off) on or before the Separation Date; (ii) any incentive bonus payable to you (to the extent not previously paid) with respect to the calendar year of the Company preceding the calendar year in which the Separation Date occurs; (iii) all other amounts or benefits to which you are entitled under any compensation, retirement or benefit plan of the Company as of the Separation Date in accordance with the terms of such plans; and (iv) any reimbursement due to you for expenses reasonably incurred by you on or before the Separation Date.

“Cause” is defined as your (i) conviction of a felony, plea of guilty or “no contest” to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to the Company or its prospects, including, but not limited to (A) dishonesty or a breach of fiduciary duty to the Company or the Company’s stockholders, or (B) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of the Board determined in good faith, any material duty or responsibility assigned to you, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by the Board, setting forth in reasonable detail the nature of such failure of performance; or (iv) material breach of any of the provisions of this Agreement or any other written agreement between you and the Company.

“Change in Control” shall have the same meaning as Change in Control as defined in the Company’s 2017 Equity Incentive Plan; provided, however, that effective upon the date on which the Company’s Registration Statement on Form

 

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S-1 filed with respect to the initial public offering (the “IPO”) becomes effective, “Change in Control” shall have the meaning given to such term in the Company’s 2021 Incentive Award Plan adopted in connection with the IPO. Notwithstanding the foregoing, if a Change in Control would give rise to a payment or settlement event with respect to any payment or benefit that constitutes “nonqualified deferred compensation,” the transaction or event constituting the Change in Control must also constitute a “change in control event” (as defined in Treasury Regulation Section 1.409A-3(i)(5)) in order to give rise to the payment or settlement event for such payment or benefit, to the extent required by Section 409A.

“Disability” is defined as your inability, due to physical or mental illness or disease, to perform the functions then performed by you for 180 consecutive days, accompanied by the likelihood, in the opinion of a physician chosen by the Company and reasonably acceptable to you, that you will be unable to perform such functions within the reasonably foreseeable future.

“Good Reason” is defined as a resignation that occurs following the occurrence of any of the following without your written consent: (i) a material change in the geographic location at which you must perform your duties (and you and the Company agree that a relocation of the geographic location at which you must perform your duties to a location outside a 35-mile radius of your principal place of employment prior to such relocation shall be considered material for this purpose) (provided that a requirement that you relocate to San Diego, California shall not constitute “Good Reason” for purposes of this Agreement); (ii) a material reduction in your base compensation or Target Bonus; (iii) any action or inaction that constitutes a material breach of this Agreement by the Company; or (iv) a material reduction in your authority, duties or responsibilities (including a requirement to report to any person or entity other than the President and Chief Executive Officer of the Company, or following a Change in Control, the chief executive officer of the ultimate parent company of the surviving entity in such Change in Control that has at least one class of publicly traded securities listed on a national stock exchange). You must provide written notice to the Company of the occurrence of any of the foregoing events or conditions without your written consent within 30 days of the occurrence of such event. The Company or any successor or affiliate shall have a period of 30 days to cure such event or condition after receipt of written notice of such event from you. Your termination of employment by reason of resignation from employment with the Company for Good Reason must occur within 30 days following the expiration of the foregoing 30-day cure period.

“Severance Period” means (i) 6 months in the event your Qualifying Termination occurs prior to November 30, 2021, and (ii) 12 months in the event your Qualifying Termination occurs on or after November 30, 2021.

 

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The intent of the parties is that payments and benefits under this Agreement comply with, or be exempt from Section 409A of the Code and, accordingly, to the maximum extent permitted, this Agreement shall be interpreted to be in compliance with such intention. To the extent that any provision in this Agreement is ambiguous as to its compliance with or exemption from Section 409A of the Code, the provision shall be read in such a manner that no payments payable under this Agreement shall be subject to an “additional tax” as defined in Section 409A(a)(1)(B) of the Code. For purposes of Section 409A of the Code, any right to a series of installment payments under this Agreement shall be treated as a right to a series of separate payments. For purposes of this Agreement, all references to your “termination of employment” shall mean your “separation from service” (as defined in Treasury Regulation Section 1.409A-1(h)) (“Separation from Service”). If you are a “specified employee” (as defined in Section 409A of the Code), as determined by the Company in accordance with Section 409A of the Code, on the date of your Separation from Service, to the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code and the delayed payment or distribution of all or any portion of such amounts to which you are entitled under this Agreement is required in order to avoid a prohibited distribution under Section 409A(a)(2)(B)(i) of the Code, then such portion deferred pursuant to this paragraph shall be paid or distributed to you in a lump sum on the earlier of (a) the date that is 6 months and one day following your Separation from Service, (b) the date of your death or (c) the earliest date as is permitted under Section 409A of the Code. Any remaining payments due under this Agreement shall be paid as otherwise provided herein.

To the extent that the payments or benefits under this Agreement are “non-qualified deferred compensation” subject to Section 409A of the Code, if the period during which you may deliver the Release required hereunder spans two calendar years, the payment of your post-termination benefits shall occur (or commence) on the later of (a) January 1 of the second calendar year, or (b) the first regularly-scheduled payroll date following the date your Release becomes effective.

Any reimbursement of expenses or in-kind benefits payable under this Agreement shall be made in accordance with Treasury Regulation Section 1.409A-3(i)(1)(iv) and shall be paid on or before the last day of your taxable year following the taxable year in which you incurred the expenses. The amount of expenses reimbursed or in-kind benefits payable in one year shall not affect the amount eligible for reimbursement or in-kind benefits payable in any other taxable year of yours, and your right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

 

  3.

Policies and Procedures: As a Company employee, you will be expected to abide by Company rules, policies, and regulations as they may be interpreted, adopted,

 

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revised or deleted from time to time in the Company’s sole discretion. You have previously signed an acknowledgement that you have read and understand the Company’s policies and procedures that govern the terms and conditions of your employment, including, but not limited to, the Employee Handbook and the Code of Ethical Business Conduct.

 

  4.

Confidential Information: You have previously executed the Company’s standard form of Employee Confidential Information and Inventions Agreement. A copy of this agreement is attached hereto as Exhibit A. We understand that you may have signed similar agreements with prior employers, and wish to impress upon you that you are prohibited from using or disclosing the confidential or proprietary information of others during your employment by the Company. You agree not to bring to the Company or use in the performance of your responsibilities at the Company any materials or documents of a former employer that are not generally available to the public, unless you have obtained express written authorization from the former employer for the possession and use of such materials or documents.

 

  5.

Arbitration: The Company has a policy of arbitration for settlement of any dispute between employees or former employees and the Company. You have previously executed the Arbitration Agreement, attached hereto as Exhibit B.

 

  6.

Complete Agreement: This Agreement, together with the Employee Confidential Information and Inventions Agreement and the Arbitration Agreement, contains the complete understanding and agreement regarding the terms of your employment by the Company. There are no other, different or prior agreements or understandings, written or oral, on this or related subjects, and this Agreement supersedes any such prior agreements or understandings, including, without limitation, the Original Agreement. Changes to the terms of your employment can be made only in a writing signed by you and an executive officer of the Company, although it is understood that the Company may, from time to time, in its sole discretion, adjust the salaries, incentive compensation and benefits paid to you and its other employees, as well as job titles, locations, duties, responsibilities, assignments and reporting relationships. This Agreement shall be construed in accordance with the laws of the State of California, without regard to conflicts-of-law principles.

If you accept the terms of this Agreement, kindly sign and date this Agreement below.

 

Best Regards,

/s/ Mark McKenna

Mark McKenna

President and Chief Executive Officer

 

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ACCEPTANCE OF AGREEMENT:

I accept the terms described in this Agreement.

Signature:     /s/ Tim Andrews                     

Date:     February 17, 2021

 

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EX-10.9 13 d14529dex109.htm EX-10.9 EX-10.9

Exhibit 10.9

INDEMNIFICATION AND ADVANCEMENT AGREEMENT

This Indemnification and Advancement Agreement (“Agreement”) is made as of ________ __, 20__ by and between Prometheus Biosciences, Inc., a Delaware corporation (the “Company”), and ______________, [a member of the Board of Directors/ an officer] of the Company (“Indemnitee”). This Agreement supersedes and replaces any and all previous Agreements between the Company and Indemnitee covering indemnification and advancement.

RECITALS

WHEREAS, the Board of Directors of the Company (the “Board”) believes that highly competent persons have become more reluctant to serve publicly-held corporations as directors, officers, or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification and advancement of expenses against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

WHEREAS, the Board has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The Bylaws and Certificate of Incorporation of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the “DGCL”). The Bylaws, Certificate of Incorporation, and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the board of directors, officers and other persons with respect to indemnification and advancement of expenses;

WHEREAS, the uncertainties relating to such insurance, to indemnification, and to advancement of expenses may increase the difficulty of attracting and retaining such persons;

WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company and its stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent


permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

WHEREAS, this Agreement is a supplement to and in furtherance of the Bylaws, Certificate of Incorporation and any resolutions adopted pursuant thereto, and is not a substitute therefor, nor diminishes or abrogates any rights of Indemnitee thereunder; and

WHEREAS, Indemnitee does not regard the protection available under the Bylaws, Certificate of Incorporation, DGCL and insurance as adequate in the present circumstances, and may not be willing to serve or continue to serve as an officer or director without adequate additional protection, and the Company desires Indemnitee to serve or continue to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that Indemnitee be so indemnified and be advanced expenses.

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Services to the Company. Indemnitee agrees to serve as a [director/officer] of the Company. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law). This Agreement does not create any obligation on the Company to continue Indemnitee in such position and is not an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee.

Section 2. Definitions. As used in this Agreement:

(a) “Agent” means any person who is authorized by the Company or an Enterprise to act for or represent the interests of the Company or an Enterprise, respectively.

(b) A “Change in Control” occurs upon the earliest to occur after the date of this Agreement of any of the following events:

i. Acquisition of Stock by Third Party. Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company’s then outstanding securities unless the change in relative beneficial ownership of the Company’s securities by any Person results solely from a reduction in the aggregate number of outstanding shares of securities entitled to vote generally in the election of directors;

ii. Change in Board of Directors. During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 2(b)(i), 2(b)(iii) or 2(b)(iv)) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period

 

-2-


or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Board;

iii. Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;

iv. Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and

v. Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act (as defined below), whether or not the Company is then subject to such reporting requirement.

vi. For purposes of this Section 2(b), the following terms have the following meanings:

 

  1

“Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

 

  2

“Person” has the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person excludes (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

 

  3

“Beneficial Owner” has the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner excludes any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.

(c) “Corporate Status” describes the status of a person who is or was acting as a director, officer, employee, fiduciary, or Agent of the Company or an Enterprise.

(d) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

 

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(e) “Enterprise” means any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other entity for which Indemnitee is or was serving at the request of the Company as a director, officer, employee, or Agent.

(f) “Expenses” includes all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts and other professionals, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes and penalties, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a witness in, or otherwise participating in, a Proceeding. Expenses also include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond, or other appeal bond or its equivalent, and (ii) for purposes of Section 14(d) only, Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement, by litigation or otherwise. Expenses, however, do not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(g) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning the Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” does not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(h) “Potential Change in Control” means the occurrence of any of the following events: (i) the Company enters into any written or oral agreement, undertaking or arrangement, the consummation of which would result in the occurrence of a Change in Control; (ii) any Person or the Company publicly announces an intention to take or consider taking actions which if consummated would constitute a Change in Control; (iii) any Person who becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 5% or more of the combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of directors increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such Person on the date hereof; or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred.

(i) The term “Proceeding” includes any threatened, pending or completed action, suit, claim, counterclaim, cross claim, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative, legislative, or investigative (formal or informal) nature, including any appeal therefrom, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of Indemnitee’s Corporate Status or by reason of any

 

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action taken by Indemnitee (or a failure to take action by Indemnitee) or of any action (or failure to act) on Indemnitee’s part while acting pursuant to Indemnitee’s Corporate Status, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement, or advancement of Expenses can be provided under this Agreement. A Proceeding also includes a situation the Indemnitee believes in good faith may lead to or culminate in the institution of a Proceeding.

(j) [“Fund Indemnitor” means [insert name]]

Section 3. Indemnity in Third-Party Proceedings. The Company will indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, the Company will indemnify Indemnitee to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines and amounts paid in settlement) actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal Proceeding had no reasonable cause to believe that Indemnitee’s conduct was unlawful.

Section 4. Indemnity in Proceedings by or in the Right of the Company. The Company will indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, the Company will indemnify Indemnitee to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company. The Company will not indemnify Indemnitee for Expenses under this Section 4 related to any claim, issue or matter in a Proceeding for which Indemnitee has been finally adjudged by a court to be liable to the Company, unless, and only to the extent that, the Delaware Court of Chancery or any court in which the Proceeding was brought determines upon application by Indemnitee that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification.

Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the fullest extent permitted by applicable law, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee in connection with any Proceeding the extent that Indemnitee is successful, on the merits or otherwise. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with or related to each successfully resolved claim, issue or matter to the fullest extent permitted by law. For purposes of this Section 5 and

 

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without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, will be deemed to be a successful result as to such claim, issue or matter.

Section 6. Indemnification For Expenses of a Witness. To the fullest extent permitted by applicable law, the Company will indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with any Proceeding to which Indemnitee is not a party but to which Indemnitee is a witness, deponent, interviewee, or otherwise asked to participate.

Section 7. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company will indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

Section 8. Additional Indemnification. Notwithstanding any limitation in Sections 3, 4, or 5, the Company will indemnify Indemnitee to the fullest extent permitted by applicable law (including but not limited to, the DGCL and any amendments to or replacements of the DGCL adopted after the date of this Agreement that expand the Company’s ability to indemnify its officers and directors) if Indemnitee is a party to or threatened to be made a party to any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor).

Section 9. Exclusions. Notwithstanding any provision in this Agreement, the Company is not obligated under this Agreement to make any indemnification payment to Indemnitee in connection with any Proceeding:

(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except to the extent provided in Section 16(b) and except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or

(b) for (i) an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act (as defined in Section 2(b) hereof) or similar provisions of state statutory law or common law, (ii) any reimbursement of the Company by the Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by the Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act) or (iii) any reimbursement of the Company by Indemnitee of any compensation pursuant to any compensation recoupment or clawback policy adopted by the Board or the compensation committee of the Board, including but not limited to any such policy adopted to comply with stock exchange listing requirements implementing Section 10D of the Exchange Act; or

(c) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or

 

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other indemnitees, unless (i) the Proceeding or part of any Proceeding is to enforce Indemnitee’s rights to indemnification or advancement, of Expenses, including a Proceeding (or any part of any Proceeding) initiated pursuant to Section 14 of this Agreement, (ii) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (iii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law.

Section 10. Advances of Expenses.

(a) The Company will advance, to the extent not prohibited by law, the Expenses incurred by Indemnitee in connection with any Proceeding (or any part of any Proceeding) not initiated by Indemnitee or any Proceeding (or any part of any Proceeding) initiated by Indemnitee if (i) the Proceeding or part of any Proceeding is to enforce Indemnitee’s rights to obtain indemnification or advancement of Expenses from the Company or Enterprise, including a proceeding initiated pursuant to Section 14 or (ii) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation. The Company will advance the Expenses within thirty (30) days after the receipt by the Company of a statement or statements requesting such advances from time to time, whether prior to or after final disposition of any Proceeding.

(b) Advances will be unsecured and interest free. Indemnitee undertakes to repay the amounts advanced (without interest) to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company, thus Indemnitee qualifies for advances upon the execution of this Agreement and delivery to the Company. No other form of undertaking is required other than the execution of this Agreement. The Company will make advances without regard to Indemnitee’s ability to repay the Expenses and without regard to Indemnitee’s ultimate entitlement to indemnification under the other provisions of this Agreement.

Section 11. Procedure for Notification of Claim for Indemnification or Advancement.

(a) Indemnitee will notify the Company in writing of any Proceeding with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof. Indemnitee will include in the written notification to the Company a description of the nature of the Proceeding and the facts underlying the Proceeding and provide such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding. Indemnitee’s failure to notify the Company will not relieve the Company from any obligation it may have to Indemnitee under this Agreement, and any delay in so notifying the Company will not constitute a waiver by Indemnitee of any rights under this Agreement. The Secretary of the Company will, promptly upon receipt of such a request for indemnification or advancement, advise the Board in writing that Indemnitee has requested indemnification or advancement.

(b) The Company will be entitled to participate in the Proceeding at its own expense.

Section 12. Procedure Upon Application for Indemnification.

 

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(a) Unless a Change of Control has occurred, the determination of Indemnitee’s entitlement to indemnification will be made:

i. by a majority vote of the Disinterested Directors, even though less than a quorum of the Board;

ii. by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board;

iii. if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by written opinion provided by Independent Counsel selected by the Board; or

iv. if so directed by the Board, by the stockholders of the Company.

(b) If a Change in Control has occurred, the determination of Indemnitee’s entitlement to indemnification will be made by written opinion provided by Independent Counsel selected by Indemnitee (unless Indemnitee requests such selection be made by the Board).

(c) The party selecting Independent Counsel pursuant to subsection (a)(iii) or (b) of this Section 12 will provide written notice of the selection to the other party. The notified party may, within ten (10) days after receiving written notice of the selection of Independent Counsel, deliver to the selecting party a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 2 of this Agreement, and the objection will set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected will act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or the Delaware Court has determined that such objection is without merit. If, within thirty (30) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 11(a) hereof and the final disposition of the Proceeding, Independent Counsel has not been selected or, if selected, any objection to has not been resolved, either the Company or Indemnitee may petition the Delaware Court for the appointment as Independent Counsel of a person selected by such court or by such other person as such court designates. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 14(a) of this Agreement, Independent Counsel will be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

(d) Indemnitee will cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. The Company will advance and pay any Expenses incurred by Indemnitee in so cooperating with the person, persons or entity making the indemnification determination irrespective of the determination as to Indemnitee’s entitlement to indemnification and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. The Company promptly will advise Indemnitee in writing of the

 

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determination that Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied and providing a copy of any written opinion provided to the Board by Independent Counsel.

(e) If it is determined that Indemnitee is entitled to indemnification, the Company will make payment to Indemnitee within thirty (30) days after such determination.

Section 13. Presumptions and Effect of Certain Proceedings.

(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination will, to the fullest extent not prohibited by law, presume Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 11(a) of this Agreement, and the Company will, to the fullest extent not prohibited by law, have the burden of proof to overcome that presumption. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, will be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(b) If the determination of the Indemnitee’s entitlement to indemnification has not made pursuant to Section 12 within sixty (60) days after the latter of (i) receipt by the Company of Indemnitee’s request for indemnification pursuant to Section 11(a) and (ii) the final disposition of the Proceeding for which Indemnitee requested Indemnification (the “Determination Period”), the requisite determination of entitlement to indemnification will, to the fullest extent not prohibited by law, be deemed to have been made and Indemnitee will be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law. The Determination Period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided, further, the Determination Period may be extended an additional fifteen (15) days if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 12(a)(iv) of this Agreement.

(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, will not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that Indemnitee’s conduct was unlawful.

 

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(d) For purposes of any determination of good faith, Indemnitee will be deemed to have acted in good faith if Indemnitee acted based on the records or books of account of the Company, its subsidiaries, or an Enterprise, including financial statements, or on information supplied to Indemnitee by the directors or officers of the Company, its subsidiaries, or an Enterprise in the course of their duties, or on the advice of legal counsel for the Company, its subsidiaries, or an Enterprise or on information or records given or reports made to the Company or an Enterprise by an independent certified public accountant or by an appraiser, financial advisor or other expert selected with reasonable care by or on behalf of the Company, its subsidiaries, or an Enterprise. Further, Indemnitee will be deemed to have acted in a manner “not opposed to the best interests of the Company,” as referred to in this Agreement if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan. The provisions of this Section 13(d) is not exclusive and does not limit in any way the other circumstances in which the Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

(e) The knowledge and/or actions, or failure to act, of any director, officer, trustee, partner, managing member, fiduciary, Agent or employee of the Enterprise may not be imputed to Indemnitee for purposes of determining Indemnitee’s right to indemnification under this Agreement.

Section 14. Remedies of Indemnitee.

(a) Indemnitee may commence litigation against the Company in the Delaware Court of Chancery to obtain indemnification or advancement of Expenses provided by this Agreement in the event that (i) a determination is made pursuant to Section 12 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) the Company does not advance Expenses pursuant to Section 10 of this Agreement, (iii) the determination of entitlement to indemnification is not made pursuant to Section 12 of this Agreement within the Determination Period, (iv) the Company does not indemnify Indemnitee pursuant to Section 5 or 6 or the second to last sentence of Section 12(d) of this Agreement within thirty (30) days after receipt by the Company of a written request therefor, (v) the Company does not indemnify Indemnitee pursuant to Section 3, 4, 7, or 8 of this Agreement within thirty (30) days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) in the event that the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or Proceeding designed to deny, or to recover from, the Indemnitee the benefits provided or intended to be provided to the Indemnitee hereunder. Alternatively, Indemnitee, at Indemnitee’s or the Company’s option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee must commence such Proceeding seeking an adjudication or an award in arbitration within one hundred and eighty (180) days following the date on which Indemnitee first has the right to commence such Proceeding pursuant to this Section 14(a); provided, however, that the foregoing clause does not apply in respect of a Proceeding brought by Indemnitee to enforce Indemnitee’s rights under Section 5 of this Agreement. The Company will not oppose Indemnitee’s right to seek any such adjudication or award in arbitration.

(b) If a determination is made pursuant to Section 12 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced

 

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pursuant to this Section 14 will be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee may not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 14 the Company will have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be, and will not introduce evidence of the determination made pursuant to Section 12 of this Agreement.

(c) If a determination is made pursuant to Section 12 of this Agreement that Indemnitee is entitled to indemnification, the Company will be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 14, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) The Company is, to the fullest extent not prohibited by law, precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 14 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and will stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement.

(e) It is the intent of the Company that, to the fullest extent permitted by law, the Indemnitee not be required to incur legal fees or other Expenses associated with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Indemnitee hereunder. The Company, to the fullest extent permitted by law, will (within thirty (30) days after receipt by the Company of a written request therefor) advance to Indemnitee such Expenses which are incurred by Indemnitee in connection with any action concerning this Agreement, Indemnitee’s right to indemnification or advancement of Expenses from the Company, or concerning any directors’ and officers’ liability insurance policies maintained by the Company, and will indemnify Indemnitee against any and all such Expenses unless the court determines that each of the Indemnitee’s claims in such action were made in bad faith or were frivolous or are prohibited by law.

Section 15. Establishment of Trust.

(a) In the event of a Potential Change in Control or a Change in Control, the Company will, upon written request by Indemnitee, create a trust for the benefit of Indemnitee (the “Trust”) and from time to time upon written request of Indemnitee will fund such Trust in an amount sufficient to satisfy the reasonably anticipated indemnification and advancement obligations of the Company to the Indemnitee in connection with any Proceeding for which Indemnitee has demanded indemnification and/or advancement prior to the Potential Change in Control or Change in Control (the “Funding Obligation”). The trustee of the Trust (the “Trustee”) will be a bank or trust company or other individual or entity chosen by the Indemnitee and reasonably acceptable to the Company. Nothing in this Section 15 relieves the Company of any of its obligations under this Agreement.

 

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(b) The amount or amounts to be deposited in the Trust pursuant to the Funding Obligation will be determined by mutual agreement of the Indemnitee and the Company or, if the Company and the Indemnitee are unable to reach such an agreement, by Independent Counsel selected in accordance with Section 12(b) of this Agreement. The terms of the Trust will provide that, except upon the consent of both the Indemnitee and the Company, upon a Change in Control: (i) the Trust may not be revoked, or the principal thereof invaded, without the written consent of the Indemnitee; (ii) the Trustee will advance Expenses incurred by Indemnitee, to the fullest extent permitted by applicable law, within two (2) business days of a request by the Indemnitee; (iii) the Company will continue to fund the Trust in accordance with the Funding Obligation; (iv) the Trustee will promptly pay to the Indemnitee all amounts for which the Indemnitee is entitled to indemnification pursuant to this Agreement or otherwise; and (v) all unexpended funds in such Trust revert to the Company upon mutual agreement by the Indemnitee and the Company or, if the Indemnitee and the Company are unable to reach such an agreement, by Independent Counsel selected in accordance with Section 12(b) of this Agreement, that the Indemnitee has been fully indemnified under the terms of this Agreement. New York law (without regard to its conflicts of laws rules) governs the Trust and the Trustee will consent to the exclusive jurisdiction of Delaware Court of Chancery, in accordance with Section 25 of this Agreement.]

Section 16. Non-exclusivity; Survival of Rights; Insurance; Subrogation.

(a) The indemnification and advancement of Expenses provided by this Agreement are not exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. The indemnification and advancement of Expenses provided by this Agreement may not be limited or restricted by any amendment, alteration or repeal of this Agreement in any way with respect to any action taken or omitted by Indemnitee in Indemnitee’s Corporate Status occurring prior to any amendment, alteration or repeal of this Agreement. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Bylaws, Certificate of Incorporation, or this Agreement, it is the intent of the parties hereto that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy is cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, will not prevent the concurrent assertion or employment of any other right or remedy.

(b) The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement of Expenses and/or insurance provided by one or more other Persons with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)].

i. The Company hereby acknowledges and agrees:

1) the Company is the indemnitor of first resort with respect to any request for indemnification or advancement of Expenses made pursuant to this Agreement

 

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concerning any Proceeding arising from or related to Indemnitee’s Corporate Status with the Company;

2) the Company is primarily liable for all indemnification and indemnification or advancement of Expenses obligations for any Proceeding arising from or related to Indemnitee’s Corporate Status, whether created by law, organizational or constituent documents, contract (including this Agreement) or otherwise;

3) any obligation of any other Persons with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)] to indemnify Indemnitee and/or advance Expenses to Indemnitee in respect of any proceeding are secondary to the obligations of the Company’s obligations;

4) the Company will indemnify Indemnitee and advance Expenses to Indemnitee hereunder to the fullest extent provided herein without regard to any rights Indemnitee may have against any other Person with whom or which Indemnitee may be associated [(including, any Fund Indemnitor)] or insurer of any such Person; and

ii. the Company irrevocably waives, relinquishes and releases (A) any other Person with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)] from any claim of contribution, subrogation, reimbursement, exoneration or indemnification, or any other recovery of any kind in respect of amounts paid by the Company to Indemnitee pursuant to this Agreement [and (B) any right to participate in any claim or remedy of Indemnitee against any Fund Indemnitor (or former Fund Indemnitor), whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any Fund Indemnitor (or former Fund Indemnitor), directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right].

iii. In the event any other Person with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)] or their insurers advances or extinguishes any liability or loss for Indemnitee, the payor has a right of subrogation against the Company or its insurers for all amounts so paid which would otherwise be payable by the Company or its insurers under this Agreement. In no event will payment by any other Person with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)] or their insurers affect the obligations of the Company hereunder or shift primary liability for the Company’s obligation to indemnify or advance of Expenses to any other Person with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)].

iv. Any indemnification or advancement of Expenses provided by any other Person with whom or which Indemnitee may be associated [(including, without limitation, any Fund Indemnitor)] is specifically in excess over the Company’s obligation to indemnify and advance Expenses or any valid and collectible insurance (including but not limited to any malpractice insurance or professional errors and omissions insurance) provided by the Company.

(c) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or Agents of the Enterprise, the

 

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Company will obtain a policy or policies covering Indemnitee to the maximum extent of the coverage available for any such director, officer, employee or Agent under such policy or policies, including coverage in the event the Company does not or cannot, for any reason, indemnify or advance Expenses to Indemnitee as required by this Agreement. If, at the time of the receipt of a notice of a claim pursuant to this Agreement, the Company has director and officer liability insurance in effect, the Company will give prompt notice of such claim or of the commencement of a Proceeding, as the case may be, to the insurers in accordance with the procedures set forth in the respective policies. The Company will thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. Indemnitee agrees to assist the Company efforts to cause the insurers to pay such amounts and will comply with the terms of such policies, including selection of approved panel counsel, if required.

(d) The Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee for any Proceeding concerning Indemnitee’s Corporate Status with an Enterprise will be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such Enterprise. The Company and Indemnitee intend that any such Enterprise (and its insurers) be the indemnitor of first resort with respect to indemnification and advancement of Expenses for any Proceeding related to or arising from Indemnitee’s Corporate Status with such Enterprise. The Company’s obligation to indemnify and advance Expenses to Indemnitee is secondary to the obligations the Enterprise or its insurers owe to Indemnitee. Indemnitee agrees to take all reasonably necessary and desirable action to obtain from an Enterprise indemnification and advancement of Expenses for any Proceeding related to or arising from Indemnitee’s Corporate Status with such Enterprise.

(e) In the event of any payment made by the Company under this Agreement, the Company will be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee from any Enterprise or insurance carrier. Indemnitee will execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

Section 17. Duration of Agreement. This Agreement continues until and terminates upon the later of: (a) ten (10) years after the date that Indemnitee ceases to serve as a [director/officer] of the Company or (b) one (1) year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any Proceeding commenced by Indemnitee pursuant to Section 14 of this Agreement relating thereto. The indemnification and advancement of Expenses rights provided by or granted pursuant to this Agreement are binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), continue as to an Indemnitee who has ceased to be a director, officer, employee or Agent of the Company or of any other Enterprise, and inure to the benefit of Indemnitee and Indemnitee’s spouse, assigns, heirs, devisees, executors and administrators and other legal representatives.

Section 18. Severability. If any provision or provisions of this Agreement is held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and

 

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enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) will not in any way be affected or impaired thereby and remain enforceable to the fullest extent permitted by law; (b) such provision or provisions will be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) will be construed so as to give effect to the intent manifested thereby.

Section 19. Interpretation. Any ambiguity in the terms of this Agreement will be resolved in favor of Indemnitee and in a manner to provide the maximum indemnification and advancement of Expenses permitted by law. The Company and Indemnitee intend that this Agreement provide to the fullest extent permitted by law for indemnification and advancement in excess of that expressly provided, without limitation, by the Certificate of Incorporation, the Bylaws, vote of the Company stockholders or disinterested directors, or applicable law.

Section 20. Enforcement.

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving or continuing to serve as a director or officer of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided, however, that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws and applicable law, and is not a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.

Section 21. Modification and Waiver. No supplement, modification or amendment of this Agreement is binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement will be deemed or constitutes a waiver of any other provisions of this Agreement nor will any waiver constitute a continuing waiver.

Section 22. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company does not relieve the Company of any obligation which it may have to the Indemnitee under this Agreement or otherwise.

Section 23. Notices. All notices, requests, demands and other communications under this Agreement will be in writing and will be deemed to have been duly given if (a) delivered by

 

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hand to the other party, (b) sent by reputable overnight courier to the other party or (c) sent by facsimile transmission or electronic mail, with receipt of oral confirmation that such communication has been received:

(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee provides to the Company.

(b) If to the Company to:

 

Name:    Prometheus Biosciences, Inc.
Address:    9410 Carroll Park Drive
   San Diego, California 92121
Attention:    General Counsel
Email:    tandrews@prometheusbiosciences.com

or to any other address as may have been furnished to Indemnitee by the Company.

Section 24. Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, will contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and Agents) and Indemnitee in connection with such event(s) and/or transaction(s).

Section 25. Applicable Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties are governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 14(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or Proceeding arising out of or in connection with this Agreement may be brought only in the Delaware Court of Chancery and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or Proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or Proceeding in the Delaware Court, and (iv) waive, and agree not to plead or to make, any claim that any such action or Proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

Section 26. Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which will for all purposes be deemed to be an original but all of which together constitutes one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

 

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Section 27. Headings. The headings of this Agreement are inserted for convenience only and do not constitute part of this Agreement or affect the construction thereof.

IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.

 

PROMETHEUS BIOSCIENCES, INC.      INDEMNITEE
By:                                                                                                                     

 

Name:                           Name:
Office:      Address:                                                                              
                                                                                                  
                                                                                                  

 

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EX-10.10 14 d14529dex1010.htm EX-10.10 EX-10.10

Exhibit 10.10

LOAN AND SECURITY AGREEMENT

THIS LOAN AND SECURITY AGREEMENT (as the same may from time to time be amended, modified, supplemented or restated, this “Agreement”) dated as of January 24, 2020 (the “Effective Date”) among OXFORD FINANCE LLC, a Delaware limited liability company with an office located at 133 North Fairfax Street, Alexandria, Virginia 22314 (“Oxford”), as collateral agent (in such capacity, “Collateral Agent”), the Lenders listed on Schedule 1.1 hereof or otherwise a party hereto from time to time including Oxford in its capacity as a Lender (each a “Lender” and collectively, the “Lenders”), and PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (“Parent”) and PROMETHEUS LABORATORIES INC., a California corporation, each with offices located at 9410 Carroll Park Drive, San Diego, CA 92121 (individually and collectively, jointly and severally, “Borrower”), provides the terms on which the Lenders shall lend to Borrower and Borrower shall repay the Lenders. The parties agree as follows:

1.    ACCOUNTING AND OTHER TERMS

1.1    Accounting terms not defined in this Agreement shall be construed in accordance with GAAP. Calculations and determinations must be made in accordance with GAAP, except as otherwise noted herein. Capitalized terms not otherwise defined in this Agreement shall have the meanings set forth in Section 13. All other terms contained in this Agreement, unless otherwise indicated, shall have the meaning provided by the Code to the extent such terms are defined therein. All references to “Dollars” or “$” are United States Dollars, unless otherwise noted.

2.    LOANS AND TERMS OF PAYMENT

2.1    Promise to Pay. Borrower hereby unconditionally promises to pay each Lender, the outstanding principal amount of all Term Loans advanced to Borrower by such Lender and accrued and unpaid interest thereon and any other amounts due hereunder as and when due in accordance with this Agreement.

2.2    Term Loans.

(a)    Availability. (i) Subject to the terms and conditions of this Agreement, the Lenders agree, severally and not jointly, to make term loans to Borrower on the Effective Date in an aggregate amount of Seven Million Five Hundred Thousand Dollars ($7,500,000.00) according to each Lender’s Term A Loan Commitment as set forth on Schedule 1.1 hereto (such term loans are hereinafter referred to singly as a “Term A Loan”, and collectively as the “Term A Loans”). After repayment, no Term A Loan may be re-borrowed.

(ii)    Subject to the terms and conditions of this Agreement, the Lenders agree, severally and not jointly, during the Second Draw Period, to make one (1) term loan to Borrower in an amount of not less than Five Million Dollars ($5,000,000.00) and up to Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00) according to each Lender’s Term B Loan Commitment as set forth on Schedule 1.1 hereto (such term loans are hereinafter referred to singly as a “Term B Loan”, and collectively as the “Term B Loans”; each Term A Loan or Term B Loan is hereinafter referred to singly as a “Term Loan” and the Term A Loans and the Term B Loans are hereinafter referred to collectively as the “Term Loans”). After repayment, no Term B Loan may be re-borrowed.

(b)    Repayment. Borrower shall make monthly payments of interest only commencing on the first (1st) Payment Date following the Funding Date of each Term Loan, and continuing on the Payment Date of each successive month thereafter through and including the Payment Date immediately preceding the Amortization Date. Borrower agrees to pay, on the Funding Date of each Term Loan, any initial partial monthly interest payment otherwise due for the period between the Funding Date of such Term Loan and the first Payment Date thereof. Commencing on the Amortization Date, and continuing on the Payment Date of each month thereafter, Borrower shall make consecutive equal monthly payments of principal, together with applicable interest, in arrears, to each Lender, as calculated by Collateral Agent (which calculations shall be deemed correct absent manifest error) based upon: (1) the amount of such Lender’s Term Loan, (2) the effective rate of interest, as determined in Section 2.3(a), and (3) a repayment schedule equal to twenty-four (24) months. All unpaid principal and accrued and unpaid interest with respect to each Term Loan is due and payable in full on the Maturity Date. Each Term Loan may only be prepaid in accordance with Sections 2.2(c) and 2.2(d).

 


(c)    Mandatory Prepayments. If the Term Loans are accelerated following the occurrence of an Event of Default, Borrower shall immediately pay to Lenders, payable to each Lender in accordance with its respective Pro Rata Share, an amount equal to the sum of: (i) all outstanding principal of the Term Loans plus accrued and unpaid interest thereon through the prepayment date, (ii) the Final Payment, (iii) the Prepayment Fee, plus (iv) all other Obligations that are due and payable, including Lenders’ Expenses and interest at the Default Rate with respect to any past due amounts. Notwithstanding (but without duplication with) the foregoing, on the Maturity Date, if the Final Payment had not previously been paid in full in connection with the prepayment of the Term Loans in full, Borrower shall pay to Collateral Agent, for payment to each Lender in accordance with its respective Pro Rata Share, the Final Payment in respect of the Term Loan(s).

(d)     Permitted Prepayment of Term Loans.

(i) Borrower shall have the option to prepay all, but not less than all, of the Term Loans advanced by the Lenders under this Agreement, provided Borrower (i) provides written notice to Collateral Agent of its election to prepay the Term Loans at least five (5) Business Days prior to such prepayment, and (ii) pays to the Lenders on the date of such prepayment, payable to each Lender in accordance with its respective Pro Rata Share, an amount equal to the sum of (A) all outstanding principal of the Term Loans plus accrued and unpaid interest thereon through the prepayment date, (B) the Final Payment, (C) the Prepayment Fee, plus (D) all other Obligations that are due and payable, including Lenders’ Expenses and interest at the Default Rate with respect to any past due amounts.

(ii) Notwithstanding anything herein to the contrary, Borrower shall also have the option to prepay part of Term Loans advanced by the Lenders under this Agreement, provided Borrower (i) provides written notice to Collateral Agent of its election to prepay the Term Loans at least five (5) Business Days prior to such prepayment, (ii) prepays such part of the Term Loans in a denomination that is a whole number multiple of Five Million Dollars ($5,000,000.00), and (iii) pays to the Lenders on the date of such prepayment, payable to each Lender in accordance with its respective Pro Rata Share, an amount equal to the sum of (A) the portion of outstanding principal of such Term Loans plus all accrued and unpaid interest thereon through the prepayment date, (B) the applicable Final Payment, and (C) all other Obligations that are then due and payable, including Lenders’ Expenses and interest at the Default Rate with respect to any past due amounts, and (D) the applicable pro-rated Prepayment Fee with respect to the portion of such Term Loans being prepaid. For the purposes of clarity, any partial prepayment shall be applied pro-rata to all outstanding amounts under each Term Loan, and shall be applied pro-rata within each Term Loan tranche to reduce amortization payments under Section 2.2(b) on a pro-rata basis.

2.3    Payment of Interest on the Credit Extensions.

(a)    Interest Rate. Subject to Section 2.3(b), the principal amount outstanding under the Term Loans shall accrue interest at a floating per annum rate equal to the Basic Rate, determined by Collateral Agent on the Funding Date of the applicable Term Loan and monthly thereafter, which interest shall be payable monthly in arrears in accordance with Sections 2.2(b) and 2.3(e). Interest shall accrue on each Term Loan commencing on, and including, the Funding Date of such Term Loan, and shall accrue on the principal amount outstanding under such Term Loan through and including the day on which such Term Loan is paid in full.

(b)    Default Rate. Immediately upon the occurrence and during the continuance of an Event of Default, Obligations shall accrue interest at a floating per annum rate equal to the rate that is otherwise applicable thereto plus five percentage points (5.00%) (the “Default Rate”). Payment or acceptance of the increased interest rate provided in this Section 2.3(b) is not a permitted alternative to timely payment and shall not constitute a waiver of any Event of Default or otherwise prejudice or limit any rights or remedies of Collateral Agent.

(c)    360-Day Year. Interest shall be computed on the basis of a three hundred sixty (360) day year, and the actual number of days elapsed.

 

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(d)    Debit of Accounts. Collateral Agent and each Lender may debit (or ACH) any deposit accounts, maintained by Borrower or any of its Subsidiaries, starting with the Designated Deposit Account, for principal and interest payments or any other amounts Borrower owes the Lenders under the Loan Documents when due. Any such debits (or ACH activity) shall not constitute a set-off. Without limiting the foregoing, Collateral Agent and each Lender shall use commercially reasonable efforts to notify Borrower for the reasons of debiting of any amounts (other than principal and interest payments) debited from Borrower’s deposit accounts in respect of this Agreement after such debit has been made; provided, however, failure to provide such notice shall not be considered a breach of any provision hereof by Collateral Agent or any Lender.

(e)    Payments. Except as otherwise expressly provided herein, all payments by Borrower under the Loan Documents shall be made to the respective Lender to which such payments are owed, at such Lender’s office in immediately available funds on the date specified herein. Unless otherwise provided, interest is payable monthly on the Payment Date of each month. Payments of principal and/or interest received after 2:00 p.m. Eastern time are considered received at the opening of business on the next Business Day. When a payment is due on a day that is not a Business Day, the payment is due the next Business Day and additional fees or interest, as applicable, shall continue to accrue until paid. All payments to be made by Borrower hereunder or under any other Loan Document, including payments of principal and interest, and all fees, expenses, indemnities and reimbursements, shall be made without set-off, recoupment or counterclaim, in lawful money of the United States and in immediately available funds.

2.4    Secured Promissory Notes. The Term Loans shall be evidenced by a Secured Promissory Note or Notes in the form attached as Exhibit D hereto (each a “Secured Promissory Note”), and shall be repayable as set forth in this Agreement. Borrower irrevocably authorizes each Lender to make or cause to be made, on or about the Funding Date of any Term Loan or at the time of receipt of any payment of principal on such Lender’s Secured Promissory Note, an appropriate notation on such Lender’s Secured Promissory Note Record reflecting the making of such Term Loan or (as the case may be) the receipt of such payment. The outstanding amount of each Term Loan set forth on such Lender’s Secured Promissory Note Record shall be prima facie evidence of the principal amount thereof owing and unpaid to such Lender, but the failure to record, or any error in so recording, any such amount on such Lender’s Secured Promissory Note Record shall not limit or otherwise affect the obligations of Borrower under any Secured Promissory Note or any other Loan Document to make payments of principal of or interest on any Secured Promissory Note when due. Upon receipt of an affidavit of an officer of a Lender as to the loss, theft, destruction, or mutilation of its Secured Promissory Note, Borrower shall issue, in lieu thereof, a replacement Secured Promissory Note in the same principal amount thereof and of like tenor.

2.5    Fees. Borrower shall pay to Collateral Agent:

(a)    Good Faith Deposit. Borrower has remitted to Collateral Agent Thirty Thousand Dollars ($30,000.00) as a good faith deposit, which amount shall be applied towards the facility fee due under Section 2.5(b) hereof on the Effective Date. For the sake of clarity, Borrower shall be responsible for the entire amount of the facility fee payable pursuant to Section 2.5(b) hereof and the Lenders’ Expenses payable under Section 2.5(e).

(b)    Facility Fee. A fully earned, non-refundable facility fee equal to one-half of one percent (0.50%) of the funded Term Loans, to be shared between the Lenders pursuant to their respective Commitment Percentages payable as follows: (i) Thirty-Seven Thousand Five Hundred Dollars ($37,500.00) of the facility fee shall be due and payable on account of the Term A Loan on the Effective Date and (ii) one-half of one percent (0.50%) of the funded amount of the Term B Loan shall be due and payable on the Funding Date of the Term B Loan;

(c)    Final Payment. The Final Payment, when due hereunder, to be shared between the Lenders in accordance with their respective Pro Rata Shares;

(d)    Prepayment Fee. The Prepayment Fee, when due hereunder, to be shared between the Lenders in accordance with their respective Pro Rata Shares;

 

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(e)    Lenders’ Expenses. All Lenders’ Expenses (including reasonable attorneys’ fees and expenses for documentation and negotiation of this Agreement) incurred through and after the Effective Date, when due.

2.6    Withholding. Payments received by the Lenders from Borrower hereunder will be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, duties, deductions, withholdings, assessments, fees or other charges imposed by any governmental authority (including any interest, additions to tax or penalties applicable thereto). Specifically, however, if at any time any Governmental Authority, applicable law, regulation or international agreement requires Borrower to make any withholding or deduction from any such payment or other sum payable hereunder to the Lenders, Borrower hereby covenants and agrees that the amount due from Borrower with respect to such payment or other sum payable hereunder will be increased to the extent necessary to ensure that, after the making of such required withholding or deduction, each Lender receives a net sum equal to the sum which it would have received had no withholding or deduction been required and Borrower shall pay the full amount withheld or deducted to the relevant Governmental Authority. Borrower will, upon request, furnish the Lenders with proof reasonably satisfactory to the Lenders indicating that Borrower has made such withholding payment; provided, however, that Borrower need not make any withholding payment if the amount or validity of such withholding payment is contested in good faith by appropriate and timely proceedings and as to which payment in full is bonded or reserved against by Borrower. The agreements and obligations of Borrower contained in this Section 2.6 shall survive the termination of this Agreement.

3.    CONDITIONS OF LOANS

3.1    Conditions Precedent to Initial Credit Extension. Each Lender’s obligation to make a Term A Loan is subject to the condition precedent that Collateral Agent and each Lender shall consent to or shall have received, in form and substance satisfactory to Collateral Agent and each Lender, such documents, and completion of such other matters, as Collateral Agent and each Lender may reasonably deem necessary or appropriate, including, without limitation:

(a)    original Loan Documents, each duly executed by Borrower and each Subsidiary, as applicable;

(b)    duly executed original Control Agreements with respect to any Collateral Accounts maintained by Borrower or any of its Subsidiaries to the extent required under Section 6.6;

(c)    duly executed original Secured Promissory Notes in favor of each Lender according to its Term A Loan Commitment Percentage;

(d)    the certificate(s) for the Shares, together with Assignment(s) Separate from Certificate, duly executed in blank;

(e)    the Operating Documents and good standing certificates of Borrower and its Subsidiaries certified by the Secretary of State (or equivalent agency) of Borrower’s and such Subsidiaries’ jurisdiction of organization or formation and each jurisdiction in which Borrower and each Subsidiary is qualified to conduct business, each as of a date no earlier than thirty (30) days prior to the Effective Date;

(f)    a completed Perfection Certificate for Borrower and each of its Subsidiaries;

(g)    the Annual Projections, for the current calendar year;

(h)    duly executed original officer’s certificate for Borrower and each Subsidiary that is a party to the Loan Documents, in a form acceptable to Collateral Agent and the Lenders;

(i)    certified copies, dated as of date no earlier than thirty (30) days prior to the Effective Date, of financing statement searches, as Collateral Agent shall request, accompanied by written evidence (including any UCC termination statements) that the Liens indicated in any such financing statements either constitute Permitted Liens or have been or, in connection with the initial Credit Extension, will be terminated or released;

 

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(j)    a landlord’s consent executed in favor of Collateral Agent in respect of Borrower’s headquarters locations, and each other of Borrower’s and each Subsidiaries’ leased locations where Borrower or any Subsidiary maintains Collateral having a book value in excess of Five Hundred Thousand Dollars ($500,000.00);

(k)    a bailee waiver executed in favor of Collateral Agent in respect of each third party bailee where Borrower or any Subsidiary maintains Collateral having a book value in excess of Five Hundred Thousand Dollars ($500,000.00);

(l)    a duly executed legal opinion of counsel to Borrower dated as of the Effective Date;

(m)    evidence satisfactory to Collateral Agent and the Lenders that the insurance policies required by Section 6.5 hereof are in full force and effect, together with appropriate evidence showing loss payable and/or additional insured clauses or endorsements in favor of Collateral Agent, for the ratable benefit of the Lenders;

(n)    a copy of any applicable Registration Rights Agreement or Investors’ Rights Agreement and any amendments thereto; and

(o)    payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof.

3.2    Conditions Precedent to all Credit Extensions. The obligation of each Lender to make each Credit Extension, including the initial Credit Extension, is subject to the following conditions precedent:

(a)    receipt by Collateral Agent of an executed Disbursement Letter in the form of Exhibit B attached hereto;

(b)    the representations and warranties in Section 5 hereof shall be true, accurate and complete in all material respects on the date of the Disbursement Letter and on the Funding Date of each Credit Extension; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date, and no Event of Default shall have occurred and be continuing or result from the Credit Extension. Each Credit Extension is Borrower’s representation and warranty on that date that the representations and warranties in Section 5 hereof are true, accurate and complete in all material respects; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date;

(c)    in such Lender’s sole but reasonable discretion, there has not been a Material Adverse Change or any material adverse deviation by Borrower from the Annual Projections of Borrower presented to and accepted by Collateral Agent and each Lender;

(d)    to the extent not delivered at the Effective Date, duly executed original Secured Promissory Notes and Warrants, in number, form and content acceptable to each Lender, and in favor of each Lender according to its Commitment Percentage, with respect to each Credit Extension made by such Lender after the Effective Date; and

(e)    payment of the fees and Lenders’ Expenses then due as specified in Section 2.5 hereof.

3.3    Covenant to Deliver. Borrower agrees to deliver to Collateral Agent and the Lenders each item required to be delivered to Collateral Agent under this Agreement as a condition precedent to any Credit Extension. Borrower expressly agrees that a Credit Extension made prior to the receipt by Collateral Agent or any Lender of any such item shall not constitute a waiver by Collateral Agent or any Lender of Borrower’s obligation to deliver such item, and any such Credit Extension in the absence of a required item shall be made in each Lender’s sole discretion.

 

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3.4    Procedures for Borrowing. Subject to the prior satisfaction of all other applicable conditions to the making of a Term Loan set forth in this Agreement, to obtain a Term Loan (other than the Term A Loan), Borrower shall notify the Lenders (which notice shall be irrevocable) by electronic mail, facsimile, or telephone by 2:00 p.m. Eastern time five (5) Business Days prior to the date the Term Loan is to be made. Together with any such electronic, facsimile or telephonic notification, Borrower shall deliver to the Lenders by electronic mail or facsimile a completed Disbursement Letter executed by a Responsible Officer or his or her designee. The Lenders may rely on any telephone notice given by a person whom a Lender reasonably believes is a Responsible Officer or designee. On the Funding Date, each Lender shall credit and/or transfer (as applicable) to the Designated Deposit Account, an amount equal to its Term Loan Commitment.

4.    CREATION OF SECURITY INTEREST

4.1    Grant of Security Interest. Borrower hereby grants Collateral Agent, for the ratable benefit of the Lenders, to secure the payment and performance in full of all of the Obligations, a continuing security interest in, and pledges to Collateral Agent, for the ratable benefit of the Lenders, the Collateral, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof. Borrower represents, warrants, and covenants that the security interest granted herein is and shall at all times continue to be a first priority perfected security interest in the Collateral, subject only to Permitted Liens that are permitted by the terms of this Agreement to have priority to Collateral Agent’s Lien. If Borrower shall acquire a commercial tort claim (as defined in the Code) greater than Fifty Thousand Dollars ($50,000.00), Borrower shall promptly notify Collateral Agent in a writing signed by Borrower, as the case may be, of the general details thereof (and further details as may be required by Collateral Agent) and grant to Collateral Agent, for the ratable benefit of the Lenders, in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance reasonably satisfactory to Collateral Agent.

If this Agreement is terminated, Collateral Agent’s Lien in the Collateral shall continue until the Obligations (other than inchoate indemnity obligations) are repaid in full in cash. Upon payment in full in cash of the Obligations (other than inchoate indemnity obligations) and at such time as the Lenders’ obligation to make Credit Extensions has terminated, Collateral Agent shall, at the sole cost and expense of Borrower, release its Liens in the Collateral and all rights therein shall revert to Borrower.

4.2    Authorization to File Financing Statements. Borrower hereby authorizes Collateral Agent to file financing statements or take any other action required to perfect Collateral Agent’s security interests in the Collateral, without notice to Borrower, with all appropriate jurisdictions to perfect or protect Collateral Agent’s interest or rights under the Loan Documents, including a notice that any disposition of the Collateral, except to the extent permitted by the terms of this Agreement, by Borrower, or any other Person, shall be deemed to violate the rights of Collateral Agent under the Code.

4.3    Pledge of Collateral. Borrower hereby pledges, assigns and grants to Collateral Agent, for the ratable benefit of the Lenders, a security interest in all the Shares, together with all proceeds and substitutions thereof, all cash, stock and other moneys and property paid thereon, all rights to subscribe for securities declared or granted in connection therewith, and all other cash and noncash proceeds of the foregoing, as security for the performance of the Obligations. On the Effective Date, or, to the extent not certificated as of the Effective Date, within ten (10) Business Days of the certification of any Shares, the certificate or certificates for the Shares will be delivered to Collateral Agent, accompanied by an instrument of assignment duly executed in blank by Borrower. To the extent a pledge of the Shares to the Collateral Agent is required by the terms and conditions governing such Shares to be reflected on the books of the applicable Issuer, Borrower shall cause the books of each entity whose Shares are part of the Collateral and any transfer agent to reflect the pledge of such Shares. Upon the occurrence and during the continuance of an Event of Default hereunder, Collateral Agent may effect the transfer of any securities included in the Collateral (including but not limited to the Shares) into the name of Collateral Agent and cause new (as applicable) certificates representing such securities to be issued in the name of Collateral Agent or its transferee. Borrower will execute and deliver such documents, and take or cause to be taken such actions, as

 

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Collateral Agent may reasonably request to perfect or continue the perfection of Collateral Agent’s security interest in the Shares. Unless an Event of Default shall have occurred and be continuing, Borrower shall be entitled to (i) exercise any voting rights with respect to the Shares and to give consents, waivers and ratifications in respect thereof, provided that no vote shall be cast or consent, waiver or ratification given or action taken which would be inconsistent with any of the terms of this Agreement or which would constitute or create any violation of any of such terms and (ii) to receive and retain any and all dividends, interest and other distributions paid in respect of the Shares to the extent that the payment thereof is not otherwise inconsistent with the terms of this Agreement. All such rights to vote and give consents, waivers and ratifications shall terminate upon the occurrence and continuance of an Event of Default. After all Events of Default have been waived in writing by Collateral Agent and the Lenders, Borrower shall regain the exclusive right to exercise the voting and/or consensual rights and powers that Borrower would otherwise be entitled to exercise and the right to receive and retain any dividends and interest payments from and after the effective date of such waiver that Borrower would otherwise be entitled to receive and retain.

5.    REPRESENTATIONS AND WARRANTIES

Borrower represents and warrants to Collateral Agent and the Lenders as follows:

5.1    Due Organization, Authorization: Power and Authority. Borrower and each of its Subsidiaries is duly existing and in good standing as a Registered Organization in its jurisdictions of organization or formation and Borrower and each of its Subsidiaries is qualified and licensed to do business and is in good standing in any jurisdiction in which the conduct of its businesses or its ownership of property requires that it be qualified except where the failure to do so could not reasonably be expected to have a Material Adverse Change. In connection with this Agreement, Borrower and each of its Subsidiaries has delivered to Collateral Agent a completed perfection certificate signed by an officer of Borrower or such Subsidiary (each a “Perfection Certificate” and collectively, the “Perfection Certificates”). Borrower represents and warrants that (a) Borrower and each of its Subsidiaries’ exact legal name is that which is indicated on its respective Perfection Certificate and on the signature page of each Loan Document to which it is a party; (b) Borrower and each of its Subsidiaries is an organization of the type and is organized in the jurisdiction set forth on its respective Perfection Certificate; (c) each Perfection Certificate accurately sets forth each of Borrower’s and its Subsidiaries’ organizational identification number or accurately states that Borrower or such Subsidiary has none; (d) each Perfection Certificate accurately sets forth Borrower’s and each of its Subsidiaries’ place of business, or, if more than one, its chief executive office as well as Borrower’s and each of its Subsidiaries’ mailing address (if different than its chief executive office); (e) Borrower and each of its Subsidiaries (and each of its respective predecessors) have not, in the past five (5) years, changed its jurisdiction of organization, organizational structure or type, or any organizational number assigned by its jurisdiction; and (f) all other information set forth on the Perfection Certificates pertaining to Borrower and each of its Subsidiaries, is accurate and complete (it being understood and agreed that Borrower and each of its Subsidiaries may from time to time update certain information in the Perfection Certificates (including the information set forth in clause (d) above) after the Effective Date to the extent permitted by one or more specific provisions in this Agreement); such updated Perfection Certificates subject to the review and approval of Collateral Agent unless such facts, events or circumstances being updated first arose or occurred after the Effective Date and do not constitute a breach, default, or Event of Default under this Agreement or any other Loan Document. If Borrower or any of its Subsidiaries is not now a Registered Organization but later becomes one, Borrower shall notify Collateral Agent of such occurrence and provide Collateral Agent with such Person’s organizational identification number within five (5) Business Days of receiving such organizational identification number.

The execution, delivery and performance by Borrower and each of its Subsidiaries of the Loan Documents to which it is a party have been duly authorized, and do not (i) conflict with any of Borrower’s or such Subsidiaries’ Operating Documents, (ii) contravene, conflict with, constitute a default under or violate any material Requirement of Law applicable thereto, (iii) contravene, conflict or violate any applicable order, writ, judgment, injunction, decree, determination or award of any Governmental Authority by which Borrower or such Subsidiary, or any of their property or assets may be bound or affected, (iv) require any action by, filing, registration, or qualification with, or Governmental Approval from, any Governmental Authority (except such Governmental Approvals which have already been obtained and are in full force and effect or are being obtained pursuant to Section 6.1(b)), or (v) constitute an event of default under any material agreement by which Borrower or any of such Subsidiaries, or their respective properties, is bound. Neither Borrower nor any of its Subsidiaries is in default under any agreement to which it is a party or by which it or any of its assets is bound in which such default could reasonably be expected to have a Material Adverse Change.

 

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5.2    Collateral.

(a)    Borrower and each of its Subsidiaries have good title to, have rights in, and the power to transfer each item of the Collateral upon which it purports to grant a Lien under the Loan Documents, free and clear of any and all Liens except Permitted Liens, and neither Borrower nor any of its Subsidiaries have any Deposit Accounts, Securities Accounts, Commodity Accounts or other investment accounts other than the Collateral Accounts or the other investment accounts, if any, described in the Perfection Certificates delivered to Collateral Agent in connection herewith with respect of which Borrower or such Subsidiary has given Collateral Agent notice and taken such actions as are necessary to give Collateral Agent a perfected security interest therein, pursuant to the terms of Section 6.6(b). The Accounts are bona fide, existing obligations of the Account Debtors.

(b)    On the Effective Date, and except as disclosed on the Perfection Certificate or as permitted under Section 6.11, (i) the Collateral is not in the possession of any third party bailee (such as a warehouse), and (ii) no such third party bailee possesses components of the Collateral in excess of Five Hundred Thousand Dollars ($500,000.00). None of the components of the Collateral shall be maintained at locations other than as disclosed in the Perfection Certificates on the Effective Date or as permitted pursuant to Section 6.11.

(c)    All Inventory held and released for commercial sale by or for the benefit of Borrower or any Subsidiary is in all material respects of good and marketable quality, free from material defects.

(d)    Borrower and each of its Subsidiaries is the sole owner of the Intellectual Property each respectively purports to own, free and clear of all Liens other than Permitted Liens. Except as noted on the Perfection Certificates (it being understood and agreed that Borrower and each of its Subsidiaries may from time to time update certain information in the Perfection Certificates after the Effective Date to the extent permitted by one or more specific provisions in this Agreement; such updated Perfection Certificates subject to the review and approval of Collateral Agent unless such facts, events or circumstances being updated first arose or occurred after the Effective Date and do not constitute a breach, default, or Event of Default under this Agreement or any other Loan Document), neither Borrower nor any of its Subsidiaries is a party to, nor is bound by, any material license or other material agreement with respect to which Borrower or such Subsidiary is the licensee that (i) prohibits or otherwise restricts Borrower or its Subsidiaries from granting a security interest in Borrower’s or such Subsidiaries’ interest in such material license or material agreement or any other property, or (ii) for which a default under or termination of could interfere with Collateral Agent’s or any Lender’s right to sell any Collateral. Borrower shall provide written notice to Collateral Agent and each Lender within ten (10) days of Borrower or any of its Subsidiaries entering into or becoming bound by any license or agreement with respect to which Borrower or any Subsidiary is the licensee (other than over-the-counter software that is commercially available to the public).

5.3    Litigation. Except as disclosed (i) on the Perfection Certificates, or (ii) in accordance with Section 6.9 hereof, there are no actions, suits, investigations, or proceedings pending or, to the knowledge of the Responsible Officers, threatened in writing by or against Borrower or any of its Subsidiaries involving more than Two Hundred Fifty Thousand Dollars ($250,000.00) or in which a likely adverse decision could reasonably be expected to have a Material Adverse Change.

5.4    No Material Deterioration in Financial Condition; Financial Statements. All consolidated financial statements for Borrower and its Subsidiaries, delivered to Collateral Agent fairly present, in conformity with GAAP, in all material respects the consolidated financial condition of Borrower and its Subsidiaries, and the consolidated results of operations of Borrower and its Subsidiaries (subject, in the case of unaudited financial statements, to normal year-end non-cash adjustments to reflect actual expenses incurred and merger consolidation adjustments and the absence of footnotes). There has not been any event or circumstance that could reasonably be expected to cause a Material Adverse Change since the date of the most recent financial statements submitted to any Lender.

5.5    Solvency. Borrower is, and Borrower and each of its Subsidiaries, on a consolidated basis, are Solvent.

 

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5.6    Regulatory Compliance. Neither Borrower nor any of its Subsidiaries is an “investment company” or a company “controlled” by an “investment company” under the Investment Company Act of 1940, as amended. Neither Borrower nor any of its Subsidiaries is engaged as one of its important activities in extending credit for margin stock (under Regulations X, T and U of the Federal Reserve Board of Governors). Borrower and each of its Subsidiaries has complied in all material respects with the Federal Fair Labor Standards Act. Neither Borrower nor any of its Subsidiaries is a “holding company” or an “affiliate” of a “holding company” or a “subsidiary company” of a “holding company” as each term is defined and used in the Public Utility Holding Company Act of 2005. Neither Borrower nor any of its Subsidiaries has violated any Requirements of Laws, the violation of which could reasonably be expected to have a Material Adverse Change. Neither Borrower’s nor any of its Subsidiaries’ properties or assets has been used by Borrower or such Subsidiary or, to Borrower’s knowledge, by previous Persons, in disposing, producing, storing, treating, or transporting any hazardous substance other than in material compliance with applicable laws. Borrower and each of its Subsidiaries has obtained all consents, approvals and authorizations of, made all declarations or filings with, and given all notices to, all Governmental Authorities that are necessary to continue their respective businesses as currently conducted.

None of Borrower, any of its Subsidiaries, or any of Borrower’s or its Subsidiaries’ controlled Affiliates or any of their respective agents acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement is (i) in violation of any Anti-Terrorism Law, (ii) engaging in or conspiring to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law, or (iii) is a Blocked Person. None of Borrower, any of its Subsidiaries, or to the knowledge of Borrower and any of their controlled Affiliates or agents, acting or benefiting in any capacity in connection with the transactions contemplated by this Agreement, (x) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any Blocked Person, or (y) deals in, or otherwise engages in any transaction relating to, any property or interest in property blocked pursuant to Executive Order No. 13224, any similar executive order or other Anti-Terrorism Law.

5.7    Investments. Neither Borrower nor any of its Subsidiaries owns any stock, shares, partnership interests or other equity securities except for Permitted Investments.

5.8    Tax Returns and Payments; Pension Contributions. Borrower and each of its Subsidiaries has timely filed all required foreign, federal, state and material local tax returns and reports, and Borrower and each of its Subsidiaries, has timely paid all foreign, federal, state, and material local taxes, assessments, deposits and contributions owed by Borrower and such Subsidiaries, in all jurisdictions in which Borrower or any such Subsidiary is subject to taxes, including the United States, unless such taxes are being contested in accordance with the following sentence. Borrower and each of its Subsidiaries, may defer payment of any contested taxes, provided that (a) Borrower or such Subsidiary, (i) in good faith contests its obligation to pay the taxes by appropriate proceedings promptly and diligently instituted and conducted, (ii) notifies Collateral Agent in writing of the commencement of, and any material development in, the proceedings, and (iii) posts bonds or takes any other steps required to prevent the Governmental Authority levying such contested taxes from obtaining a Lien upon any of the Collateral that is other than a “Permitted Lien” or (b) such taxes, assessments, deposits and contributions do not, individually or in the aggregate exceed Fifty Thousand Dollars ($50,000.00). Neither Borrower nor any of its Subsidiaries is aware of any claims or adjustments proposed for any of Borrower’s or such Subsidiaries’, prior tax years which could result in additional taxes becoming due and payable by Borrower or its Subsidiaries in excess of Fifty Thousand Dollars ($50,000.00). Borrower and each of its Subsidiaries have paid all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with their terms, and neither Borrower nor any of its Subsidiaries have, withdrawn from participation in, and have not permitted partial or complete termination of, or permitted the occurrence of any other event with respect to, any such plan which could reasonably be expected to result in any liability of Borrower or its Subsidiaries, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other Governmental Authority.

5.9    Use of Proceeds. Borrower shall use the proceeds of the Credit Extensions solely as working capital and to fund its general business requirements in accordance with the provisions of this Agreement, and not for personal, family, household or agricultural purposes.

5.10    Shares. Borrower has full power and authority to create a first lien on the Shares and no disability or contractual obligation exists that would prohibit Borrower from pledging the Shares pursuant to this Agreement.

 

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To Borrower’s knowledge, there are no subscriptions, warrants, rights of first refusal or other restrictions on transfer relative to, or options exercisable with respect to the Shares. The Shares have been and will be duly authorized and validly issued, and are fully paid and non-assessable. To Borrower’s knowledge, the Shares are not the subject of any present or threatened suit, action, arbitration, administrative or other proceeding, and Borrower knows of no reasonable grounds for the institution of any such proceedings.

5.11    Full Disclosure. No written representation, warranty or other statement of Borrower or any of its Subsidiaries in any certificate or written statement given to Collateral Agent or any Lender, as of the date such representation, warranty, or other statement was made, taken together with all such written certificates and written statements given to Collateral Agent or any Lender, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in the certificates or statements not misleading (it being recognized that the projections and forecasts provided by Borrower in good faith and based upon reasonable assumptions are not viewed as facts and that actual results during the period or periods covered by such projections and forecasts may differ from the projected or forecasted results).

5.12    Definition of Knowledge.” For purposes of the Loan Documents, whenever a representation or warranty is made to Borrower’s knowledge or awareness, to the “best of” Borrower’s knowledge, or with a similar qualification, knowledge or awareness means the actual knowledge, after reasonable investigation, of the Responsible Officers.

6.    AFFIRMATIVE COVENANTS

Borrower shall, and shall cause each of its Subsidiaries to, do all of the following:

6.1    Government Compliance.

(a)    Maintain its and, except as permitted by Section 7.3 all its Subsidiaries’ legal existence and good standing in their respective jurisdictions of organization and maintain qualification in each jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Change. Comply with all laws, ordinances and regulations to which Borrower or any of its Subsidiaries is subject, the noncompliance with which could reasonably be expected to have a Material Adverse Change.

(b)    Obtain and keep in full force and effect, all of the material Governmental Approvals necessary for the performance by Borrower and its Subsidiaries of their respective businesses and obligations under the Loan Documents and the grant of a security interest to Collateral Agent for the ratable benefit of the Lenders, in all of the Collateral. Borrower shall promptly provide copies to Collateral Agent of any material Governmental Approvals obtained by Borrower or any of its Subsidiaries.

6.2    Financial Statements, Reports, Certificates.

(a)    Deliver to each Lender:

(i)    as soon as available, but no later than thirty (30) days after the last day of each month, a company prepared consolidated and consolidating balance sheet and income statement, and a consolidated cash flow statement, covering the consolidated (and consolidating, as applicable) operations of Borrower and its Subsidiaries for such month certified by a Responsible Officer and in a form reasonably acceptable to Collateral Agent;

(ii)    as soon as available, but no later than one hundred eighty (180) days after the last day of Borrower’s fiscal year or within five (5) days of filing with the SEC, audited consolidated financial statements prepared under GAAP, consistently applied, together with an unqualified opinion on the financial statements (or qualified only as to going concern) from an independent certified public accounting firm acceptable to Collateral Agent in its reasonable discretion;

 

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(iii)    as soon as available after approval thereof by Borrower’s Board of Directors, but no later than sixty (60) days after the last day of each of Borrower’s fiscal years, Borrower’s annual financial projections for the entire current fiscal year as approved by Borrower’s Board of Directors, which such annual financial projections shall be set forth in a month-by-month format (such annual financial projections as originally delivered to Collateral Agent and the Lenders are referred to herein as the “Annual Projections”; provided that, any revisions of the Annual Projections approved by Borrower’s Board of Directors shall be delivered to Collateral Agent and the Lenders no later than seven (7) days after such approval);

(iv)    within five (5) days of delivery, copies of all written statements, reports and notices generally made available to Borrower’s security holders or holders of Subordinated Debt in their capacities as security holders or holders of Subordinated Debt;

(v)    in the event that Borrower becomes subject to the reporting requirements under the Securities Exchange Act of 1934, as amended, within five (5) days of filing, all reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission,

(vi)    together with the Compliance Certificate delivered pursuant to Section 6.2(b), notice of any material amendments of or other material changes to the capitalization table of Borrower and of any changes to the Operating Documents of Borrower or any of its Subsidiaries, together with any copies reflecting such amendments or changes with respect thereto; provided, however, Borrower shall also upon Collateral Agent’s request, promptly deliver to Collateral Agent its then current capitalization table;

(vii)    prompt notice of any event that could reasonably be expected to materially and adversely affect the value of the Intellectual Property;

(viii)    as soon as available, but no later than thirty (30) days after the last day of each month, copies of the month-end account statements for each Collateral Account maintained by Borrower or its Subsidiaries, which statements may be provided to Collateral Agent and each Lender by Borrower or directly from the applicable institution(s); and

(ix)    other information as reasonably requested by Collateral Agent or any Lender.

Notwithstanding the foregoing, documents required to be delivered pursuant to the terms hereof (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the internet at Borrower’s website address.

(b)    Concurrently with the delivery of the financial statements specified in Section 6.2(a)(i) above but no later than thirty (30) days after the last day of each month, deliver to each Lender, a duly completed Compliance Certificate signed by a Responsible Officer.

(c)    Keep proper books of record and account in accordance with GAAP in all material respects (subject, in the case of unaudited financial statements, to normal year-end non-cash adjustments to reflect actual expenses incurred and merger consolidation adjustments and the absence of footnotes), in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities. Borrower shall, and shall cause each of its Subsidiaries to, allow, at the sole cost of Borrower, Collateral Agent or any Lender, during regular business hours upon reasonable prior notice (provided that no notice shall be required when an Event of Default has occurred and is continuing), to visit and inspect any of its properties, to examine and make abstracts or copies from any of its books and records, and to conduct a collateral audit and analysis of its operations and the Collateral. Such audits shall be conducted no more often than once every year unless (and more frequently if) an Event of Default has occurred and is continuing.

6.3    Inventory; Returns. Keep all Inventory held and released for commercial sale, by or for the benefit of Borrower or any Subsidiary, in good and marketable condition, free from material defects. Returns and allowances between Borrower, or any of its Subsidiaries, and their respective Account Debtors, shall follow

 

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Borrower’s, or such Subsidiary’s, customary practices as they exist on the Effective Date. Borrower must promptly notify Collateral Agent and the Lenders of all returns, recoveries, disputes and claims that involve more than Five Hundred Thousand Dollars ($500,000.00) individually or in the aggregate in any calendar year

6.4    Taxes; Pensions. Timely file and require each of its Subsidiaries to timely file, all required foreign, federal, state and material local tax returns and reports and timely pay, and require each of its Subsidiaries to timely file, all foreign, federal, state, and material local taxes, assessments, deposits and contributions owed by Borrower or its Subsidiaries, except for deferred payment of any taxes contested pursuant to the terms of Section 5.8 hereof or as otherwise permitted pursuant to Section 5.8 hereof, and shall deliver to Collateral Agent, on demand, appropriate certificates attesting to such payments, and pay all amounts necessary to fund all present pension, profit sharing and deferred compensation plans in accordance with the terms of such plans.

6.5    Insurance. Keep Borrower’s and its Subsidiaries’ business and the Collateral insured for risks and in amounts standard for companies in Borrower’s and its Subsidiaries’ industry and location and as Collateral Agent may reasonably request. Insurance policies shall be in a form, with companies, and in amounts that are reasonably satisfactory to Collateral Agent and Collateral Agent hereby agrees that as of the Effective Date, Borrower’s insurance coverage is satisfactory for the purposes herein. All property policies shall have a lender’s loss payable endorsement showing Collateral Agent as lender loss payee and waive subrogation against Collateral Agent, and all liability policies shall show, or have endorsements showing, Collateral Agent, as additional insured. The Collateral Agent shall be named as lender loss payee and/or additional insured with respect to any such insurance providing coverage in respect of any Collateral, and each provider of any such insurance shall agree, by endorsement upon the policy or policies issued by it or by independent instruments furnished to the Collateral Agent, that it will give the Collateral Agent thirty (30) days’ (or, ten (10) days’ for non-payment of premiums) prior written notice before any such policy or policies shall be canceled. Borrower and its Subsidiaries shall give the Collateral Agent thirty (30) days prior written notice before any insurance policy or policies shall be materially altered (other than to increase or expand coverage); provided, however, that, if such prior written notice cannot be provided in such thirty (30) day period, it must in any event be provided within two (2) Business Days after Borrower’s receipt of notice thereof. At Collateral Agent’s request, Borrower shall deliver certified copies of policies and evidence of all premium payments. Proceeds payable under any policy shall, at Collateral Agent’s option, be payable to Collateral Agent, for the ratable benefit of the Lenders, on account of the Obligations. Notwithstanding the foregoing, (a) so long as no Event of Default has occurred and is continuing, Borrower shall have the option of applying the proceeds of any casualty policy up to Two Hundred Fifty Thousand Dollars ($250,000.00) with respect to any loss, but not exceeding Two Hundred Fifty Thousand Dollars ($250,000.00), in the aggregate for all losses under all casualty policies in any one year, toward the replacement or repair of destroyed or damaged property; provided that any such replaced or repaired property (i) shall be of equal or like value as the replaced or repaired Collateral and (ii) shall be deemed Collateral in which Collateral Agent has been granted a first priority security interest, subject to Permitted Liens, and (b) after the occurrence and during the continuance of an Event of Default, all proceeds payable under such casualty policy shall, at the option of Collateral Agent, be payable to Collateral Agent, for the ratable benefit of the Lenders, on account of the Obligations. If Borrower or any of its Subsidiaries fails to obtain insurance as required under this Section 6.5 or to pay any amount or furnish any required proof of payment to third persons, Collateral Agent and/or any Lender may make, at Borrower’s expense, all or part of such payment or obtain such insurance policies required in this Section 6.5, and take any action under the policies Collateral Agent or such Lender deems prudent.

6.6    Operating Accounts.

(a)    Maintain all of Borrower’s and its Subsidiaries’ Collateral Accounts, other than accounts excluded pursuant to Section 6.6(b), in accounts which are subject to a Control Agreement in favor of Collateral Agent; provided, that, all of Borrower’s and its Subsidiaries’ Collateral Accounts maintained at Bank of America (the “B of A Accounts”) shall (i) have an aggregate balance that does not exceed One Hundred Thousand Dollars ($100,000.00) in the aggregate at any time and (ii) in accordance with the Post Closing Letter, such B of A Accounts shall be subject to a Control Agreement in favor of Collateral Agent on and after February 14, 2020

(b)    Borrower shall provide Collateral Agent five (5) days’ prior written notice before Borrower or any of its Subsidiaries establishes any Collateral Account. In addition, for each Collateral Account that Borrower or any of its Subsidiaries, at any time maintains, Borrower or such Subsidiary shall cause the applicable

 

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bank or financial institution at or with which such Collateral Account is maintained to execute and deliver a Control Agreement or other appropriate instrument with respect to such Collateral Account to perfect Collateral Agent’s Lien in such Collateral Account in accordance with the terms hereunder substantially contemporaneously with the establishment of such Collateral Account, which Control Agreement may not be terminated without prior written consent of Collateral Agent. The provisions of the previous sentence shall not apply to deposit accounts exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of Borrower’s, or any of its Subsidiaries’, employees and identified to Collateral Agent by Borrower as such in the Perfection Certificates.

(c)    Neither Borrower nor any of its Subsidiaries shall maintain any Collateral Accounts except Collateral Accounts maintained in accordance with Sections 6.6(a) and (b).

6.7    Protection of Intellectual Property Rights. Borrower and each of its Subsidiaries shall: (a) use commercially reasonable efforts to protect, defend and maintain the validity and enforceability of its Intellectual Property that is material to Borrower’s business; (b) promptly after Borrower or any of its Subsidiaries obtains knowledge thereof, advise Collateral Agent in writing of material infringement by a third party of its Intellectual Property; and (c) not allow any owned Intellectual Property to be abandoned, forfeited or dedicated to the public without Collateral Agent’s prior written consent.

6.8    Litigation Cooperation. Commencing on the Effective Date and continuing through the termination of this Agreement, make available to Collateral Agent and the Lenders, without expense to Collateral Agent or the Lenders, Borrower and each of Borrower’s officers, employees and agents and Borrower’s Books, to the extent that Collateral Agent or any Lender may reasonably deem them necessary to prosecute or defend any third-party suit or proceeding instituted by or against Collateral Agent or any Lender with respect to any Collateral or relating to Borrower.

6.9    Notices of Litigation and Default. Borrower will give prompt written notice to Collateral Agent and the Lenders of any litigation or governmental proceedings pending or threatened (in writing) against Borrower or any of its Subsidiaries, which could reasonably be expected to result in damages or costs to Borrower or any of its Subsidiaries of Five Hundred Thousand Dollars ($500,000.00) or more or which could reasonably be expected to have a Material Adverse Change. Without limiting or contradicting any other more specific provision of this Agreement, promptly (and in any event within three (3) Business Days) upon (i) Borrower becoming aware of the existence of any Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default, Borrower shall give written notice to Collateral Agent and the Lenders of such occurrence, which such notice shall include a reasonably detailed description of such Event of Default or event which, with the giving of notice or passage of time, or both, would constitute an Event of Default; and (ii) any material developments in any of the litigation disclosed in the Perfection Certificate delivered to Collateral Agent as of the Effective Date, or otherwise pending on or after the Effective Date, but no less frequently than quarterly, Borrower shall give written notice to Collateral Agent and the Lenders of such material developments, with at least the same level of detail as presented in the Perfection Certificate delivered to Collateral Agent as of the Effective Date.

 

  6.10    [Intentionally

Omitted.]

6.11    Landlord Waivers; Bailee Waivers. In the event that Borrower or any of its Subsidiaries, after the Effective Date, intends to add any new offices or business locations, including warehouses, or otherwise store any portion of the Collateral with, or deliver any portion of the Collateral to, a bailee, in each case pursuant to Section 7.2, then Borrower or such Subsidiary will provide written notice thereof to Collateral Agent and, in the event that the new location is the chief executive office of the Borrower or such Subsidiary or the Collateral at any such new location is valued in excess of Five Hundred Thousand Dollars ($500,000.00) in the aggregate, such bailee or landlord, as applicable, must execute and deliver a bailee waiver or landlord waiver, as applicable, in form and substance reasonably satisfactory to Collateral Agent prior to the addition of any new offices or business locations, or any such storage with or delivery to any such bailee, as the case may be; provided, that, in accordance with this Section 6.11 and with respect to any offices or business locations located in a foreign jurisdiction, where Borrower or any its Subsidiaries (including Foreign Subsidiaries) store any portion of the Collateral, Borrower or any its Subsidiaries shall deliver and execute a bailee waiver or landlord waiver, as applicable, in form and substance reasonably satisfactory to Collateral Agent, to the extent such bailee waiver or landlord waiver is accepted and recognized in such foreign jurisdiction.

 

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6.12    Creation/Acquisition of Subsidiaries. In the event Borrower, or any of its Subsidiaries creates or acquires any Subsidiary, Borrower shall provide prior written notice to Collateral Agent and each Lender of the creation or acquisition of such new Subsidiary and take all such action as may be reasonably required by Collateral Agent or any Lender to cause each such Subsidiary to become a co-Borrower hereunder or to guarantee the Obligations of Borrower under the Loan Documents and, in each case, grant a continuing pledge and security interest in and to the assets of such Subsidiary (substantially as described on Exhibit A hereto); and Borrower (or its Subsidiary, as applicable) shall grant and pledge to Collateral Agent, for the ratable benefit of the Lenders, a perfected security interest in the Shares of each such newly created Subsidiary; provided, however, that solely in the circumstance in which Borrower or any Subsidiary creates or acquires a Foreign Subsidiary in an acquisition permitted by Section 7.3 hereof or otherwise approved by the Required Lenders, (i) such Foreign Subsidiary shall not be required to guarantee the Obligations of Borrower under the Loan Documents and grant a continuing pledge and security interest in and to the assets of such Foreign Subsidiary, and (ii) Borrower shall not be required to grant and pledge to Collateral Agent, for the ratable benefit of Lenders, a perfected security interest in more than sixty-five percent (65%) of the Shares of such Foreign Subsidiary, if (A) Borrower demonstrates to the reasonable satisfaction of Collateral Agent that such Foreign Subsidiary providing such guarantee or pledge and security interest or Borrower providing a perfected security interest in more than sixty-five percent (65%) of the Shares would create a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code; (B) no Intellectual Property is held or maintained by such Foreign Subsidiary at any time; and (C) the aggregate value of cash and Cash Equivalents held or maintained by such Foreign Subsidiary does not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) at any time.

6.13    Further Assurances.

(a)    Execute any further instruments and take further action as Collateral Agent or any Lender reasonably requests to perfect or continue Collateral Agent’s Lien in the Collateral or to effect the purposes of this Agreement.

(b)    Deliver to Collateral Agent and Lenders, within five (5) days after the same are sent or received, copies of all material correspondence, reports, documents and other filings with any Governmental Authority that could reasonably be expected to have a material adverse effect on any of the Governmental Approvals material to Borrower’s business or otherwise could reasonably be expected to have a Material Adverse Change.

7.    NEGATIVE COVENANTS

Borrower shall not, and shall not permit any of its Subsidiaries to, do any of the following without the prior written consent of the Required Lenders:

7.1    Dispositions. Convey, sell, lease, transfer, assign, or otherwise dispose of (collectively, “Transfer”), or permit any of its Subsidiaries to Transfer, all or any part of its business or property, except for Transfers (a) of Inventory in the ordinary course of business; (b) of worn out or obsolete Equipment; (c) in connection with Permitted Liens, Permitted Investments and Permitted Licenses; (d) of cash and Cash Equivalents in connection with transactions not prohibited hereunder in the ordinary course of business; (e) consisting of the abandonment, forfeiture or dedication to the public of any Intellectual Property that is not material to Borrower’s business to the extent not otherwise prohibited by the terms of Section 6.7(c); and (f) of other property (other than Intellectual Property) not to exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate in any fiscal year.

7.2    Changes in Business, Management, Ownership, or Business Locations. (a) Engage in or permit any of its Subsidiaries to engage in any business other than the businesses engaged in by Borrower as of the Effective Date or reasonably related thereto; (b) liquidate or dissolve, except as permitted under Section 7.3; or (c) (i) any Key Person shall cease to be actively engaged in the management of Borrower unless written notice thereof is provided to Collateral Agent within ten (10) days of such change, or (ii) enter into any transaction or series of related transactions in which the stockholders of Borrower who were not stockholders immediately prior to the

 

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first such transaction own more than forty nine percent (49%) of the voting stock of Borrower immediately after giving effect to such transaction or related series of such transactions (other than by the sale of Borrower’s equity securities in a public offering, a private placement of public equity or to venture capital investors so long as Borrower identifies to Collateral Agent the venture capital investors prior to the closing of the transaction). Borrower shall not, without at least twenty (20) days’ prior written notice to Collateral Agent: (A) add any new offices or business locations, including warehouses (unless such new offices or business locations (i) contain less than Five Hundred Thousand Dollars ($500,000.00) in assets or property of Borrower or any of its Subsidiaries and (ii) are not Borrower’s or its Subsidiaries’ chief executive office); (B) change its jurisdiction of organization, (C) change its organizational structure or type, (D) change its legal name, or (E) change any organizational number (if any) assigned by its jurisdiction of organization.

7.3    Mergers or Acquisitions. Merge or consolidate, or permit any of its Subsidiaries to merge or consolidate, with any other Person, or acquire, or permit any of its Subsidiaries to acquire, all or substantially all of the capital stock, shares or property of another Person. A Subsidiary may merge or consolidate into another Subsidiary (provided such surviving Subsidiary is a “co-Borrower” hereunder or has provided a secured Guaranty of Borrower’s Obligations hereunder) or with (or into) Borrower provided Borrower is the surviving legal entity, and as long as no Event of Default is occurring prior thereto or arises as a result therefrom.

7.4    Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or permit any Subsidiary to do so, other than Permitted Indebtedness.

7.5    Encumbrance. Create, incur, allow, or suffer any Lien on any of its property, or assign or convey any right to receive income, including the sale of any Accounts, or permit any of its Subsidiaries to do so, except for Permitted Liens, or permit any Collateral not to be subject to the first priority security interest granted herein (except for Permitted Liens that are permitted by the terms of this Agreement to have priority over Collateral Agent’s Lien), or enter into any agreement, document, instrument or other arrangement (except with or in favor of Collateral Agent, for the ratable benefit of the Lenders) with any Person which directly or indirectly prohibits or has the effect of prohibiting Borrower, or any of its Subsidiaries, from assigning, mortgaging, pledging, granting a security interest in or upon, or encumbering any of Borrower’s or such Subsidiary’s Intellectual Property, except as is otherwise permitted in Section 7.1 hereof and the definition of “Permitted Liens” herein.

7.6    Maintenance of Collateral Accounts. Maintain any Collateral Account except pursuant to the terms of Section 6.6 hereof.

7.7    Distributions; Investments. (a) Pay any dividends (other than dividends payable solely in capital stock) or make any distribution or payment in respect of or redeem, retire or purchase any capital stock, in each case other than (i) repurchases pursuant to the terms of employee stock purchase plans, employee restricted stock agreements, stockholder rights plans, director or consultant stock option plans, or similar plans, provided such repurchases do not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate per fiscal year, (ii) repurchases of stock of former employees, officers, consultants or directors pursuant to stock repurchase agreements by the cancellation of indebtedness owed by such former employees or directors to Borrower, (iii) dividends and distributions to Borrower and (iv) conversion to equity of equity securities and Subordinated Debt or (b) directly or indirectly make any Investment other than Permitted Investments, or permit any of its Subsidiaries to do so.

7.8    Transactions with Affiliates. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower or any of its Subsidiaries, except for (a) transactions that are in the ordinary course of Borrower’s or such Subsidiary’s business, upon fair and reasonable terms that are no less favorable to Borrower or such Subsidiary than would be obtained in an arm’s length transaction with a non-affiliated Person, (b) transaction explicitly permitted or required to be made hereunder between Affiliates, (c) compensation related arrangements in the ordinary course of business or otherwise approved by Borrower’s board or by the Required Lenders in writing, (d) (i) intercompany sales and distribution agreements and (ii) intercompany cost-plus plans or similar arrangements; in each case of (d)(i) and (ii), in the ordinary course of business, and (f) Subordinated Debt or equity investments by Borrower’s investors in Borrower or its Subsidiaries.

7.9    Subordinated Debt. (a) Make or permit any payment on any Subordinated Debt, except under the terms of the subordination, intercreditor, or other similar agreement to which such Subordinated Debt is subject, or (b) amend any provision in any document relating to the Subordinated Debt which would increase the amount thereof or adversely affect the subordination thereof to Obligations owed to the Lenders.

 

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7.10    Compliance. Become an “investment company” or a company controlled by an “investment company”, under the Investment Company Act of 1940, as amended, or undertake as one of its important activities extending credit to purchase or carry margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), or use the proceeds of any Credit Extension for that purpose; fail to meet the minimum funding requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards Act or violate any other law or regulation, if the violation could reasonably be expected to have a Material Adverse Change, or permit any of its Subsidiaries to do so; withdraw or permit any Subsidiary to withdraw from participation in, permit partial or complete termination of, or permit the occurrence of any other event with respect to, any present pension, profit sharing and deferred compensation plan which could reasonably be expected to result in any liability of Borrower or any of its Subsidiaries, including any liability to the Pension Benefit Guaranty Corporation or its successors or any other Governmental Authority.

7.11    Compliance with Anti-Terrorism Laws. Collateral Agent hereby notifies Borrower and each of its Subsidiaries that pursuant to the requirements of Anti-Terrorism Laws, and Collateral Agent’s policies and practices, Collateral Agent is required to obtain, verify and record certain information and documentation that identifies Borrower and each of its Subsidiaries and their principals, which information includes the name and address of Borrower and each of its Subsidiaries and their principals and such other information that will allow Collateral Agent to identify such party in accordance with Anti-Terrorism Laws. Neither Borrower nor any of its Subsidiaries shall, nor shall Borrower or any of its Subsidiaries permit any controlled Affiliate to, directly or indirectly, knowingly enter into any documents, instruments, agreements or contracts with any Person listed on the OFAC Lists. Borrower and each of its Subsidiaries shall immediately notify Collateral Agent if Borrower or such Subsidiary has knowledge that Borrower, or any Subsidiary or controlled Affiliate of Borrower, is listed on the OFAC Lists or (a) is convicted on, (b) pleads nolo contendere to, (c) is indicted on, or (d) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Neither Borrower nor any of its Subsidiaries shall, nor shall Borrower or any of its Subsidiaries, permit any controlled Affiliate to, directly or indirectly, (i) conduct any business or engage in any transaction or dealing with any Blocked Person, including, without limitation, the making or receiving of any contribution of funds, goods or services to or for the benefit of any Blocked Person, (ii) deal in, or otherwise engage in any transaction relating to, any property or interests in property blocked pursuant to Executive Order No. 13224 or any similar executive order or other Anti-Terrorism Law, or (iii) engage in or conspire to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order No. 13224 or other Anti-Terrorism Law.

8.    EVENTS OF DEFAULT

Any one of the following shall constitute an event of default (an “Event of Default”) under this Agreement:

8.1    Payment Default. Borrower fails to (a) make any payment of principal or interest on any Credit Extension on its due date, or (b) pay any other Obligations within three (3) Business Days after such Obligations are due and payable (which three (3) Business Day grace period shall not apply to payments due on the Maturity Date or the date of acceleration pursuant to Section 9.1 (a) hereof). During the cure period, the failure to cure the payment default is not an Event of Default (but no Credit Extension will be made during the cure period);

8.2    Covenant Default.

(a)    Borrower or any of its Subsidiaries fails or neglects to perform any obligation in Sections 6.2 (Financial Statements, Reports, Certificates), 6.4 (Taxes), 6.5 (Insurance), 6.6 (Operating Accounts), 6.7 (Protection of Intellectual Property Rights), 6.9 (Notice of Litigation and Default), 6.11 (Landlord Waivers; Bailee Waivers), 6.12 (Creation/Acquisition of Subsidiaries) or 6.13 (Further Assurances) or Borrower violates any covenant in Section 7; or

 

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(b)    Borrower, or any of its Subsidiaries, fails or neglects to perform, keep, or observe any other term, provision, condition, covenant or agreement contained in this Agreement or any Loan Documents, and as to any default (other than those specified in this Section 8) under such other term, provision, condition, covenant or agreement that can be cured, has failed to cure the default within fifteen (15) days after the occurrence thereof; provided, however, that if the default cannot by its nature be cured within the fifteen (15) day period or cannot after diligent attempts by Borrower be cured within such fifteen (15) day period, and such default is likely to be cured within a reasonable time, then Borrower shall have an additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and within such reasonable time period the failure to cure the default shall not be deemed an Event of Default (but no Credit Extensions shall be made during such cure period). Grace periods provided under this Section shall not apply, among other things, to financial covenants or any other covenants set forth in subsection (a) above;

8.3    Material Adverse Change. A Material Adverse Change occurs;

8.4    Attachment; Levy; Restraint on Business.

(a)    (i) The service of process seeking to attach, by trustee or similar process, any funds of Borrower or any of its Subsidiaries or of any entity under control of Borrower or its Subsidiaries on deposit with any Lender or any Lender’s Affiliate or any bank or other institution at which Borrower or any of its Subsidiaries maintains a Collateral Account, or (ii) a notice of lien, levy, or assessment is filed against Borrower or any of its Subsidiaries or their respective assets by any government agency, and the same under subclauses (i) and (ii) hereof are not, within ten (10) days after the occurrence thereof, discharged or stayed (whether through the posting of a bond or otherwise); provided, however, no Credit Extensions shall be made during any ten (10) day cure period; and

(b)    (i) any material portion of Borrower’s or any of its Subsidiaries’ assets is attached, seized, levied on, or comes into possession of a trustee or receiver, or (ii) any court order enjoins, restrains, or prevents Borrower or any of its Subsidiaries from conducting any part of its business;

8.5    Insolvency. (a) Borrower or any of its Subsidiaries is or becomes Insolvent; (b) Borrower or any of its Subsidiaries begins an Insolvency Proceeding; or (c) an Insolvency Proceeding is begun against Borrower or any of its Subsidiaries and not dismissed or stayed within forty-five (45) days (but no Credit Extensions shall be made while Borrower or any Subsidiary is Insolvent and/or until any Insolvency Proceeding is dismissed);

8.6    Other Agreements. There is a default in any agreement to which Borrower or any of its Subsidiaries is a party with a third party or parties resulting in a right by such third party or parties, whether or not exercised, to accelerate the maturity of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars ($500,000.00) or that could reasonably be expected to have a Material Adverse Change;

8.7    Judgments. (a) One or more judgments, orders, or decrees for the payment of money, other than punitive, special, consequential, indirect or like damages (collectively, “Punitive Damages”), in an amount, individually or in the aggregate, of at least Five Hundred Thousand Dollars ($500,000.00) (not covered by independent third-party insurance as to which liability has been accepted by such insurance carrier) shall be rendered against Borrower or any of its Subsidiaries and shall remain unsatisfied, unvacated, or unstayed for a period of ten (10) days after the entry thereof (provided that no Credit Extensions will be made prior to the satisfaction, vacation, or stay of such judgment, order or decree); or (b) one or more judgments, orders, or decrees for the payment of Punitive Damages in an amount, individually or in the aggregate, in excess of Two Million Dollars ($2,000,000.00) shall be rendered against Borrower or any of its Subsidiaries;

8.8    Misrepresentations. Borrower or any of its Subsidiaries or any Person acting for Borrower or any of its Subsidiaries makes any representation, warranty, or other statement now or later in this Agreement, any Loan Document or in any writing delivered to Collateral Agent and/or Lenders, when taken as a whole, or to induce Collateral Agent and/or the Lenders to enter this Agreement or any Loan Document, and such representation, warranty, or other statement, when taken as a whole, is incorrect in any material respect when made;

 

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8.9    Subordinated Debt. A default or breach occurs under any agreement between Borrower or any of its Subsidiaries and any creditor of Borrower or any of its Subsidiaries that signed a subordination, intercreditor, or other similar agreement with Collateral Agent or the Lenders, or any creditor that has signed such an agreement with Collateral Agent or the Lenders breaches any terms of such agreement;

8.10    Guaranty. (a) Any Guaranty terminates or ceases for any reason to be in full force and effect; (b) any Guarantor does not perform any obligation or covenant under any Guaranty; (c) any circumstance described in Sections 8.3, 8.4, 8.5, 8.7, or 8.8 occurs with respect to any Guarantor, or (d) the liquidation, winding up, or termination of existence of any Guarantor;

8.11    Governmental Approvals. Any Governmental Approval shall have been revoked, rescinded, suspended, modified in an adverse manner, or not renewed in the ordinary course for a full term and such revocation, rescission, suspension, modification or non-renewal has resulted in or could reasonably be expected to result in a Material Adverse Change; or

8.12    Lien Priority. Except as the result of any action or inaction by Collateral Agent or any Lender, any Lien created hereunder or by any other Loan Document shall at any time fail to constitute a valid and perfected Lien on any of the Collateral purported to be secured thereby, subject to no prior or equal Lien, other than Permitted Liens which are permitted to have priority in accordance with the terms of this Agreement.

9.    RIGHTS AND REMEDIES

9.1    Rights and Remedies.

(a)    Upon the occurrence and during the continuance of an Event of Default, Collateral Agent may, and at the written direction of Required Lenders shall, without notice or demand, do any or all of the following: (i) deliver notice of the Event of Default to Borrower, (ii) by notice to Borrower declare all Obligations immediately due and payable (but if an Event of Default described in Section 8.5 occurs all Obligations shall be immediately due and payable without any action by Collateral Agent or the Lenders) or (iii) by notice to Borrower suspend or terminate the obligations, if any, of the Lenders to advance money or extend credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Collateral Agent and/or the Lenders (but if an Event of Default described in Section 8.5 occurs all obligations, if any, of the Lenders to advance money or extend credit for Borrower’s benefit under this Agreement or under any other agreement between Borrower and Collateral Agent and/or the Lenders shall be immediately terminated without any action by Collateral Agent or the Lenders).

(b)    Without limiting the rights of Collateral Agent and the Lenders set forth in Section 9.1(a) above, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right at the written direction of the Required Lenders, without notice or demand, to do any or all of the following:

(i)    foreclose upon and/or sell or otherwise liquidate, the Collateral;

(ii)    apply to the Obligations any (a) balances and deposits of Borrower that Collateral Agent or any Lender holds or controls, or (b) any amount held or controlled by Collateral Agent or any Lender owing to or for the credit or the account of Borrower; and/or

(iii)    commence and prosecute an Insolvency Proceeding or consent to Borrower commencing any Insolvency Proceeding.

(c)    Without limiting the rights of Collateral Agent and the Lenders set forth in Sections 9.1(a) and (b) above, upon the occurrence and during the continuance of an Event of Default, Collateral Agent shall have the right, without notice or demand, to do any or all of the following:

(i)    settle or adjust disputes and claims directly with Account Debtors for amounts on terms and in any order that Collateral Agent considers advisable, notify any Person owing Borrower money of Collateral Agent’s security interest in such funds, and verify the amount of such account;

 

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(ii)    make any payments and do any acts it considers necessary or reasonable to protect the Collateral and/or its security interest in the Collateral. Borrower shall assemble the Collateral if Collateral Agent requests and make it available in a location as Collateral Agent reasonably designates. Collateral Agent may enter premises where the Collateral is located, take and maintain possession of any part of the Collateral, and pay, purchase, contest, or compromise any Lien which appears to be prior or superior to its security interest and pay all expenses incurred. Borrower grants Collateral Agent a license to enter and occupy any of its premises, without charge, to exercise any of Collateral Agent’s rights or remedies;

(iii)    ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, and/or advertise for sale, the Collateral. Collateral Agent is hereby granted a non-exclusive, royalty-free license or other right to use, without charge, Borrower’s and each of its Subsidiaries’ labels, patents, copyrights, mask works, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any similar property as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and, in connection with Collateral Agent’s exercise of its rights under this Section 9.1, Borrower’s and each of its Subsidiaries’ rights under all licenses and all franchise agreements inure to Collateral Agent, for the benefit of the Lenders;

(iv)    place a “hold” on any account maintained with Collateral Agent or the Lenders and/or deliver a notice of exclusive control, any entitlement order, or other directions or instructions pursuant to any Control Agreement or similar agreements providing control of any Collateral;

(v)    demand and receive possession of Borrower’s Books;

(vi)    appoint a receiver to seize, manage and realize any of the Collateral, and such receiver shall have any right and authority as any competent court will grant or authorize in accordance with any applicable law, including any power or authority to manage the business of Borrower or any of its Subsidiaries; and

(vii)    subject to clauses 9.1(a) and (b), exercise all rights and remedies available to Collateral Agent and each Lender under the Loan Documents or at law or equity, including all remedies provided under the Code (including disposal of the Collateral pursuant to the terms thereof).

Notwithstanding any provision of this Section 9.1 to the contrary, upon the occurrence of any Event of Default, Collateral Agent shall have the right to exercise any and all remedies referenced in this Section 9.1 without the written consent of Required Lenders following the occurrence of an Exigent Circumstance. As used in the immediately preceding sentence, “Exigent Circumstance” means any event or circumstance that, in the reasonable judgment of Collateral Agent, imminently threatens the ability of Collateral Agent to realize upon all or any material portion of the Collateral, such as, without limitation, fraudulent removal, concealment, or abscondment thereof, destruction or material waste thereof, or failure of Borrower or any of its Subsidiaries after reasonable demand to maintain or reinstate adequate casualty insurance coverage, or which, in the judgment of Collateral Agent, could reasonably be expected to result in a material diminution in value of the Collateral.

9.2    Power of Attorney. Borrower hereby irrevocably appoints Collateral Agent as its lawful attorney-in-fact, exercisable upon the occurrence and during the continuance of an Event of Default, to: (a) endorse Borrower’s or any of its Subsidiaries’ name on any checks or other forms of payment or security; (b) sign Borrower’s or any of its Subsidiaries’ name on any invoice or bill of lading for any Account or drafts against Account Debtors; (c) settle and adjust disputes and claims about the Accounts directly with Account Debtors, for amounts and on terms Collateral Agent determines reasonable; (d) make, settle, and adjust all claims under Borrower’s insurance policies; (e) pay, contest or settle any Lien, charge, encumbrance, security interest, and adverse claim in or to the Collateral, or any judgment based thereon, or otherwise take any action to terminate or discharge the same; and (f) transfer the Collateral into the name of Collateral Agent or a third party as the Code or any applicable law permits. Borrower hereby appoints Collateral Agent as its lawful attorney-in-fact to sign Borrower’s or any of its Subsidiaries’ name on any documents necessary to perfect or continue the perfection of

 

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Collateral Agent’s security interest in the Collateral regardless of whether an Event of Default has occurred until all Obligations (other than inchoate indemnity obligations) have been satisfied in full and Collateral Agent and the Lenders are under no further obligation to make Credit Extensions hereunder. Collateral Agent’s foregoing appointment as Borrower’s or any of its Subsidiaries’ attorney in fact, and all of Collateral Agent’s rights and powers, coupled with an interest, are irrevocable until all Obligations (other than inchoate indemnity obligations) have been fully repaid and performed and Collateral Agent’s and the Lenders’ obligation to provide Credit Extensions terminates.

9.3    Protective Payments. If Borrower or any of its Subsidiaries fail to obtain the insurance called for by Section 6.5 or fails to pay any premium thereon or fails to pay any other amount which Borrower or any of its Subsidiaries is obligated to pay under this Agreement or any other Loan Document, Collateral Agent may obtain such insurance or make such payment, and all amounts so paid by Collateral Agent are Lenders’ Expenses and immediately due and payable, bearing interest at the Default Rate, and secured by the Collateral. Collateral Agent will make reasonable efforts to provide Borrower with notice of Collateral Agent obtaining such insurance or making such payment at the time it is obtained or paid or within a reasonable time thereafter. No such payments by Collateral Agent are deemed an agreement to make similar payments in the future or Collateral Agent’s waiver of any Event of Default.

9.4    Application of Payments and Proceeds. Notwithstanding anything to the contrary contained in this Agreement, upon the occurrence and during the continuance of an Event of Default, (a) Borrower irrevocably waives the right to direct the application of any and all payments at any time or times thereafter received by Collateral Agent from or on behalf of Borrower or any of its Subsidiaries of all or any part of the Obligations, and, as between Borrower on the one hand and Collateral Agent and Lenders on the other, Collateral Agent shall have the continuing and exclusive right to apply and to reapply any and all payments received against the Obligations in such manner as Collateral Agent may deem advisable notwithstanding any previous application by Collateral Agent, and (b) the proceeds of any sale of, or other realization upon all or any part of the Collateral shall be applied: first, to the Lenders’ Expenses; second, to accrued and unpaid interest on the Obligations (including any interest which, but for the provisions of the United States Bankruptcy Code, would have accrued on such amounts); third, to the principal amount of the Obligations outstanding; and fourth, to any other indebtedness or obligations of Borrower owing to Collateral Agent or any Lender under the Loan Documents. Any balance remaining shall be delivered to Borrower or to whoever may be lawfully entitled to receive such balance or as a court of competent jurisdiction may direct. In carrying out the foregoing, (x) amounts received shall be applied in the numerical order provided until exhausted prior to the application to the next succeeding category, and (y) each of the Persons entitled to receive a payment in any particular category shall receive an amount equal to its pro rata share of amounts available to be applied pursuant thereto for such category. Any reference in this Agreement to an allocation between or sharing by the Lenders of any right, interest or obligation “ratably,” “proportionally” or in similar terms shall refer to Pro Rata Share unless expressly provided otherwise. Collateral Agent, or if applicable, each Lender, shall promptly remit to the other Lenders such sums as may be necessary to ensure the ratable repayment of each Lender’s portion of any Term Loan and the ratable distribution of interest, fees and reimbursements paid or made by Borrower. Notwithstanding the foregoing, a Lender receiving a scheduled payment shall not be responsible for determining whether the other Lenders also received their scheduled payment on such date; provided, however, if it is later determined that a Lender received more than its ratable share of scheduled payments made on any date or dates, then such Lender shall remit to Collateral Agent or other Lenders such sums as may be necessary to ensure the ratable payment of such scheduled payments, as instructed by Collateral Agent. If any payment or distribution of any kind or character, whether in cash, properties or securities, shall be received by a Lender in excess of its ratable share, then the portion of such payment or distribution in excess of such Lender’s ratable share shall be received by such Lender in trust for and shall be promptly paid over to the other Lender for application to the payments of amounts due on the other Lenders’ claims. To the extent any payment for the account of Borrower is required to be returned as a voidable transfer or otherwise, the Lenders shall contribute to one another as is necessary to ensure that such return of payment is on a pro rata basis. If any Lender shall obtain possession of any Collateral, it shall hold such Collateral for itself and as agent and bailee for Collateral Agent and other Lenders for purposes of perfecting Collateral Agent’s security interest therein.

9.5    Liability for Collateral. So long as Collateral Agent and the Lenders comply with reasonable banking practices regarding the safekeeping of the Collateral in the possession or under the control of Collateral Agent and the Lenders, Collateral Agent and the Lenders shall not be liable or responsible for: (a) the safekeeping of

 

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the Collateral; (b) any loss or damage to the Collateral; (c) any diminution in the value of the Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or other Person. Borrower bears all risk of loss, damage or destruction of the Collateral.

9.6    No Waiver; Remedies Cumulative. Failure by Collateral Agent or any Lender, at any time or times, to require strict performance by Borrower of any provision of this Agreement or any other Loan Document shall not waive, affect, or diminish any right of Collateral Agent or any Lender thereafter to demand strict performance and compliance herewith or therewith. No waiver hereunder shall be effective unless signed by Collateral Agent and the Required Lenders and then is only effective for the specific instance and purpose for which it is given. The rights and remedies of Collateral Agent and the Lenders under this Agreement and the other Loan Documents are cumulative. Collateral Agent and the Lenders have all rights and remedies provided under the Code, any applicable law, by law, or in equity. The exercise by Collateral Agent or any Lender of one right or remedy is not an election, and Collateral Agent’s or any Lender’s waiver of any Event of Default is not a continuing waiver. Collateral Agent’s or any Lender’s delay in exercising any remedy is not a waiver, election, or acquiescence.

9.7    Demand Waiver. Borrower waives, to the fullest extent permitted by law, demand, notice of default or dishonor, notice of payment and nonpayment, notice of any default, nonpayment at maturity, release, compromise, settlement, extension, or renewal of accounts, documents, instruments, chattel paper, and guarantees held by Collateral Agent or any Lender on which Borrower or any Subsidiary is liable.

10.    NOTICES

All notices, consents, requests, approvals, demands, or other communication (collectively, “Communication”) by any party to this Agreement or any other Loan Document must be in writing and shall be deemed to have been validly served, given, or delivered: (a) upon the earlier of actual receipt and three (3) Business Days after deposit in the U.S. mail, first class, registered or certified mail return receipt requested, with proper postage prepaid; (b) upon transmission, when sent by facsimile transmission; (c) one (1) Business Day after deposit with a reputable overnight courier with all charges prepaid; or (d) when delivered, if hand-delivered by messenger, all of which shall be addressed to the party to be notified and sent to the address, facsimile number, or email address indicated below. Any of Collateral Agent, Lender or Borrower may change its mailing address or facsimile number by giving the other party written notice thereof in accordance with the terms of this Section 10.

 

If to any Borrower:   

c/o PROMETHEUS BIOSCIENCES, INC.

9410 Carroll Park Drive

San Diego, CA 92121

Attn: Vika Brough, VP Finance

with a copy (which shall not constitute notice) to:   

Latham & Watkins

505 Montgomery Street, Suite 2000

San Francisco, CA 94111-6538

Attn: Haim Zaltzman

If to Collateral Agent:     

OXFORD FINANCE LLC

133 North Fairfax Street

Alexandria, Virginia 22314

Attention: Legal Department

with a copy (which shall not constitute notice) to:   

Barnes & Thornburg LLP

655 W. Broadway, Suite 900

San Diego, California 92101

 

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11.    CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER, AND JUDICIAL REFERENCE

California law governs the Loan Documents without regard to principles of conflicts of law. Borrower, Collateral Agent and each Lender each submit to the exclusive jurisdiction of the State and Federal courts in Santa Clara County, California; provided, however, that nothing in this Agreement shall be deemed to operate to preclude Collateral Agent or any Lender from bringing suit or taking other legal action in any other jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment or other court order in favor of Collateral Agent or any Lender. Borrower expressly submits and consents in advance to such jurisdiction in any action or suit commenced in any such court, and Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is deemed appropriate by such court. Borrower hereby waives personal service of the summons, complaints, and other process issued in such action or suit and agrees that service of such summons, complaints, and other process may be made by registered or certified mail addressed to Borrower at the address set forth in, or subsequently provided by Borrower in accordance with, Section 10 of this Agreement and that service so made shall be deemed completed upon the earlier to occur of Borrower’s actual receipt thereof or three (3) days after deposit in the U.S. mails, proper postage prepaid.

TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, BORROWER, COLLATERAL AGENT AND EACH LENDER EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

WITHOUT INTENDING IN ANY WAY TO LIMIT THE PARTIES’ AGREEMENT TO WAIVE THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY, if the above waiver of the right to a trial by jury is not enforceable, the parties hereto agree that any and all disputes or controversies of any nature between them arising at any time shall be decided by a reference to a private judge, mutually selected by the parties (or, if they cannot agree, by the Presiding Judge of the Santa Clara County, California Superior Court) appointed in accordance with California Code of Civil Procedure Section 638 (or pursuant to comparable provisions of federal law if the dispute falls within the exclusive jurisdiction of the federal courts), sitting without a jury, in Santa Clara County, California; and the parties hereby submit to the jurisdiction of such court. The reference proceedings shall be conducted pursuant to and in accordance with the provisions of California Code of Civil Procedure §§ 638 through 645.1, inclusive. The private judge shall have the power, among others, to grant provisional relief, including without limitation, entering temporary restraining orders, issuing preliminary and permanent injunctions and appointing receivers. All such proceedings shall be closed to the public and confidential and all records relating thereto shall be permanently sealed. If during the course of any dispute, a party desires to seek provisional relief, but a judge has not been appointed at that point pursuant to the judicial reference procedures, then such party may apply to the Santa Clara County, California Superior Court for such relief. The proceeding before the private judge shall be conducted in the same manner as it would be before a court under the rules of evidence applicable to judicial proceedings. The parties shall be entitled to discovery which shall be conducted in the same manner as it would be before a court under the rules of discovery applicable to judicial proceedings. The private judge shall oversee discovery and may enforce all discovery rules and orders applicable to judicial proceedings in the same manner as a trial court judge. The parties agree that the selected or appointed private judge shall have the power to decide all issues in the action or proceeding, whether of fact or of law, and shall report a statement of decision thereon pursuant to California Code of Civil Procedure § 644(a). Nothing in this paragraph shall limit the right of any party at any time to exercise self-help remedies, foreclose against collateral, or obtain provisional remedies. The private judge shall also determine all issues relating to the applicability, interpretation, and enforceability of this paragraph.

12.    GENERAL PROVISIONS

12.1    Successors and Assigns. This Agreement binds and is for the benefit of the successors and permitted assigns of each party. Borrower may not transfer, pledge or assign this Agreement or any rights or obligations under it without Collateral Agent’s and each Lender’s prior written consent (which may be granted or withheld in Collateral Agent’s and each Lender’s discretion, subject to Section 12.6). The Lenders have the right,

 

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without the consent of or notice to Borrower, to sell, transfer, assign, pledge, negotiate, or grant participation in (any such sale, transfer, assignment, negotiation, or grant of a participation, a Lender Transfer) all or any part of, or any interest in, the Lenders’ obligations, rights, and benefits under this Agreement and the other Loan Documents; provided, however, that any such Lender Transfer (other than a transfer, pledge, sale or assignment to an Eligible Assignee) of its obligations, rights, and benefits under this Agreement and the other Loan Documents shall require the prior written consent of the Required Lenders (such approved assignee, an “Approved Lender”). Borrower and Collateral Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned until Collateral Agent shall have received and accepted an effective assignment agreement in form satisfactory to Collateral Agent executed, delivered and fully completed by the applicable parties thereto, and shall have received such other information regarding such Eligible Assignee or Approved Lender as Collateral Agent reasonably shall require. Notwithstanding anything to the contrary contained herein, so long as no Event of Default has occurred and is continuing, no Lender Transfer (other than a Lender Transfer (i) in respect of the Warrants or (ii) in connection with (x) assignments by a Lender due to a forced divestiture at the request of any regulatory agency; or (y) upon the occurrence of a default, event of default or similar occurrence with respect to a Lender’s own financing or securitization transactions) shall be permitted, without Borrower’s consent, to any Person which is an Affiliate or Subsidiary of Borrower, a direct competitor of Borrower or a vulture hedge fund, each as determined by Collateral Agent.

12.2    Indemnification. Borrower agrees to indemnify, defend and hold Collateral Agent and the Lenders and their respective directors, officers, employees, agents, attorneys, or any other Person affiliated with or representing Collateral Agent or the Lenders (each, an “Indemnified Person”) harmless against: (a) all obligations, demands, claims, and liabilities (collectively, “Claims”) asserted by any other party in connection with; related to; following; or arising from, out of or under, the transactions contemplated by the Loan Documents; and (b) all losses or Lenders’ Expenses incurred, or paid by Indemnified Person in connection with; related to; following; or arising from, out of or under, the transactions contemplated by the Loan Documents between Collateral Agent, and/or the Lenders and Borrower (including reasonable and documented attorneys’ fees and expenses), except for Claims and/or losses directly caused by such Indemnified Person’s gross negligence or willful misconduct. Borrower hereby further indemnifies, defends and holds each Indemnified Person harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including the reasonable and documented fees and disbursements of counsel for such Indemnified Person) in connection with any investigative, response, remedial, administrative or judicial matter or proceeding, whether or not such Indemnified Person shall be designated a party thereto and including any such proceeding initiated by or on behalf of Borrower, and the reasonable expenses of investigation by engineers, environmental consultants and similar technical personnel and any commission, fee or compensation claimed by any broker (other than any broker retained by Collateral Agent or Lenders) asserting any right to payment for the transactions contemplated hereby which may be imposed on, incurred by or asserted against such Indemnified Person as a result of or in connection with the transactions contemplated hereby and the use or intended use of the proceeds of the loan provided hereunder, in each case except for liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements directly caused by such Indemnified Person’s gross negligence or willful misconduct.

12.3    Time of Essence. Time is of the essence for the performance of all Obligations in this Agreement.

12.4    Severability of Provisions. Each provision of this Agreement is severable from every other provision in determining the enforceability of any provision.

12.5    Correction of Loan Documents. Collateral Agent and the Lenders may correct patent errors and fill in any blanks in this Agreement and the other Loan Documents consistent with the agreement of the parties so long as Collateral Agent provides Borrower with written notice of such correction and allows Borrower at least ten (10) days to object to such correction. In the event of such objection, such correction shall not be made except by an amendment signed by Collateral Agent, the Lenders and Borrower.

12.6    Amendments in Writing; Integration. (a) No amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, or any consent

 

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to any departure by Borrower or any of its Subsidiaries therefrom, shall in any event be effective unless the same shall be in writing and signed by Borrower, Collateral Agent and the Required Lenders provided that:

(i)    no such amendment, waiver or other modification that would have the effect of increasing or reducing a Lender’s Term Loan Commitment or Commitment Percentage shall be effective as to such Lender without such Lender’s written consent;

(ii)    no such amendment, waiver or modification that would affect the rights and duties of Collateral Agent shall be effective without Collateral Agent’s written consent or signature;

(iii)    no such amendment, waiver or other modification shall, unless signed by all the Lenders directly affected thereby, (A) reduce the principal of, rate of interest on or any fees with respect to any Term Loan or forgive any principal, interest (other than default interest) or fees (other than late charges) with respect to any Term Loan (B) postpone the date fixed for, or waive, any payment of principal of any Term Loan or of interest on any Term Loan (other than default interest) or any fees provided for hereunder (other than late charges or for any termination of any commitment); (C) change the definition of the term “Required Lenders” or the percentage of Lenders which shall be required for the Lenders to take any action hereunder; (D) release all or substantially all of any material portion of the Collateral, authorize Borrower to sell or otherwise dispose of all or substantially all or any material portion of the Collateral or release any Guarantor of all or any portion of the Obligations or its guaranty obligations with respect thereto, except, in each case with respect to this clause (D), as otherwise may be expressly permitted under this Agreement or the other Loan Documents (including in connection with any disposition permitted hereunder); (E) amend, waive or otherwise modify this Section 12.6 or the definitions of the terms used in this Section 12.6 insofar as the definitions affect the substance of this Section 12.6; (F) consent to the assignment, delegation or other transfer by Borrower of any of its rights and obligations under any Loan Document or release Borrower of its payment obligations under any Loan Document, except, in each case with respect to this clause (F), pursuant to a merger or consolidation permitted pursuant to this Agreement; (G) amend any of the provisions of Section 9.4 or amend any of the definitions of Pro Rata Share, Term Loan Commitment, Commitment Percentage or that provide for the Lenders to receive their Pro Rata Shares of any fees, payments, setoffs or proceeds of Collateral hereunder; (H) subordinate the Liens granted in favor of Collateral Agent securing the Obligations; or (I) amend any of the provisions of Section 12.10. It is hereby understood and agreed that all Lenders shall be deemed directly affected by an amendment, waiver or other modification of the type described in the preceding clauses (C), (D), (E), (F), (G) and (H) of the preceding sentence;

(iv)    the provisions of the foregoing clauses (i), (ii) and (iii) are subject to the provisions of any interlender or agency agreement among the Lenders and Collateral Agent pursuant to which any Lender may agree to give its consent in connection with any amendment, waiver or modification of the Loan Documents only in the event of the unanimous agreement of all Lenders.

(b)    Other than as expressly provided for in Section 12.6(a)(i)-(iii), Collateral Agent may, if requested by the Required Lenders, from time to time designate covenants in this Agreement less restrictive by notification to a Responsible Officer.

(c)    This Agreement and the Loan Documents represent the entire agreement about this subject matter and supersede prior negotiations or agreements. All prior agreements, understandings, representations, warranties, and negotiations between the parties about the subject matter of this Agreement and the Loan Documents merge into this Agreement and the Loan Documents.

12.7    Counterparts. This Agreement may be executed in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, is an original, and all taken together, constitute one Agreement.

12.8    Survival. All covenants, representations and warranties made in this Agreement continue in full force and effect until this Agreement has terminated pursuant to its terms and all Obligations (other than inchoate indemnity obligations and any other obligations which, by their terms, are to survive the termination of this Agreement) have been satisfied. The obligation of Borrower in Section 12.2 to indemnify each Lender and Collateral Agent, as well as the confidentiality provisions in Section 12.9 below, shall survive until the statute of limitations with respect to such claim or cause of action shall have run.

 

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12.9    Confidentiality. In handling any confidential information of Borrower or any of its Subsidiaries, the Lenders and Collateral Agent shall exercise the same degree of care that it exercises for their own proprietary information, but disclosure of information may be made: (a) subject to the terms and conditions of this Agreement, to the Lenders’ and Collateral Agent’s Subsidiaries or Affiliates that are subject to confidentiality provisions of this Section 12.9, or in connection with a Lender’s own financing or securitization transactions and upon the occurrence of a default, event of default or similar occurrence with respect to such financing or securitization transaction; (b) to prospective transferees (other than those identified in (a) above) or purchasers of any interest in the Credit Extensions (provided, however, the Lenders and Collateral Agent shall, except upon the occurrence and during the continuance of an Event of Default, obtain such prospective transferee’s or purchaser’s agreement to the terms of this provision or to similar confidentiality terms); (c) as required by law, regulation, subpoena, or other order; (d) to Lenders’ or Collateral Agent’s regulators or as otherwise required in connection with an examination or audit; (e) as Collateral Agent reasonably considers appropriate in exercising remedies under the Loan Documents; and (f) to third party service providers of the Lenders and/or Collateral Agent so long as such service providers have executed a confidentiality agreement with the Lenders and Collateral Agent with terms no less restrictive than those contained herein. Confidential information does not include information that either: (i) is in the public domain or in the Lenders’ and/or Collateral Agent’s possession when disclosed to the Lenders and/or Collateral Agent, or becomes part of the public domain after disclosure to the Lenders and/or Collateral Agent (other than as a result of its disclosure by Collateral Agent or any Lender in violation of this Agreement); or (ii) is disclosed to the Lenders and/or Collateral Agent by a third party, if the Lenders and/or Collateral Agent does not know that the third party is prohibited from disclosing the information. Collateral Agent and the Lenders may use confidential information for any purpose, including, without limitation, for the development of client databases, reporting purposes, and market analysis so long as Collateral Agent and the Lenders do not disclose Borrower’s identity or the identity of any person associated with Borrower unless otherwise expressly permitted by this Agreement. The provisions of this Section 12.9 shall survive the termination of this Agreement. The agreements provided under this Section 12.9 supersede all prior agreements, understanding, representations, warranties, and negotiations between the parties about the subject matter of this Section 12.9.

12.10    Right of Set Off. Borrower hereby grants to Collateral Agent and to each Lender, a lien, security interest and right of set off as security for all Obligations to Collateral Agent and each Lender hereunder, whether now existing or hereafter arising upon and against all deposits, credits, collateral and property, now or hereafter in the possession, custody, safekeeping or control of Collateral Agent or the Lenders or any entity under the control of Collateral Agent or the Lenders (including a Collateral Agent affiliate) or in transit to any of them. At any time after the occurrence and during the continuance of an Event of Default, without demand or notice, Collateral Agent or the Lenders may set off the same or any part thereof and apply the same to any liability or obligation of Borrower even though unmatured and regardless of the adequacy of any other collateral securing the Obligations. ANY AND ALL RIGHTS TO REQUIRE COLLATERAL AGENT TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER COLLATERAL WHICH SECURES THE OBLIGATIONS, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH RESPECT TO SUCH DEPOSITS, CREDITS OR OTHER PROPERTY OF BORROWER ARE HEREBY KNOWINGLY, VOLUNTARILY AND IRREVOCABLY WAIVED.

12.11    Cooperation of Borrower. If necessary, Borrower agrees to (i) execute any documents (including new Secured Promissory Notes) reasonably required to effectuate and acknowledge each assignment of a Term Loan Commitment or Loan to an assignee in accordance with Section 12.1, (ii) make Borrower’s management available to meet with Collateral Agent and prospective participants and assignees of Term Loan Commitments or Credit Extensions (which meetings shall be conducted no more often than twice every twelve months unless an Event of Default has occurred and is continuing), and (iii) assist Collateral Agent or the Lenders in the preparation of information relating to the financial affairs of Borrower as any prospective participant or assignee of a Term Loan Commitment or Term Loan reasonably may request. Subject to the provisions of Section 12.9, Borrower authorizes each Lender to disclose to any prospective participant or assignee of a Term Loan Commitment, any and all information in such Lender’s possession concerning Borrower and its financial affairs which has been delivered to such Lender by or on behalf of Borrower pursuant to this Agreement, or which has been delivered to such Lender by or on behalf of Borrower in connection with such Lender’s credit evaluation of Borrower prior to entering into this Agreement.

 

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12.12    Borrower Liability. Either Borrower may, acting singly, request Credit Extensions hereunder. Each Borrower hereby appoints the other as agent for the other for all purposes hereunder, including with respect to requesting Credit Extensions hereunder. Each Borrower hereunder shall be jointly and severally obligated to repay all Credit Extensions made hereunder, regardless of which Borrower actually receives said Credit Extension, as if each Borrower hereunder directly received all Credit Extensions. Each Borrower waives (a) any suretyship defenses available to it under the Code or any other applicable law, including, without limitation, the benefit of California Civil Code Section 2815 permitting revocation as to future transactions and the benefit of California Civil Code Sections 1432, 2809, 2810, 2819, 2839, 2845, 2847, 2848, 2849, 2850, and 2899 and 3433, and (b) any right to require Collateral Agent or any Lender to: (i) proceed against any Borrower or any other person; (ii) proceed against or exhaust any security; or (iii) pursue any other remedy. Collateral Agent and or any Lender may exercise or not exercise any right or remedy it has against any Borrower or any security it holds (including the right to foreclose by judicial or non-judicial sale) without affecting any Borrower’s liability. Notwithstanding any other provision of this Agreement or other related document, each Borrower irrevocably waives all rights that it may have at law or in equity (including, without limitation, any law subrogating Borrower to the rights of Collateral Agent and the Lenders under this Agreement) to seek contribution, indemnification or any other form of reimbursement from any other Borrower, or any other Person now or hereafter primarily or secondarily liable for any of the Obligations, for any payment made by Borrower with respect to the Obligations in connection with this Agreement or otherwise and all rights that it might have to benefit from, or to participate in, any security for the Obligations as a result of any payment made by Borrower with respect to the Obligations in connection with this Agreement or otherwise. Any agreement providing for indemnification, reimbursement or any other arrangement prohibited under this Section shall be null and void. If any payment is made to a Borrower in contravention of this Section, such Borrower shall hold such payment in trust for Collateral Agent and the Lenders and such payment shall be promptly delivered to Collateral Agent for application to the Obligations, whether matured or unmatured.

13.    DEFINITIONS

13.1    Definitions. As used in this Agreement, the following terms have the following meanings:

Account” is any “account” as defined in the Code with such additions to such term as may hereafter be made, and includes, without limitation, all accounts receivable and other sums owing to Borrower.

Account Debtor” is any “account debtor” as defined in the Code with such additions to such term as may hereafter be made.

Affiliate” of any Person is a Person that owns or controls directly or indirectly the Person, any Person that controls or is controlled by or is under common control with the Person, and each of that Person’s senior executive officers, directors, partners and, for any Person that is a limited liability company, that Person’s managers and members.

Agreement” is defined in the preamble hereof.

Amortization Date” is March 1, 2023.

Annual Projections” is defined in Section 6.2(a).

Anti-Terrorism Laws” are any laws relating to terrorism or money laundering, including Executive Order No. 13224 (effective September 24, 2001), the USA PATRIOT Act, the laws comprising or implementing the Bank Secrecy Act, and the laws administered by OFAC.

Approved Fund” is any (i) investment company, fund, trust, securitization vehicle or conduit that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business or (ii) any Person (other than a natural person) which temporarily warehouses loans for any Lender or any entity described in the preceding clause (i) and that, with respect to each of the preceding clauses (i) and (ii), is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) a Person (other than a natural person) or an Affiliate of a Person (other than a natural person) that administers or manages a Lender.

 

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Approved Lender” is defined in Section 12.1.

Basic Rate” is the per annum rate of interest (based on a year of three hundred sixty (360) days) equal to the sum of (I) the greater of (a) the thirty (30) day U.S. LIBOR rate reported in The Wall Street Journal on the last Business Day of the month that immediately precedes the month in which the interest will accrue, and (b) two and one hundredths percent (2.01%), plus (II) five and ninety-eight hundredths percent (5.98%). Notwithstanding the foregoing, (x) the Basic Rate from the period of the Effective Date through and including January 31, 2020, shall be 7.99%; and (y) the Basic Rate shall at no time be less than seven and ninety-nine one hundredths percent (7.99%). If The Wall Street Journal (or another nationally recognized rate reporting source acceptable to Collateral Agent) no longer reports the U.S. LIBOR Rate or if such interest rate no longer exists or if The Wall Street Journal no longer publishes the U.S. LIBOR Rate or ceases to exist, Collateral Agent may in good faith, and with reference to the margin above such interest rate in this definition, select a replacement interest rate and replacement margin above such interest rate that results in a substantially similar interest rate floor and total rate in effect immediately prior to the effectiveness of such replacement interest rate and replacement margin, or replacement publication, as the case may be, and shall notify Borrower of such replacement interest rate and replacement margin or replacement publication.

Blocked Person is any Person: (a) listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (b) a Person owned or controlled by, or acting for or on behalf of, any Person that is listed in the annex to, or is otherwise subject to the provisions of, Executive Order No. 13224, (c) a Person with which any Lender is prohibited from dealing or otherwise engaging in any transaction by any Anti-Terrorism Law, (d) a Person that commits, threatens or conspires to commit or supports “terrorism” as defined in Executive Order No. 13224, or (e) a Person that is named a “specially designated national” or “blocked person” on the most current list published by OFAC or other similar list.

Borrower” is defined in the preamble hereof.

Borrower’s Books” are Borrower’s or any of its Subsidiaries’ books and records including ledgers, federal, and state tax returns, records regarding Borrower’s or its Subsidiaries’ assets or liabilities, the Collateral, business operations or financial condition, and all computer programs or storage or any equipment containing such information.

Business Day” is any day that is not a Saturday, Sunday or a day on which Collateral Agent is closed.

Cash Equivalents” are (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc., (c) certificates of deposit maturing no more than one (1) year after issue provided that the account in which any such certificate of deposit is maintained is subject to a Control Agreement in favor of Collateral Agent and (d) money market funds at least 95% of which constitute Cash Equivalents of the kinds described in clauses (a) through (c) herein. For the avoidance of doubt, the direct purchase by Borrower or any of its Subsidiaries of any Auction Rate Securities, or purchasing participations in, or entering into any type of swap or other derivative transaction, or otherwise holding or engaging in any ownership interest in any type of Auction Rate Security by Borrower or any of its Subsidiaries shall be conclusively determined by the Lenders as an ineligible Cash Equivalent, and any such transaction shall expressly violate each other provision of this Agreement governing Permitted Investments. Notwithstanding the foregoing, Cash Equivalents does not include and Borrower, and each of its Subsidiaries, are prohibited from purchasing, purchasing participations in, entering into any type of swap or other equivalent derivative transaction, or otherwise holding or engaging in any ownership interest in any type of debt instrument, including, without limitation, any corporate or municipal bonds with a long term nominal maturity for which the interest rate is reset through a dutch auction and more commonly referred to as an auction rate security (each, an “Auction Rate Security”).

Claims” are defined in Section 12.2.

 

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Code” is the Uniform Commercial Code, as the same may, from time to time, be enacted and in effect in the State of California; provided, that, to the extent that the Code is used to define any term herein or in any Loan Document and such term is defined differently in different Articles or Divisions of the Code, the definition of such term contained in Article or Division 9 shall govern; provided further, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection, or priority of, or remedies with respect to, Collateral Agent’s Lien on any Collateral is governed by the Uniform Commercial Code in effect in a jurisdiction other than the State of California, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority, or remedies and for purposes of definitions relating to such provisions.

Collateral” is any and all properties, rights and assets of Borrower described on Exhibit A.

Collateral Account” is any Deposit Account, Securities Account, or Commodity Account, or any other bank account maintained by Borrower or any Subsidiary which is a Borrower or Guarantor at any time.

Collateral Agent” is, Oxford, not in its individual capacity, but solely in its capacity as agent on behalf of and for the benefit of the Lenders.

Commitment Percentage” is set forth in Schedule 1.1, as amended from time to time.

Commodity Account” is any “commodity account” as defined in the Code with such additions to such term as may hereafter be made.

Communication” is defined in Section 10.

Compliance Certificate” is that certain certificate in the form attached hereto as Exhibit C.

Contingent Obligation” is, for any Person, any direct or indirect liability, contingent or not, of that Person for (a) any indebtedness, lease, dividend, letter of credit or other obligation of another such as an obligation directly or indirectly guaranteed, endorsed, co-made, discounted or sold with recourse by that Person, or for which that Person is directly or indirectly liable; (b) any obligations for undrawn letters of credit for the account of that Person; and (c) all obligations from any interest rate, currency or commodity swap agreement, interest rate cap or collar agreement, or other agreement or arrangement designated to protect a Person against fluctuation in interest rates, currency exchange rates or commodity prices; but “Contingent Obligation” does not include endorsements in the ordinary course of business. The amount of a Contingent Obligation is the stated or determined amount of the primary obligation for which the Contingent Obligation is made or, if not determinable, the maximum reasonably anticipated liability for it determined by the Person in good faith; but the amount may not exceed the maximum of the obligations under any guarantee or other support arrangement.

Control Agreement” is any control agreement entered into among the depository institution at which Borrower or any of its Subsidiaries maintains a Deposit Account or the securities intermediary or commodity intermediary at which Borrower or any of its Subsidiaries maintains a Securities Account or a Commodity Account, Borrower or such Subsidiary, and Collateral Agent pursuant to which Collateral Agent obtains control (within the meaning of the Code) for the benefit of the Lenders over such Deposit Account, Securities Account, or Commodity Account.

Copyrights” are any and all copyright rights, copyright applications, copyright registrations and like protections in each work or authorship and derivative work thereof, whether published or unpublished and whether or not the same also constitutes a trade secret.

Credit Extension” is any Term Loan or any other extension of credit by Collateral Agent or Lenders for Borrower’s benefit.

Default Rate” is defined in Section 2.3(b).

 

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Deposit Account” is any “deposit account” as defined in the Code with such additions to such term as may hereafter be made.

Designated Deposit Account” is Borrower’s deposit account, account number ending in 4420, maintained with Union Bank.

Disbursement Letter” is that certain form attached hereto as Exhibit B.

Dollars, dollars” and “$” each mean lawful money of the United States.

Effective Date” is defined in the preamble of this Agreement.

Eligible Assignee” is (i) a Lender, (ii) an Affiliate of a Lender, (iii) an Approved Fund and (iv) any commercial bank, savings and loan association or savings bank or any other entity which is an “accredited investor” (as defined in Regulation D under the Securities Act of 1933, as amended) and which extends credit or buys loans as one of its businesses, including insurance companies, mutual funds, lease financing companies and commercial finance companies, in each case, which either (A) has a rating of BBB or higher from Standard & Poor’s Rating Group and a rating of Baa2 or higher from Moody’s Investors Service, Inc. at the date that it becomes a Lender or (B) has total assets in excess of Five Billion Dollars ($5,000,000,000.00), and in each case of clauses (i) through (iv), which, through its applicable lending office, is capable of lending to Borrower without the imposition of any withholding or similar taxes; provided that notwithstanding the foregoing, “Eligible Assignee” shall not include, unless an Event of Default has occurred and is continuing, (i) Borrower or any of Borrower’s Affiliates or Subsidiaries or (ii) a direct competitor of Borrower or a vulture hedge fund, each as determined by Collateral Agent. Notwithstanding the foregoing, (x) in connection with assignments by a Lender due to a forced divestiture at the request of any regulatory agency, the restrictions set forth herein shall not apply and Eligible Assignee shall mean any Person or party and (y) in connection with a Lender’s own financing or securitization transactions, the restrictions set forth herein shall not apply and Eligible Assignee shall mean any Person or party providing such financing or formed to undertake such securitization transaction and any transferee of such Person or party upon the occurrence of a default, event of default or similar occurrence with respect to such financing or securitization transaction; provided that no such sale, transfer, pledge or assignment under this clause (y) shall release such Lender from any of its obligations hereunder or substitute any such Person or party for such Lender as a party hereto until Collateral Agent shall have received and accepted an effective assignment agreement from such Person or party in form satisfactory to Collateral Agent executed, delivered and fully completed by the applicable parties thereto, and shall have received such other information regarding such Eligible Assignee as Collateral Agent reasonably shall require.

Equipment” is all “equipment” as defined in the Code with such additions to such term as may hereafter be made, and includes without limitation all machinery, fixtures, goods, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing.

Equity Event” is the receipt by Borrower on or after the Effective Date of unrestricted net cash proceeds of not less than Thirty Million Dollars ($30,000,000.00) from the issuance and sale by Borrower of its Series C Preferred equity securities on terms and conditions reasonably acceptable to Collateral Agent.

ERISA” is the Employee Retirement Income Security Act of 1974, as amended, and its regulations.

Event of Default” is defined in Section 8.

Final Payment” is a payment (in addition to and not a substitution for the regular monthly payments of principal plus accrued interest) due on the earliest to occur of (a) the Maturity Date, or (b) the acceleration of any Term Loan, or (c) the prepayment of a Term Loan pursuant to Section 2.2(c) or (d), equal to the original principal amount of such funded Term Loan multiplied by the Final Payment Percentage, payable to Lenders in accordance with their respective Pro Rata Shares. For the avoidance of doubt, the calculation of any Final Payment shall not include the principal amount prepaid in accordance with Section 2.2(d)(ii) if a Final Payment based on such principal amount was made at the time of such prepayment.

 

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Final Payment Percentage” is (i) four percent (4.00%) with respect to the Term A Loan, plus (ii) three percent (3.00%) of the funded amount of the Term B Loan.

Foreign Subsidiary” is a Subsidiary that is not an entity organized under the laws of the United States or any territory thereof.

Funding Date” is any date on which a Credit Extension is made to or on account of Borrower which shall be a Business Day.

GAAP” is generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other Person as may be approved by a significant segment of the accounting profession in the United States, which are applicable to the circumstances as of the date of determination.

General Intangibles” are all “general intangibles” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation, all copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work, whether published or unpublished, any patents, trademarks, service marks and, to the extent permitted under applicable law, any applications therefor, whether registered or not, any trade secret rights, including any rights to unpatented inventions, payment intangibles, royalties, contract rights, goodwill, franchise agreements, purchase orders, customer lists, route lists, telephone numbers, domain names, claims, income and other tax refunds, security and other deposits, options to purchase or sell real or personal property, rights in all litigation presently or hereafter pending (whether in contract, tort or otherwise), insurance policies (including without limitation key man, property damage, and business interruption insurance), payments of insurance and rights to payment of any kind.

Governmental Approval” is any consent, authorization, approval, order, license, franchise, permit, certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect of, any Governmental Authority.

Governmental Authority” is any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization.

Guarantor” is any Person providing a Guaranty in favor of Collateral Agent.

Guaranty” is any guarantee of all or any part of the Obligations, as the same may from time to time be amended, restated, modified or otherwise supplemented.

Indebtedness” is (a) indebtedness for borrowed money or the deferred price of property or services, such as reimbursement and other obligations for surety bonds and letters of credit, (b) obligations evidenced by notes, bonds, debentures or similar instruments, (c) capital lease obligations, and (d) Contingent Obligations.

Indemnified Person” is defined in Section 12.2.

Insolvency Proceeding” is any proceeding by or against any Person under the United States Bankruptcy Code, or any other bankruptcy or insolvency law, including assignments for the benefit of creditors, compositions, extensions generally with its creditors, or proceedings seeking reorganization, arrangement, or other relief.

Insolvent” means not Solvent.

Intellectual Property” means all of Borrower’s or any Subsidiary’s right, title and interest in and to the following:

(a)    its Copyrights, Trademarks and Patents;

 

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(b)    any and all trade secrets and trade secret rights, including, without limitation, any rights to unpatented inventions, know-how, operating manuals;

(c)    any and all source code;

(d)    any and all design rights which may be available to Borrower;

(e)    any and all claims for damages by way of past, present and future infringement of any of the foregoing, with the right, but not the obligation, to sue for and collect such damages for said use or infringement of the Intellectual Property rights identified above; and

(f)    all amendments, renewals and extensions of any of the Copyrights, Trademarks or Patents.

Inventory” is all “inventory” as defined in the Code in effect on the date hereof with such additions to such term as may hereafter be made, and includes without limitation all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products, including without limitation such inventory as is temporarily out of any Person’s custody or possession or in transit and including any returned goods and any documents of title representing any of the above.

Investment” is any beneficial ownership interest in any Person (including stock, partnership interest or other securities), and any loan, advance or capital contribution to any Person.

Key Person” is each of Borrower’s (i) Chief Executive Officer and President and Treasurer, who is Mark McKenna as of the Effective Date, (ii) Chief Operating Officer, who is Lauren Otsuki as of the Effective Date, (iii) Chief Medical Officer, who is Allison Luo as of the Effective Date and (iv) Chief Scientific Officer, who is Laurens Kruidenier as of the Effective Date.

Lender” is any one of the Lenders.

Lenders” are the Persons identified on Schedule 1.1 hereto and each assignee that becomes a party to this Agreement pursuant to Section 12.1.

Lenders’ Expenses” are all audit fees and expenses, costs, and expenses (including reasonable and documented attorneys’ fees and expenses, as well as appraisal fees, fees incurred on account of lien searches, inspection fees, and filing fees) for preparing, amending, negotiating, administering, defending and enforcing the Loan Documents (including, without limitation, those incurred in connection with appeals or Insolvency Proceedings) or otherwise incurred by Collateral Agent and/or the Lenders in connection with the Loan Documents.

Lien” is a claim, mortgage, deed of trust, levy, charge, pledge, security interest, or other encumbrance of any kind, whether voluntarily incurred or arising by operation of law or otherwise against any property.

Loan Documents” are, collectively, this Agreement, the Warrants, the Perfection Certificates, each Compliance Certificate, each Disbursement Letter, the Post Closing Letter, any subordination agreements, any note, or notes or guaranties executed by Borrower or any other Person, and any other present or future agreement entered into by Borrower, any Guarantor or any other Person for the benefit of the Lenders and Collateral Agent in connection with this Agreement; all as amended, restated, or otherwise modified.

Material Adverse Change” is (a) a material impairment in the perfection or priority of Collateral Agent’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse change in the business, operations or condition (financial or otherwise) of Borrower or Borrower and its Subsidiaries, taken as a whole; or (c) a material impairment of the prospect of repayment of any portion of the Obligations.

 

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Maturity Date” is January 23, 2025.

Obligations” are all of Borrower’s obligations to pay when due any debts, principal, interest, Lenders’ Expenses, the Prepayment Fee, the Final Payment, and other amounts Borrower owes the Lenders now or later, in connection with, related to, following, or arising from, out of or under, this Agreement or, the other Loan Documents (other than the Warrants or any other equity instruments), or otherwise, and including interest accruing after Insolvency Proceedings begin (whether or not allowed) and debts, liabilities, or obligations of Borrower assigned to the Lenders and/or Collateral Agent, and the performance of Borrower’s duties under the Loan Documents (other than the Warrants or any other equity instruments).

OFAC” is the U.S. Department of Treasury Office of Foreign Assets Control.

OFAC Lists” are, collectively, the Specially Designated Nationals and Blocked Persons List maintained by OFAC pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or other restricted Persons maintained pursuant to any of the rules and regulations of OFAC or pursuant to any other applicable Executive Orders.

Operating Documents” are, for any Person, such Person’s formation documents, as certified by the Secretary of State (or equivalent agency) of such Person’s jurisdiction of organization on a date that is no earlier than thirty (30) days prior to the Effective Date, and, (a) if such Person is a corporation, its bylaws in current form, (b) if such Person is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with all current amendments or modifications thereto.

Patents” means all patents, patent applications and like protections including without limitation improvements, divisions, continuations, renewals, reissues, extensions and continuations-in-part of the same.

Payment Date” is the first (1st) calendar day of each calendar month, commencing on March 1, 2020.

Perfection Certificate” and “Perfection Certificates” is defined in Section 5.1.

Permitted Indebtedness” is:

(a)    Borrower’s Indebtedness to the Lenders and Collateral Agent under this Agreement and the other Loan Documents;

(b)    Indebtedness existing on the Effective Date and disclosed on the Perfection Certificate(s);

(c)    Subordinated Debt;

(d)    unsecured Indebtedness to trade creditors incurred in the ordinary course of business;

(e)    Indebtedness consisting of capitalized lease obligations and purchase money Indebtedness, in each case incurred by Borrower or any of its Subsidiaries to finance the acquisition, repair, improvement or construction of fixed or capital assets of such person, provided that (i) the aggregate outstanding principal amount of all such Indebtedness does not exceed Five Hundred Thousand Dollars ($500,000.00) at any time and (ii) the principal amount of such Indebtedness does not exceed the lower of the cost or fair market value of the property so acquired or built or of such repairs or improvements financed with such Indebtedness (each measured at the time of such acquisition, repair, improvement or construction is made);

(f)    Indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of Borrower’s business;

(g)    Indebtedness of Borrower with respect to corporate credit cards in an aggregate amount not to exceed Two Hundred Thousand Dollars ($200,000.00);

 

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(h)    Indebtedness of Borrower with respect to automobile leases in the ordinary course of business in an aggregate amount not to exceed One Million Two Hundred Thousand Dollars ($1,200,000.00) in any fiscal year;

(i)    intercompany Indebtedness among Borrower and its Subsidiaries otherwise constituting (and without duplication with any clause of the definition of) “Permitted Investments;”

(j)    other unsecured Indebtedness not exceeding One Hundred Thousand Dollars ($100,000.00) in the aggregate outstanding at any time; and

(k)    extensions, refinancings, modifications, amendments and restatements of any items of Permitted Indebtedness (a) through (i) above, provided that the principal amount thereof is not increased or the terms thereof are not modified to impose materially more burdensome terms upon Borrower, or its Subsidiary, as the case may be.

Permitted Investments” are:

(a)    Investments disclosed on the Perfection Certificate(s) and existing on the Effective Date;

(b)    (i) Investments consisting of cash and Cash Equivalents, and (ii) any other Investments permitted by Borrower’s investment policy, as amended from time to time, provided that such investment policy (and any such amendment thereto) has been approved in writing by Collateral Agent;

(c)    Investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower;

(d)    Investments consisting of Deposit Accounts in which Collateral Agent has a perfected security interest, except to the extent a perfected security interest is not required therein, in accordance with Section 6.6;

(e)    Investments in connection with Transfers permitted by Section 7.1 and Investments consisting of the creation of a Subsidiary permitted under Section 6.12 of this Agreement, which is otherwise a Permitted Investment;

(f)    Investments (i) by Borrower in Subsidiaries which are Borrowers or Guarantors; (ii) by Borrower in Subsidiaries which are not Borrowers or Guarantors, not to exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate per fiscal year or otherwise pursuant to transfer pricing arrangements entered into between Borrower and any Subsidiary in the ordinary course of business; and (iii) of Subsidiaries in or to Borrower or any Guarantor;

(g)    Investments consisting of (i) travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s Board of Directors; not to exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate for (i) and (ii) in any fiscal year;

(h)    Investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;

(i)    Investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not Affiliates, in the ordinary course of business; provided that this paragraph (h) shall not apply to Investments of Borrower in any Subsidiary;

 

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(j)    to the extent constituting Investments, but without duplication with any clause of the definition of, “Permitted Indebtedness;”

(k)    cash and non-cash Investments in joint ventures or strategic alliances in the ordinary course of Borrower’s business consisting of the licensing of technology permitted under this Agreement, the development of technology or the providing of technical support; provided that any cash Investments do not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate in any fiscal year; and

(l)    other Investments in an amount not to exceed One Hundred Thousand Dollars ($100,000.00) in any fiscal year.

Permitted Licenses” are (A) licenses of over-the-counter software that is commercially available to the public, and (B) non-exclusive and exclusive licenses for the use of the Intellectual Property of Borrower or any of its Subsidiaries entered into in the ordinary course of business, provided, that, with respect to each such license described in clause (B), (i) no Event of Default has occurred or is continuing at the time of such license; (ii) the license constitutes an arms-length transaction, the terms of which, on their face, do not provide for a sale or assignment of any Intellectual Property and do not restrict the ability of Borrower or any of its Subsidiaries, as applicable, to pledge, grant a security interest in or lien on, or assign or otherwise Transfer any Intellectual Property; (iii) in the case of any exclusive license, (x) Borrower delivers ten (10) days’ prior written notice and a brief summary of the terms of the proposed license to Collateral Agent and the Lenders and delivers to Collateral Agent and the Lenders copies of the final executed licensing documents in connection with the exclusive license promptly upon consummation thereof, and (y) any such license could not result in a legal transfer of title of the licensed property but may be exclusive in respects other than territory and may be exclusive as to territory only as to discrete geographical areas outside of the United States; and (iv) all upfront payments, royalties, milestone payments or other proceeds arising from the licensing agreement that are payable to Borrower or any of its Subsidiaries are paid to a Deposit Account that is governed by a Control Agreement.

Permitted Liens” are:

(a)    Liens existing on the Effective Date and disclosed on the Perfection Certificates or arising under this Agreement and the other Loan Documents;

(b)    Liens for taxes, fees, assessments or other government charges or levies, either (i) not due and payable or (ii) being contested in good faith and for which Borrower maintains adequate reserves on its Books, provided that no notice of any such Lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

(c)    liens securing Indebtedness permitted under clause (e) of the definition of “Permitted Indebtedness,” provided that (i) such liens exist prior to the acquisition of, or attach substantially simultaneous with, or within twenty (20) days after the, acquisition, lease, repair, improvement or construction of, such property financed or leased by such Indebtedness and (ii) such liens do not extend to any property of Borrower other than the property (and proceeds thereof) acquired, leased or built, or the improvements or repairs, financed by such Indebtedness;

(d)    Liens of carriers, warehousemen, suppliers, or other Persons that are possessory in nature arising in the ordinary course of business so long as such Liens attach only to Inventory, securing liabilities in the aggregate amount not to exceed One Hundred Thousand Dollars ($100,000.00), and which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

(e)    Liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than Liens imposed by ERISA);

 

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(f)    Liens incurred in the extension, renewal or refinancing of the indebtedness secured by Liens described in (a) through (c), but any extension, renewal or replacement Lien must be limited to the property encumbered by the existing Lien and the principal amount of the indebtedness may not increase;

(g)    leases or subleases of real property granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), and leases, subleases, non-exclusive licenses or sublicenses of personal property (other than Intellectual Property) granted in the ordinary course of Borrower’s business (or, if referring to another Person, in the ordinary course of such Person’s business), if the leases, subleases, licenses and sublicenses do not prohibit granting Collateral Agent or any Lender a security interest therein;

(h)    banker’s liens, rights of setoff and Liens in favor of financial institutions incurred in the ordinary course of business arising in connection with Borrower’s deposit accounts or securities accounts held at such institutions solely to secure payment of fees and similar costs and expenses and provided such accounts are maintained in compliance with Section 6.6(b) hereof;

(i)    Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 8.4 or 8.7;

(j)    deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature; in each case, incurred in the ordinary course of business and not representing obligations for borrowed money, in an amount not exceeding Two Hundred Fifty Thousand Dollars ($250,000.00) in the aggregate outstanding at any time;

(k)    Liens on cash securing obligations permitted under clause (g) of Permitted Indebtedness; and

(l)    Liens consisting of Permitted Licenses.

Person” is any individual, sole proprietorship, partnership, limited liability company, joint venture, company, trust, unincorporated organization, association, corporation, institution, public benefit corporation, firm, joint stock company, estate, entity or government agency.

Post Closing Letter” is that certain Post Closing Letter dated as of the Effective Date by and between Collateral Agent and Borrower.

Prepayment Fee” is, with respect to any Term Loan subject to prepayment prior to the Maturity Date, whether by mandatory or voluntary prepayment, acceleration or otherwise, an additional fee payable to the Lenders in amount equal to:

(i)    for a prepayment made on or after the Effective Date through and including the first anniversary of the Effective Date, three percent (3.00%) of the principal amount of the Term Loans prepaid;

(ii)    for a prepayment made after the first anniversary of the Effective Date through and including the second anniversary of the Effective Date, two percent (2.00%) of the principal amount of the Term Loans prepaid;

(iii)    for a prepayment made after the second anniversary of the Effective Date through and including the third anniversary of the Effective Date, one percent (1.00%) of the principal amount of the Term Loans prepaid; and

(iv)    for a prepayment made after the third anniversary of the Effective Date and prior to the Maturity Date, no Prepayment Fee shall be applicable.

 

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Pro Rata Share” is, as of any date of determination, with respect to each Lender, a percentage (expressed as a decimal, rounded to the ninth decimal place) determined by dividing the outstanding principal amount of Term Loans held by such Lender by the aggregate outstanding principal amount of all Term Loans.

Registered Organization” is any “registered organization” as defined in the Code with such additions to such term as may hereafter be made.

Required Lenders” means (i) for so long as all of the Persons that are Lenders on the Effective Date (each an “Original Lender”) have not assigned or transferred any of their interests in their Term Loan, Lenders holding one hundred percent (100%) of the aggregate outstanding principal balance of the Term Loan, or (ii) at any time from and after any Original Lender has assigned or transferred any interest in its Term Loan, Lenders holding at least sixty six percent (66%) of the aggregate outstanding principal balance of the Term Loan and, in respect of this clause (ii), (A) each Original Lender that has not assigned or transferred any portion of its Term Loan, (B) each assignee or transferee of an Original Lender’s interest in the Term Loan, but only to the extent that such assignee or transferee is an Affiliate or Approved Fund of such Original Lender, and (C) any Person providing financing to any Person described in clauses (A) and (B) above; provided, however, that this clause (C) shall only apply upon the occurrence of a default, event of default or similar occurrence with respect to such financing.

Requirement of Law” is as to any Person, the organizational or governing documents of such Person, and any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

Responsible Officer” is any of the President, Chief Executive Officer, or Chief Financial Officer of Borrower acting alone.

Second Draw Period” is the period commencing on the date of the occurrence of the Equity Event and ending on the earliest of (i) ninety (90) days after the occurrence of the Equity Event; (ii) September 30, 2020; and (iii) the occurrence of an Event of Default; provided, however, that the Second Draw Period shall not commence if on the date of the occurrence of the Equity Event an Event of Default has occurred and is continuing.

Secured Promissory Note” is defined in Section 2.4.

Secured Promissory Note Record” is a record maintained by each Lender with respect to the outstanding Obligations owed by Borrower to Lender and credits made thereto.

Securities Account” is any “securities account” as defined in the Code with such additions to such term as may hereafter be made.

Shares” is one hundred percent (100%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower or Borrower’s Subsidiary, in any Subsidiary; provided that, in the event Borrower, demonstrates to Collateral Agent’s reasonable satisfaction, that a pledge of more than sixty five percent (65%) of the Shares of such Subsidiary which is a Foreign Subsidiary, creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code, “Shares” shall mean sixty-five percent (65%) of the issued and outstanding capital stock, membership units or other securities owned or held of record by Borrower or its Subsidiary in such Foreign Subsidiary.

Solvent” is, with respect to any Person: the fair salable value of such Person’s consolidated assets (including goodwill minus disposition costs) exceeds the fair value of such Person’s liabilities; such Person is not left with unreasonably small capital after the transactions in this Agreement; and such Person is able to pay its debts (including trade debts) as they mature.

Subordinated Debt” is indebtedness incurred by Borrower or any of its Subsidiaries subordinated to all Indebtedness of Borrower and/or its Subsidiaries to the Lenders (pursuant to a subordination, intercreditor, or other similar agreement in form and substance satisfactory to Collateral Agent and the Lenders entered into between Collateral Agent, Borrower, and/or any of its Subsidiaries, and the other creditor), on terms acceptable to Collateral Agent and the Lenders.

 

36


Subsidiary” is, with respect to any Person, any Person of which more than fifty percent (50%) of the voting stock or other equity interests (in the case of Persons other than corporations) is owned or controlled, directly or indirectly, by such Person or through one or more intermediaries.

Term A Loan” is defined in Section 2.2(a)(i) hereof.

Term B Loan” is defined in Section 2.2(a)(ii) hereof.

Term Loan” is defined in Section 2.2(a)(ii) hereof.

Term Loan Commitment” is, for any Lender, the obligation of such Lender to make a Term Loan, up to the principal amount shown on Schedule 1.1.Term Loan Commitments” means the aggregate amount of such commitments of all Lenders.

Trademarks” means any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections, and the entire goodwill of the business of Borrower connected with and symbolized by such trademarks.

Transfer” is defined in Section 7.1.

Warrants” are those certain Warrants to Purchase Stock dated as of the Effective Date, or any date thereafter, issued by Borrower in favor of each Lender or such Lender’s Affiliates.

[Balance of Page Intentionally Left Blank]

 

37


IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the Effective Date.

 

BORROWER:
PROMETHEUS BIOSCIENCES, INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer
PROMETHEUS LABORATORIES INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer
COLLATERAL AGENT AND LENDER:
OXFORD FINANCE LLC
By   /s/ Colette H. Featherly
Name:   Colette H. Featherly
Title:   Senior Vice President

[Signature Page to Loan and Security Agreement]


SCHEDULE 1.1

Lenders and Commitments

 

Term A Loans

 

Lender

   Term Loan Commitment      Commitment Percentage  

OXFORD FINANCE LLC

   $ 7,500,000.00        100.00
  

 

 

    

 

 

 

TOTAL

   $ 7,500,000.00        100.00
  

 

 

    

 

 

 

 

Term B Loans

 

Lender

   Term Loan Commitment      Commitment Percentage  

OXFORD FINANCE LLC

   $ 17,500,000.00        100.00
  

 

 

    

 

 

 

TOTAL

   $ 17,500,000.00        100.00
  

 

 

    

 

 

 

 

Aggregate (all Term Loans)

 

Lender

   Term Loan Commitment      Commitment Percentage  

OXFORD FINANCE LLC

   $ 25,000,000.00        100.00
  

 

 

    

 

 

 

TOTAL

   $ 25,000,000.00        100.00
  

 

 

    

 

 

 


EXHIBIT A

Description of Collateral

The Collateral consists of all of Borrower’s right, title and interest in and to the following personal property:

All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles (except as noted below), commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts and other Collateral Accounts, all certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

All Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

Notwithstanding the foregoing, the Collateral does not include (i) any Intellectual Property; provided, however, the Collateral shall include all Accounts and all proceeds of Intellectual Property. If a judicial authority (including a U.S. Bankruptcy Court) would hold that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and such property that are proceeds of Intellectual Property, then the Collateral shall automatically, and effective as of the Effective Date, include the Intellectual Property to the extent necessary to permit perfection of Collateral Agent’s security interest in such Accounts and such other property of Borrower that are proceeds of the Intellectual Property; (ii) more than sixty-five percent (65%) of the total combined voting power of all classes of stock entitled to vote the shares of capital stock (the “Shares”) of any Foreign Subsidiary, if Borrower demonstrates to Collateral Agent’s reasonable satisfaction that a pledge of more than sixty-five percent (65%) of the Shares of such Subsidiary creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code; and (iii) any license or contract, in each case if the granting of a Lien in such license or contract is prohibited by or would constitute a default under the agreement governing such license or contract (but (A) only to the extent such prohibition is enforceable under applicable law and (B) other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-408 or 9-409 (or any other Section) of Division 9 of the Code); provided that upon the termination, lapsing or expiration of any such prohibition, such license or contract, as applicable, shall automatically be subject to the security interest granted in favor of Collateral Agent hereunder and become part of the “Collateral.”

Pursuant to the terms of a certain negative pledge arrangement with Collateral Agent and the Lenders, Borrower has agreed not to encumber any of its Intellectual Property.


EXHIBIT B

Form of Disbursement Letter

[see attached]


DISBURSEMENT LETTER

January 24, 2020

The undersigned, being the duly elected and acting President and Chief Executive Officer of PROMETHEUS BIOSCIENCES, INC., a Delaware corporation with offices located at 9410 Carroll Park Drive, San Diego, CA 92121, on behalf of itself and each borrower under the Loan Agreement (collectively, “Borrower”), does hereby certify to OXFORD FINANCE LLC (“Oxford” and “Lender”), as collateral agent (the “Collateral Agent”) in connection with that certain Loan and Security Agreement dated as of January 24, 2020, by and among Borrower, Collateral Agent and the Lenders from time to time party thereto (the “Loan Agreement”; with other capitalized terms used below having the meanings ascribed thereto in the Loan Agreement) that:

1.    The representations and warranties made by Borrower in Section 5 of the Loan Agreement and in the other Loan Documents are true and correct in all material respects as of the date hereof; provided that those representations and warranties expressly referring to a specific date shall be true and correct in all material respects as of such date.

2.    No event or condition has occurred that would constitute an Event of Default under the Loan Agreement or any other Loan Document.

3.    Borrower is in compliance with the covenants and requirements contained in Sections 4, 6 and 7 of the Loan Agreement.

4.    All conditions referred to in Section 3 of the Loan Agreement to the making of the Loan to be made on or about the date hereof have been satisfied or waived by Collateral Agent.

5.    No Material Adverse Change has occurred.

6.    The undersigned is a Responsible Officer.

[Balance of Page Intentionally Left Blank]


7.    The proceeds of the Term A Loan shall be disbursed as follows:

 

Loan Amount

   $ 7,500,000.00  

Plus:

  

—Deposit Received

   $ 30,000.00  

Less:

  

—Facility Fee

   ($ 37,500.00

—Interim Interest

   ($ 13,316.67

—Lender’s Legal Fees

   ($ 86,608.50 )* 

Net Term A Loan Proceeds due from Oxford:

   $ 7,392,574.83  

8.    The Term A Loan shall amortize in accordance with the Amortization Table attached hereto.

9.    The aggregate net proceeds of the Term Loans shall be transferred to the Designated Deposit Account as follows:

 

Account Name:    PROMETHEUS BIOSCIENCES, INC.

[Balance of Page Intentionally Left Blank]

 

 

*

Legal fees and costs are through the Effective Date. Post-closing legal fees and costs, payable after the Effective Date, to be invoiced and paid post-closing.


Dated as of the date first set forth above.

 

BORROWER:
PROMETHEUS BIOSCIENCES, INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer
PROMETHEUS LABORATORIES INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer
COLLATERAL AGENT AND LENDER:
OXFORD FINANCE LLC
By   /s/ Colette H. Featherly
Name:   Colette H. Featherly
Title:   Senior Vice President

[Signature Page to Disbursement Letter]


EXHIBIT C

Compliance Certificate

 

TO:    OXFORD FINANCE LLC, as Collateral Agent and Lender
FROM:   

PROMETHEUS BIOSCIENCES, INC., for itself and on behalf of all Borrowers

under the Loan Agreement

The undersigned authorized officer (“Officer”) of PROMETHEUS BIOSCIENCES, INC. (“Borrower”), hereby certifies in [his/her] capacity as an Officer, and not under any individual capacity, that in accordance with the terms and conditions of the Loan and Security Agreement by and among Borrower, Collateral Agent, and the Lenders from time to time party thereto (the “Loan Agreement;” capitalized terms used but not otherwise defined herein shall have the meanings given them in the Loan Agreement),

(a)    Borrower is in complete compliance for the period ending                      with all required covenants except as noted below;

(b)    There are no Events of Default, except as noted below;

(c)    Except as noted below, all representations and warranties of Borrower stated in the Loan Documents are true and correct in all material respects on this date and for the period described in (a), above; provided, however, that such materiality qualifier shall not be applicable to any representations and warranties that already are qualified or modified by materiality in the text thereof; and provided, further that those representations and warranties expressly referring to a specific date shall be true, accurate and complete in all material respects as of such date.

(d)    Borrower, and each of Borrower’s Subsidiaries, has timely filed all required tax returns and reports, Borrower, and each of Borrower’s Subsidiaries, has timely paid all foreign, federal, state, and local taxes, assessments, deposits and contributions owed by Borrower, or Subsidiary, except as otherwise permitted pursuant to the terms of Section 5.8 of the Loan Agreement;

(e)    No Liens have been levied or claims made against Borrower or any of its Subsidiaries relating to unpaid employee payroll or benefits of which Borrower has not previously provided written notification to Collateral Agent and the Lenders.

Attached are the required documents, if any, supporting our certification(s). The Officer, on behalf of Borrower, further certifies that the attached financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP) and are consistently applied from one period to the next except as explained in an accompanying letter or footnotes and except, in the case of unaudited financial statements, for the absence of footnotes and subject to year-end audit adjustments as to the interim financial statements.

Please indicate compliance status since the last Compliance Certificate by circling Yes, No, or N/A under “Complies” column.

 

     Reporting Covenant    Requirement    Actual    Complies
1)        Financial statements    Monthly within 30 days                            Yes    No    N/A
2)    Annual (CPA Audited) statements    Within 180 days after FYE       Yes    No    N/A
3)    Annual Financial Projections/Budget (prepared on a monthly basis)    Annually (within 60 days of FYE), and when revised       Yes    No    N/A


4)    A/R & A/P agings    If applicable       Yes    No    N/A
5)        8-K, 10-K and 10-Q Filings    If applicable, within 5 days of filing       Yes    No    N/A
6)    Compliance Certificate    Monthly within 30 days       Yes    No    N/A
7)    IP Report    When required       Yes    No    N/A
8)    Total amount of Borrower’s cash and cash equivalents at the last day of the measurement period       $                Yes    No    N/A
9)    Total amount of Borrower’s Subsidiaries’ cash and cash equivalents at the last day of the measurement period       $                Yes    No    N/A

Deposit and Securities Accounts

(Please list all accounts; attach separate sheet if additional space needed)

 

     Institution Name    Account Number    New Account?    Account Control Agreement in place?
1)          Yes    No    Yes    No
2)          Yes    No    Yes    No
3)          Yes    No    Yes    No
4)          Yes    No    Yes    No

Other Matters

 

1)        Have there been any changes in management since the last Compliance Certificate?    Yes        No    
2)    Have there been any transfers/sales/disposals/retirement of Collateral or IP prohibited by the Loan Agreement?    Yes    No
3)    Have there been any new or pending claims or causes of action against Borrower that involve more than Five Hundred Thousand Dollars ($500,000.00)?    Yes    No
4)    Have there been any amendments of or other changes to the capitalization table of Borrower and to the Operating Documents of Borrower or any of its Subsidiaries? If yes, provide copies of any such amendments or changes with this Compliance Certificate.    Yes    No


Exceptions

Please explain any exceptions with respect to the certification above: (If no exceptions exist, state “No exceptions.” Attach separate sheet if additional space needed.)

 

PROMETHEUS BIOSCIENCES, INC.,
For itself and on behalf of all Borrowers
By  

 

Name:  

 

Title:  

 

Date:  

 

 

LENDER USE ONLY
Received by:                                            Date:                     
Verified by:                                             Date:                     
Compliance Status:            Yes            No


EXHIBIT D

Form of Secured Promissory Note

[see attached]


SECURED PROMISSORY NOTE

(Term A Loan)

 

$7,500,000.00

Dated: January 24, 2020

FOR VALUE RECEIVED, the undersigned, PROMETHEUS BIOSCIENCES, INC., a Delaware corporation, and PROMETHEUS LABORATORIES INC., a California corporation, each with offices located at 9410 Carroll Park Drive, San Diego, CA 92121 (individually and collectively, jointly and severally, “Borrower”) HEREBY PROMISES TO PAY to the order of OXFORD FINANCE LLC (“Lender”) the principal amount of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000.00) or such lesser amount as shall equal the outstanding principal balance of the Term A Loan made to Borrower by Lender, plus interest on the aggregate unpaid principal amount of such Term A Loan, at the rates and in accordance with the terms of the Loan and Security Agreement dated January 24, 2020 by and among Borrower, Lender, Oxford Finance LLC, as Collateral Agent, and the other Lenders from time to time party thereto (as amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). If not sooner paid, the entire principal amount and all accrued and unpaid interest hereunder shall be due and payable on the Maturity Date as set forth in the Loan Agreement. Any capitalized term not otherwise defined herein shall have the meaning attributed to such term in the Loan Agreement.

Principal, interest and all other amounts due with respect to the Term A Loan, are payable in lawful money of the United States of America to Lender as set forth in the Loan Agreement and this Secured Promissory Note (this “Note”). The principal amount of this Note and the interest rate applicable thereto, and all payments made with respect thereto, shall be recorded by Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Note.

The Loan Agreement, among other things, (a) provides for the making of a secured Term A Loan by Lender to Borrower, and (b) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events.

This Note may not be prepaid except as set forth in Section 2.2 (c) and Section 2.2(d) of the Loan Agreement.

This Note and the obligation of Borrower to repay the unpaid principal amount of the Term A Loan, interest on the Term A Loan and all other amounts due Lender under the Loan Agreement is secured under the Loan Agreement.

Presentment for payment, demand, notice of protest and all other demands and notices of any kind in connection with the execution, delivery, performance and enforcement of this Note are hereby waived.

Borrower shall pay all reasonable fees and expenses, including, without limitation, reasonable attorneys’ fees and costs, incurred by Lender in the enforcement or attempt to enforce any of Borrower’s obligations hereunder not performed when due.

This Note shall be governed by, and construed and interpreted in accordance with, the internal laws of the State of California.

The ownership of an interest in this Note shall be registered on a record of ownership maintained by Lender or its agent. Notwithstanding anything else in this Note to the contrary, the right to the principal of, and stated interest on, this Note may be transferred only if the transfer is registered on such record of ownership and the transferee is identified as the owner of an interest in the obligation. Borrower shall be entitled to treat the registered holder of this Note (as recorded on such record of ownership) as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in this Note on the part of any other person or entity.

[Balance of Page Intentionally Left Blank]


IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed by one of its officers thereunto duly authorized on the date hereof.

 

BORROWER:
PROMETHEUS BIOSCIENCES, INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer
PROMETHEUS LABORATORIES INC.
By   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer

[Signature Page to Secured Promissory Note]

[Term A Loan Note]


LOAN INTEREST RATE AND PAYMENTS OF PRINCIPAL

 

Date

  

Principal

Amount

  

Interest Rate

  

Scheduled

Payment Amount

  

Notation By

           
           
           
           
           


CORPORATE BORROWING CERTIFICATE

 

BORROWER:        PROMETHEUS BIOSCIENCES, INC.    DATE: January 24, 2020
LENDERS:    OXFORD FINANCE LLC, as Collateral Agent and Lender

I hereby certify, solely in my capacity as an officer of Borrower, and not in any individual capacity, as follows, as of the date set forth above:

1.    I am the Secretary, Assistant Secretary or other officer of Borrower. My title is as set forth below.

2.    Borrower’s exact legal name is set forth above. Borrower is a corporation existing under the laws of the State of Delaware.

3.    Attached hereto as Exhibit A and Exhibit B, respectively, are true, correct and complete copies of (i) Borrower’s Certificate of Incorporation (including amendments), as filed with the Secretary of State of the state in which Borrower is incorporated as set forth in paragraph 2 above; and (ii) Borrower’s Bylaws. Neither such Certificate of Incorporation nor such Bylaws have been amended, annulled, rescinded, revoked or supplemented, and such Articles/Certificate of Incorporation and such Bylaws remain in full force and effect as of the date hereof.

4.    The following resolutions were duly and validly adopted by Borrower’s Board of Directors at a duly held meeting of such directors (or pursuant to a unanimous written consent or other authorized corporate action). Such resolutions are in full force and effect as of the date hereof and have not been in any way modified, repealed, rescinded, amended or revoked, and the Lenders may rely on them until each Lender receives written notice of revocation from Borrower.

[Balance of Page Intentionally Left Blank]


RESOLVED, that any one of the following officers or employees of Borrower, whose names, titles and signatures are below, may act on behalf of Borrower:

 

Name    Title    Signature   

Authorized to

Add or Remove

Signatories

Mark McKenna

  

President and Chief Executive Officer

  

/s/ Mark McKenna

   x

Christopher Slavinsky            

  

General Counsel and Head of Business Development

  

/s/ Christopher Slavinsky            

   x

Viktoria Brough

  

Vice President, Finance

  

/s/ Viktoria Brough

   x

 

  

 

  

 

  

RESOLVED FURTHER, that any one of the persons designated above with a checked box beside his or her name may, from time to time, add or remove any individuals to and from the above list of persons authorized to act on behalf of Borrower.

RESOLVED FURTHER, that such individuals may, on behalf of Borrower:

Borrow Money. Borrow money from the Lenders.

Execute Loan Documents. Execute any loan documents any Lender requires.

Grant Security. Grant Collateral Agent a security interest in substantially all of Borrower’s assets.

Negotiate Items. Negotiate or discount all drafts, trade acceptances, promissory notes, or other indebtedness in which Borrower has an interest and receive cash or otherwise use the proceeds.

Issue Warrants. Issue warrants for Borrower’s capital stock.

Further Acts. Designate other individuals to request advances, pay fees and costs and execute other documents or agreements (including documents or agreement that waive Borrower’s right to a jury trial) they believe to be necessary to effectuate such resolutions.

RESOLVED FURTHER, that all acts authorized by the above resolutions and any prior acts relating thereto are ratified.

[Balance of Page Intentionally Left Blank]


5.    The persons listed above are Borrower’s officers or employees with their titles and signatures shown next to their names.

 

PROMETHEUS BIOSCIENCES, INC.

By:   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer

*** If the Secretary, Assistant Secretary or other certifying officer executing above is designated by the resolutions set forth in paragraph 4 as one of the authorized signing officers, this Certificate must also be signed by a second authorized officer or director of Borrower.

I, the General Counsel and Head of Business Development of Borrower, hereby certify as to paragraphs 1 through 5 above, as

                [print title]

of the date set forth above.

 

PROMETHEUS BIOSCIENCES, INC.

By:   /s/ Christopher Slavinsky
Name:   Christopher Slavinsky
Title:   General Counsel and Head of Business Development

[Signature Page to Corporate Borrowing Certificate]

[Prometheus Biosciences, Inc.]


CORPORATE BORROWING CERTIFICATE

 

BORROWER:        PROMETHEUS LABORATORIES INC.    DATE: January 24, 2020
LENDERS:    OXFORD FINANCE LLC, as Collateral Agent and Lender

I hereby certify, solely in my capacity as an officer of Borrower, and not in any individual capacity, as follows, as of the date set forth above:

1.    I am the Secretary, Assistant Secretary or other officer of Borrower. My title is as set forth below.

2.    Borrower’s exact legal name is set forth above. Borrower is a corporation existing under the laws of the State of Delaware.

3.    Attached hereto as Exhibit A and Exhibit B, respectively, are true, correct and complete copies of (i) Borrower’s Articles of Incorporation (including amendments), as filed with the Secretary of State of the state in which Borrower is incorporated as set forth in paragraph 2 above; and (ii) Borrower’s Bylaws. Neither such Articles of Incorporation nor such Bylaws have been amended, annulled, rescinded, revoked or supplemented, and such Articles/Certificate of Incorporation and such Bylaws remain in full force and effect as of the date hereof.

4.    The following resolutions were duly and validly adopted by Borrower’s Board of Directors at a duly held meeting of such directors (or pursuant to a unanimous written consent or other authorized corporate action). Such resolutions are in full force and effect as of the date hereof and have not been in any way modified, repealed, rescinded, amended or revoked, and the Lenders may rely on them until each Lender receives written notice of revocation from Borrower.

[Balance of Page Intentionally Left Blank]


RESOLVED, that any one of the following officers or employees of Borrower, whose names, titles and signatures are below, may act on behalf of Borrower:

 

Name

  

Title

  

Signature

  

Authorized to

Add or Remove

Signatories

Mark McKenna

  

President and Chief Executive Officer

  

/s/ Mark McKenna

   x

Christopher Slavinsky            

  

General Counsel and Head of Business Development

  

/s/ Christopher Slavinsky            

   x

Viktoria Brough

  

Vice President, Finance

  

/s/ Viktoria Brough

   x

 

  

 

  

 

  

RESOLVED FURTHER, that any one of the persons designated above with a checked box beside his or her name may, from time to time, add or remove any individuals to and from the above list of persons authorized to act on behalf of Borrower.

RESOLVED FURTHER, that such individuals may, on behalf of Borrower:

Borrow Money. Borrow money from the Lenders.

Execute Loan Documents. Execute any loan documents any Lender requires.

Grant Security. Grant Collateral Agent a security interest in substantially all of Borrower’s assets.

Negotiate Items. Negotiate or discount all drafts, trade acceptances, promissory notes, or other indebtedness in which Borrower has an interest and receive cash or otherwise use the proceeds.

Further Acts. Designate other individuals to request advances, pay fees and costs and execute other documents or agreements (including documents or agreement that waive Borrower’s right to a jury trial) they believe to be necessary to effectuate such resolutions.

RESOLVED FURTHER, that all acts authorized by the above resolutions and any prior acts relating thereto are ratified.

[Balance of Page Intentionally Left Blank]


5.    The persons listed above are Borrower’s officers or employees with their titles and signatures shown next to their names.

 

PROMETHEUS LABORATORIES INC.

By:   /s/ Mark McKenna
Name:   Mark McKenna
Title:   President and Chief Executive Officer

*** If the Secretary, Assistant Secretary or other certifying officer executing above is designated by the resolutions set forth in paragraph 4 as one of the authorized signing officers, this Certificate must also be signed by a second authorized officer or director of Borrower.

I, the General Counsel and Head of Business Development of Borrower, hereby certify as to paragraphs 1 through 5 above, as

                [print title]

of the date set forth above.

 

PROMETHEUS LABORATORIES INC.

By:

  /s/ Christopher Slavinsky
Name:   Christopher Slavinsky
Title:   General Counsel and Head of Business Development


DEBTOR:    PROMETHEUS BIOSCIENCES, INC.
   PROMETHEUS LABORATORIES INC.
SECURED PARTY:        OXFORD FINANCE LLC, as Collateral Agent

EXHIBIT A TO UCC FINANCING STATEMENT

Description of Collateral

The Collateral consists of all of Debtor’s right, title and interest in and to the following personal property:

All goods, Accounts (including health-care receivables), Equipment, Inventory, contract rights or rights to payment of money, leases, license agreements, franchise agreements, General Intangibles (except as noted below), commercial tort claims, documents, instruments (including any promissory notes), chattel paper (whether tangible or electronic), cash, deposit accounts and other Collateral Accounts, all certificates of deposit, fixtures, letters of credit rights (whether or not the letter of credit is evidenced by a writing), securities, and all other investment property, supporting obligations, and financial assets, whether now owned or hereafter acquired, wherever located; and

All Borrower’s Books relating to the foregoing, and any and all claims, rights and interests in any of the above and all substitutions for, additions, attachments, accessories, accessions and improvements to and replacements, products, proceeds and insurance proceeds of any or all of the foregoing.

Notwithstanding the foregoing, the Collateral does not include (i) any Intellectual Property; provided, however, the Collateral shall include all Accounts and all proceeds of Intellectual Property. If a judicial authority (including a U.S. Bankruptcy Court) would hold that a security interest in the underlying Intellectual Property is necessary to have a security interest in such Accounts and such property that are proceeds of Intellectual Property, then the Collateral shall automatically, and effective as of the Effective Date, include the Intellectual Property to the extent necessary to permit perfection of Collateral Agent’s security interest in such Accounts and such other property of Borrower that are proceeds of the Intellectual Property; (ii) more than sixty-five percent (65%) of the total combined voting power of all classes of stock entitled to vote the shares of capital stock (the “Shares”) of any Foreign Subsidiary, if Borrower demonstrates to Collateral Agent’s reasonable satisfaction that a pledge of more than sixty-five percent (65%) of the Shares of such Subsidiary creates a present and existing adverse tax consequence to Borrower under the U.S. Internal Revenue Code; and (iii) any license or contract, in each case if the granting of a Lien in such license or contract is prohibited by or would constitute a default under the agreement governing such license or contract (but (A) only to the extent such prohibition is enforceable under applicable law and (B) other than to the extent that any such term would be rendered ineffective pursuant to Sections 9-406, 9-408 or 9-409 (or any other Section) of Division 9 of the Code); provided that upon the termination, lapsing or expiration of any such prohibition, such license or contract, as applicable, shall automatically be subject to the security interest granted in favor of Collateral Agent hereunder and become part of the “Collateral.”

Pursuant to the terms of a certain negative pledge arrangement with Collateral Agent and the Lenders, Borrower has agreed not to encumber any of its Intellectual Property.

Capitalized terms used but not defined herein have the meanings ascribed in the Uniform Commercial Code in effect in the State of California as in effect from time to time (the “Code”) or, if not defined in the Code, then in the Loan and Security Agreement by and between Debtor, Secured Party and the other Lenders party thereto (as modified, amended and/or restated from time to time).


SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT

This Second Amendment to Loan and Security Agreement (this “Amendment”) is entered into as of December 31, 2020, by and among OXFORD FINANCE LLC, a Delaware limited liability company with an office located at 115 South Union Street, Suite 300, Alexandria, Virginia 22314 (“Oxford”), as collateral agent (in such capacity, “Collateral Agent”), the Lenders listed on Schedule 1.1 to the Loan Agreement (as defined below) or otherwise a party thereto from time to time including Oxford in its capacity as a Lender (each a “Lender” and collectively, the “Lenders”), PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (“Parent”) and PROMETHEUS LABORATORIES INC., a California corporation, each with offices located at 9410 Carroll Park Drive, San Diego, CA 92121 (individually and collectively, jointly and severally, “Borrower”).

RECITALS

Borrower, Collateral Agent and the Lenders are parties to that certain Loan and Security Agreement dated as of January 24, 2020 (as amended from time to time, the “Agreement”).

Parent has informed Collateral Agent and the Lenders that Parent will spinoff (the “Spinoff”) via a distribution to Parent’s stockholders of all of the outstanding shares of Prometheus Laboratories, Inc., a California corporation (“Spinco”), with such Spinoff to be effected on December 31, 2020.

Parent has requested Collateral Agent and the Lenders to consent to the Spinoff and Collateral Agent and the Lenders have agreed to the Spinoff, subject to the terms and conditions of this Amendment. The parties further desire to amend the Agreement in accordance with the terms of this Amendment.

NOW, THEREFORE, the parties agree as follows:

1. The Recitals to this Amendment are incorporated herein by reference.

2. Notwithstanding any provision of the Agreement to the contrary, Collateral Agent and the Lenders hereby consent to (i) the Spinoff and (ii) a one-time distribution to Spinco of up to Five Million Dollars ($5,000,000.00).

3. Collateral Agent and the Lenders hereby acknowledge and agree that from and after the effective date of the Spinoff, (i) Spinco shall no longer be a “Borrower” under the Loan Documents; (ii) all references to Prometheus Laboratories, Inc. as a Borrower thereunder shall be omitted in their entireties; and (iii) all references to “Borrower” under the Loan Documents shall refer, solely and exclusively, to Prometheus Biosciences, Inc. In furtherance of the foregoing, and at the sole cost and expense of Parent, Collateral Agent agrees to file such termination statements and/or such other instruments or agreements necessary to reflect the termination of any security interest or Lien granted by Spinco to secure any Obligations under the Loan Documents.

4. The notice addresses for Collateral Agent, and counsel to Collateral Agent, in Section 10 of the Agreement, hereby are amended and restated in their entireties to read as follows:

 

“If to Collateral Agent:   

OXFORD FINANCE LLC

115 South Union Street, Suite 300,

Alexandria, Virginia 22314

Attention: Legal Department

with a copy (which shall not constitute notice) to:   

Barnes & Thornburg LLP

655 W. Broadway, Suite 1300

San Diego, California 92101

Attn: Troy Zander”

 

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5. No course of dealing on the part of Collateral Agent or the Lenders or their officers, nor any failure or delay in the exercise of any right by Collateral Agent or any Lender, shall operate as a waiver thereof, and any single or partial exercise of any such right shall not preclude any later exercise of any such right. Collateral Agent’s or any Lender’s failure at any time to require strict performance by Borrower of any provision shall not affect any right of Collateral Agent or any Lender thereafter to demand strict compliance and performance. Any suspension or waiver of a right must be in writing signed by an officer of Collateral Agent.

6. Unless otherwise defined, all initially capitalized terms in this Amendment shall be as defined in the Agreement. The Agreement, as amended hereby, shall be and remain in full force and effect in accordance with its respective terms and hereby is ratified and confirmed in all respects. Except as expressly set forth herein, the execution, delivery, and performance of this Amendment shall not operate as a waiver of, or as an amendment of, any right, power, or remedy of Collateral Agent or any Lender under the Agreement, as in effect prior to the date hereof.

7. Release by Borrower.

7.1 FOR GOOD AND VALUABLE CONSIDERATION, Borrower hereby forever relieves, releases, and discharges Collateral Agent and each Lender and their respective present or former employees, officers, directors, agents, representatives, attorneys, and each of them, from any and all claims, debts, liabilities, demands, obligations, promises, acts, agreements, costs and expenses, actions and causes of action, of every type, kind, nature, description or character whatsoever, whether known or unknown, suspected or unsuspected, absolute or contingent, arising out of or in any manner whatsoever connected with or related to facts, circumstances, issues, controversies or claims existing or arising from the beginning of time through and including the date of execution of this Amendment (collectively “Released Claims”). Without limiting the foregoing, the Released Claims shall include any and all liabilities or claims arising out of or in any manner whatsoever connected with or related to the Loan Documents, the Recitals hereto, any instruments, agreements or documents executed in connection with any of the foregoing or the origination, negotiation, administration, servicing and/or enforcement of any of the foregoing.

7.2 In furtherance of this release, Borrower expressly acknowledges and waives the provisions of the following and any similar provision under the laws of any state:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

7.3 By entering into this release, Borrower recognizes that no facts or representations are ever absolutely certain and it may hereafter discover facts in addition to or different from those which it presently knows or believes to be true, but that it is the intention of Borrower hereby to fully, finally and forever settle and release all matters, disputes and differences, known or unknown, suspected or unsuspected; accordingly, if Borrower should subsequently discover that any fact that it relied upon in entering into this release was untrue, or that any understanding of the facts was incorrect, Borrower shall not be entitled to set aside this release by reason thereof, regardless of any claim of mistake of fact or law or any other circumstances whatsoever. Borrower acknowledges that it is not relying upon and has not relied upon any representation or statement made by Collateral Agent with respect to the facts underlying this release or with regard to any of such party’s rights or asserted rights.

7.4 This release may be pleaded as a full and complete defense and/or as a cross-complaint or counterclaim against any action, suit, or other proceeding that may be instituted, prosecuted or attempted in breach of this release. Borrower acknowledges that the release contained herein constitutes a material inducement to Collateral Agent and the Lenders to enter into this Amendment, and that Collateral Agent and the Lenders would not have done so but for Collateral Agent’s and the Lenders’ expectation that such release is valid and enforceable in all events.

 

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8. To induce Collateral Agent and Lenders to enter into this Amendment, Borrower hereby makes the following representations and warranties to Collateral Agent and Lenders:

 

  a.

Immediately after giving effect to this Amendment (a) the representations and warranties contained in the Loan Documents are true, accurate and complete in all material respects as of the date hereof (except to the extent such representations and warranties relate to an earlier date, in which case they are true and correct as of such date), and (b) no Event of Default has occurred and is continuing;

 

  b.

Borrower has the power and due authority to execute and deliver this Amendment and to perform its obligations under the Loan Agreement, as amended by this Amendment;

 

  c.

Other than as set forth in Schedule 6(c) to this Amendment, the organizational documents of Borrower delivered to Collateral Agent on the Effective Date, and updated pursuant to subsequent deliveries by the Borrower to the Collateral Agent, remain true, accurate and complete and have not been amended, supplemented or restated and are and continue to be in full force and effect;

 

  d.

The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not and will not contravene (i) any law or regulation binding on or affecting Borrower, (ii) any contractual restriction with a Person binding on Borrower, (iii) any order, judgment or decree of any court or other governmental or public body or authority, or subdivision thereof, binding on Borrower, or (iv) the organizational documents of Borrower;

 

  e.

The execution and delivery by Borrower of this Amendment and the performance by Borrower of its obligations under the Loan Agreement, as amended by this Amendment, do not require any order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by any governmental or public body or authority, or subdivision thereof, binding on Borrower, except as already has been obtained or made; and

 

  f.

This Amendment has been duly executed and delivered by Borrower and is the binding obligation of Borrower, enforceable against Borrower in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar laws of general application and equitable principles relating to or affecting creditors’ rights.

9. As a condition to the effectiveness of this Amendment, Collateral Agent shall have received, in form and substance satisfactory to Collateral Agent, the following:

(a) this Amendment, duly executed by Borrower and Collateral Agent;

(b) evidence of the consummation of the Spinoff;

(c) all reasonable Lender Expenses incurred through the date of this Amendment, which may be debited from any of Borrower’s accounts; and

(d) such other documents, and completion of such other matters, as Collateral Agent may reasonably deem necessary or appropriate.

10. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument.

[Balance of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the First date above written.

 

BORROWER:

 

PROMETHEUS BIOSCIENCES, INC.

By:   /s/ Viktoria Brough
Name: Viktoria Brough
Title: SVP, Finance

COLLATERAL AGENT AND LENDER:

 

OXFORD FINANCE LLC

By:   /s/ Colette H. Featherly
Name: Colette H. Featherly
Title: Senior Vice President

[Signature Page to Second Amendment to Loan and Security Agreement]

EX-10.11 15 d14529dex1011.htm EX-10.11 EX-10.11

Exhibit 10.11

SUBLEASE AGREEMENT

This Sublease Agreement (“Sublease”) is dated as of December 31, 2020 (the “Effective Date”), by and between PROMETHEUS LABORATORIES INC., a California corporation (“Sublandlord”), and PROMETHEUS BIOSCIENCES, INC., a Delaware corporation (previously known as Precision IBD, Inc.), (“Subtenant”).

RECITALS

A.    Sublandlord currently leases certain premises from The Irvine Company LLC, a Delaware limited liability company (the “Master Landlord” or “Landlord”), pursuant to the terms and conditions of that certain Lease (Single Tenant; Net), dated as of June 22, 2005 (“Base Lease”), as amended by that certain First Amendment, dated as of January 25, 2010 (“First Amendment”), that certain Second Amendment, dated as of October 5, 2011 (“Second Amendment”), that certain Third Amendment, dated as of January 19, 2012 (“Third Amendment”), and that certain Fourth Amendment, dated as of May 9, 2016 (the “Fourth Amendment” and together with the Base Lease, First Amendment, Second Amendment, and Third Amendment, collectively, the “Master Lease”). Pursuant to the Master Lease, Sublandlord currently leases from Master Landlord those certain premises consisting of approximately 110,041 rentable square feet consisting of the first floor and mezzanine level of that certain building located at 9410 Carroll Park Drive, San Diego, California (the “Premises”), as more particularly described in the Master Lease. Sublandlord represents that a true, correct and complete copy of the Master Lease is attached hereto as Exhibit A which may be redacted as to non-material financial terms. All terms capitalized but undefined herein shall have the meanings ascribed to them in the Master Lease.

B.    The Term of the Master Lease with respect to the Premises is scheduled to expire by its terms on December 31, 2022.

C.    Sublandlord desires to sublease a portion of the Premises to Subtenant and Subtenant desires to sublease a portion of the Premises from Sublandlord pursuant to the terms and conditions of this Sublease.

AGREEMENT

NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, Sublandlord and Subtenant hereby agree as follows:

1.    Sublease Premises. Sublandlord hereby subleases to Subtenant a portion of the Premises (“Subleased Premises”), as mutually agreed upon by Sublandlord and Subtenant and Subtenant hereby subleases the Subleased Premises from Sublandlord, pursuant to the terms and conditions of this Sublease. Subtenant shall accept the Subleased Premises in the condition and state of repair on the “Sublease Commencement Date” (defined below) it its “AS IS” and “WHERE IS” condition. Except as otherwise provided in this Sublease, Subtenant expressly acknowledges and agrees Sublandlord shall not have any obligation to perform any work to prepare the Subleased Premises for Subtenant’s use and occupancy. Within ten (10) days after the full execution of this Sublease by Sublandlord and Subtenant and Master Landlord’s execution and delivery of the acceptable form of Master Landlord consent to this Sublease, Sublandlord shall deliver possession of the Subleased Premises to Subtenant in accordance with this Sublease unless delayed as a result of any cause beyond the reasonable control of Sublandlord.

 

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2.    Term. The term of this Sublease (the “Sublease Term”) shall commence on the date that is the later of: (i) the Effective Date, and, (ii) the date on which Sublandlord obtains the consent of Master Landlord to this Sublease, in form and substance reasonably satisfactory to Sublandlord and Subtenant (the “Sublease Commencement Date”) and shall expire on December 31, 2021 (“Sublease Expiration Date”), unless earlier terminated pursuant to the terms of this Sublease. Subtenant shall have a right to extend the Sublease Term for an additional one (1) year renewal term (“Sublease Renewal Term”) exercisable by Subtenant in writing delivered to Sublandlord at least ninety (90) days prior to the Sublease Expiration Date. All terms and conditions set forth in this Sublease shall apply during the Sublease Renewal Term, if exercised by Subtenant.

3.    Use. Subtenant shall use the Subleased Premises in compliance with the Master Lease, and solely for conducting Subtenant’s business, which includes general office, manufacturing, laboratory and warehouse uses.

4.    Rent. Sublandlord shall be responsible for the timely payment of Basic Rent and Operating Expenses under the Master Lease and otherwise complying with the obligations of Sublandlord under the Master Lease before and during the Sublease Term. Subtenant shall pay to Sublandlord the following as Sublease rent hereunder:

4.1    Sublease Term Rent; Rent Commencement Date. Beginning on the Sublease Rent Commencement Date, and continuing during the Sublease Term, Subtenant shall pay to Sublandlord, as sublease rent (“Monthly Rent”) and in lieu of the Basic Rent set forth in the Master Lease, in lawful money of the United States of America, without any deduction, offset, prior notice or demand, in advance on the first date of each month of the Sublease Term from the Sublease Rent Commencement Date through the Sublease Expiration Date, the amount of $80,000, which includes Subtenant’s Share of Operating Expenses (as defined in the Master Lease) required under the Master Lease with respect to the Subleased Premises in and for the Sublease Term, excluding any late fees, damages or penalties arising from Sublandlord’s breach of the Master Lease (other than those, if any, resulting from Subtenant’s failure to comply with this Sublease), and except as otherwise provided in this Sublease. As used herein, (a) “Subtenant’s Share” means 36%, and (b) “Rent Commencement Date” shall mean the Effective Date. On each anniversary of the Sublease Commencement Date, Monthly Rent shall increase by three percent (3%) throughout the Term.

4.2    Other Charges. In addition, Subtenant shall pay Sublandlord any charges, actually incurred for services requested by Subtenant that Sublandlord is liable to Landlord for which relate to services that Landlord is not obligated to provide at no additional cost under the Master Lease, such as freight elevator charges for Subtenant moving in (“Other Charges”). Such Other Charges, if not paid directly to the Landlord by Subtenant, shall be paid to Sublandlord for remittance to Landlord within seven (7) days of being billed to Subtenant by Sublandlord.

4.3    “Sublease Rent” Defined. All monetary obligations of Subtenant to Sublandlord under the terms of this Sublease are deemed to be rent (“Sublease Rent”). Sublease

 

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Rent shall be payable in lawful money of the United States to Sublandlord. Sublease Rent payable for any partial month during the Term shall be prorated on a daily basis based on the actual number of days in such month.

5.    Master Lease.

5.1    Sublease Subordinate to Master Lease; Subtenant’s Covenants. This Sublease is in all respects subject and subordinate to all of the terms, provisions, covenants, stipulations, conditions and agreements of the Master Lease. Subtenant agrees as follows: except as otherwise provided in this Sublease, all references in such incorporated provision to the word “Tenant” shall be deemed to refer to Subtenant, all references to the word “Premises” shall be deemed to refer to the Subleased Premises, all references to the term “Lease” shall be deemed to refer to this Sublease, all references to the word “Term” shall be deemed to refer to the Sublease Term, all references to the term “Landlord” shall be deemed to refer to the Sublandlord, and all references to the term “indemnitees” shall be deemed to include reference to the Sublandlord, each unless expressly stated, or the context would imply, otherwise):

(a)    Basic Lease Provisions. The provisions of the Master Lease are hereby incorporated herein by reference, except for Article 1, Section 2.2 (other than the first two sentences which shall apply to this Sublease), Sections 3.2, 3.3, 5.2, 7.6, 7.7, Schedule A to the Master Lease, the First Amendment, the Second Amendment, Sections III, IV, VI, and VII(A),(D), (E), (F), and (H) of the Third Amendment, and the Fourth Amendment.

(b)    Alterations. Subtenant shall not make any alterations, additions or improvements to the Subleased Premises without the prior written consent of (i) Master Landlord, which consent may be granted or withheld as set forth in the Master Lease, and (ii) Sublandlord, which consent shall not be unreasonably withheld, conditioned or delayed. The foregoing notwithstanding, as to any other alterations, additions or improvements desired to be undertaken by Subtenant, (A) Subtenant shall provide all documentation and information required under the Master Lease with respect to such proposed alterations, additions or improvements and Sublandlord shall promptly submit such documentation and information to Master Landlord for its consent to such alterations, additions or improvements, and (B) upon receipt of all such documentation and information in compliance with the Master Lease, Sublandlord shall respond to Subtenant’s requests for Sublandlord’s consent to such alterations, additions or improvements within seven (7) days of receipt of such documentation and information.

(c)    Insurance. Subtenant shall obtain the insurance coverages required by the Master Lease, which are incorporated herein by this reference, except that Sublandlord shall not be required to obtain the insurance designated for Landlord in this Section but it shall continue the coverages required of Tenant. Each policy of liability insurance shall name Sublandlord and Master Landlord as an additional insured and the waiver of subrogation requirements of property policies shall operate between Sublandlord and Subtenant, in the same manner as between Master Landlord and Sublandlord.

(d)    Assignment and Subletting. Subtenant shall not assign or sub-sublet the Subleased Premises without the prior written consent of (i) Master Landlord, which may be granted or withheld as set forth in Article IX of the Master Lease, and (ii) Sublandlord, which consent shall not be unreasonably withheld, conditioned, or delayed.

 

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(e)    Consents. Any consent or approval by requested from Sublandlord in accordance with this Sublease shall be deemed reasonably withheld if Master Landlord withholds its consent or approval.

Except as set forth above, the provisions of the Master Lease are hereby incorporated into this Sublease except as otherwise provided in this Sublease. Neither party shall take any action or do or permit to be done anything (i) in violation of or default under any of the terms, covenants, conditions or provisions of the Master Lease or any other instrument to which this Sublease is subordinate (and Sublandlord shall comply with all of the terms of the Master Lease to the extent Sublandlord remains obligated thereunder or to the extent that Subtenant cannot directly comply with such obligations); or (ii) which could result in any additional cost or other liability to Sublandlord unless Subtenant assumes and pays such cost or liability.

5.2    Sublandlord Not Responsible for Representations and Covenants of Master Landlord under Master Lease. Sublandlord shall not be deemed to have made any representation made by Master Landlord in the Master Lease in its capacity as the lessor of the Building. Moreover, during the Term of this Sublease, Subtenant acknowledges and agrees that Sublandlord shall not be responsible for Master Landlord’s breach of its covenants and obligations under the Master Lease. Without limiting the generality of the foregoing, Sublandlord shall not be obligated (i) to provide any of the services or utilities that Master Landlord has agreed in the Master Lease to provide, (ii) to make any of the repairs or restorations that Master Landlord has agreed in the Master Lease to make, (iii) to comply with any laws or requirements of public authorities with which Master Landlord has agreed in the Master Lease to comply, or (iv) to take any action with respect to the operation, administration or control of the Property or any of the Common Areas that the Master Landlord has agreed in the Master Lease to take, and Sublandlord shall have no liability to Subtenant on account of any failure of Master Landlord to do so, or on account of any failure by Master Landlord to observe or perform any of the terms, covenants or conditions of the Master Lease required to be observed or performed by Master Landlord, provided that in the event that Subtenant determines in good faith that Master Landlord has not performed its obligations under the Master Lease, then upon receipt of written notice from Subtenant, Sublandlord shall be obligated to use best efforts to cause such breaches, defaults or failures of Master Landlord under the Master Lease to be resolved or otherwise settled to Subtenant’s reasonable satisfaction; provided, further however: Sublandlord shall not have any obligation to commence litigation or other dispute resolution proceedings to cause Master Landlord to comply with the Master Lease unless Subtenant cannot do so in its own name, in which event Sublandlord shall do so at Subtenant’s expense. If the breach or default of Master Landlord under the Master Lease has not been resolved after the expiration of thirty (30) days, then provided that Subtenant is not in default under this Sublease, upon the request of Subtenant, Sublandlord shall assign to Subtenant its right to institute legal action against Master Landlord (a “Subtenant Action”), provided that Subtenant shall indemnify, protect, defend and hold Sublandlord harmless from any and all liabilities, claims, demands, losses, damages, costs and expenses (including reasonable attorneys’ fees and litigation and court costs) arising out of, or relating to, the Subtenant Action. The foregoing notwithstanding, if any breach of the Master Lease shall entitle Sublandlord to assert claims for an abatement of rent for constructive eviction or otherwise, then such abatement shall accrue in favor of Subtenant. If Sublandlord shall be entitled to an abatement rent or other claims arising from fire or other casualty, then Subtenant shall have the same claims.

 

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6.    Indemnity by Subtenant. The indemnification provisions of the Lease shall apply to this Sublease as if Sublandlord was the Landlord and Subtenant was the Tenant described in the Lease.

7.    Sublandlord’s Covenants. Sublandlord covenants to do the following:

7.1    Sublandlord shall not (1) surrender or terminate the Master Lease prior to its scheduled expiration date without the consent of Subtenant, or (2) amend or modify the Master Lease, the result of which would materially and adversely affect Subtenant’s rights or obligations under this Sublease or the Subleased Premises;

7.2    Sublandlord shall comply with all the terms and provisions of the Master Lease, except to the extent Subtenant has assumed the same, and

7.3    Sublandlord shall, promptly following receipt thereof, deliver to Subtenant a copy of any and all notices received by Sublandlord from Master Landlord which would have any material effect upon the Subleased Premises or this Sublease.

8.    Sublandlord’s Right to Cure Subtenant Default/Subtenant’s Right to Cure Sublandlord Default. Upon a default by Subtenant under this Sublease (after lapse of any applicable notice and cure periods), Sublandlord may, without waiving or releasing any obligation of Subtenant hereunder and without waiving any rights or remedies at law or otherwise, make such payment or perform such act. All sums so paid or incurred by Sublandlord, together with interest thereon, from the date such sums were paid or incurred, at the annual rate equal to 12% per annum or the highest rate permitted by law, whichever is less, shall be payable to Sublandlord on demand as additional Sublease Rent. In the event of Sublandlord’s failure to pay rent under the Master Lease by the date due, Subtenant shall have the right, (but not the obligation, unless so required by the Master Landlord) on written notice, to provide such payments to Master Landlord unless Sublandlord, at its sole election, (a) provides Subtenant with reasonable assurances that such failure will not cause Sublandlord to be in default under the Master Lease, or (b) establishes an escrow account to hold such unpaid rent pending resolution of such failure by Sublandlord and Master Landlord. In the event that Subtenant provides such payment hereunder, Sublandlord shall reimburse Subtenant for such payments on demand.

9.    Brokers. Neither Sublandlord nor Subtenant has been represented by a broker in connection with this Sublease. Each party shall indemnify, defend and hold the other party harmless on demand from and against any liability of the other party for claims of any broker based upon breach by the indemnifying party of its representations contained in this paragraph.

10.    Entire Agreement/Modification. This Sublease, including the Exhibits, contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Sublease, and no prior agreements or understanding or letter or proposal pertaining to any such matters shall be effective for any purpose. This Sublease may only be modified by a writing signed by Sublandlord and Subtenant. No provisions of this Sublease may be amended or added to, whether by conduct, oral or written communication, or otherwise, except by an agreement in writing signed by the parties hereto or their respective successors-in-interest.

 

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11.    Interpretation. The title and paragraph headings are not a part of this Sublease and shall have no effect upon the construction or interpretation of any part of this Sublease. Unless stated otherwise, references to paragraphs and subparagraphs are to those in this Sublease. This Sublease shall be strictly construed neither against Sublandlord nor Subtenant.

12.    Representations. Sublandlord represents to Subtenant that to Sublandlord’s actual knowledge:

(a)    the copy of the Master Lease delivered by Sublandlord Subtenant is a complete and accurate copy of the Master Lease, which is in effect and has not otherwise been amended and there are no other agreements between Master Landlord and Sublandlord relating to the leasing, use, and occupancy of the Subleased Premises; and

(b)    that the Subleased Premises has not been sublet or licensed to any third party, in whole or in part, and the Master Lease has not been assigned; and

(c)    that no circumstance exists and no event has occurred which, with the giving of notice, the passage of time, or both, would constitute a breach or default of either party to the Master Lease; and

(d)    Sublandlord is not the debtor, defendant or respondent in any pending receivership, insolvency, bankruptcy, foreclosure, lease termination or other creditors’ action or proceeding.

13.    FAILURE TO OBTAIN LANDLORD CONSENT. This lease shall constitute a valid and binding obligation of the parties on and after the date that it has been signed and delivered by them despite the fact that the Sublease Term and Subtenant’s rights to possession will not have commenced. Within five (5) days after Subtenant has signed and delivered this Sublease, Sublandlord shall submit a fully executed original of this Sublease to the Landlord for Landlord’s consent in accordance with the Master Lease and send a duplicate original of this Sublease fully executed to Subtenant with a copy of the notice to Landlord requesting consent. The parties shall cooperate reasonably in connection with the application for Landlord’s consent and furnish such available documents and information as Landlord may reasonably require for such purpose. If Landlord’s written consent to this Sublease is not issued in form and substance reasonably satisfactory to both Sublandlord and Subtenant within thirty (30) days after the date on which Subtenant has signed and delivered this Sublease to Sublandlord, then Subtenant or Sublandlord may elect to cancel this Sublease by giving notice of such cancellation after the end of such thirty (30) day period and prior to the Landlord’s execution and delivery of the Landlord’s consent in form and substance reasonably satisfactory to Sublandlord and to Subtenant. If Subtenant or Sublandlord shall give its cancellation notice within the time (of the essence) and under the circumstances described in the previous sentence, this Sublease shall be cancelled, any advance rent and security previously paid shall be refunded, and neither party shall have any other or further claims arising under this Sublease.

[signature page follows]

 

6


IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this Sublease as of the Effective Date.

 

SUBLANDLORD:     SUBTENANT:
PROMETHEUS LABORATORIES INC., a California corporation                  PROMETHEUS BIOSCIENCES INC., a Delaware corporation
By:  

/s/ Mike Walther

                        By:  

/s/ Mark C. McKenna

Name:   Mike Walther                         Name:   Mark C. McKenna
Title:   President, Chief Financial Officer and Secretary     Title:   Chief Executive Officer

[Signature Page to Sublease]


EXHIBIT A

MASTER LEASE

[To Be Attached]

 

Exhibit A


LEASE

(Single Tenant; Net)

BETWEEN

THE IRVINE COMPANY

AND

PROMETHEUS LABORATORIES INC.


INDEX TO LEASE

 

ARTICLE I. BASIC LEASE PROVISIONS

     1  

ARTICLE II. PREMISES

     3  

SECTION 2.1.

  LEASED PREMISES      3  

SECTION 2.2.

  ACCEPTANCE OF PREMISES      3  

SECTION 2.3.

  BUILDING NAME AND ADDRESS      3  

SECTION 2.4.

  LANDLORD’S RESPONSIBILITIES      4  

ARTICLE III. TERM

     4  

SECTION 3.1.

  GENERAL      4  

SECTION 3.4.

  EARLY OCCUPANCY      4  

SECTION 3.3.

  RIGHT TO EXTEND THIS LEASE      4  

ARTICLE IV. RENT AND OPERATING EXPENSES

     5  

SECTION 4.1.

  BASIC RENT      5  

SECTION 4.2.

  OPERATING EXPENSES      5  

SECTION 4.3.

  SECURITY DEPOSIT      8  

ARTICLE V. USES

     8  

SECTION 5.1.

  USE      8  

SECTION 5.2.

  SIGNS      9  

SECTION 5.3.

  HAZARDOUS MATERIALS      9  

ARTICLE VI. COMMON AREAS; SERVICES

     11  

SECTION 6.1.

  UTILITIES AND SERVICES      11  

SECTION 6.2.

  OPERATION AND MAINTENANCE OF COMMON AREAS      12  

SECTION 6.3.

  USE OF COMMON AREAS      12  

SECTION 6.4.

  PARKING      12  

SECTION 6.5.

  CHANGES AND ADDITIONS BY LANDLORD      12  

ARTICLE VII. MAINTAINING THE PREMISES

     13  

SECTION 7.1.

  TENANT’S MAINTENANCE AND REPAIR      13  

SECTION 7.2.

  LANDLORD’S MAINTENANCE AND REPAIR      13  

SECTION 7.3.

  ALTERATIONS      13  

SECTION 7.4.

  MECHANIC’S LIENS      14  

SECTION 7.5.

  ENTRY AND INSPECTION      15  

SECTION 7.6.

  COMMUNICATIONS EQUIPMENT      15  

SECTION 7.7.

  EMERGENCY GENERATORS      16  

ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT’S PROPERTY

     16  

ARTICLE IX. ASSIGNMENT AND SUBLETTING

     16  

SECTION 9.1.

  RIGHTS OF PARTIES      16  

SECTION 9.2.

  EFFECT OF TRANSFER      17  

SECTION 9.3.

  SUBLEASE REQUIREMENTS      18  

SECTION 9.4.

  CERTAIN TRANSFERS      18  

ARTICLE X. INSURANCE AND INDEMNITY

     18  

SECTION 10.1.

  TENANT’S INSURANCE      18  

SECTION 10.2.

  LANDLORD’S INSURANCE      18  

SECTION 10.3.

  JOINT INDEMNITY      19  

SECTION 10.4.

  LANDLORD’S NONLIABILITY      19  

SECTION 10.5.

  WAIVER OF SUBROGATION      19  

ARTICLE XI. DAMAGE OR DESTRUCTION

     20  

SECTION 11.1.

  RESTORATION      20  

SECTION 11.2.

  LEASE GOVERNS      21  

ARTICLE XII. EMINENT DOMAIN

     21  

SECTION 12.1.

  TOTAL OR PARTIAL TAKING      21  

SECTION 12.2.

  TEMPORARY TAKING      21  

SECTION 12.3.

  TAKING OF PARKING AREA      21  

 

i


ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS

     21  

SECTION 13.1.

  SUBORDINATION      21  

SECTION 13.2.

  ESTOPPEL CERTIFICATE      22  

SECTION 13.3.

  FINANCIALS      22  

ARTICLE XIV. EVENTS OF DEFAULT AND REMEDIES

     22  

SECTION 14.1.

  TENANT’S DEFAULTS      22  

 

SECTION 14.2.

  LANDLORD’S REMEDIES      23  

SECTION 14.3.

  LATE PAYMENTS      24  

SECTION 14.4.

  RIGHT OF LANDLORD TO PERFORM      24  

SECTION 14.5.

  DEFAULT BY LANDLORD      25  

SECTION 14.6.

  EXPENSES AND LEGAL FEES      25  

SECTION 14.7.

  WAIVER OF JURY TRIAL      25  

SECTION 14.8.

  SATISFACTION OF JUDGMENT      25  

ARTICLE XV. END OF TERM

     25  

SECTION 15.1.

  HOLDING OVER      25  

SECTION 15.2.

  MERGER ON TERMINATION      26  

SECTION 15.3.

  SURRENDER OF PREMISES; REMOVAL OF PROPERTY      26  

ARTICLE XVI. PAYMENTS AND NOTICES

     26  

ARTICLE XVII. RULES AND REGULATIONS

     26  

ARTICLE XVIII. BROKER’S COMMISSION

     26  

ARTICLE XIX. TRANSFER OF LANDLORD’S INTEREST

     27  

ARTICLE XX. INTERPRETATION

     27  

SECTION 20.1.

  GENDER AND NUMBER      27  

SECTION 20.2.

  HEADINGS      27  

SECTION 20.3.

  JOINT AND SEVERAL LIABILITY      27  

SECTION 20.4.

  SUCCESSORS      27  

SECTION 20.5.

  TIME OF ESSENCE      27  

SECTION 20.6.

  CONTROLLING LAW/VENUE      27  

SECTION 20.7.

  SEVERABILITY      27  

SECTION 20.8.

  WAIVER AND CUMULATIVE REMEDIES      27  

SECTION 20.9.

  INABILITY TO PERFORM      27  

SECTION 20.10.

  ENTIRE AGREEMENT      27  

SECTION 20.11.

  QUIET ENJOYMENT      28  

SECTION 20.12.

  SURVIVAL      28  

SECTION 20.13.

  INTERPRETATION      28  

ARTICLE XXI. EXECUTION AND RECORDING

     28  

SECTION 21.1.

  COUNTERPARTS      28  

SECTION 21.2.

  CORPORATE, LIMITED LIABILITY COMPANY AND PARTNERSHIP AUTHORITY      28  

SECTION 21.3.

  EXECUTION OF LEASE; NO OPTION OR OFFER      28  

SECTION 21.4.

  RECORDING      28  

SECTION 21.5.

  AMENDMENTS      28  

SECTION 21.6.

  EXECUTED COPY      28  

SECTION 21.7.

  ATTACHMENTS      28  

ARTICLE XXII. MISCELLANEOUS

     28  

SECTION 22.1.

  NONDISCLOSURE OF LEASE TERMS      28  

SECTION 22.2.

  [INTENTIONALLY DELETED]      29  

SECTION 22.3.

  CHANGES REQUESTED BY LENDER      29  

SECTION 22.4.

  MORTGAGEE PROTECTION      29  

SECTION 22.5.

  [INTENTIONALLY DELETED]      29  

SECTION 22.6.

  SECURITY MEASURES      29  

 

EXHIBITS     

Exhibit A

   Description of Premises

Schedule A

   Landlord’s Work

Exhibit B

   Environmental Questionnaire

Exhibit C

   [Intentionally Deleted]

Exhibit D

   Insurance Requirements

Exhibit E

   Rules and Regulations

Exhibit F

   Location of Generators/Trash Enclosures

Exhibit G

   Signage Criteria

Exhibit H

   Requirements for Contractors

Exhibit I

   Standard Improvements

Exhibit J

   Howard’s Rug Proposal Dated June 1, 2005

Exhibit X

   Work Letter

Exhibit X-1

   Preliminary Plan

Exhibit X-2

   Approved Subcontractors

Exhibit Y

   Project Site Plan

 

ii


LEASE

(Single Tenant; Net)

THIS LEASE is made as of the 22nd day of June, 2005, by and between THE IRVINE COMPANY, a Delaware corporation hereafter called “Landlord,” and PROMETHEUS LABORATORIES INC., a California corporation, hereinafter called “Tenant.”

ARTICLE I. BASIC LEASE PROVISIONS

Each reference in this Lease to the “Basic Lease Provisions” shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease.

 

1.

Premises: The Premises are more particularly described in Section 2.1.

Address of Building: 9410 Carroll Park Drive, San Diego, CA

 

2.

Project Description: Canyon Ridge Technology Park (as more particularly described on Exhibit Y attached hereto)

 

3.

Use of Premises: General office, research and development and all permitted uses under the project zoning: IL-2-1.

 

4.

Commencement Date: January 1, 2006 (subject to “Landlord Delays” as defined in Section 3.1 of this Lease)

 

5.

Expiration Date: December 31, 2012

 

6.

Basic Rent: Commencing on the Commencement Date, the Basic Rent shall be Ninety Four Thousand Eighty-Nine Dollars ($94,089.00) per month, based on $0.95 per rentable square foot.

Basic Rent is subject to adjustment as follows:

Commencing January 1, 2007, the Basic Rent shall be Ninety Seven Thousand Sixty Dollars ($97,060.00) per month, based on $0.98 per rentable square foot.

Commencing January 1, 2008, the Basic Rent shall be One Hundred Thousand Thirty One Dollars ($100,031.00) per month, based on $1.01 per rentable square foot.

Commencing January 1, 2009, the Basic Rent shall be One Hundred Three Thousand Three Dollars ($103,003.00) per month, based on $1.04 per rentable square foot.

Commencing January 1, 2010, the Basic Rent shall be One Hundred Five Thousand Nine Hundred Seventy-Four Dollars ($105,974.00) per month, based on $1.07 per rentable square foot.

Commencing January 1, 2011, the Basic Rent shall be One Hundred Eight Thousand Nine Hundred Forty- Five Dollars ($108,945.00) per month, based on $1.10 per rentable square foot.

Commencing January 1, 2012, the Basic Rent shall be One Hundred Eleven Thousand Nine Hundred Sixteen Dollars ($111,916.00) per month, based on $1.13 per rentable square foot.

 

7.

Guarantor(s): None

 

8.

Floor Area: Approximately 99,041 rentable square feet

 

9.

Security Deposit: $280,867.00 (subject to reduction as set forth in Section 4.3)

 

10.

Broker(s): Cushman & Wakefield/CREA/Grubb & Ellis/BRE

 

11.

Additional Insureds: None

 

12.

Address for Payments and Notices:

 

LANDLORD

   TENANT

THE IRVINE COMPANY

   Prior to the Commencement Date:

dba Office Properties

8105 Irvine Center Drive, Suite 300

  

 

PROMETHEUS LABORATORIES INC.

Irvine, CA 92618

   5739 Pacific Center Blvd.

Attn: Vice President, Operations, Technology Portfolio

   San Diego, CA 92121
   Attn: Legal Department

 

1


with a copy of notices to:

 

THE IRVINE COMPANY

   Following the Commencement Date:

dba Office Properties

8105 Irvine Center Drive, Suite 300

   PROMETHEUS LABORATORIES INC.

Irvine, CA 92618

   9410 Carroll Park Drive

Attn: Senior Vice President, Operations

   San Diego, CA 92121

Office Properties

   Attn: Legal Department

 

13.

Tenant’s Liability Insurance Requirement (as defined in Exhibit D): $2,000,000.00

 

I4.

Vehicle Parking Spaces: Two Hundred Seventy-Eight (278)

 

2


ARTICLE II. PREMISES

SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the premises shown in Exhibit A (the “Premises”), containing approximately the rentable square footage set forth as the “Floor Area” in Item 8 of the Basic Lease Provisions. The Premises consist of all of the Floor Area within the building identified in Item 1 of the Basic Lease Provisions. The Premises together with such building, the underlying real property and all improvements outside of such building located on such real property (including, without limitation, the structure housing the boiler room, chiller room and cooling tower (the “Utility Building”)), are collectively called the “Building.” The Building is a portion of the project identified in Item 2 of the Basic Lease Provisions and shown in Exhibit Y (the “Project”). Landlord makes no representation that the Project will not be changed from the Project as shown on Exhibit Y; provided, however, that in the event of such change Tenant’s obligation with respect to Operating Expenses shall be reasonably adjusted to take into account such change. All references to “Floor Area” in this Lease shall mean the rentable square footage set forth in Item 8 of the Basic Lease Provisions. The rentable square footage set forth in Item 8 may include or have been adjusted by various factors, including, without limitation, a load factor for any vertical penetrations, stairwells or similar features or areas of the Building. Tenant agrees that the Floor Area set forth in Item 8 shall be binding on Landlord and Tenant for purposes of this Lease regardless of whether any future or differing measurements of the Premises or the Building are consistent or inconsistent with the Floor Area set forth in Item 8.

SECTION 2.2. ACCEPTANCE OF PREMISES. Except as expressly provided in this Lease, Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises, the Building or the Project. No representation or warranty is made concerning the suitability or fitness of the Premises, the Building or the Project for any purpose, including without limitation any representations or warranties regarding the compliance of Tenant’s use of the Premises with the applicable zoning or regarding any other land use matters, and Tenant shall be solely responsible as to such matters. Further, neither Landlord nor any representative of Landlord has made any representations or warranties regarding (i) what other tenants or uses may be permitted or intended in the Building or the Project, (ii) any exclusivity of use by Tenant with respect to its permitted use of the Premises as set forth in Item 3 of the Basic Lease Provisions, or (iii) any construction of portions of the Project not yet completed. Except as expressly provided in this Lease, Tenant’s lease of the Premises shall be on an “as is” basis. Landlord shall, at its sole cost and expense, construct, repair and/or replace the items set forth on Schedule A attached to this Lease (collectively, the “Landlord’s Work”). The Landlord’s Work shall be constructed in a good and workmanlike manner in compliance with all applicable building codes and permits, and in accordance with the scheduled completion dates for each component of the Landlord’s Work set forth on attached Schedule A. Landlord shall obtain any customary manufacturers/installers warranties for the Landlord’s Work. Except as expressly provided in this Lease, Tenant shall be conclusively deemed to have accepted the Premises and those portions of the Building and Project in which Tenant has any rights under this Lease as of the “Early Occupancy Date” (as defined in Section 3.2), which acceptance shall mean that it is conclusively established that the Premises and those portions of the Building and Project in which Tenant has any rights under this Lease were in satisfactory condition and in conformity with the provisions of this Lease, subject only to (1) those defective or incomplete portions of the Landlord’s Work which Tenant shall have itemized on a written punch list and delivered to Landlord within forty-five (45) days following Landlord’s written notice(s) that the Landlord’s Work has been substantially completed (or within forty five (45) days following the date of this Lease for items of Landlord’s Work designated as “complete” on the attached Schedule A), and (2) Landlord’s obligations expressly set forth in Section 2.4 below. Landlord shall correct any deficiencies with the Landlord’s Work promptly following delivery of the itemized punch list therefor as provided in the foregoing. Landlord shall also provide two (2) allowances to Tenant as follows: (a) Sixteen Thousand Seven Hundred Dollars ($16,700.00) (the “Access Control Allowance”) towards the cost to repair and/or replace the access control system in the Premises (the “Access Control Work”); and (b) Three Hundred thousand Dollars ($300,000.00) (the “Floor Surface Allowance”) towards the cost of bead blasting, repairing and otherwise preparing the surface of the Building’s slab as more particularly provided in that certain proposal from Howard’s Rug dated June 1, 2005, a copy of which proposal is attached hereto as Exhibit J (the “Floor Surfacing Work”). Tenant shall obtain those warranties from the manufacturers/installers for the Access Control Work and for the Floor Surfacing Work satisfactory to Tenant in its sole discretion, and Landlord shall have no liability whatsoever for the Access Control Work and/or for the Floor Surfacing Work beyond payment of the applicable allowance therefor. Sums from each of the allowances shall be paid within thirty (30) days of Landlord’s receipt of an invoice(s) with respect to the covered work. Promptly from and after the full execution and delivery of this Lease, Landlord shall deliver possession of the Premises to Tenant (such date of delivery of possession (the “Delivery Date”) for Tenant’s construction of those tenant improvements (the “Tenant Improvements”) in the Premises as provided in, and subject to the terms and conditions of, the Work Letter attached as Exhibit X hereto (the “Work Letter”).

SECTION 2.3. BUILDING NAME AND ADDRESS. Except for any names already in use by Tenant prior to such selection and notification by Landlord, Tenant shall not utilize any name selected by Landlord from time to time for the Building and/or the Project as any part of Tenant’s corporate or trade name. Upon not less than sixty (60) days written notice to Tenant, Landlord shall have the right to change the name, address, number or designation of the Building or Project without liability to Tenant. Notwithstanding the foregoing, Landlord shall reimburse Tenant for all reasonable out-of-pocket expenses incurred by Tenant, including without limitation, Tenant’s costs of obtaining new business cards, stationery and informing Tenant’s customers and vendors of Tenant’s new address, not to exceed Ten Thousand Dollars ($10,000.00) in the aggregate, resulting from any changed name, number or designation of the Building or Project initiated by Landlord.

 

3


SECTION 2.4. LANDLORD’S RESPONSIBILITIES. Landlord warrants to Tenant that (a) the roof, foundation, footings, slab, structural walls, exterior windows and skylights (including seals), plumbing, fire sprinkler\life safety system, lighting, heating, ventilation and air conditioning systems, electrical systems, and the passenger and freight elevators serving the Premises shall be in good operating condition and repair (except to the extent modified or otherwise impaired by Tenant’s construction of the Tenant Improvements) on the Early Occupancy Date, (b) the Premises, the Building, and Common Areas shall be free of all mold as of the Delivery Date, and (c) the Premises, Building and the Common Areas (except for the Tenant Improvements) shall comply with all laws, codes and regulations (collectively, “Laws”) pertaining thereto, and shall be free of latent defects in the construction thereof, as of the Early Occupancy Date. Provided that Tenant shall notify Landlord of a non-compliance with the foregoing warranty set forth in Subsection 2.4(a) above not later than one hundred twenty (120) days from and after the Early Occupancy Date, or of a non-compliance with the foregoing warranty set forth in Subsection 2.4(b) above not later than sixty (60) days from and after the Delivery Date, then Landlord shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth the nature and extent of each non-compliance, rectify same at Landlord’s sole cost and expense and not as a Project Cost. Except as otherwise provided in this Lease, promptly after receipt of written notice from Tenant setting forth the nature and extent of each non-compliance, Landlord shall rectify any non-compliance with the foregoing warranty contained in Subsection 2.4(c) above throughout the Term of this Lease at Landlord’s sole cost and expense and not as a Project Cost.

ARTICLE III. TERM

SECTION 3.1. GENERAL. The term of this Lease (“Term”) shall commence on the date set forth in Item 4 of the Basic Lease Provisions (the “Commencement Date”), and shall expire on the date set forth in Item 5 of the Basic Lease Provisions (the “Expiration Date”). Notwithstanding the foregoing, the Commencement Date and the Expiration Date shall be extended, on a day-for-day basis, in the event that Tenant’s construction of the Tenant Improvements is actually delayed due to: (i) Landlord’s failure to respond within the time period(s) required for approvals as set forth in the attached Work Letter, or (ii) Landlord’s failure to complete any component of the Landlord’s Work as set forth on Schedule A attached to this Lease (collectively, a “Landlord’s Delay”); provided, however, that no Landlord’s Delay shall be effective unless and until Tenant shall notify Landlord that any such failure is causing, or is likely to cause, an actual delay in Tenant’s construction of the Tenant Improvements, and Landlord shall thereafter fail to cure such failure within two (2) business days thereafter. Any dispute involving a Landlord’s Delay shall be resolved by JAMs as provided in Article III of the attached Work Letter.

SECTION 3.2. EARLY OCCUPANCY. Landlord agrees that Tenant shall be permitted to occupy the Premises for the conduct of its business on that date (the “Early Occupancy Date”) of Tenant’s choosing following the Delivery Date and prior to the Commencement Date of this Lease. Tenant’s occupancy of the Premises prior to the Commencement Date shall be subject to all of the covenants and conditions on Tenant’s part contained in this Lease (including, without limitation, the covenants contained in Sections 5.3, 6.1, 7.1, 7.3, 7.4, 10.1 and 10.3 of the Lease), except for the obligation to pay Basic Rent.

SECTION 3.3. RIGHT TO EXTEND THIS LEASE. Provided that no Event of Default has occurred and is continuing under any provision of this Lease, either at the time of exercise of the extension right granted herein or at the time of the commencement of such extension, and provided further that Tenant is occupying at least fifty percent (50%) of the Premises, then Tenant may extend the Term of this Lease for one (1) period of sixty (60) months at the “Fair Market Rent” (as defined below). Tenant shall exercise its right to extend the Term by and only by delivering to Landlord, not less than ten (10) months or more than thirteen (13) months prior to the Expiration Date, Tenant’s written notice that it desires to so extend the Term of this Lease (the “Extension Notice”). The “Fair Market Rent” shall mean the economic terms (e.g., Basic Rent, tenant improvement allowance, brokerage commission and any other concessions typically granted by landlords of similar buildings/comparable space in the Sorrento Mesa and Sorrento Valley areas to the extent applicable to the proposed extension) secured at that time by landlords of similar buildings/comparable space in the Sorrento Mesa and Sorrento Valley areas for lease extensions. The Fair Market Rent for any extension of the Term shall be determined as provided in the following provisions.

Landlord shall, within thirty (30) days following the Extension Notice, notify Tenant in writing of its determination of the Fair Market Rent including the basis for such determination (“Landlord’s Determination”). Within twenty (20) business days following delivery of the Landlord’s Determination, Tenant shall notify Landlord in writing (“Tenant’s Notice”) that it shall (a) lease the Premises on the terms set forth in Landlord’s Determination, (b) arbitrate Landlord’s Determination as set forth in this Section 3.3 in which case Tenant shall include Tenant’s determination of the Fair Market Rent (“Tenant’s Determination”), or (c) irrevocably withdraw the Extension Notice. If Tenant fails to provide Tenant’s notice as provided herein, Tenant shall be deemed to have irrevocably withdrawn the Extension Notice and waived its extension rights under this Section 3.3. Tenant’s Notice shall serve as its irrevocable notice of its commitment to extend the Term on the terms and conditions herein provided. If applicable, within ten (10) days following delivery of the Tenant’s Determination, the parties shall attempt to agree on an appraiser to determine the Fair Market Rent. If the parties are unable to agree in that time, then each party shall designate an appraiser within ten (10) days thereafter. Should either party fail to so designate an appraiser within that time, then the appraiser designated by the other party shall determine the Fair Market Rent. Should each of the parties timely designate an appraiser, then the two appraisers so designated shall appoint a third appraiser who shall, acting alone, determine the Fair Market Rent for the Premises. Any appraiser designated hereunder shall have an MAl certification with not less than five (5) years experience in the valuation of commercial industrial buildings in the vicinity of the Project.

 

4


Within thirty (30) days following the selection of the appraiser and such appraiser’s receipt of the Landlord’s Determination and the Tenant’s Determination, the appraiser shall determine whether the Landlord’s Determination or the Tenant’s Determination more accurately reflects the Fair Market Rent. Accordingly, either the Landlord’s Determination or the Tenant’s Determination shall be selected by the appraiser as the Fair Market Rent for the extension period. In making such determination, the appraiser shall not attribute any factor for brokerage commissions in making its determination of the Fair Market Rent. At any time before the decision of the appraiser is rendered, either party may, by written notice to the other party, accept the rental terms submitted by the other party, in which event such terms shall be deemed adopted as the agreed Fair Market Rent. The fees of the appraiser(s) shall be borne entirely by the party whose determination of the Fair Market Rent was not accepted by the appraiser.

Within twenty (20) days after the determination of the Fair Market Rent, Landlord shall prepare an appropriate and commercially reasonable and mutually agreeable amendment to this Lease for the extension period, and Tenant shall execute and return same to Landlord within ten (10) days after Tenant’s receipt of same. Should the Fair Market Rent not be established by the commencement of the extension period, then Tenant shall continue paying rent at the rate in effect during the last month of the initial Term, and a lump sum adjustment shall be made promptly upon the determination of such new rental rate.

If Tenant fails to timely exercise the extension right granted herein within the time period expressly set forth for exercise by Tenant in the initial paragraph of this Section, Tenant’s right to extend the Term shall be extinguished and the Lease shall automatically terminate as of the expiration date of the Term, without any extension and without any liability to Landlord. Except for a “Permitted Transfer” (as defined in Section 9.4 of this Lease), any attempt to assign or transfer any right or interest created by this paragraph shall be void from its inception. Tenant shall have no other right to extend the Term beyond the single sixty (60) month extension period created by this paragraph. Unless agreed to in a writing signed by Landlord and Tenant, any extension of the Term, whether created by an amendment to this Lease or by a holdover of the Premises by Tenant, or otherwise, shall be deemed a part of, and not in addition to, any duly exercised extension period permitted by this paragraph.

ARTICLE IV. RENT AND OPERATING EXPENSES

SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset, the rental amount for the Premises shown in Item 6 of the Basic Lease Provisions (the “Basic Rent”), including subsequent adjustments, if any. Any rental adjustment to Basic Rent shown in Item 6 shall be deemed to occur on the specified monthly anniversary of the Commencement Date, whether or not the Commencement Date occurs at the end of a calendar month. The rent shall be due and payable in advance commencing on the Commencement Date (as prorated for any partial month) and continuing thereafter on the first day of each successive calendar month of the Term. No demand, notice or invoice shall be required for the payment of Basic Rent. An installment of rent in the amount of one (1) full month’s Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions and one (1) month’s estimated Tenant’s Share of Operating Expenses (as defined in Section 4.2) shall be delivered to Landlord concurrently with Tenant’s execution of this Lease and shall be applied against the Basic Rent and Operating Expenses first due hereunder.

SECTION 4.2. OPERATING EXPENSES.

(a) From and after the Early Occupancy Date, Tenant shall pay to Landlord, as additional rent, Tenant’s Share of all Operating Expenses, as defined in Section 4.2(f), incurred by Landlord in the operation of the Building and the Project. The term “Tenant’s Share” means (i) one hundred percent (100%) of Operating Expenses reasonably determined by Landlord to relate specifically to the Building rather than the entire Project or any other building in the Project, plus (ii) that portion of any Operating Expenses determined by multiplying the cost of such item by a fraction, the numerator of which is the Floor Area and the denominator of which is the total rentable square footage intended for lease or occupancy of (A) all of the buildings in the Project for expenses reasonably determined by Landlord to benefit or relate substantially to the entire Project rather than any specific building, or (B) all or some of the buildings within the Project as well as all or a portion of other property owned by Landlord and/or its affiliates for expenses reasonably determined by Landlord to benefit or relate to such buildings within the Project and such other real property. In the event that Landlord reasonably determines that any premises within any building within the Project or any portion of a building or project within a larger area incurs a non-proportional benefit from any expense, or is the non-proportional cause of any such expense, Landlord may, allocate a greater percentage of such Operating Expense to such premises, building or project, as applicable. Notwithstanding the foregoing provision for calculation of the “Tenant’s Share” (but subject to the provisions of Section 4.2(h) “capping” said management fee), the full amount of any management fee for the management of the Premises that is calculated as a percentage of the rent payable by Tenant shall be paid in full by Tenant as additional rent.

(b) Prior to the start of each full Expense Recovery Period (as defined in this Section 4.2), Landlord shall give Tenant a good faith line item written estimate of the amount of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period. Failure to provide such estimate shall not relieve Tenant from its obligation to pay Tenant’s Share of Operating Expenses or estimated amounts thereof, if and when Landlord provides such estimate or final payment amount. Tenant shall pay the estimated amounts to Landlord in equal monthly installments, in advance concurrently with payments of Basic Rent. If Landlord has not furnished its written estimate for any Expense Recovery Period by the time set forth above, Tenant shall continue to pay monthly the estimated Tenant’s Share of Operating Expenses in effect during the prior Expense Recovery Period; provided that when the new estimate is delivered to Tenant, Tenant shall, at the next monthly payment date(s), pay any accrued estimated Tenant’s Share of Operating Expenses based upon the new estimate or receive a credit against

 

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amounts next due for overpaid amounts. For purposes hereof, “Expense Recovery Period” shall mean every twelve month period during the Term (or portion thereof for the first and last lease years) commencing July 1 and ending June 30, provided that Landlord shall have the right to change the date on which an Expense Recovery Period commences in which event appropriate reasonable adjustments shall be made to Tenant’s Share of Operating Expenses so that the amount payable by Tenant shall not materially vary as a result of such change.

(c) Within one hundred twenty (120) days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement showing in reasonable detail the actual or prorated Tenant’s Share of Operating Expenses incurred by Landlord during the period, and the parties shall within thirty (30) days thereafter make any payment or allowance necessary to adjust Tenant’s estimated payments of Tenant’s Share of Operating Expenses, if any, to the actual Tenant’s Share of Operating Expenses as shown by the annual statement. Any delay or failure by Landlord in delivering any statement hereunder shall not constitute a waiver of Landlord’s right to require Tenant to pay Tenant’s Share of Operating Expenses pursuant hereto. Any amount due Tenant shall be credited against installments next coming due under this Section 4.2, and any deficiency shall be paid by Tenant together with the next installment. Should Tenant fail to object in writing to Landlord’s determination of Tenant’s Share of Operating Expenses within one hundred eighty (180) days following Tenant’s receipt of Landlord’s expense statement (the “Review Period”), Landlord’s determination of Tenant’s Share of Operating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on the parties for all purposes and any future claims to the contrary shall be barred.

Provided no Event of Default (based on Tenant’s failure to pay any sum due under this Lease) has occurred, which has not either been cured by Tenant or waived by Landlord, Tenant shall have the right to cause its own qualified employee(s) or a certified public accountant, in either case engaged on a non-contingency fee basis, to audit Operating Expenses by inspecting Landlord’s general ledger of expenses not more than once for any Expense Recovery Period. However, to the extent that insurance premiums are determined by Landlord on the basis of an internal allocation of costs utilizing information Landlord in good faith deems proprietary, such expense component shall not be subject to audit. Tenant shall give notice to Landlord of Tenant’s intent to audit, if at all, within the Review Period for the applicable Expense Recovery Period. Such audit shall be conducted at a mutually agreeable time during normal business hours at the office of Landlord or its management agent where such accounts are maintained. If Tenant’s audit determines that actual Operating Expenses have been overstated by more than five percent (5%), then subject to Landlord’s right to review and/or contest the audit results, Landlord shall reimburse Tenant for the reasonable out-of-pocket costs of such audit. Tenant’s rent shall be appropriately adjusted to reflect any overstatement in Operating Expenses. In the event of a dispute between Landlord and Tenant regarding such audit, such dispute shall be submitted and resolved by binding arbitration pursuant to the provisions of Article III of the attached Work Letter. All of the information obtained by Tenant and/or its auditor in connection with such audit, as well as any compromise, settlement, or adjustment reached between Landlord and Tenant as a result thereof, shall be held in strict confidence and, except as may be required pursuant to litigation, shall not be disclosed to any third party, directly or indirectly, by Tenant or its auditor or any of their officers, agents or employees. Landlord may require Tenant’s auditor to execute a separate confidentiality agreement affirming the foregoing as a condition precedent to any audit. In the event of a violation of this confidentiality covenant in connection with any audit, then in addition to any other legal or equitable remedy available to Landlord, Tenant shall forfeit its right to any reconciliation or cost reimbursement payment from Landlord due to said audit (and any such payment theretofore made by Landlord shall be promptly returned by Tenant), and Tenant shall have no further audit rights under this Lease.

(d) Even though this Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Tenant’s Share of Operating Expenses for the Expense Recovery Period in which this Lease terminates, Tenant shall, subject to the audit rights set forth in Section 4.2(c) above, within thirty (30) days of written notice pay the entire increase over the estimated Tenant’s Share of Operating Expenses already paid. Conversely, any overpayment by Tenant shall be rebated by Landlord to Tenant not later than thirty (30) days after such final determination.

(e) If, at any time during any Expense Recovery Period, any one or more of the Operating Expenses are increased to a rate(s) or amount(s) in excess of the rate(s) or amount(s) used in calculating the estimated Tenant’s Share of Operating Expenses for the year, then the estimate of Tenant’s Share of Operating Expenses may be increased by written notice from Landlord for the month in which such rate(s) or amount(s) becomes effective and for all succeeding months by an amount equal to Tenant’s Share of the increase. If Landlord gives Tenant written notice of the amount or estimated amount of the increase, the month in which the increase will or has become effective, then Tenant shall pay the increase to Landlord as a part of Tenant’s monthly payments of the estimated Tenant’s Share of Operating Expenses as provided in Section 4.2(b), commencing with the month following Tenant’s receipt of Landlord’s notice. In addition, Tenant shall pay upon written request any such increases which were incurred prior to the Tenant commencing to pay such monthly increase. Following any such increase, if requested by Tenant, Landlord shall review any possible decreases in other of the Operating Expenses for such year with Tenant, and will implement any such decreases, if warranted.

(f) The term “Operating Expenses” shall mean and include all Project Costs, as defined in subsection (g), and Property Taxes, as defined in subsection (h).

(g) The term “Project Costs” shall include all commercially reasonable expenses of operation, repair and maintenance of the Building and the Project, including without limitation all appurtenant Common Areas (as defined in Section 6.2), and shall include the following charges by way of illustration but not limitation: water and sewer charges; insurance premiums and deductibles and/or reasonable premium and deductible equivalents should

 

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Landlord elect to self-insure all or any portion of any risk that Landlord is authorized to insure hereunder; license, permit, and inspection fees; light; power; window washing; trash pickup; heating, ventilating and air conditioning (to the extent not performed and paid for by Tenant as provided under Section 7.1 below); supplies; materials; equipment; tools; the cost of any commercially reasonable environmental, insurance, tax or other consultant utilized by Landlord in connection with the Building and/or Project; establishment of reasonable reserves for replacements and/or repairs; costs incurred in connection with compliance with any laws or changes in laws applicable to the Building or the Project that become effective after the Early Occupancy Date; the cost of any capital investments or replacements (other than tenant improvements for specific tenants) to the extent of the amortized amount thereof over the useful life of such capital investments or replacements with interest calculated at seven percent (7%) per annum, all as determined by Landlord in accordance with generally accepted accounting principles, consistently applied, for each such year of useful life during the Term; costs associated with the maintenance of an air conditioning, heating and ventilation service agreement (to the extent not performed and paid for by Tenant as provided under Section 7.1 below); third-party labor costs and expenses; reasonably allocated wages and salaries, fringe benefits, and payroll taxes for administrative and other personnel directly applicable to the Building and/or Project, including both Landlord’s personnel and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 6.4, 7.2, and 10.2; and a reasonable overhead/management fee for the professional operation of the Project. It is understood and agreed that Project Costs may include competitive charges for direct services (including, without limitation, management and/or operations services) provided by any subsidiary, division or affiliate of Landlord. Tenant shall bear the burden of proof in any challenge to Landlord’s designation of an item as a Project Cost based on the fact Tenant does not consider it to be commercially reasonable.

(h) Notwithstanding the provisions of Section 4.2(g) above, Project Costs shall not include: (i) the cost of capital improvements (except as permitted in Section 4.2(g) above, but subject to Landlord’s obligations contained in Section 2.4 above); (ii) all fees, costs, principal and interest related to any mortgage(s) or deed(s) of trust, all payments made under any ground or underlying lease and all other non-operating debts of Landlord; (iii) the cost of repairs or other work to the extent Landlord is actually reimbursed by insurance or condemnation proceeds, or otherwise actually reimbursed by a third party; (iv) costs in connection with leasing space in the Building (including, without limitation, brokerage commissions, marketing costs, attorneys’ fees, lease concessions, rental abatements and construction allowances granted to specific tenants); (v) costs incurred in connection with the sale, financing or refinancing of the Building or Project; (vi) fines, interest and penalties incurred due to the late payment of Property Taxes or Project Costs not caused to by Tenant’s failure to timely pay Basic Rent, Operating Expenses or Property Taxes; (vii) any penalties or damages that Landlord pays to Tenant under this Lease or to other tenants in the Building or Project under their respective leases; (viii) any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority; (ix) the cost of any service provided to Tenant or other occupants of the Building or Project for which Landlord is actually reimbursed by another tenant in the Building; (x) costs associated with damage or repairs to the Project or Common Areas necessitated by the willful misconduct of Landlord or Landlord’s employees or authorized agents; (xi) salaries and benefits or employees over the level of property manager or building engineer; (xii) legal fees, accountant fees and other expenses incurred in disputes with other tenants or occupants of the Building or Project or associated with the enforcement of any other leases or defense of Landlord’s title to or interest in the Building, Project or any part thereof; (xiii) services or installations furnished to any tenant in the Building or Project that are not also furnished to Tenant; (xiv) the cost of any service provided to Tenant or other occupants of the Building or Project for which Landlord is actually reimbursed; (xv) costs or fees payable to public authorities in connection with any future construction, renovation and/or improvements to the Project (other than the Tenant Improvements or any improvements made to the Premises by or for Tenant) including fees for transit, housing, schools, open space, child care, arts programs, traffic mitigation measures, environmental impact reports, traffic studies, and transportation system management plans (provided, however, any of the foregoing that would be considered part of Property Taxes and/or billed as such may be included in Property Taxes); (xvi) expenditures covered by the “Property Policy” or by the “Liability Policy” (as defined in Section 10.2) should Landlord elect to self-insure such coverage under Section 10.2; (xvii) organizational expenses associated with the creation, maintenance and operation of the entity which constitutes Landlord; (xviii) except as allowed as a capital replacement or investment cost pursuant to Section 4.2(g) above, rentals and other related expenses, if any, incurred in leasing air conditioning systems, elevators or other equipment ordinarily considered capital in nature; (xix) amounts paid to persons or entities affiliated with, controlled by, controlling of, or under common control with, Landlord to the extent such amounts are greater than would have been charged by an unaffiliated third party in an arms-length transaction; (xx) any management fee or administrative cost in excess of the lower of (A) the fee charged by similar landlords in the area of the Project or (B) four percent (4%) of the Basic Rent and Operating Expenses for the period in question for the first five (5) years of the Term; and five percent (5%) for the final two years of the Term; (xxi) any reserves for capital replacements of any item other than a reasonable reserve for the replacement of the roof of the Building and the Utility Building; (xxii) should Landlord elect to self-insure the “Property Policy” and/or the “Liability Policy” (as defined in Section 10.2), the costs of premium and/or deductible equivalents to the extent such costs are in excess of the cost of such coverage if purchased in the insurance marketplace (based on the size of Landlord’s portfolio and its loss history); (xxiii) as determined following each Expense Recovery Period, any item of Project Cost which is duplicative of any other item of Project Costs; and (xxiv) taxes on Landlord’s income from all sources.

(i) The term “Property Taxes” as used herein shall include any form of federal, state, county or local government or municipal taxes, fees, charges or other impositions of every kind (whether general, special, ordinary or extraordinary) related to the ownership, leasing or operation of the Premises, Building or Project, including without limitation, the following: (i) all real estate taxes or personal property taxes, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease or to the Building and/or the Project, and any improvements, fixtures and equipment and other property of Landlord located in the Building and/or the Project, (iii) all assessments and fees for public improvements, services,

 

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and facilities and impacts thereon, including without limitation arising out of any Community Facilities Districts, “Mello Roos” districts, similar assessment districts, and any traffic impact mitigation assessments or fees; (iv) any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, other than taxes covered by Article VIII; and (v) taxes based on the receipt of rent (including gross receipts or sales taxes applicable to the receipt of rent), and (vi) reasonable costs and expenses incurred in good faith in contesting the amount or validity of any Property Tax by appropriate proceedings. Notwithstanding the foregoing, Property Taxes shall not include: (A) income, capital, stock, succession, transfer, franchise, gift, estate or inheritance tax; (B) any item to the extent otherwise included in Project Costs; (C) any environmental assessments, charges or liens arising in connection with the remediation of Hazardous Materials from the Project, the causation of which arose prior to the Commencement Date or to the extent caused by Landlord, its agents, employees or contractors or any tenant of the Project (other than Tenant or its sublessees or assignees); (D) reserves for future Property Taxes; or (E) penalties or interest on the late payment of any Property Taxes. In no event shall Tenant be obligated to pay that portion of Property Taxes allocated to the Building or Premises by Landlord that is more than five percent (5%) greater than the taxes actually levied against the assessor’s parcel on which the Premises is located. If any Property Taxes are payable in installments over a period of time, Tenant shall be liable only for the payment of those installments falling due and payable during the Term, with appropriate proration for fractional years.

SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant’s delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of the Basic Lease Provisions, to be held by Landlord as security for the full and faithful performance of all of Tenant’s obligations under this Lease (the “Security Deposit”). Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. Subject to the last sentence of this Section, the Security Deposit shall be understood and agreed to be the property of Landlord upon Landlord’s receipt thereof, and may be utilized by Landlord in its sole and absolute discretion towards the payment of all expenses by Landlord for which Tenant would be required to reimburse Landlord under this Lease. Upon any Event of Default by Tenant (as defined in Section 14.1), Landlord may, in its sole and absolute discretion, use or apply the whole or any part of the Security Deposit to pay any sum which Tenant is obligated to pay under this Lease including, but not limited to, sums that Landlord may reasonably expend or be required to expend by reason of the Event of Default by Tenant or any loss or damage that Landlord may suffer by reason of the Event of Default or costs incurred by Landlord in connection with the repair or restoration of the Premises pursuant to Section 15.3 of this Lease upon expiration or earlier termination of this Lease. In no event shall Landlord be obligated to apply the Security Deposit upon an Event of Default and Landlord’s rights and remedies resulting from an Event of Default, including without limitation, Tenant’s failure to pay Basic Rent, Tenant’s Share of Operating Expenses or any other amount due to Landlord pursuant to this Lease, shall not be diminished or altered in any respect due to the fact that Landlord is holding the Security Deposit. If any portion of the Security Deposit is applied by Landlord as permitted by this Section, Tenant shall within five (5) business days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. If Tenant fully performs its obligations under this Lease, the Security Deposit shall be returned to Tenant within thirty (30) days after the expiration of the Term, provided that Tenant agrees that Landlord may retain the Security Deposit to the extent and until such time as all amounts due from Tenant in accordance with this Lease have been determined (which determination shall not be unreasonably withheld, conditioned or delayed) and paid in full and Tenant agrees that Tenant shall have no claim against Landlord for Landlord’s retaining such Security Deposit to the extent provided in this Section.

Provided that no Event of Default has theretofore occurred under any provision of this Lease, Tenant shall have the right to have the Security Deposit reduced to the amount of One Hundred Twenty-Three Thousand One Hundred Eight Dollars ($123,108.00) by sending written request thereof to Landlord, which request shall be accompanied by Tenant’s audited Statements demonstrating two (2) immediately prior consecutive years of positive net income for Tenant. Following such written request to Landlord, Tenant shall be credited in the amount of the difference between the amount of the Security Deposit stated in Item 9 of the Basic Lease Provisions and the reduced amount of Security Deposit set forth above, against Basic Rent and Operating Expenses next coming due under this Lease.

ARTICLE V. USES

SECTION 5.1. USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with applicable laws and restrictions and pursuant to approvals to be obtained by Tenant from all relevant and required governmental agencies and authorities. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant, at its expense, shall procure, maintain and make available for Landlord’s inspection throughout the Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Tenant’s permitted use of the Premises. Tenant shall not do or permit anything to be done in or about the Premises which will in any way unreasonably interfere with the rights of other occupants of the Project, or use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises or the Project. Tenant shall not, without Landlord’s prior written consent conduct its business operations in areas outside the Premises or the Utility Building, including but not limited to storing any property, equipment or trash in such areas except as shown on Exhibit F attached hereto. Tenant shall be responsible for any increased cost of any insurance policy(ies) covering the Project and/or their contents occasioned by its use. Tenant shall comply at its expense with all present and future laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety requirements, whether or not Tenant’s compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. Tenant shall comply at its expense with all present and future covenants, conditions, easements or restrictions now or

 

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hereafter affecting or encumbering the Building and/or Project, and any amendments or modifications thereto, including without limitation the payment by Tenant of any periodic or special dues or assessments charged against the Premises or Tenant which may be allocated to the Premises or Tenant in accordance with the provisions thereof, provided, however, that such future or amended covenants, conditions, easements or restrictions are provided to Tenant (and, to the extent action is required of Tenant to comply, Tenant has reasonable prior notice) and do not materially impair the rights of Tenant or materially increase the obligations of Tenant under this Lease. Tenant shall promptly upon demand reimburse Landlord for any additional commercially reasonable insurance premium charged by reason of Tenant’s failure to comply with the provisions of this Section, and shall indemnify Landlord from any liability and/or reasonable expense resulting from Tenant’s noncompliance.

SECTION 5.2. SIGNS. Tenant shall have the right to install one (1) exterior building-top sign on the Building, one (1) sign on either side of the existing monument sign in front of the Building and commercially reasonable signage for Tenant’s name (and for any subtenant’s name) on the Premises’ entry and exit doors, subject to Landlord’s right of prior approval that such exterior signage is in compliance with the Signage Criteria (defined below). Except as provided in the foregoing, Tenant shall have no right to maintain signs in any location on or about the Building or the Project and shall not place or erect any signs that are visible from the exterior of the Building, except to the extent required by law, regulation or government authority. The size, design, graphics, material, style, color and other physical aspects of any permitted sign shall be subject to Landlord’s written determination, as determined solely by Landlord, prior to installation, that signage is in compliance with any covenants, conditions or restrictions encumbering the Premises and Landlord’s signage program for the Project, in effect and approved by the City of San Diego (the “Signage Criteria”) as of the date of installation of such signage. A copy of the Signage Criteria in effect as of the date of this Lease is attached as Exhibit G to this Lease. Prior to placing or erecting any such signs, Tenant shall obtain and deliver to Landlord a copy of any applicable municipal or other governmental permits and approvals and comply with any applicable insurance requirements for such signage. Tenant shall be responsible for the cost of any permitted sign, including the fabrication, installation, maintenance and removal thereof and the cost of any permits therefor. If Tenant fails to maintain its sign in good condition, or if Tenant fails to remove same upon termination of this Lease and repair and restore any damage caused by the sign or its removal, Landlord may do so at Tenant’s expense. Landlord shall have the right to temporarily remove any signs in connection with any repairs or maintenance in or upon the Building. The term “sign” as used in this Section shall include all signs, designs, monuments, displays, advertising materials, logos, banners, projected images, pennants, decals, pictures, notices, lettering, numerals or graphics.

SECTION 5.3. HAZARDOUS MATERIALS.

(a) For purposes of this Lease, the term “Hazardous Materials” includes (i) any “hazardous material” as defined in Section 25501(o) of the California Health and Safety Code, (ii) hydrocarbons, polychlorinated biphenyls or asbestos, (iii) any toxic or hazardous materials, substances, wastes or materials as defined pursuant to any other applicable state, federal or local law or regulation, and (iv) any other substance or matter which may result in liability to any person or entity as a result of such person’s possession, use, release or distribution of such substance or matter and that is considered a hazardous material under any applicable law or regulation.

(b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord, which shall not be unreasonably withheld as hereinafter provided. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises: (A) a reasonable quantity of standard office or consumer products that may contain Hazardous Materials (such as photocopy toner, “White Out”, and the like), provided however, that (i) Tenant shall maintain such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant’s storage, use and disposal of all such products; and (B) those Hazardous Materials (i) in kind and content listed on the Environmental Questionnaire (defined below) delivered to Landlord prior to the execution of this Lease or otherwise reasonably related to Tenant’s diagnostic business (the “Current HazMats”) to the extent that the use of such Current HazMats shall comply with all applicable laws and all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant’s storage, use and disposal of such Current HazMats, and (ii) reasonably related to any future, non-diagnostic business which Tenant (each a “Future HazMat”) to the extent (1) the use of such Future HazMats shall comply with all applicable laws and all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant’s storage, use and disposal of such Future HazMats, (2) Tenant gives Landlord prior written notice with regard to its proposed use of any Future HazMat, (3) if Landlord reasonably determines that a Future HazMat is materially different in type and risk than the Current HazMats, Landlord may require Tenant obtain the insurance described in Exhibit D, Section 2 in amount commensurate with such different type and risk, and ( 4) Landlord may place such reasonable conditions with respect to Tenant’s use of any Future HazMat and may further require that Tenant demonstrate that any such Future HazMats are necessary or useful to Tenant’s business and will be generated, stored, used and disposed of in a manner that complies with all applicable laws and regulations pertaining thereto and with good business practices. Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval in connection with the storage, generation, release, disposal or use of Future HazMats proposed by Tenant as provided in the foregoing sentence on or about the Premises, and Tenant agrees that any reasonable costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord either as a condition to such consent by Landlord or as additional rent hereunder upon demand.

 

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(c) Prior to the execution of this Lease, Tenant shall complete, execute and deliver to Landlord an Environmental Questionnaire and Disclosure Statement (the “Environmental Questionnaire”) in the form of Exhibit B attached hereto. The completed Environmental Questionnaire shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. Tenant shall disclose to Landlord in writing at the time it makes its annual regulatory disclosures regarding its use of Hazardous Materials or, if no such disclosure is made or required, on or about each anniversary of the Commencement Date, the names and amounts of all Hazardous Materials which were stored, generated, used, released and/or disposed of on, under or about the Premises for the twelve-month period prior thereto, and which Tenant expects to store, generate, use, release and/or dispose of on, under or about the Premises for the succeeding twelve-month period. In addition, to the extent Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant shall, upon reasonable notice, make available for inspection and copying complete and legible copies of all the following environmental documents relating to Hazardous Materials utilized by Tenant on or about the Premises: reports filed pursuant to any self-reporting requirements; permit applications, permits, monitoring reports, emergency response or action plans, workplace exposure and community exposure warnings or notices and all other reports, disclosures, plans or documents (even those which may be characterized as confidential) relating to water discharges, air pollution, waste generation or disposal, and underground storage tanks for Hazardous Materials; orders, reports, notices, listings and correspondence (even those which may be considered confidential) of or concerning the release, investigation of, compliance, cleanup, remedial and corrective actions, and abatement of Hazardous Materials; and all complaints, pleadings and other legal documents filed by or against Tenant related to Tenant’s use, handling, storage, release and/or disposal of Hazardous Materials. Notwithstanding anything to the contrary contained in this Section 5.3, under no circumstances shall (i) any provision in this Section 5.3 require Tenant to disclose to Landlord any document Tenant reasonably believes is attorney-client privileged or attorney work product or (ii) Tenant be required to disclose any confidential materials without such disclosure being subject to the parties’ execution of a commercially reasonable non-disclosure agreement.

(d) Landlord and its agents shall have the right, but not the obligation, after giving Tenant at least 24 hours prior notice (except in an emergency for which no notice shall be required) to inspect, sample and/or monitor the Premises and/or the soil or groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith Tenant shall provide, with prior reasonable notice, Landlord with full access to all facilities, records and personnel related thereto. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under or about the Premises caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord’s other rights and remedies under this Lease, to immediately enter upon the Premises without notice and to discharge Tenant’s obligations under this Section 5.3 at Tenant’s expense (which expense shall be reasonable under the circumstances), including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant’s business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant’s expense (which expense shall be reasonable under the circumstances), shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises (provided that Landlord reasonably determines that an actual or potential conflict of interest between Landlord and Tenant exists or may exist that reasonably requires Landlord to retain a separate attorney from Tenant).

(e) If the presence of any Hazardous Materials on, under, from or about the Premises or the Project caused or permitted by Tenant or its agents, employees, contractors, licensees or invitees results in (i) injury to any person, (ii) injury to or any contamination of the Premises or the Project, or (iii) injury to or contamination of any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and the Project and any other directly affected real or personal property owned by Landlord to the “Required Condition” (as hereinafter defined). Notwithstanding the foregoing, Tenant shall not, without Landlord’s prior written consent, which consent may be given or withheld in Landlord’s sole and absolute discretion, take any remedial action in response to the presence of any Hazardous Materials on, from, under or about the Premises or the Project or any other directly affected real or personal property owned by Landlord or enter into any similar agreement to take remedial action, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord’s prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under or about the Premises or the Project or any other directly affected real or personal property owned by Landlord ( i) imposes an immediate threat to the health, safety or welfare of any individual and (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord’s consent before taking such action. Landlord shall be responsible for any increased costs or liability to the extent they are directly attributable to Landlord’s withholding or delay in providing its consent. As used herein, “Required Condition” shall mean returning the Premises and the Project and any other directly affected real or personal property owned by Landlord to a condition that is both (A) required by applicable federal, state or local law, regulation or order, including without limitation, performing any required cleanup, remediation, removal, disposal, neutralization or other treatment of Hazardous Materials, and (B) wherein Landlord’s marketability, use and leasing thereof as commercial properties is not materially impaired. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys reasonably acceptable to Landlord) Landlord and any successors to all or any portion of Landlord’s interest in the Premises and the Project and any other directly affected real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation reasonable attorneys’ fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, generation, storage, treatment,

 

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release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Building or the Project and any other directly affected real or personal property owned by Landlord caused or knowingly permitted by Tenant, its agents, employees, contractors, licensees or invitees (each a “Tenant Party”). Such indemnity obligation shall specifically include, without limitation, the cost of any repair, restoration, cleanup or detoxification of the Premises, the Building and the Project and any other directly affected real or personal property owned by Landlord required or necessary to return same to the Required Condition, the preparation of any closure or other required plans, whether or not such action is required or necessary during the Term or after the expiration of this Lease and any loss of rental due to the inability to lease the Premises or any portion of the Building or Project as a result of such Hazardous Material or remediation thereof. If it is at any time discovered that Hazardous Materials have been released on, into, from, under or about the Premises during the Term by Tenant or any Tenant Party, or that Tenant or any Tenant Party may have caused or knowingly permitted the release of a Hazardous Material on, under, from or about the Premises, the Building or the Project or any other directly affected real or personal property owned by Landlord, Tenant shall, at Landlord’s request, immediately prepare and submit to Landlord a comprehensive plan, subject to Landlord’s reasonable approval, specifying the actions to be taken by Tenant to return the Premises, the Building or the Project or any other directly affected real or personal property owned by Landlord to the Required Condition. Upon Landlord’s approval of such cleanup plan, Tenant shall, at its expense, and without limitation of any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this Section 5.3(e) shall expressly survive the expiration or sooner termination of this Lease.

(f) Notwithstanding anything to the contrary contained in this Lease, Tenant shall have no liability or responsibility with respect to any Hazardous Materials in, on, under or around the Building or Project which were not caused or knowingly permitted by Tenant or by any Tenant Party. Notwithstanding the preceding sentence, Tenant agrees to notify its agents, employees, contractors, licensees, and invitees of any exposure or potential exposure to Hazardous Materials at the Premises that Landlord brings to Tenant’s attention. Provided such information is accurate, Tenant hereby acknowledges that this disclosure satisfies any obligation of Landlord to Tenant pursuant to California Health & Safety Code Section 25359.7, or any amendment or substitute thereto or any other disclosure obligations of Landlord. Landlord shall take responsibility, at its sole cost and expense, for any governmentally-required clean-up, remediation, removal, disposal, neutralization or other treatment of Hazardous Materials conditions described in this Section 5.3(f). The foregoing obligation on the part of Landlord shall include the reasonable costs (including, without limitation, reasonable attorney’s fees) of defending Tenant from and against any legal action or proceeding instituted by any governmental agency in connection with such clean-up, remediation, removal, disposal, neutralization or other treatment of such conditions, provided that Tenant promptly tenders such defense to Landlord.

(g) Landlord represents that, to “Landlord’s knowledge” (as hereinafter defined), there are no Hazardous Materials in or about the Premises or the Building, nor have there been Hazardous Materials in or about the Premises or the Building, which are in violation of any applicable federal, state or local law, regulation or order. As used herein, “Landlord’s knowledge” shall mean the actual knowledge, without duty of inquiry or investigation, of the current employees or authorized agents of Landlord responsible for Hazardous Materials compliance matters.

ARTICLE VI. COMMON AREAS; SERVICES

SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible, at its sole cost and expense, for all charges for water, gas, electricity, sewer, heat, light, power, telephone, telecommunications service, refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services furnished directly to Tenant or the Premises or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. If any utilities or services are not separately metered or assessed to Tenant, Landlord shall make a reasonable determination of Tenant’s proportionate share of the cost of such utilities and services, and Tenant shall pay such amount to Landlord, as an item of additional rent, within thirty (30) days after receipt of Landlord’s statement or invoice therefor. Alternatively, Landlord may elect to include such cost in the definition of Project Costs in which event Tenant shall pay Tenant’s proportionate share of such costs in the manner set forth in Section 4.2. Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder. Notwithstanding the foregoing, if as a result of the direct actions of Landlord, its employees, contractors or authorized agents, for more than three (3) consecutive business days following written notice to Landlord there is no HVAC or electricity services to all or a portion of the Premises, or such an interruption of other essential utilities and building services, such as fire protection or water, so that all or a portion of the Premises cannot be used by Tenant, then Tenant’s Basic Rent (or an equitable portion of such Basic Rent to the extent that less than all of the Premises are affected) shall thereafter be abated until the Premises are again usable by Tenant; provided, however, that if Landlord is diligently pursuing the repair of such utilities or services and Landlord provides substitute services reasonably suitable for Tenant’s purposes, as for example, bringing in portable air-conditioning equipment, then there shall not be an abatement of Basic Rent. Provided Landlord shall diligently pursue the repair of such utilities and services, the foregoing provisions shall be Tenant’s sole recourse and remedy in the event of such an interruption of services. The foregoing provisions shall not apply in case of the actions of parties other than Landlord, its employees, contractors or authorized agents, or in the case of damage to, or destruction of, the Premises (which shall be governed by the provisions of Article XI of the Lease). Any disputes concerning the foregoing provisions shall be submitted to and resolved by JAMS arbitration pursuant to Article III of the Work Letter attached to this Lease.

 

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Landlord shall at all reasonable times have free access to the Building and Premises to install, maintain, repair, replace or remove all electrical and mechanical installations of Landlord. Tenant acknowledges that the costs incurred by Landlord related to providing above-standard utilities to Tenant (which shall only be provided upon Tenant’s request), including, without limitation, telephone lines, shall be charged to Tenant.

SECTION 6.2. OPERATION AND MAINTENANCE OF COMMON AREAS. During the Term, Landlord shall operate all Common Areas within the Project. The term “Common Areas” shall mean all areas which are not held for exclusive use by persons entitled to occupy space, and all other appurtenant areas and improvements within the Project provided by Landlord for the common use of Landlord and tenants and their respective employees and invitees, including without limitation parking areas and structures, driveways, sidewalks, landscaped and planted areas, but shall not include any interior spaces within any buildings in the Project.

SECTION 6.3. USE OF COMMON AREAS. The occupancy by Tenant of the Premises shall include the use of the Common Areas in common with Landlord and with all others for whose convenience and use the Common Areas may be provided by Landlord, subject, however, to compliance with the Rules and Regulations (as defined in Article XVII of this Lease). Landlord shall operate and maintain the Common Areas in the manner as determined by Landlord in its reasonable discretion. All costs incurred by Landlord for the maintenance and operation of the Common Areas shall be included in Project Costs except to the extent any particular cost incurred is related to or associated with a specific tenant and can be charged to such tenant of the Project. Landlord shall at all times during the Term have exclusive control of the Common Areas, and may restrain or permit any use or occupancy, except as authorized by Landlord’s rules and regulations. Tenant shall keep the Common Areas clear of any obstruction or unauthorized use related to Tenant’s operations or use of Premises, including without limitation, planters and furniture. Except as expressly provided elsewhere in this Lease, nothing in this Lease shall be deemed to impose liability upon Landlord for any damage to or loss of the property of, or for any injury to, Tenant, its invitees or employees. Landlord may temporarily close any portion of the Common Areas for repairs, remodeling and/or alterations, to prevent a public dedication or the accrual of prescriptive rights, or for any other reason deemed sufficient by Landlord, without liability to Landlord, provided, however, that any such closure shall not unreasonably interfere with Tenant’s access to the Premises or Tenant’s parking rights granted in this Lease.

SECTION 6.4. PARKING. Tenant shall be entitled to the number of vehicle parking spaces set forth in Item 14 of the Basic Lease Provisions, which spaces shall be unreserved and unassigned, on those portions of the Common Areas designated by Landlord for parking. Tenant shall not use more parking spaces than such number. All parking spaces shall be used only for parking of vehicles no larger than full size passenger automobiles, sports utility vehicles or pickup trucks. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking within the Common Areas shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any area which would prohibit or impede the free flow of traffic within the Common Areas. There shall be no parking of any vehicles for longer than seven (7) consecutive days unless otherwise authorized by Landlord, and vehicles which have been abandoned or parked in violation of the terms hereof may be towed away at the owner’s expense. Nothing contained in this Lease shall be deemed to create liability upon Landlord for any damage to motor vehicles of visitors or employees, for any loss of property from within those motor vehicles, or for any injury to Tenant, its visitors or employees, unless ultimately determined to be caused by the active negligence or willful misconduct of Landlord, or Landlord’s employees, authorized agents or contractors. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking within the Common Areas. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; to restrict parking by tenants, their officers, agents and employees to employee parking areas; after the expiration of the initial 84-month Term of this Lease, to enforce parking charges (by operation of meters or otherwise); and to do and perform such other acts in and to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Any person using the parking area shall observe all directional signs and arrows and any posted speed limits. In no event shall Tenant interfere with the use and enjoyment of the parking area by other tenants of the Project or their employees or invitees. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for longer than 48-hours, is prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant’s employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas.

SECTION 6.5. CHANGES AND ADDITIONS BY LANDLORD. Landlord reserves the right to make alterations or additions to the Building or the Project, or to the attendant fixtures, equipment and Common Areas. Landlord may at any time relocate or remove any of the various buildings, parking areas, and other Common Areas, and may add buildings and areas to the Project from time to time. No change shall entitle Tenant to any abatement of rent or other claim against Landlord, provided that the change does not deprive Tenant of reasonable access to or use of the Premises. Notwithstanding the foregoing, no change by Landlord to the Common Areas shall: (i) materially impair access to and from the Premises from the parking areas, (ii) reduce the number of Tenant’s parking spaces granted under this Lease, or (iii) otherwise unreasonably interfere with Tenant’s access to and use of the Premises, the parking areas and the Common Areas adjacent to the Building in any material manner without Tenant’s prior written consent, which shall not be unreasonably withheld.

 

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ARTICLE VII. MAINTAINING THE PREMISES

SECTION 7.1. TENANT’S MAINTENANCE AND REPAIR. Tenant at its sole expense shall repair and maintain and make all appropriate replacements necessary to keep the Premises in the condition as existed on the Commencement Date (or on any later date that the improvements may have been installed), excepting ordinary wear and tear and casualty, including without limitation all interior glass, doors, door closures, hardware, fixtures, HVAC systems and equipment serving the Premises, electrical, plumbing, fire extinguisher equipment and other equipment installed in the Premises, all Alterations constructed by Tenant pursuant to Section 7.3 below, and all of the “Tenant Improvements” installed by Tenant pursuant to the Work Letter. In no event, however, shall Tenant be responsible for capitalized replacements exceeding the amount of Ten Thousand Dollars ($10,000.00) in cost per replacement, or for any repairs required of Landlord pursuant to Sections 2.2 or 2.4. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. As part of its maintenance obligations hereunder, Tenant shall provide all janitorial services to the Premises and, at Landlord’s request, shall provide Landlord with copies of all maintenance schedules, reports and notices prepared by, for or on behalf of Tenant. All repairs and replacements shall, unless otherwise permitted in this Lease, be at least equal in quality to the original work, taking into account ordinary wear and tear, and shall be made only by a licensed contractor, which contractor, for repairs or replacements exceeding $50,000.00, shall be approved in writing in advance by Landlord, not to be unreasonably withheld or delayed. Any contractor utilized by Tenant shall be subject to Landlord’s standard requirements for contractors attached hereto as Exhibit H, as reasonably modified from time to time. Landlord may impose reasonable restrictions and requirements with respect to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs. If Tenant fails to properly maintain and/or repair the Premises as herein provided following Landlord’s notice and the expiration of the applicable cure period (or earlier if Landlord determines that such work must be performed prior to such time in order to avoid damage to the Premises or Building or other detriment), then Landlord may elect, but shall have no obligation, to perform any repair or maintenance required hereunder on behalf of Tenant and at Tenant’s expense, and Tenant shall reimburse Landlord upon demand for all reasonable costs incurred upon submission of an invoice. Notwithstanding anything to the contrary in this Section 7.1, Tenant may, by giving Landlord not less than sixty (60) days prior written notice, elect to have Landlord assume Tenant’s obligations under this Section 7.1 for repair and maintenance of the HVAC systems and equipment serving the Premises.

SECTION 7.2. LANDLORD’S MAINTENANCE AND REPAIR. Subject to Section 7.1 and Article XI, Landlord shall maintain in good operating condition and repair all parts of the Premises that are not Tenant’s obligation under Section 7.1 and all areas outside of the Premises including, without limitation, all portions and elements of the roof (including sky lights and related seals), foundations, footings, the exterior surfaces of the exterior walls of the Building (including exterior glass and doors), structural walls, passenger and freight elevators and the structural, life/safety, electrical and mechanical systems (except for HVAC systems and equipment) in or serving the Building, except that Tenant at its expense shall make all repairs which Landlord deems reasonably necessary as a result of the act or negligence of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord’s affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section shall limit Landlord’s right to reimbursement from Tenant for reasonable maintenance, repair costs and replacement costs as provided elsewhere in this Lease (but subject to any limitations therein provided). Tenant understands that it shall not make repairs at Landlord’s expense or by rental offset. Tenant further understands that Landlord shall not be required to make any repairs to the roof, foundations, footings, the exterior surfaces of the exterior walls of the Building (excluding exterior glass), or structural, electrical or mechanical systems unless and until Tenant has notified Landlord in writing of the need for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. Except as set forth in Sections 2.4 and 4.2 of this Lease, all costs of any maintenance, repairs and replacement on the part of Landlord provided hereunder shall be considered part of Project Costs.

SECTION 7.3. ALTERATIONS. Except as otherwise provided in this Section, Tenant shall make no alterations, additions, fixtures or improvements (“Alterations”) to the Premises or the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, Tenant may make Alterations to the Premises costing less than Fifty Thousand Dollars ($50,000.00) during each calendar year of the Term without Landlord’s consent, provided, however, that any Alterations which require a governmental permit as a prerequisite to the construction thereof, shall require Landlord’s prior written consent, which shall not be unreasonably withheld, and Tenant shall supply an itemized summary to Landlord’s property manager, including as-built plans (if applicable), at least annually, of all of the foregoing Alterations made without Landlord’s consent. Notwithstanding anything to the contrary contained in either of the foregoing sentences, without the prior written consent of Landlord which may be withheld in Landlord’s sole and absolute discreton, no Alterations shall: (i) affect the exterior of the Building or outside areas (or be visible from adjoining sites), (ii) adversely affect or penetrate through any of the structural portions of the Building, including but not limited to the roof, (iii) require any change to the basic floor plan of the Premises (including, without limitation, the adding of any additional “office” square footage) or any material change to any structural, electrical or mechanical systems of the Premises, (iv) fail to comply with any applicable governmental requirements or with any governmental permit prerequisite to the construction thereof, (v) result in the Premises requiring building services beyond the level normally provided to other tenants, (vi) interfere in any manner with the proper functioning of, or Landlord’s access

 

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to, any mechanical, electrical, plumbing or HVAC systems, facilities or equipment located in or serving the Building, or (vii) alter or replace Standard Improvements with a Non-Standard Improvement. In the event that any requested Alteration involves the use of lesser quality materials or less stringent specifications than the building standard materials and specifications attached hereto as Exhibit I (“Standard Improvements”), Landlord may withhold consent to such Alteration in its sole and absolute discretion. In the event Landlord so consents to the use of lesser quality materials or less stringent specifications than the Standard Improvements (such use being referred to as a “Non-Standard Improvement”), Tenant shall be responsible for the cost of replacing such Non-Standard Improvement with the applicable Standard Improvement (“Replacements”), which Replacements shall be completed prior to the Expiration Date or earlier termination of this Lease. Landlord may impose any reasonable condition to its consent, including but not limited to reasonable requirements as to the manner and time of performance of such work, but not including a lien and completion bond unless: (A) Tenant’s current Statements show a net worth less than the Statements of Tenant at lease execution, and (B) such Alterations cost in excess of Two Hundred Fifty Thousand Dollars ($250,000.00). Landlord shall in all events, whether or not Landlord’s consent is required, have the right to reasonably approve the contractor performing the installation and removal of Alterations and Replacements and Tenant shall not permit any contractor not approved by Landlord to perform any work on the Premises or on the Building. The restriction set forth in the preceding sentence shall not apply if the cost of such Alteration or Replacement is less than Fifty Thousand Dollars ($50,000.00). Tenant shall obtain all required permits for the installation and removal of Alterations and Replacements and shall perform the installation and removal of Alterations and Replacements in compliance with all applicable laws, regulations and ordinances, including without limitation the Americans with Disabilities Act, all covenants, conditions and restrictions affecting the Project, and the Rules and Regulations as described in Article XVII. Tenant understands and agrees that Landlord shall be entitled to a supervision fee for any Alterations either requiring a permit from the City of San Diego or affecting any mechanical, electrical, plumbing or HVAC systems, facilities or equipment located in or serving the Building, in the following amounts: (i) five percent (5%) of the cost of such Alterations costing less than Fifty Thousand Dollars ($50,000.00), or (ii) for Alterations costing more than Fifty Thousand Dollars ($50,000.00), the sum of Two Thousand Five Hundred Dollars ($2,500.00) plus one percent (1%) of the cost of such Alterations (not to exceed the aggregate amount of Fifteen Thousand Dollars ($15,000.00)), plus Landlord’s actual and reasonable costs of its mechanical and/or electrical engineers to review such Alterations. Under no circumstances shall Tenant make any Alterations or Replacements which incorporate any Hazardous Materials, including without limitation asbestos-containing construction materials into the Premises, the Building or the Common Area. If any governmental entity requires, as a condition to any proposed Alterations by Tenant, that improvements be made to the Common Areas, and if Landlord consents to such improvements to the Common Areas (which consent may be withheld in the sole and absolute discretion of Landlord), then Tenant shall, at Tenant’s sole expense, make such required improvements to the Common Areas in such manner, utilizing such materials, and with such contractors, architects and engineers as Landlord may require in its reasonable discretion. Any request for Landlord’s consent to any proposed Alterations shall be made in writing and shall contain architectural plans describing the work in detail reasonably satisfactory to Landlord. Landlord may elect to cause its architect to review Tenant’s architectural plans, and the reasonable cost of that review shall be reimbursed by Tenant. Should the work proposed by Tenant and consented to by Landlord modify the basic floor plan of the Premises, then Tenant shall, at its expense, furnish Landlord with as-built drawings and CAD disks compatible with Landlord’s systems and standards. Unless Landlord otherwise agrees in writing, all Alterations made or affixed to the Premises, the Building or to the Common Area (but excluding trade fixtures, personal property, equipment and furniture, including, but not limited to, laboratory equipment and benching and emergency generators which shall remain the property of Tenant), shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term; except that Landlord may, as provided in the next succeeding paragraph of this Section 7.3, require Tenant to remove by the Expiration Date or sooner termination date of this Lease, all or any of the Alterations installed either by Tenant or by Landlord at Tenant’s request, and to repair any damage to the Premises, the Building or the Common Area arising from that removal and restore the Premises to their condition prior to making such Alterations, reasonable wear and tear and casualty excepted.

As of the Expiration Date or earlier termination date of this Lease, Landlord shall have the right to require Tenant to remove any Alterations made by Tenant to the Premises and to replace same with the applicable Replacements, whether or not Landlord’s consent was required. Notwithstanding anything to the contrary in this Section 7.3, if at the time of requesting Landlord’s consent to any such Alterations or if prior to commencing any Alterations for which Landlord’s consent is not required, Tenant shall request in writing whether or not Landlord shall require such Alterations to be so removed and replaced as of the Expiration Date or earlier termination date of this Lease, then Landlord’s right to require Tenant to so remove and replace such Alterations shall be exercised, if at all, at the time of Landlord’s consent thereto.

As used in this Section 7.3, “Alterations” do not include the Tenant Improvements to be constructed by Tenant pursuant to the attached Work Letter.

SECTION 7.4. MECHANIC’S LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly (but in no event later than ten (10) business days following such request) cause any such lien to be released by posting a bond in accordance with California Civil Code Section 3143 or any successor statute. In the event that Tenant shall not, within thirty (30) days following the imposition of any lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other available remedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. All reasonable expenses so incurred by Landlord, including Landlord’s attorneys’ fees, and any direct damages incurred by Landlord proximately caused by such lien, shall be reimbursed by Tenant upon demand, together with interest from the date of payment by Landlord at the per annum rate of ten

 

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percent (10%) not to exceed the maximum rate permitted by law until paid. Tenant shall give Landlord no less than ten (10) business days prior notice in writing before commencing construction of any kind on the Premises or Common Area and shall again notify Landlord that construction has commenced, such notice to be given on or about the actual date on which construction commences, so that Landlord may post and maintain notices of nonresponsibility on the Premises or Common Area, as applicable, which notices Landlord shall have the right to post and which Tenant agrees it shall not disturb. Tenant shall also provide Landlord notice in writing within ten (10) days following the date on which such work is substantially completed. The provisions of this Section shall expressly survive the expiration or sooner termination of this Lease.

SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times, upon at least 24 hours prior written or oral notice (except in emergencies, when no notice shall be required) have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to have access to install, repair, maintain, replace or remove all electrical and mechanical installations of Landlord and to protect the interests of Landlord in the Premises, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the last one hundred and eighty (180) days of the Term or when an uncured Tenant Event of Default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall have the right, if desired, to retain a key which unlocks all of the doors in the Premises, excluding Tenant’s vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises.

SECTION 7.6. COMMUNICATIONS EQUIPMENT. Landlord hereby grants to Tenant a non-exclusive license (the “License”) to install, maintain and operate on the roof of the Building one or more antenna or satellite dishes not exceeding forty-eight inches (48”) in height (the “Antenna”) in accordance with and subject to the terms and conditions set forth below. The Antenna shall be installed at a location designated by Landlord and reasonably acceptable to Tenant (“Licensed Area”). The Licensed Area shall be considered to be a part of the Premises for all purposes under the Lease, and except as otherwise expressly provided in this Section 7.6 all provisions applicable to the use of the Premises under the Lease shall apply to the Licensed Area and its use by Tenant.

(1) The Term of the License shall be coterminous with this Lease;

(2) Tenant shall not be obligated to pay any license fee for the use of the Licensed Area pursuant to this Section 7.7 during the Term of this Lease.

(3) Tenant shall use the Licensed Area only for the installation, operation, repair, replacement and maintenance of the Antenna and the necessary mechanical and electrical equipment to service said Antenna and for no other use or purpose. The installation of the Antenna and all equipment and facilities related thereto, including any required conduit from the Premises to the Antenna, shall be deemed to constitute an alteration subject to the provisions of Section 7.3 of the Lease, provided that Landlord shall not unreasonably withhold its approval of the same. Landlord may require appropriate screening for the Antenna as a condition of Landlord’s approval of the installation of the Antenna. Tenant may have access to the Licensed Area for such uses during normal business hours and at times upon reasonable prior notice to Landlord and shall reimburse Landlord for any reasonable out-of-pocket expenses incurred by Landlord in connection therewith;

(4) The Antenna shall be used only for transmitting and/or receiving data, audio and/or video signals to and from Tenant’s facilities within the Premises for Tenant’s use, and shall not be used or permitted to be used by Tenant for purposes of broadcasting signals to the public or to provide telecommunications or other communications transmitting or receiving services to any third parties as a commercial business;

(5) Landlord reserves the right upon reasonable prior written notice to Tenant to require the removal of any and all of such equipment should Landlord reasonably determine that its presence results in material damage to the Building unless Tenant makes satisfactory arrangements to protect Landlord therefrom;

(6) Tenant shall require its employees, when using the Licensed Area, to stay within the immediate vicinity thereof. In addition, in the event any communications system or broadcast or receiving facilities are operating in the area, Tenant shall at all times during the term of the License conduct its operations so as to ensure that such system or facilities shall not be subjected to harmful interference as a result of such operations by Tenant. Upon notification from Landlord of any such interference, Tenant agrees to immediately take the necessary steps to correct such situation, and Tenant’s failure to do so shall be deemed a default under the terms of this License, as a result of which Landlord may terminate the License on five (5) days notice, and Tenant shall remove the Antenna.

(7) During the term of the License, Tenant shall comply with any standards promulgated by applicable governmental authorities or otherwise reasonably established by Landlord regarding the generation of electromagnetic fields. Should Landlord determine in good faith at any time that the Antenna poses a health or safety hazard to occupants of the Building, Landlord may require Tenant to make arrangements satisfactory to Landlord to mitigate such hazard or, if Tenant either fails or is unable to make such satisfactory arrangements, to remove the Antenna. Any claim or liability resulting from the use of the Antenna or the Licensed Area shall be subject to the indemnification provisions of this Lease applicable to Tenant’s use of the Premises;

 

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(8) During the term of the License, Tenant shall pay all taxes attributable to the Antenna and other equipment owned and installed by Tenant, and Tenant shall assure and provide Landlord with evidence that the Licensed Area and Tenant’s use thereof are subject to the insurance coverages otherwise required to be maintained by Tenant as to the Premises pursuant to Exhibit D; and

(9) Upon the expiration or sooner termination of the Lease, Tenant shall remove the Antenna and all related equipment and facilities, including any conduit from the Premises to the Antenna, from the Licensed Area and any other portions of the Building within or upon which the same may be installed, and shall restore the Licensed Area and all other areas affected by such removal to their original condition, reasonable wear and tear excepted, all at its sole cost and expense.

SECTION 7.7. EMERGENCY GENERATORS. Landlord acknowledges that Tenant desires to install as part of the Tenant Improvements up to two (2) emergency generators in or about the Building (the “Generators”) in the locations shown on Exhibit F attached hereto. Provided such installation complies with all laws, Landlord approves Tenant’s installation of the Generators as part of the Tenant Improvements.

ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT’S PROPERTY

Tenant shall be liable for and shall pay, prior to delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises, and, if required by Landlord, against all Non-Standard Improvements to the Premises (as defined in Section 7.3) made by Landlord or Tenant, and against any Alterations (as defined in Section 7.3) made to the Premises or the Building by or on behalf of Tenant. If requested by Landlord, Tenant shall cause its personal property, Non-Standard Improvements and Alterations to be assessed and billed separately from the real property of which the Premises form a part. If any taxes required to be paid by Tenant on Tenant’s personal property, Non-Standard Improvements and/or Alterations are levied against Landlord or Landlord’s property and if Landlord pays the same, or if the assessed value of Landlord’s property is increased by the inclusion of a value placed upon the personal property, Non-Standard Improvements and/or Alterations and if Landlord pays the taxes based upon the increased assessment, Landlord shall have the right to require that Tenant pay to Landlord the taxes so levied against Landlord or the proportion of the taxes resulting from the increase in the assessment. In calculating what portion of any tax bill which is assessed against Landlord separately, or Landlord and Tenant jointly, is attributable to Tenant’s Non-Standard Improvements, Alterations and personal property, Landlord’s reasonable determination shall be conclusive. At Tenant’s request, Landlord shall provide Tenant with the basis and rationale for such allocation.

ARTICLE IX. ASSIGNMENT AND SUBLETTING

SECTION 9.1. RIGHTS OF PARTIES.

(a) Notwithstanding any provision of this Lease to the contrary, and except as to transfers expressly permitted without Landlord’s consent pursuant to Section 9.4, Tenant will not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant’s interest in this Lease or the Premises, or permit the Premises to be occupied by anyone other than Tenant, without Landlord’s prior written consent, which consent shall not unreasonably be withheld or conditioned in accordance with the provisions of Section 9.1(b). No assignment (whether voluntary, involuntary or by operation of law) and no subletting shall be valid or effective without Landlord’s prior written consent and, at Landlord’s election, any such assignment or subletting shall be void and of no force and effect and any such attempted assignment or subletting shall constitute an Event of Default of this Lease if not cured within thirty (30) days of written notice from Landlord. Landlord shall not be deemed to have given its consent to any assignment or subletting by any course of action other than written consent. To the extent not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq., (the “Bankruptcy Code”), including Section 365(f)(1), Tenant on behalf of itself and its creditors, administrators and assigns waives the applicability of Section 365(e) of the Bankruptcy Code unless the proposed assignee of the Trustee for the estate of the bankrupt meets Landlord’s standard for consent as set forth in Section 9.1(b) of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations to be delivered in connection with the assignment shall be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to have assumed all of the obligations arising under this Lease on and after the date of the assignment, and shall upon demand execute and deliver to Landlord an instrument confirming that assumption.

(b) If Tenant desires to transfer an interest in this Lease or the Premises, it shall first notify Landlord of its desire and shall submit in writing to Landlord: (i) the name and address of the proposed transferee; (ii) the nature of any proposed transferee’s business to be carried on in the Premises; (iii) the terms and provisions of any proposed sublease, assignment or other transfer, including a copy of the proposed assignment, sublease or transfer form; (iv) evidence that the proposed assignee, subtenant or transferee will comply with the requirements of Exhibit D hereto; (v) a completed Environmental Questionnaire from the proposed assignee, subtenant or transferee; (vi) any other information requested by Landlord and reasonably related to the transfer and (vii) the fee described in Section 9.1(e). Except as provided in Section 9.1 (c), Landlord shall not unreasonably withhold or condition its consent, provided that the parties agree that it shall be reasonable for Landlord to withhold and/or condition its consent if: (1) the use of the Premises will not be consistent with the provisions of this Lease; (2) a proposed subtenant or assignee has not demonstrated to the reasonable satisfaction of Landlord that it is financially responsible or has failed to submit to Landlord all reasonable information as requested by Landlord (following

 

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execution of a commercially reasonable non-disclosure agreement, if required by the proposed subtenant or assignee) concerning the proposed subtenant or assignee, including, but not limited to, a certified balance sheet of the proposed subtenant or assignee as of a date within one hundred eighty (180) days of the request for Landlord’s consent, statements of income or profit and loss of the proposed subtenant or assignee for the two-year period preceding the request for Landlord’s consent, and/or a certification signed by the proposed subtenant or assignee that it has not been evicted or been in arrears in rent at any other leased premises for the 3-year period preceding the request for Landlord’s consent; (3) the proposed assignee or subtenant is an existing tenant of the Building or Project or a prospect with whom Landlord is actively negotiating to become a tenant at the Building or Project; or (4) the proposed transfer will impose adverse tax effects on Landlord for which Landlord will not be fully compensated. Tenant’s exterior signage rights are personal to Tenant and may not be assigned or transferred to any assignee of this Lease or subtenant of the Premises.

Notwithstanding the foregoing, Tenant may assign its exterior signage rights in connection with an assignment of this Lease or a subletting of more than fifty percent (50%) of the Floor Area of the Premises that is consented to by Landlord or in connection with a Permitted Transfer (as defined below); provided, however, that Landlord shall have the right of prior approval that such signage continues to comply with the Sign Criteria and the other requirements of Section 5.2 of this Lease, and provided further that any name and/or graphics on such signage do not materially devalue the Project as determined by Landlord in its sole and absolute discretion.

If Landlord consents to the proposed transfer, Tenant may within ninety (90) days after the date of the consent effect the transfer upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord’s consent as set forth in this Section 9.1. Landlord shall approve or disapprove any requested transfer within fifteen (15) business days following receipt of Tenant’s written request, the information set forth above, and the fee set forth below.

(c) Notwithstanding the provisions of Section 9.1(b) above, in lieu of consenting to a proposed assignment of this Lease or to a proposed subletting of more than fifty percent (50%) of the Floor Area of the Premises for all or substantially all of the then-remaining Term of this Lease, Landlord may elect, within the fifteen (15) business day period permitted for Landlord to approve or disapprove a requested transfer, to (i) sublease the Premises (or the portion proposed to be so subleased), or take an assignment of Tenant’s interest in this Lease, upon substantially the same terms as offered to the proposed subtenant or assignee (excluding terms relating to the purchase of trade fixtures, furniture and equipment, personal property, the use of Tenant’s name or the continuation of Tenant’s business), or (ii) terminate this Lease as to the portion of the Premises proposed to be so subleased or assigned with a proportionate abatement in the rent payable under this Lease in which case Tenant shall have no further liability for Basic Rent or Operating Expenses accruing from and after the effective date of such termination with respect to such portion of the Premises, effective thirty (30) days following written notice by Landlord of its election to so sublease or terminate. Landlord may thereafter, at its option, assign, sublet or re-let any space so sublet, obtained by assignment or obtained by termination to any third party, including without limitation the proposed transferee of Tenant. (d) In the event that Landlord approves the requested assignment or subletting, Tenant agrees that fifty percent (50%) of any amounts actually paid by the assignee or subtenant, however described, in excess of (i) the Basic Rent payable by Tenant hereunder, or in the case of a sublease of a portion of the Premises, in excess of the Basic Rent and Operating Expenses reasonably allocable to such portion as determined by Landlord, plus (ii) Tenant’s direct out-of-pocket costs which Tenant certifies to Landlord have been incurred to provide occupancy related services or other costs to such assignee or subtenant of a nature commonly provided by landlords of similar space (e.g. brokerage commissions, improvement allowances, etc., actually incurred by Tenant), shall be the property of Landlord and such amounts shall be payable directly to Landlord by the assignee or subtenant or, at Landlord’s option, by Tenant within ten (10) days of Tenant’s receipt thereof. Landlord shall have the right to review or audit the books and records of Tenant, or have such books and records reviewed or audited by an outside accountant, to confirm any such direct out-of-pocket costs. In the event that such direct out-of-pocket costs claimed by Tenant are overstated by more than five percent (5%), Tenant shall reimburse Landlord for any of Landlord’s costs related to such review or audit. At Landlord’s request, a commercially reasonable written agreement shall be entered into by and among Tenant, Landlord and the proposed assignee or subtenant confirming the requirements of this Section 9.1(d).

(e) Tenant shall pay to Landlord a fee equal to the greater of (i) Landlord’s actual and reasonable costs related to such assignment, subletting or other transfer or (ii) Five Hundred Dollars ($500.00), to process any request by Tenant for an assignment, subletting or other transfer under this Lease. Tenant shall pay Landlord the sum of Five Hundred Dollars ($500.00) concurrently with Tenant’s request for consent to any assignment, subletting or other transfer, and Landlord shall have no obligation to consider such request unless accompanied by such payment. Tenant shall pay Landlord upon demand any costs in excess of such payment to the extent Landlord’s actual costs related to such request exceeds $500.00. Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord for its costs of review and evaluation of a proposed transfer.

SECTION 9.2. EFFECT OF TRANSFER. Except for a termination elected by Landlord pursuant to Subsection 9.1(c)(ii) above, no subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3, for any act or omission by an assignee or subtenant. Each assignee, other than Landlord, shall assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant’s obligations, under this Lease. No assignment or subletting shall be effective or binding on Landlord unless documentation in form and

 

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substance satisfactory to Landlord in its reasonable discretion evidencing the transfer, and in the case of an assignment, the assignee’s assumption of the obligations of Tenant under this Lease, is delivered to Landlord and both the assignee/subtenant and Tenant deliver to Landlord a commercially reasonable executed consent to transfer instrument prepared by Landlord and consistent with the requirements of this Article. The acceptance by Landlord of any payment due under this Lease from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any transfer. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease or as a consent to any subsequent transfer.

SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be deemed included in each sublease:

(a) Except as expressly otherwise agreed by Landlord in its written consent to such sublease, the sublease and/or any subletting by Tenant shall be subject and subordinate to this Lease.

(b) Tenant hereby irrevocably assigns to Landlord all of Tenant’s interest in all rentals and income arising from any sublease of the Premises, and Landlord may collect such rent and income and apply same toward Tenant’s obligations under this Lease during the pendency of any Event of Default; provided, however, that unless there is an uncured Event of Default by Tenant, Tenant shall have the right to receive and collect the sublease rentals. At Tenant’s request, not more frequently than quarterly, Landlord shall supply Tenant with the gross amounts of any such sublease rentals so collected by Landlord to date and the application of such subrentals so collected to amounts then due under the Lease. Landlord shall not, by reason of this assignment or the collection of sublease rentals, be deemed liable to the subtenant for the performance of any of Tenant’s obligations under the sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon receipt of a written notice from Landlord stating that an uncured Event of Default exists in the performance of Tenant’s obligations under this Lease, to pay to Landlord all sums then and thereafter due under the sublease. Tenant agrees that the subtenant may rely on that notice without any duty of further inquiry and notwithstanding any notice or claim by Tenant to the contrary.

(c) In the event of the termination of this Lease for any reason, including without limitation as the result of an Event of Default by Tenant or by the mutual agreement of Landlord and Tenant, Landlord may, at its sole option, take over Tenant’s entire interest in any sublease and, upon notice from Landlord, the subtenant shall attorn to Landlord. In no event, however, shall Landlord be liable for any previous act or omission by Tenant under the sublease or for the return of any advance rental payments or deposits under the sublease that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification executed without Landlord’s consent or for any advance rental payment by the subtenant in excess of one month’s rent. The general provisions of this Lease, including without limitation those pertaining to insurance and indemnification, shall be deemed incorporated by reference into the sublease despite the termination of this Lease. In the event Landlord does not elect to take over Tenant’s interest in a sublease in the event of any such termination of this Lease, such sublease shall terminate concurrently with the termination of this Lease and such subtenant shall have no further rights under such sublease and Landlord shall have no obligations to such subtenant.

SECTION 9.4. CERTAIN TRANSFERS. The following shall be deemed to constitute an assignment of this Lease: (a) the sale of all or substantially all of Tenant’s assets (other than bulk sales in the ordinary course of business), or (b) the transfer, assignment or hypothecation of any stock or interest in Tenant to a single entity which constitutes more than fifty percent (50%) of Tenant’s voting stock. Notwithstanding the foregoing, Landlord’s consent shall not be required for the assignment of this Lease to: (A) any person(s) or entity who controls, is controlled by or is under common control with Tenant, (B) to any entity resulting from the merger, consolidation or other reorganization with Tenant, whether or not Tenant is the surviving entity, or (C) to any person or legal entity which acquires all or substantially all of the assets or stock of Tenant (each of the foregoing is hereinafter referred to as “Permitted Transfer”), so long as (i) the net worth of the successor or reorganized entity after such Permitted Transfer is at least equal to the net worth of Tenant as of the execution of this Lease by Landlord, evidence of which, reasonably satisfactory to Landlord, shall be presented to Landlord prior to such Permitted Transfer, (ii) Tenant shall provide to Landlord, prior to such Permitted Transfer, written notice of such Permitted Transfer and such assignment documentation and other information as Landlord may reasonably require in connection therewith, and (iii) all of the other terms and requirements Section 9.2 and 9.3 (but not of Section 9.1) shall apply with respect to such assignment. For purposes of this Section 9.4, a public or private offering of Tenant debt or equity shall not be deemed an assignment of this Lease.

ARTICLE X. INSURANCE AND INDEMNITY

SECTION 10.1. TENANT’S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D. Evidence of that insurance must be delivered to Landlord prior to the Commencement Date.

SECTION 10.2. LANDLORD’S INSURANCE. Landlord shall provide property insurance coverage insuring the full replacement cost of the Building, including all Tenant Improvements constructed pursuant to the attached Work Letter, with or without deductible and in amounts and coverages appropriate and consistent with industry standards as reasonably determined by Landlord and subject to standard exclusions (such as, but not limited to, earthquake and flood exclusions) (the “Property Policy”), and commercial general liability insurance with or without deductible and in amounts and coverages appropriate and consistent with industry standards as reasonably determined by Landlord (the “Liability Policy”). In addition, Landlord may, at its election, obtain insurance for such other risks as Landlord or its mortgages may from time to time deem appropriate in its sole discretion,

 

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including without limitation, coverage for earthquake and flood. Landlord shall not be required to carry insurance of any kind on Tenant’s Alterations or on Tenant’s other property, including, without limitation, Tenant’s trade fixtures, furnishings, equipment, signs and all other items of personal property, and Landlord shall not be obligated to repair or replace that property should damage occur. All proceeds of insurance maintained by Landlord upon the Building and/or Project shall be the property of Landlord, whether or not Landlord is obligated to or elects to make any repairs. At Landlord’s option, Landlord may self-insure all or any portion of the risks for which Landlord is required or elects to provide insurance hereunder; provided, however, that in the event The Irvine Company, or any affiliate thereof, is no longer the “Landlord” under this Lease, such successor Landlord must demonstrate to Tenant a net worth of at least One Hundred Million Dollars ($100,000,000.00) to continue to self-insure such risks.

SECTION 10.3. JOINT INDEMNITY.

(a) To the fullest extent permitted by law, Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its agents, and any and all affiliates of Landlord, including, without limitation, any corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date from Tenant’s use or occupancy of the Premises, the Building or the Common Areas, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises, the Building or the Common Areas, or from any Event of Default in the performance of any obligation on Tenant’s part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, visitors, patrons, guests, invitees or licensees. Tenant shall assume Landlord’s defense in any action covered by this Section through counsel reasonably satisfactory to Landlord. The provisions of this Section 10.3(a) shall expressly survive the expiration or sooner termination of this Lease. Tenant’s obligations under this Section shall not apply in the event that the claim, liability, cost or expense (i) is caused by the active negligence or willful misconduct of Landlord, Landlord’s employees, contractors or authorized agents; or (ii) (1) relates to an obligation of Landlord hereunder and (2) is of the nature that Landlord had actual knowledge of the condition; or (iii) that is Landlord’s responsibility to indemnify Tenant pursuant to Section 10.3(b) below.

(b) To the fullest extent permitted by law, but subject to the express limitations on liability contained in this Lease (including, without limitation, the provisions of Sections 10.4, 10.5 and 14.8 of this Lease), Landlord shall defend, indemnify, protect, save and hold harmless Tenant, its agents and any and all affiliates of Tenant, including without limitation, any corporations, or other entities controlling, controlled by or under common control with Tenant, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date that occurs in connection with the operation, maintenance and repair of the Common Areas of the Project and (i) is caused by the active negligence or willful misconduct of Landlord, Landlord’s employees, contractors or authorized agents; or (ii) (1) relates to an obligation of Landlord hereunder and (2) is of the nature that Landlord had actual knowledge of the condition. The provisions of this Section 10.3(b) shall expressly survive the expiration or sooner termination of this Lease.

SECTION 10.4. LANDLORD’S NONLIABILITY. Subject to the express indemnity obligations contained in Section 10.3(b) of this Lease and such other applicable provisions of this Lease (including, without limitation, Landlord’s right to self-insure pursuant to Section 10.2 above), Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord for personal injury or any other loss, cost, damage, injury or liability whatsoever resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Premises or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building. Notwithstanding any provision of this Lease to the contrary, including, without limitation, the provisions of Section 10.3(b) of this Lease, Landlord shall in no event be liable to Tenant, its employees, agents, and invitees, and Tenant hereby waives all claims against Landlord, for (i) loss or interruption of Tenant’s business or income (including, without limitation, any consequential damages and lost profit or opportunity costs), or (ii) any other loss, cost, damage, injury or liability resulting from Acts of God (except with respect to restoration obligations pursuant to Article XI below), acts of civil disobedience or insurrection, acts or omissions (criminal or otherwise) of any third parties (other than Landlord’s employees or authorized agents), including without limitation, any other tenants within the Project or their agents, employees, contractors, guests or invitees. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Landlord shall have no liability (including without limitation consequential damages and lost profit or opportunity costs) and, except as provided in Sections 6.1, 11.1 and 12.1 below, there shall be no abatement of rent, by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the Premises, nor shall any related activity by Landlord constitute an actual or constructive eviction; provided, however, that in making repairs, alterations or improvements, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant’s business in the Premises. Should Tenant elect to receive any service or products from a concessionaire, licensee or third party tenant of Landlord, Landlord shall have no liability for any services or products so provided or for any breach of contract by such third party provider. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises or the Building and of matters related to the condition of the Premises or Building that pose a material threat to the safety or health of persons in or around the Premises or Building.

SECTION 10.5. WAIVER OF SUBROGATION. Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant each hereby waives all rights of recovery against the other and the other’s agents on account of loss and damage occasioned to the property of such waiving party to the extent that the waiving party is entitled to proceeds for such loss or damage under any property insurance policies carried or required to be carried

 

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by the provisions of this Lease (including, without limitation, the Property Policy carried by Landlord, regardless of whether Landlord self-insures such coverage); provided however, that the foregoing waiver shall not apply to the extent of Tenant’s obligations to pay deductibles under any such policies and this Lease. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any property insurance policies contemplated by this Lease, even though such loss or damage might be occasioned by the negligence of such party, its agents, employees, contractors, guests or invitees.

ARTICLE XI. DAMAGE OR DESTRUCTION

SECTION 11.1. RESTORATION.

(a) If the Premises or the Building or a part thereof are materially damaged by any fire, flood, earthquake or other casualty (including but not limited to, the contamination of the Premises and/or the Building by Hazardous Materials not caused or knowingly permitted by Tenant or by any Tenant Party which contamination renders the Premises unsafe for occupancy by Tenant), then Landlord shall have the right to terminate this Lease upon written notice to Tenant if: (i) Landlord reasonably determines that proceeds necessary to pay the full cost of repair is not available from Landlord’s Property Policy (regardless of whether Landlord self-insures such coverage), or from any earthquake insurance carried by Landlord, plus such additional amounts Tenant elects, at its option, to contribute, excluding however the deductible (for which Tenant shall be responsible for Tenant’s Share); (ii) Landlord reasonably determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, including without limitation Hazardous Materials, earthquake faults, and other similar dangers) within two hundred seventy (270) days after the date of the damage; (iii) an uncured monetary Event of Default by Tenant has occurred; or (iv) the material damage occurs during the final twelve (12) months of the Term. Landlord shall notify Tenant in writing (“Landlord’s Notice”) within sixty (60) days after the damage occurs as to (A) whether Landlord is terminating this Lease as a result of such material damage and (B) if Landlord is not terminating this Lease, the number of days within which Landlord has estimated that the Premises, with reasonable diligence, are likely to be fully repaired. In the event Landlord elects to terminate this Lease, this Lease shall terminate as of the date specified for termination by Landlord’s Notice (which termination date shall in no event be later than sixty (60) days following the date of the damage, or, if no such date is specified, such termination shall be the date of Landlord’s Notice).

(b) If Landlord has the right to terminate this Lease pursuant to Section 11.1(a) and does not elect to so terminate this Lease, and provided that at the time of Landlord’s Notice no uncured monetary Event of Default exists, then within twenty (20) days following delivery of Landlord’s Notice pursuant to Section 11.1(a), Tenant may elect to terminate this Lease by written notice to Landlord, but only if (i) Landlord’s Notice specifies that Landlord has determined that the Premises cannot be repaired, with reasonable diligence, within two hundred seventy (270) days after the date of damage or (ii) the casualty has occurred within the final twelve (12) months of the Term and such material damage has a materially adverse impact on Tenant’s continued use of the Premises. If Tenant fails to provide such termination notice within such twenty (20) day period, Tenant shall be deemed to have waived any termination right under this Section 11.1(b) or any other applicable law.

(c) In the event that neither Landlord nor Tenant terminates this Lease pursuant to this Section 11.1 as a result of material damage to the Building or Premises resulting from a casualty, Landlord shall repair all material damage to the Premises or the Building as soon as reasonably possible and this Lease shall continue in effect for the remainder of the Term. Subject to any provision to the contrary in the Work Letter, such repair by Landlord shall include repair of material damage to the Tenant Improvements constructed pursuant to the Work Letter, so long as insurance proceeds from insurance required to be carried by Tenant are made available to Landlord. Landlord shall have the right, but not the obligation, to repair or replace any other leasehold improvements made by Tenant or any Alterations (as defined in Section 7.3) constructed by Tenant. If Landlord elects to repair or replace such leasehold improvements and/or Alterations, all insurance proceeds available for such repair or replacement shall be made available to Landlord (to the extent expended for such repair and/or replacement by Landlord). Landlord shall have no liability to Tenant in the event that the Premises or the Building has not been fully repaired within the time period specified by Landlord in Landlord’s Notice to Tenant as described in Section 11.1(a). Notwithstanding the foregoing, the repair of damage to the Premises to the extent such damage is not material shall be governed by Sections 7.1 and 7.2.

(d) In the event the Lease is not terminated by Landlord or Tenant as provided in this Article XI, commencing on the date of such material damage to the Building, and ending on the sooner of the date the damage is repaired or the date this Lease is terminated, the Basic Rent and Operating Expenses to be paid under this Lease shall be abated in the same proportion that the Floor Area of the Premises that is rendered unusable by the damage from time to time bears to the total Floor Area of the Premises, as reasonably determined by Landlord, provided that Tenant is then carrying the rental loss insurance required of Tenant pursuant to Exhibit D.

(e) Except as provided in Section 11.1(c), Landlord shall not be required to repair or replace any of Tenant’s furniture, trade fixtures or equipment or any Tenant Improvement or Alteration.

(f) Tenant shall fully cooperate with Landlord in removing Tenant’s personal property and any debris from the Premises to facilitate all inspections of the Premises and the making of any repairs. Notwithstanding anything to the contrary contained in this Lease, if Landlord in good faith believes there is a risk of injury to persons or damage to property from entry into the Building or Premises following any damage or destruction thereto, Landlord may restrict entry into the Building or the Premises by Tenant, its employees, agents and contractors in a

 

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non-discriminatory manner, without being deemed to have violated Tenant’s rights of quiet enjoyment to, or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to determine if there are safe methods of entry into the Building or the Premises solely in order to allow Tenant to retrieve files, data in computers, and necessary inventory, subject however to all indemnities and waivers of liability from Tenant to Landlord contained in this Lease and any additional indemnities and waivers of liability which Landlord may require.

SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law.

ARTICLE XII. EMINENT DOMAIN

SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the Building is taken by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. For purposes of this Article XII, a material portion of the Building shall be enough that, in Tenant’s good faith judgment, the part of the Building that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of Tenant’s business. In the event title to a portion of the Building or Project, whether or not including a portion of the Premises, is taken or sold in lieu of taking, and if Landlord elects to restore the Building in such a way as to alter the Premises materially, either party may terminate this Lease, by written notice to the other party, effective on the date of vesting of title. In the event neither party has elected to terminate this Lease as provided above, then Landlord shall promptly, after receipt of a sufficient condemnation award, proceed to restore the Premises to substantially their condition prior to the taking, and a proportionate allowance shall be made to Tenant for the Basic Rent and Operating Expenses corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of the taking and restoration. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses recoverable from the taking authority.

SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to abatement of rent, and any award specifically attributable to a temporary taking of the Premises shall belong entirely to Tenant. A temporary taking shall be deemed to be a taking of the use or occupancy all or any part of the Building for a period of not to exceed thirty (30) days.

SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord may substitute reasonably equivalent parking in a location reasonably close to the Building at no cost to Tenant; provided that if Landlord fails to make that substitution within fifteen (15) days following the taking and if the taking materially impairs Tenant’s use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect.

ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS

SECTION 13.1. SUBORDINATION. At the option of Landlord or any lender of Landlord’s that obtains a security interest in the Building, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Building, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as no Event of Default exists under this Lease, Tenant’s possession and quiet enjoyment of the Premises shall not be disturbed and this Lease shall not terminate in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust, to which this Lease has been subordinated pursuant to this Section. Tenant shall execute and deliver any commercially reasonable documents or agreements requested by Landlord or such lessor or lender which provide Tenant with the non-disturbance protections set forth in this Section. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in-interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall execute any instrument reasonably required by Landlord’s successor for that purpose. Tenant shall also, upon written request of Landlord, execute and deliver all commercially reasonable instruments as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above), or, if requested by Landlord, to subordinate, in whole or in part, any ground or underlying lease or the lien of any mortgage or deed of trust to this Lease. Tenant agrees that any purchaser at a foreclosure sale or lender taking title under a deed-in-lieu of foreclosure shall not be responsible for any act or omission of a prior landlord, shall not be subject to any offsets or defenses Tenant may have against a prior landlord, and shall not be liable for the return of the security deposit to the extent it is not actually received by such purchaser or bound by any rent paid for more than the current month in which the foreclosure occurred. Landlord shall use its reasonable diligence to obtain the instrument described in the foregoing from the holder of any ground or underlying lease and/or of any mortgage or deed of trust of record as of the execution of this Lease.

 

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Within sixty (60) days of the execution hereof, as a condition precedent to Tenant’s obligations under this Lease, Landlord shall deliver to Tenant executed and notarized nondisturbance agreements in writing from any lenders whose debt is secured by all or a portion of the Project, in form and content provided for in the applicable underlying financing documents, stating that so long as Tenant is not in default under any of the terms, covenants, conditions, or agreements of this Lease, this Lease and all of the terms, provisions, and conditions of this Lease, shall remain in full force and effect, and neither this Lease, nor Tenant’s rights nor Tenant’s possession of the Premises will be disturbed during the Term of this Lease or any extension thereof. Tenant shall reimburse Landlord for, or shall pay directly, all costs assessed by said lender (in excess of One Thousand Dollars ($1,000.00)) in connection with obtaining such nondisturbance agreement(s).

SECTION 13.2. ESTOPPEL CERTIFICATE.

(a) Tenant shall, at any time upon not less than ten (10) business days prior written notice from Landlord, execute, acknowledge and deliver to Landlord, in any form that Landlord may reasonably require, a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect) and the dates to which the rental, additional rent and other charges have been paid in advance, if any, and (ii) acknowledging that, to Tenant’s knowledge, there are no uncured defaults on the part of Landlord, or specifying each default if any are claimed, and (iii) setting forth all further information regarding this Lease and/or Tenant’s occupancy of the Premises that Landlord or any purchaser or encumbrancer may reasonably require. Tenant’s statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Building or Project.

(b) Notwithstanding any other rights and remedies of Landlord, Tenant’s failure to deliver any estoppel statement required by the provisions of Section 13.2(a) above within the provided time shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured Events of Default in Landlord’s performance, and (iii) not more than one month’s rental (excluding the Security Deposit) has been paid in advance.

SECTION 13.3. FINANCIALS.

(a) Tenant has delivered to Landlord prior to the execution of this Lease, and shall deliver to Landlord at any time upon not less than ten (10) business days prior written notice from Landlord, Tenant’s audited financial statements, including a balance sheet and profit and loss statement for the most recent prior year for which such statements are available (collectively, the “Statements”), which Statements shall accurately and completely reflect the financial condition of Tenant. Landlord agrees that it will keep the Statements confidential, except that Landlord shall have the right to deliver the same to any proposed purchaser of the Building or Project (provided that Landlord shall require that any such proposed purchaser execute a confidentiality agreement, in commercially reasonable form, requiring that the Statement be kept confidential), and to any encumbrancer of all or any portion of the Building or Project (provided that Landlord shall request such encumbrancer to keep such Statements confidential). Notwithstanding the foregoing, in the event Tenant shall become a publicly-traded corporation whose stock is traded on a nationally recognized exchange or on NASDAQ, the “Statements” shall consist of Tenant’s most recently publicly disclosed financial statements.

(b) Tenant acknowledges that Landlord is relying on the Statements in its determination to enter into this Lease, and Tenant represents to Landlord, which representation shall be deemed made on the date of this Lease, that no material adverse change in the financial condition of Tenant, as reflected in the Statements, has occurred since the date Tenant delivered the Statements to Landlord. The Statements are represented and warranted by Tenant to be correct and to accurately and fully reflect Tenant’s true financial condition as of, and for the periods presented in, such Statements provided to Landlord.

ARTICLE XIV. EVENTS OF DEFAULT AND REMEDIES

SECTION 14.1. TENANT’S DEFAULTS. In addition to any other breaches of this Lease which are defined as Events of Default in this Lease, the occurrence of any one or more of the following events shall constitute an Event of Default by Tenant:

(a) The failure by Tenant to make any payment of Basic Rent or additional rent required to be made by Tenant, as and when due, where the failure continues for a period of five (5) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. For purposes of these Events of Default and remedies provisions, the term “additional rent” shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease.

(b) The assignment, sublease, encumbrance or other transfer of this Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord when consent is required by this Lease.

(c) The discovery by Landlord that any of the Statements provided by Tenant was materially and adversely false.

(d) The failure of Tenant to timely and fully provide any subordination agreement, estoppel certificate or financial statements in accordance with the requirements of Article XIII.

 

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(e) The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in this Section 14.1, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant or such shorter period as is specified in any other provision of this Lease; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature of the failure is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to have committed an Event of Default if Tenant commences the cure within thirty (30) days, and thereafter diligently pursues the cure to completion.

(f) (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, if possession is not restored to Tenant within sixty (60) days; (iv) the attachment, execution or other judicial seizure of substantially all of Tenant’s assets located at the Premises or of Tenant’s interest in this Lease, where the seizure is not discharged within sixty (60) days; or (v) Tenant’s convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts. Landlord shall not be deemed to have knowledge of any event described in this Section 14.1(f) unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant’s insolvency. In the event that any provision of this Section 14.1(f) is contrary to applicable law, the provision shall be of no force or effect.

SECTION 14.2. LANDLORD’S REMEDIES.

(a) If an Event of Default by Tenant occurs, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies:

(i) Landlord may terminate Tenant’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant:

(1) The worth at the time of award of the unpaid Basic Rent and additional rent which had been earned at the time of termination;

(2) The worth at the time of award of the amount by which the unpaid Basic Rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided;

(3) The worth at the time of award of the amount by which the unpaid Basic Rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided;

(4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant’s Event of Default, including, but not limited to, the cost of recovering possession of the Premises, refurbishment of the Premises, marketing costs, commissions and other expenses of reletting, including necessary repair, the unamortized portion of any tenant improvements and brokerage commissions funded by Landlord in connection with this Lease, reasonable attorneys’ fees, and any other reasonable costs; and

(5) The term “rent” as used in the Lease shall be deemed to mean the Basic Rent, Tenant’s Share of Operating Expenses and any other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease, including, without limitation, any sums that may be owing from Tenant pursuant to Section 4.3 of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty-four (24) month period immediately prior to the Event of Default, except that if it becomes necessary to compute such rental before the twenty-four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in Sections 14.2(a)(i) (1) and (2) above, the “worth at the time of award” shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in Section 14.2(a)(i)(3) above, the “worth at the time of award” shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).

(ii) Landlord may elect not to terminate Tenant’s right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord’s interests under this Lease, shall not constitute a termination of the Tenant’s right to possession of the Premises. In the event that Landlord elects to avail itself of the remedy provided by this Section 14.2(a)(ii), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord’s consent as are contained in this Lease.

 

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(b) Landlord shall be under no obligation to observe or perform any covenant of this Lease on its part to be observed or performed which accrues after the date of any Event of Default by Tenant unless and until the Event of Default is cured by Tenant, it being understood and agreed that the performance by Landlord of its obligations under this Lease are expressly conditioned upon Tenant’s full and timely performance of its obligations under this Lease. The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time.

(c) No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy of any Event of Default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding Event of Default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord’s knowledge of the preceding Event of Default at the time of acceptance of rent, or (ii) a waiver of Landlord’s right to exercise any remedy available to Landlord by virtue of the Event of Default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant’s estate shall not waive or cure an Event of Default under Section 14.1. No payment by Tenant or receipt by Landlord of a lesser amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord’s right to recover the balance of the rent or pursue any other remedy available to it. No act or thing done by Landlord or Landlord’s agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord’s agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of this Lease or a surrender of the Premises.

SECTION 14.3. LATE PAYMENTS.

(a) Any payment due to Landlord under this Lease, including without limitation Basic Rent, Tenant’s Share of Operating Expenses or any other payment due to Landlord under this Lease, that is not received by Landlord within five (5) days following the date due shall bear interest at the maximum per annum rate of ten percent (10%) not to exceed the rate permitted by law from the date due until fully paid. The payment of interest shall not cure any Event of Default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of Basic Rent and Tenant’s Share of Operating Expenses will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to, administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any Basic Rent or Tenant’s Share of Operating Expenses due from Tenant shall not be received by Landlord or Landlord’s designee within five (5) days following the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge, which the Tenant agrees is reasonable, in a sum equal to the greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment; provided, however, that Landlord shall waive such late fee in connection with the initial late payment by Tenant. Acceptance of a late charge alone by Landlord shall not constitute a waiver of Tenant’s Event of Default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies.

(b) Following each second installment of Basic Rent and/or the payment of Tenant’s Share of Operating Expenses within any twelve (12) month period that is not paid within five (5) days following the date due, Landlord shall have the option to require that beginning with the first payment of Basic Rent next due, Basic Rent and the Tenant’s Share of Operating Expenses shall no longer be paid in monthly installments but shall be payable quarterly three (3) months in advance. Should Tenant deliver to Landlord, at any time during the Term, two (2) or more insufficient checks, the Landlord may require that all monies then and thereafter due from Tenant be paid to Landlord by cashier’s check or wire transfer. If any check for any payment to Landlord hereunder is returned by the bank for any reason, such payment shall not be deemed to have been received by Landlord and Tenant shall be responsible for any applicable late charge, interest payment and the charge to Landlord by its bank for such returned check. Nothing in this Section shall be construed to compel Landlord to accept Basic Rent, Tenant’s Share of Operating Expenses or any other payment from Tenant if there exists an Event of Default unless such payment fully cures any and all such Event of Default. Any acceptance of any such payment shall not be deemed to waive any other right of Landlord under this Lease. Any payment by Tenant to Landlord may be applied by Landlord, in its sole and absolute discretion, in any order determined by Landlord to any amounts then due to Landlord.

SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant’s sole cost and expense and without any abatement of rent or right of set-off. If Tenant fails to pay any sum of money due under this Lease, other than rent payable to Landlord, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant’s part and Tenant hereby grants Landlord the right to enter onto the Premises in order to carry out such performance. Landlord’s election to make the payment or perform the act on Tenant’s part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts nor shall Landlord be responsible to Tenant for any damage caused to Tenant as the result of such performance by Landlord. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all reasonable sums paid by Landlord and all necessary incidental costs, together with interest at the per annum rate of ten percent (10%) not to exceed the maximum rate permitted by law from the date of the payment by Landlord. Landlord shall provide Tenant with written notice and the appropriate cure period provided in this Lease before performing any act on behalf of Tenant.

 

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SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease, and Tenant shall have no rights to take any action against Landlord, unless and until Landlord has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion. In the event of Landlord’s default under this Lease, Tenant’s sole remedies shall be to seek damages or specific performance from Landlord, provided that any damages shall be limited to Tenant’s actual out-of-pocket expenses and shall in no event include any consequential damages, lost profits or opportunity costs; provided, however, if Landlord fails to commence and diligently pursue a cure to its default with respect to an item or condition that threatens the health or safety of persons in or around the Building, Tenant may take all reasonable actions to resolve the issue and seek its actual out-of-pocket damages so incurred against Landlord. Tenant may resort to its sole remedies cumulatively or in the alternative.

SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by Landlord in connection with any Event of Default by Tenant under this Lease or holding over of possession by Tenant after the expiration or earlier termination of this Lease, or any action related to a filing for bankruptcy or reorganization by Tenant, including without limitation all costs, expenses and actual accountants, appraisers, attorneys and other professional fees, and any reasonable collection agency or other collection charges, shall be due and payable to Landlord on demand, and shall bear interest at the rate of ten percent (10%) per annum not to exceed the maximum rate permitted by law. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys’ fees, and all other reasonable costs. The prevailing party for the purpose of this Section shall be determined by the trier of the facts.

SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT’S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. FURTHERMORE, THIS WAIVER AND RELEASE OF ALL RIGHTS TO A JURY TRIAL IS DEEMED TO BE INDEPENDENT OF EACH AND EVERY OTHER PROVISION, COVENANT, AND/OR CONDITION SET FORTH IN THIS LEASE.

SECTION 14.8. SATISFACTION OF JUDGMENT. The respective obligations of Landlord and Tenant do not constitute the personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord or Tenant, respectively or their constituent partners. Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only from the interest of Landlord in the Project and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord’s right, title or interest in the Project and no action for any deficiency may be sought or obtained by Tenant. The provisions of the foregoing sentence shall not apply, however, to: (i) proceeds from insurance coverage required of Landlord pursuant to Section 10.2 of this Lease, (ii) Landlord’s obligation to carry insurance coverage pursuant to Section 10.2 to the extent that Landlord elects to “self-insure” such coverage, and (iii) Landlord’s obligation to fund the Access Control Allowance, the Floor Surface Allowance and/or the Landlord’s Contribution (as defined in the Work Letter) pursuant to the applicable provisions of this Lease.

ARTICLE XV. END OF TERM

SECTION 15.1. HOLDING OVER. This Lease shall terminate without further notice upon the expiration of the Term, and any holding over by Tenant after the expiration shall not constitute a renewal or extension of this Lease, or give Tenant any rights under this Lease, except when in writing signed by both parties. Any period of time following the Expiration Date or earlier termination of this Lease required for Tenant to remove its property or to place the Premises in the condition required pursuant to Section 15.3 (or for Landlord to do so if Tenant fails to do so) shall be deemed a holding over by Tenant. If Tenant holds over for any period after the Expiration Date (or earlier termination) of the Term without the prior written consent of Landlord, such possession shall constitute a tenancy at sufferance only and an Event of Default under this Lease; such holding over with the prior written consent of Landlord shall constitute a month-to-month tenancy commencing on the first (1st) day following the termination of this Lease and terminating thirty (30) days following delivery of written notice of termination by either Landlord or Tenant to the other. In either of such events, possession shall be subject to all of the terms of this Lease, except that for the initial two (2) months of holdover the monthly Basic Rent shall be one hundred fifty percent (150%) of the Basic Rent for the month immediately preceding the date of termination, and thereafter the monthly Basic Rent shall be the greater of (a) one hundred fifty percent (150%) of the Basic Rent for the month immediately preceding the date of termination or (b) the then currently scheduled Basic Rent for comparable space in the Project. The acceptance by Landlord of monthly holdover rental in a lesser amount shall not constitute a waiver of Landlord’s right to recover the full amount due for any holdover by Tenant, unless otherwise agreed in writing by Landlord. If Tenant fails to surrender the Premises upon the expiration of this Lease

 

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despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claims made by any succeeding tenant relating to such failure to surrender. The foregoing provisions of this Section are in addition to and do not affect Landlord’s right of re-entry or any other rights of Landlord under this Lease or at law.

SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of this Lease by Tenant, or a mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises.

SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Subject to the provisions of 7.3 of this Lease, upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as of the date of substantial completion of the Tenant Improvements by Tenant or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear, casualty and repairs which are Landlord’s obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all personal property, trade fixtures (including, without limitation, laboratory benches and equipment and the Generators) and debris, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the restoration of all electrical and plumbing facilities caused by such removal, the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect to repair any structural damage and the reasonable costs thereof shall be reimbursed by Tenant. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If Tenant fails to remove Tenant’s personal property from the Premises upon the expiration of the Term, Landlord may remove, store, dispose of and/or retain such personal property, at Landlord’s option, in accordance with then applicable laws, all at the expense of Tenant. If requested by Landlord following the Expiration Date or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quitclaiming to Landlord all right, title and interest of Tenant in the Premises.

ARTICLE XVI. PAYMENTS AND NOTICES

All sums payable by Tenant to Landlord shall be deemed to be rent under this Lease and shall be paid, without deduction or offset, except as expressly provided in this Lease, in lawful money of the United States to Landlord at its address set forth in Item 12 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of Basic Rent and the Tenant’s Share of Operating Expenses pursuant to Sections 4.1 and 4.2, all payments shall be due and payable within five (5) business days after demand. All payments requiring proration shall be prorated on the basis of a thirty (30) day month and a three hundred sixty (360) day year. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered in person or by courier or overnight delivery service to the other party, addressed to the other party at the address set forth in Item 12 of the Basic Lease Provisions. Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them.

ARTICLE XVII. RULES AND REGULATIONS

Tenant agrees to observe faithfully and comply strictly with the Rules and Regulations, attached as Exhibit E (the “Rules and Regulations”), and any reasonable and nondiscriminatory amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises, Building, Project and Common Areas, provided that such additional rules and regulations do not materially decrease Tenant’s rights under this Lease or materially increase Tenant’s obligations under this Lease. Landlord shall use its commercially reasonable efforts to apply the Rules and Regulations uniformly and on a non-discriminatory basis, but Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease by any other tenant or such tenant’s agents, employees, contractors, guests or invitees. One or more waivers by Landlord of any breach of the Rules and Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant’s failure to keep and observe the Rules and Regulations, following written notice from Landlord and Tenant’s failure to cure pursuant to the applicable provisions of Section 14.1 above, shall constitute an Event of Default. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling.

ARTICLE XVIII. BROKER’S COMMISSION

The parties recognize as the broker(s) who negotiated this Lease the firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Lease Provisions, and agree that Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. Tenant warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from any cost, expense or liability (including reasonable attorneys’ fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease.

 

26


ARTICLE XIX. TRANSFER OF LANDLORD’S INTEREST

In the event of any transfer of Landlord’s interest in the Premises, and the transferee’s assumption of the obligations of the Landlord arising from and after the effective date of such transfer, the transferor shall be automatically relieved of all further obligations on the part of Landlord, (but shall not be relieved of any obligations or liabilities arising during its ownership of such interest in the Building or Project) and the transferor shall be relieved of any obligation to pay any funds in which Tenant has an interest to the extent that such funds have been turned over, subject to that interest, to the transferee and Tenant is notified of the transfer as required by law. No beneficiary of a deed of trust to which this Lease is or may be subordinate, and no landlord under a so-called sale-leaseback, shall be responsible in connection with the Security Deposit, unless the mortgagee or beneficiary under the deed of trust or the landlord actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership.

ARTICLE XX. INTERPRETATION

SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease requires, the words “Landlord” and “Tenant” shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others.

SECTION 20.2. HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation.

SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease.

SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease.

SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease.

SECTION 20.6. CONTROLLING LAW/VENUE. This Lease shall be governed by and interpreted in accordance with the laws of the State of California. Any litigation commenced concerning any matters whatsoever arising out of or in any way connected to this Lease shall be initiated in the Superior Court of the county in which the Project is located.

SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law.

SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party’s consent to any subsequent act. No breach by either party of this Lease shall be deemed to have been waived by the other party unless the waiver is in a writing signed by such party. Subject to the express limitations and restrictions contained in this Lease, the rights and remedies of Landlord and Tenant under this Lease shall be cumulative and in addition to any and all other rights and remedies which such party may have.

SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, other than financial inability, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent, or either party from the timely performance of any of their respective obligations under this Lease within such party’s reasonable control.

SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises, the Building, and the Project, and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding.

 

27


SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant’s part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall have the right of quiet enjoyment and use of the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord.

SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns.

SECTION 20.13. INTERPRETATION. This Lease shall not be construed in favor of or against either party, but shall be construed as if both parties prepared this Lease.

ARTICLE XXI. EXECUTION AND RECORDING

SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement.

SECTION 21.2. CORPORATE, LIMITED LIABILITY COMPANY AND PARTNERSHIP AUTHORITY. The parties hereto represent and warrant that they are duly authorized to execute and deliver this Lease, and that this Lease is binding in accordance with its terms. If this Lease is not signed by two officers as provided in California Corporations Code Section 313, Tenant shall, at Landlord’s request, deliver a certified copy of its board of directors’ resolution, operating agreement or partnership agreement or certificate authorizing or evidencing the execution of this Lease.

SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant.

SECTION 21.4. RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a “short form” memorandum of this Lease for recording purposes.

SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect.

SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar reproduction of this Lease shall be deemed an original for all purposes.

SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease.

ARTICLE XXII. MISCELLANEOUS

SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord’s relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose, by public filings or otherwise, the terms and conditions of this Lease (“Confidential Information”) to any third party, either directly or indirectly, without the prior written consent of Landlord, which consent may be given or withheld in Landlord’s sole and absolute discretion. The foregoing restriction shall not apply if either: (i) Tenant is required to disclose the Confidential Information in response to a subpoena or other regulatory, administrative or court order, (ii) independent legal counsel to Tenant advises that Tenant is required to disclose the Confidential Information to, or file a copy of this Lease with, any governmental agency or any stock exchange; provided however, that in such event, Tenant shall, before making any such disclosure (A) provide Landlord with prompt written notice of such required disclosure, (B) at Tenant’s sole cost, take all commercially reasonable steps to resist or narrow such requirement, including without limitation preparing and filing a request for confidential treatment of the Confidential Information and (C) if disclosure of the Confidential Information is required by subpoena or other regulatory, administrative or court order, Tenant shall provide Landlord with as much advance notice of the possibility of such disclosure as practical so that Landlord may attempt to stop such disclosure or obtain an order concerning such disclosure. In addition, Tenant may disclose the terms of this Lease to prospective assignees of this Lease and prospective subtenants under this Lease with whom Tenant is actively negotiating such an assignment or sublease. Notwithstanding anything to the contrary, the restrictions contained in this Section 22.1 shall not apply to the filing of this Lease with the Securities and Exchange Commission in connection with any public offering of securities.

 

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SECTION 22.2. [INTENTIONALLY DELETED]

SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining financing for the Project, the lender shall request reasonable modifications in this Lease as a condition to the financing, Tenant will not unreasonably withhold or delay its consent, provided that the modifications do not materially increase the obligations nor materially decrease the rights of Tenant, or materially and adversely affect the leasehold interest created by this Lease.

SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of its obligations hereunder shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Building whose address has been furnished to Tenant and (b) such beneficiary is afforded a reasonable opportunity to cure the default by Landlord (which in no event shall be less than sixty (60) days), including, if necessary to effect the cure, time to obtain possession of the Building by power of sale or judicial foreclosure provided that such foreclosure remedy is diligently pursued. Tenant agrees that each beneficiary of a deed of trust or mortgage covering the Building is an express third party beneficiary hereof, Tenant shall have no right or claim for the collection of any deposit from such beneficiary or from any purchaser at a foreclosure sale unless such beneficiary or purchaser shall have actually received and not refunded the deposit, and Tenant shall comply with any written directions by any beneficiary to pay rent due hereunder directly to such beneficiary without determining whether a default exists under such beneficiary’s deed of trust.

SECTION 22.5. [Intentionally Deleted]

SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises or the Project. Tenant assumes all responsibility for the protection of Tenant, its employees, agents, invitees and property from acts of third parties. Nothing herein contained shall prevent Landlord, at its sole option, from providing security protection for the Project or any part thereof, in which event the reasonable cost thereof shall be included within the definition of Project Costs.

 

LANDLORD:     TENANT:
THE IRVINE COMPANY     PROMETHEUS LABORATORIES INC.,
      a California corporation

By:

 

/s/ William R. Halford

    By:  

/s/ Joseph M. Limber

  William R. Halford       Joseph M. Limber
  President, Office Properties       President and Chief Executive Officer

By:

 

/s/ Steven M. Case

    By:  

/s/ Michael V. Swanson

  Steven M. Case, Senior Vice President       Michael V. Swanson
  Leasing, Office Properties       Vice President, Finance
        and Chief Financial Officer

 

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LOGO

 

1


LOGO

 

1


SCHEDULE A

Landlord’s Work

Landlord shall repair and/or replace the following items located in or around the Building and Premises, insuring that such items are in good operating condition:

 

  1.

Central plant

 

  a.

Cooling tower system, loop chemistry and flow performance – Complete, subject to Note 1 below

 

  b.

Boiler controls, burners and ignition integrity - Complete, subject to Note 1 below

 

  i.

Chiller System #1 – Complete, subject to Note 1 below

 

  ii.

Chiller System #2 – Landlord shall replace with a 180-ton Turbocor McQuay chiller system. Chiller System #2 shall be installed as the “Lead Chiller System”– To be completed within sixteen (16) weeks of Lease execution

 

  c.

All circulating pumps - Complete, subject to Note 1 below

 

  d.

Controls – Landlord has installed a new Siemens Control Panel. All points have been tested & verified. Complete, subject to Note 1 below.

 

  2.

Building

 

  a.

Air handlers drives/fans and controllers - Complete, subject to Note 1 below

 

  b.

VAV distribution boxes performance and integrity in Existing Office Areas – Complete, subject to Note 1 below

 

  c.

Reheat coils in Existing Office Areas - Complete, subject to Note 1 below

 

  d.

Siemens Building Automation control system including a new computer & printer, software, supporting documentation including, but not limited to, programming printout with point locations and setpoints, loop control performance integrity in existing office areas - To be completed within four (4) weeks of Lease execution, subject to Note 1 below

 

  e.

ADA Compliance Work as follows, to be completed within eight (8) weeks of Lease Execution:

 

  i.

Lower grab bars in all handicapped stalls. Includes lowering flushometers and wall tile repair

 

  ii.

Lower coat hooks. Plugs will be inserted into removed screw holes

 

  iii.

Add U-shaped pulls

 

  iv.

Lower feminine napkin dispensers. Screw holes to be patched

 

  v.

Add deck-mounted soap dispensers

 

  vi.

Adjust drinking fountains if required.

 

  3.

Premises

 

  a.

Provide functional trash/recycle container storage enclosures as set forth in Exhibit F – To be completed by July 30, 2005

 

  b.

Provide functional Hazardous Materials storage enclosures as set forth in Exhibit F – To be completed by July 30, 2005

Note 1 – Landlord shall provide written notice of completion of these items after execution and delivery of the Lease. To ensure that the Premises’ existing HVAC system (consisting of the items in Section I above except for Chiller System #2 and the items in Section 2(a)-(d) above and referred to herein as the “Existing HVAC System”) is complete, Landlord shall run the Existing HVAC System for a 72-hour period to verify stable temperature control. Upon the successful completion of this test, Landlord may notify Tenant that the Existing HVAC System is complete. Should the Existing HVAC System fail to remain in good operating condition during the forty-five (45) day period after such written notice, Landlord shall repair this system, provide written notice that it is in good operating condition, and the forty-five (45) day period shall start over.

Schedule A to the Lease


FIRST AMENDMENT

THIS FIRST AMENDMENT (the “Amendment”) is made and entered into as of January 25, 2010, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company, (“Landlord”) and PROMETHEUS LABORATORIES INC., a California corporation (“Tenant”).

RECITALS

 

A.

Landlord (formerly known as The Irvine Company, a Delaware corporation) and Tenant are parties to that certain lease dated June 22, 2005 (the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 99,041 rentable square feet (the “Original Premises”) described as the 1st floor of the building located at 9410 Carroll Park Drive, San Diego, California (the “Building”).

 

B.

Tenant has requested that additional space containing approximately 11,000 rentable square feet on the mezzanine level (the “Mezzanine”) of the Building shown on Exhibit A hereto (the “Expansion Space”) be added to the Original Premises and that the Lease be appropriately amended and Landlord is willing to do the same on the following terms and conditions.

NOW, THEREFORE, in consideration of the above recitals which by this reference are incorporated herein, the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

 

I.

Expansion and Effective Date. Effective as of November 1, 2009 (the “Expansion Effective Date”), the Premises, as defined in the Lease, is increased from 99,041 rentable square feet on the 1st floor to 110,041 rentable square feet on the 1st floor and the Mezzanine level by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on the Expiration Date (i.e., December 31, 2012). The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises or the Expansion Space, except as set forth herein or in the Lease.

 

II.

Basic Rent. In addition to Tenant’s obligation to pay Basic Rent for the Original Premises, Tenant shall pay Landlord Basic Rent for the Expansion Space as follows:

 

Months of Term or
Period

   Monthly Rate Per
Square Foot
   Monthly Basic Rent

11/1/09 – 12/31/09

   $0.52    $5,720.00

1/1/10 – 12/31/10

   $0.535    $5,885.00

1/1/11 – 12/31/11

   $0.55    $6,050.00

1/1/12 – 12/31/12

   $0.565    $6,215.00

All such Basic Rent shall be payable by Tenant in accordance with the terms of the Lease.

 

III.

Project Costs and Property Taxes. For the period commencing on the Expansion Effective Date and ending on the Expiration Date, Tenant shall be obligated to pay Tenant’s Share of Property Taxes accruing in connection with the Expansion Space in accordance with the Lease. For the purposes of clarity, Tenant shall be responsible for the payment of supplemental Property Taxes assessed, if any, solely with respect to the addition of the square footage in the Expansion Space and not for any other improvements. Landlord represents and warrants that no other tenant in the Project has expanded its space during the term of this Lease for which Tenant has been assessed additional charges. Landlord acknowledges and agrees that if, in the future, any other tenant in the Project expands its space, Tenant shall not be responsible for any supplemental taxes or charges due to such expansion.

 

IV.

Additional Security Deposit. No additional security deposit shall be required in connection with this Amendment.

 

V.

Improvements to Expansion Space.

 

  A.

Condition of Expansion Space. Tenant has inspected the Expansion Space and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment.

 

  B.

Any construction, alterations or improvements to the Expansion Space shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the provisions of Section 7.3 of the Lease. Landlord, to the best of the actual knowledge of the on-site project manager, Mark Breeden, has no actual knowledge of any failure of Tenant to comply with the terms and provisions contained therein. Nothing contained herein shall be deemed a representation by Landlord that Tenant has fully complied with Section 7.3 of the Lease.

 

1


VI.

Parking. Tenant shall not be entitled to any additional parking spaces in connection with the Expansion Space.

 

VII.

SDN List. Tenant hereby represents and warrants that, to the best of its knowledge, neither Tenant nor any officer, director, controlling or managing partner, member or other principal of Tenant (collectively, “Tenant Parties”) is listed as a Specially Designated National and Blocked Person (“SDN”) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control (OFAC).

 

VIII.

Other Pertinent Provisions. Landlord and Tenant agree that, effective as of the date of this Amendment (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects:

 

  A.

Restoration of Expansion Space. Upon Landlord’s request, Tenant shall restore the Expansion Space on or prior to the Expiration Date to its original condition, reasonable wear and tear excepted. Tenant’s out-of-pocket costs for such restoration shall not exceed $100,000.00. Notwithstanding the foregoing, in the event Tenant renews the Lease for a minimum of 3 years following the Expiration Date, Tenant’s restoration obligation set forth herein shall be waived.

 

  B.

Payment and Notice. Landlord’s addresses for payment of rent and notices in accordance with Article I, Item 13 (Basic Lease Provisions) shall be deleted in their entirety and the following substituted in lieu thereof:

“Payment Address:

The Irvine Company LLC

Department #6421

Los Angeles, CA 90084-6421

Notice Address:

The Irvine Company LLC

9171 Towne Center Drive, Suite 140

San Diego, Ca 92122

Attn: Property Manager

with a copy of notices to:

THE IRVINE COMPANY LLC

P.O. Box 6370

Newport Beach, CA 92658-6370

Attn: Vice President, Operations,

Office Properties/San Diego”

 

IX.

GENERAL.

 

  A.

Effect of Amendments. The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment.

 

  B.

Entire Agreement. This Amendment and the Lease embody the entire understanding between Landlord and Tenant and can be changed only by a writing signed by Landlord and Tenant. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement, improvement allowance, leasehold improvements, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment.

 

  C.

Counterparts. If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation.

 

  D.

Defined Terms. All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment.

 

  E.

Authority. If Tenant is a corporation, limited liability company or partnership, or is comprised of any of them, each individual executing this Amendment for the corporation, limited liability company or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of such entity and that this Amendment is binding upon such entity in accordance with its terms.

 

2


  F.

Attorneys’ Fees. The provisions of the Lease respecting payment of attorneys’ fees shall also apply to this Amendment.

 

  G.

Execution of Amendment. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Neither party shall be bound by this Amendment until the parties have executed and delivered the same to the other party.

 

  H.

Nondisclosure of Terms. Tenant hereby acknowledges that the provisions of Section 22.1 of the Lease (Nondisclosure of Lease Terms) is hereby restated and in full force and effect relative to the terms and conditions of this Amendment and any other subsequent amendment, agreement, or other modification of the Lease.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

 

LANDLORD:     TENANT:
THE IRVINE COMPANY LLC,     PROMETHEUS LABORATORIES INC.,
a Delaware limited liability company     a California corporation

By:

 

/s/ Steven M. Case

    By:  

/s/ Joseph M. Limber

  Steven M. Case     Printed Name:   Joseph M. Limber
  Executive Vice President Office Properties     Title:   President & CEO

By:

 

/s/ Michael T. Bennett

    By:  

/s/ Mark E. Spring

  Michael T. Bennett     Printed Name:   Mark E. Spring
  Senior Vice President, Operations Office Properties     Title:   Sr VP Finance & CFO

 

3


LOGO

 

1


SECOND AMENDMENT

THIS SECOND AMENDMENT (the “Amendment”) is made and entered into as of October 5, 2011, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company (“Landlord”), and PROMETHEUS LABORATORIES, INC., a California corporation (“Tenant”).

RECITALS

 

A.

Landlord (formerly known as The Irvine Company, a Delaware corporation) and Tenant are parties to that certain lease dated Jun 22, 2005 (“Original Lease”), which lease has been previously amended by a First Amendment dated January 25, 2010 (“First Amendment”, the Original Lease, as amended by the First Amendment, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 110,041 rentable square feet (the “Premises”) described as the 1st floor and the mezzanine level of the building located at 9410 Carroll Park Drive, San Diego, California (the “Building”).

 

B.

The Lease by its terms shall expire on December 31, 2012 (“Prior Expiration Date”), and the parties desire to extend the Term of the Lease, all on the following terms and conditions.

NOW, THEREFORE, in consideration of the above recitals which by this reference are incorporated herein, the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

 

I.

Extension. The Term of the Lease is hereby extended and shall expire on December 31, 2017 (“Extended Expiration Date”), unless sooner terminated in accordance with the terms of the Lease. That portion of the Term commencing the day immediately following the Prior Expiration Date (“Extension Date”) and ending on the Extended Expiration Date shall be referred to herein as the “Extended Term”.

 

II.

Basic Rent. As of the Extension Date, the schedule of Basic Rent payable with respect to the Premises during the Extended Term is the following:

 

Months of Term or Period

   Monthly Rate Per
Square Foot
   Monthly Basic Rent

1/1/13 – 12/31/13

   $0.80    $88,033.00

1/1/14 – 12/31/14

   $0.84    $92,434.00

1/1/15 – 12/31/15

   $0.87    $95,736.00

1/1/16 – 12/31/16

   $0.91    $100,137.00

1/1/17 – 12/31/17

   $0.95    $104,539.00

All such Basic Rent shall be payable by Tenant in accordance with the terms of the Lease.

 

Ill.

Building Costs and Property Taxes. For the period commencing on the Extension Date and ending on the Extended Expiration Date, Tenant shall be obligated to pay Tenant’s Share of Operating Expenses accruing in connection with the Premises in accordance with the terms of the Lease.

 

IV.

Additional Security Deposit. Provided that no Event of Default has occurred under any provision of the Lease, then effective as of the Extension Date, the Security Deposit held by Landlord as provided under Section 4.3 of the Lease as security for payment of rent and the performance of the other terms and conditions of the Lease by Tenant shall be reduced from $123,108.00 to $0.00. Landlord shall return to Tenant the Security Deposit in the amount of $123,108.00 within thirty (30) days after the Extension Date.

 

V.

Improvements to Premises.

 

  A.

Condition of Premises. Tenant is in possession of the Premises and accepts the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment or the Lease.

 

  B.

Tenant Improvements. Effective as of the Extension Date Tenant shall be permitted to construct the Tenant Improvements for the Premises in accordance with the provisions of Exhibit A, Work Letter, attached hereto (“Work Letter’’) and may utilize the Landlord Contribution as set forth in the Work Letter.

 

VI.

Parking. Effective as of the Extension Date, Tenant shall continue to be entitled to 278 unreserved parking spaces in accordance with Section 6.4 of the Lease.

 

VII.

SDN List. Tenant hereby represents and warrants that neither Tenant nor any officer, director, employee, partner, member or other principal of Tenant (collectively, “Tenant Parties”) is listed as a Specially Designated National and Blocked Person (“SDN”) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control (OFAC). In the event

 

1


  Tenant or any Tenant Party is or becomes listed as an SDN, Tenant shall be deemed in breach of this Lease and Landlord shall have the right to terminate the Lease immediately upon written notice to Tenant.

 

VIII.

Other Pertinent Provisions. Landlord and Tenant agree that, effective as of the date of this Amendment (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects:

 

  A.

Removal and Restoration. Notwithstanding any contrary provisions in the Lease, Tenant, shall not be required to remove or restore (i) the improvements existing within the Premises as of the date of the full and final execution of this Amendment or (ii) the Tenant Improvements (as defined in Exhibit A of this Amendment), if and to the extent approved in accordance with the terms and conditions set forth in Exhibit A of this Amendment, upon the earlier termination or expiration of this Lease, as amended.

 

  B.

Alterations. Effective as of the Extension Date, Section 7.3 (Alterations) shall be amended by deleting the reference to “$50,000.00” in the second sentence and substituting “$60,000.00” in lieu thereof. In addition, Landlord agrees that Tenant shall not be responsible for the 5% supervision/management fee in connection with Cosmetic Alterations and further, Cosmetic Alterations, as defined, shall not be subject to the $60,000.00 annual limit of Alterations not requiring the consent of Landlord, however, they shall be included in the summary of Alterations made without Landlord’s consent as required by Section 7.3. As used herein, “Cosmetic Alterations” includes installing or replacing carpeting (or other types of flooring), or applying or touching up paint.

 

  C.

Right to Extend. Tenant shall have an additional one time right to extend the Term of the Lease for an additional sixty (60) month period beyond the Extended Expiration Date, pursuant and subject to the terms and conditions of Section 3.3 (Right to Extend this Lease) of the Lease; except that such right shall be exercised, if at all, not less than nine (9) and not more than twelve (12) months prior to the Extended Expiration Date.

 

  D.

Right of First Offer. Provided that no Event of Default has occurred under the Lease, Landlord hereby grants Tenant a right (“First Right”) to lease, during the initial Extended Term each of (i) approximately 23,455 rentable square feet of office space known as Suite No. 100, and/or (ii) approximately 18,351 rentable square feet of office space known as Suite No. 150 in the building located at 9339 Carroll Park Drive, San Diego, California and shown on Exhibit A hereto (each, “First Right Space”) in accordance with and subject to the provisions of this Section; provided that this First Right shall cease to be effective during the final 12 months of the Extended Term unless and until Tenant exercises its extension option set forth in Section VIII.C above (or is then negotiating alternate terms for the extension of the Lease). Except as otherwise provided below, prior to leasing each First Right Space, or any portion thereof, to any other party during the period that this First Right is in effect and after determining that the existing tenant in the applicable First Right Space will not extend or renew the term of its lease, Landlord shall give Tenant written notice of the basic economic terms including but not limited to the Basic Rent, term, operating expense base, security deposit, and tenant improvement allowance (collectively, the “Economic Terms”), upon which Landlord is willing to lease such particular First Right Space to Tenant or to a third party; provided that the Economic Terms shall exclude brokerage commissions and other Landlord payments that do not directly inure to the tenant’s benefit. Further, if the First Right is exercised by Tenant during the first eighteen (18) months of the Extended Term, Tenant shall not be required to provide any security deposit if (i) Tenant is not then otherwise required to provide any security deposit with respect to the then current Premises, and (ii) Tenant’s net worth at the time the First Right is exercised is not less than 90% of its net worth as of the date hereof. If Tenant exercises any First Right during the initial 18 months of the Extended Term, the term for the applicable First Right Space shall be for a term equal to the then unexpired portion of the Term of the Lease and the Economic Terms shall be upon the same economic terms as the original Premises leased hereunder (including without limitation, the applicable Monthly Rate per square foot as set forth in Section II above). If Landlord intends to lease other office space in addition to the First Right Space as part of a single transaction, then Landlord’s notice shall so provide and all such space shall collectively be subject to the provisions of this Section VIII.D. Within 5 business days after receipt of Landlord’s notice, Tenant must give Landlord written notice pursuant to which Tenant shall elect to (i) lease all, but not less than all, of the space specified in Landlord’s notice (the “Designated Space”) upon such Economic Terms and the same non-Economic Terms as set forth in this Lease; (ii) refuse to lease the Designated Space, specifying that such refusal is not based upon the Economic Terms, but upon Tenant’s lack of need for the Designated Space, in which event Landlord may lease the Designated Space upon any terms it deems appropriate; or (iii) refuse to lease the Designated Space, specifying that such refusal is based upon said Economic Terms, in which event Tenant shall also specify revised Economic Terms upon which Tenant shall be willing to lease the Designated Space. In the event that Tenant does not so respond in writing to Landlord’s notice within said period, Tenant shall be deemed to have elected clause (ii) above. In the event Tenant gives Landlord notice pursuant to clause (iii) above, Landlord may elect to either (x) lease the Designated Space to Tenant upon such

 

2


   

revised Economic Terms and the same other non-Economic Terms as set forth in this Lease, or (y) lease the Designated Space to any third party upon Economic Terms which are not materially more favorable to such party than those Economic Terms proposed by Tenant. Should Landlord so elect to lease the Designated Space to Tenant (or if Tenant exercises its right under Section VIII.D(i) above), then Landlord shall promptly prepare and deliver to Tenant an amendment to this Lease consistent with the foregoing, and Tenant shall execute and return same to Landlord within 10 days. If either Tenant or Landlord fails to timely deliver such amendment the other party may specifically enforce their respective rights hereunder, and/or to pursue any other available legal remedy. Notwithstanding the foregoing, it is understood that Tenant’s First Right shall be subject to those certain extension or expansion rights previously granted by Landlord to any third party tenant in the Building, and Landlord shall in no event be obligated to initiate this First Right prior to leasing any portion of the First Right Space to the then-current occupant thereof. Tenant’s rights under this Section shall be personal to the original Tenant named in this Lease and may not be assigned or transferred (except in connection with a Permitted Transfer of this Lease as described in Section 9.4 of the Lease). Any other attempted assignment or transfer shall be void and of no force or effect. Tenant’s election not to lease any Designated Space relating to one First Right Space shall not waive, limit, alter, or impair Tenant’s First Right with respect to the other First Right Space.

 

  E.

Deleted Provision. Section VIII.A of the First Amendment (Restoration of Expansion Space) shall be deleted in its entirety and of no further force and effect.

 

IX.

GENERAL.

 

  A.

Effect of Amendments. The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment.

 

  B.

Entire Agreement. This Amendment embodies the entire understanding between Landlord and Tenant and can be changed only by a writing signed by Landlord and Tenant. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement, improvement allowance, leasehold improvements, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment.

 

  C.

Counterparts. If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation.

 

  D.

Defined Terms. All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment.

 

  E.

Authority. If Tenant is a corporation, limited liability company or partnership, or is comprised of any of them, each individual executing this Amendment for the corporation, limited liability company or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of such entity and that this Amendment is binding upon such entity in accordance with its terms.

 

  F.

Attorneys’ Fees. The provisions of the Lease respecting payment of attorneys’ fees shall also apply to this Amendment.

 

  G.

Execution of Amendment. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.

 

  H.

Nondisclosure of Terms. Tenant hereby acknowledges that the provisions of Section 22.1 of the Lease (Nondisclosure of Lease Terms) are hereby restated in full force and effect relative to the terms and conditions of this Amendment and any other subsequent amendment, agreement, or other modification of the Lease (as well as the Lease itself).

(SIGNATURES TO FOLLOW ON NEXT PAGE)

 

3


IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

 

LANDLORD:     TENANT:
THE IRVINE COMPANY LLC,     PROMETHEUS LABORATORIES, INC.,
a Delaware limited liability company     a California corporation

By:

 

/s/ Douglas G. Holte

    By:  

/s/ JOSEPH M. LIMBER

  Douglas G. Holte     Printed Name:   JOSEPH M. LIMBER
  President     Title:   PRESIDENT & CEO
  Office Properties      

By:

 

/s/ Jeanne M. Lazar

    By:  

/s/ William Franzblau

  Jeanne M. Lazar     Printed Name:   William Franzblau
  Senior Vice President, Finance     Title:   Secretary
  Office Properties      

 

4


EXHIBIT A

WORK LETTER

 

I.

TENANT IMPROVEMENTS

The tenant improvement work (“Tenant Improvements”) shall consist of any work required to complete the Premises pursuant to approved plans and specifications. Tenant shall employ its own architect and general contractor in constructing the Tenant Improvements, subject to Landlord’s reasonable prior approval. Notwithstanding the foregoing, if the Tenant Improvement work requires a permit from the City of San Diego, then the general contractor shall be selected and engaged by Tenant on the basis of a competitive bid involving 3 pre-selected general contractors reasonably approved by Landlord and Tenant. The Tenant Improvement work shall be completed by the general contractor with the lowest bid. The work shall be undertaken and prosecuted in accordance with the following requirements (provided that, to the extent Tenant elects to perform Tenant Improvements without applying the Landlord Contribution (defined below) to the payment of such Tenant Improvements, then (except with respect to Tenant’s right to apply the Landlord Contribution towards the Basic Rent Credit as set forth below) this Work Letter shall not apply, and Section 7.3 of the Lease shall be solely applicable to such Tenant Improvements, which shall constitute Alterations for all purposes thereunder):

 

  A.

Concurrently with approval being granted by Tenant, the space plans, construction drawings and specifications for all improvements and finishes, together with any changes thereto for the Tenant Improvements, shall be submitted to Landlord (with samples as required) for review and approval by Landlord and its architect for the Project (as described in Article I of the Lease). In lieu of disapproving an item, Landlord may approve same on the condition that Tenant pay to Landlord, prior to the start of construction and in addition to all sums otherwise due hereunder, an amount equal to the cost, as reasonably estimated by Landlord, of removing and replacing the item upon the expiration or termination of the Lease. Should Landlord approve work that would necessitate any ancillary Building modification or other expenditure by Landlord, then except to the extent of any remaining balance of the “Landlord Contribution”, Tenant shall, in addition to its other obligations herein, promptly fund the cost thereof to Landlord.

 

  B.

All construction drawings prepared by Tenant’s architect shall follow Landlord’s CAD standards, which standards shall be provided to Tenant or its architect upon request.

 

  C.

Landlord shall, subject to the foregoing, approve or disapprove any submittal of plans or specifications by Tenant within 5 business days following receipt thereof by Landlord.

 

  D.

Tenant shall use the electrical, mechanical, plumbing and fire/life safety engineers and subcontractors designated by Landlord. All other subcontractors shall be subject to Landlord’s reasonable approval.

 

  E.

Tenant shall deliver to Landlord a copy of the final application for permit and issued permit for the construction work, if any.

 

  F.

Tenant’s general contractor and each of its subcontractors shall comply with Landlord’s requirements as generally imposed on third party contractors, including without limitation all insurance coverage requirements and the obligation to furnish appropriate certificates of insurance to Landlord prior to commencement of construction.

 

  G.

A construction schedule shall be provided to Landlord prior to commencement of the construction work, and weekly updates shall be supplied during the progress of the work.

 

  H.

Tenant shall give Landlord 10 days prior written notice of the commencement of construction so that Landlord may cause an appropriate notice of non-responsibility to be posted.

 

  I.

Tenant and its general contractor shall attend weekly job meetings with Landlord’s construction manager for the Project.

 

  J.

Upon substantial completion of the work, Tenant shall cause to be provided to Landlord (i) as-built drawings of the Premises signed by Tenant’s architect, (ii) CAD files of the improved space compatible with Landlord’s CAD standards, (iii) a final punchlist signed by Tenant, (iv) final and unconditional lien waivers from all contractors and subcontractors, (v) a duly recorded Notice of Completion of the improvement work, and (vi) a certificate of occupancy for the Premises (collectively, the “Close-out Package”). Should Tenant fail to provide complete CAD files compatible with Landlord’s standards as required herein, Landlord may cause its architect to prepare same and the cost thereof shall be reimbursed to Landlord by Tenant within ten (10) days of invoice therefor.

 

1


  K.

The work shall be prosecuted at all times in accordance with all state, federal and local laws, regulations and ordinances, including without limitation all OSHA and other safety laws.

 

  L.

All of the provisions of the Lease shall apply to any activity of Tenant, its agents and contractors, in the Premises prior to the Extension Date, except for the obligation of Tenant to pay rent.

 

  M.

Notwithstanding anything herein to the contrary, Jones Lang Lasalle is hereby approved by Landlord to act as Tenant’s construction manager with respect to the Tenant Improvements.

Landlord shall not be liable in any way for any injury, loss or damage which may occur to any work performed by Tenant, nor shall Landlord be responsible for repairing any defective condition therein. In no event shall Tenant’s failure to complete the Tenant Improvements extend the Commencement Date of the Lease.

 

II.

COST OF THE WORK

 

  A.

On the Extension Date, Landlord shall provide to Tenant a tenant improvement allowance in the amount of $550,205.00 (the Landlord Contribution), with any excess cost to be borne solely by Tenant. The Landlord Contribution shall also be utilized to fund space planning and other architectural costs (including the reasonable cost charged by Landlord’s architect to review Tenant’s drawings and CAD files), construction costs, plan check and permit fees, and fees to Tenant’s construction manager. It is understood that Landlord shall be entitled to a supervision/administrative fee equal to 5% of such costs, which fee shall be paid from the Landlord Contribution; provided, however, if Landlord reasonably determines a permit from the City of San Diego is not required for the Tenant Improvement work, Tenant shall not be liable for such supervision/administrative fee. Notwithstanding the foregoing, Tenant may utilize the Landlord Contribution toward (i) the out-of-pocket expenses incurred by Tenant for furniture, fixtures and equipment (“FF&E Allowance”), or (ii) the next then due Basic Rent (“Basic Rent Credit”), and subsequent months (if applicable) until such amount is exhausted; provided Tenant delivers written notice to Landlord on or prior to March 31, 2013 of its election to apply such Landlord Contribution to the next then due Basic Rent. Should Tenant utilize the Landlord Contribution, or any portion thereof, for the FF&E Allowance, Tenant shall be reimbursed for such expenses by submitting copies of all supporting third-party invoices to Landlord by December 31, 2013. If Tenant elects to utilize any portion of the Landlord Contribution towards FF&E, Landlord shall reimburse Tenant in one installment for the FF&E Allowance within 30 days following receipt of all such invoices. Tenant understands and agrees that any portion of the Landlord Contribution, including the FF&E Allowance and/or the Basic Rent Credit, not utilized by Tenant by December 31, 2013, shall inure to the benefit of Landlord and Tenant shall not be entitled to any credit or payment.

 

  B.

Landlord shall fund the Landlord Contribution (less deductions for the above-described supervision fee and charges of Landlord’s architect) in installments as and when costs are incurred and a payment request therefor is submitted by Tenant. Each payment request shall include a copy of all supporting invoices, conditional progress payment lien waivers (in the form prescribed by the California Civil Code) for labor and materials incorporated in such payment request, unconditional lien waivers (in the form prescribed by the California Civil Code) for labor and materials on the basis of which payment has previously been by Landlord, and pertinent back-up (including copies of Tenant’s payment checks to its contractors and suppliers). Landlord shall fund the payment request within 30 days following receipt of the application and supporting materials; provided that a 10% retention shall be held on payments to Tenant until Landlord receives the complete Close-out Package. The remaining balance of the Landlord Contribution shall be funded when Landlord receives the complete Close-out Package. Prior to any payment by Landlord hereunder, Tenant shall provide to Landlord in writing the address to which such payment is to be delivered, together with a complete copy of the construction contract(s) for the Tenant Improvements.

 

2


THIRD AMENDMENT

THIS THIRD AMENDMENT (the “Amendment”) is made and entered into as of January 19th 2012, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company (“Landlord”), and PROMETHEUS LABORATORIES INC., a California corporation (“Tenant”).

RECITALS

 

A.

Landlord (formerly known as The Irvine Company, a Delaware corporation) and Tenant are parties to that certain lease dated June 22, 2005 (“Original Lease”), which lease has been previously amended by a First Amendment dated January 25, 2010 (“First Amendment”) and a Second Amendment dated October 5, 2011 (“Second Amendment”), (the Original Lease, as amended by the First Amendment and Second Amendment, is hereinafter referred to as the Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 110,041 rentable square feet (the “Original Premises”) described as the 1st floor and the mezzanine level of the building located at 9410 Carroll Park Drive, San Diego, California (the “9410 Building”).

 

B.

Tenant has requested that additional space containing approximately 41,782 rentable square feet of space, described as the entire building located at 9449 Carroll Park Drive, San Diego, California, (the “9449 Building”) as shown on Exhibit A hereto (the “9449 Expansion Space”), be added to the Original Premises. A portion of the 9449 Expansion Space shall be used by Tenant to conduct its business operations (such portion, “9449 Office Space”), and the balance of the 9449 Expansion Space shall be used as storage space only (such portion, the “9449 Storage Space”).

 

C.

The Lease by its terms is scheduled to expire on December 31, 2017 (Original Premises Expiration Date) with respect to the Original Premises, and the parties desire to extend the Term of the Lease as to the 9449 Expansion Space only.

 

D.

Landlord and Tenant have agreed to amend the Lease to reflect the foregoing and other modifications to the Lease, subject and pursuant to the following terms and conditions.

NOW, THEREFORE, in consideration of the above recitals which by this reference are incorporated herein, the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

 

I.

9449 Expansion Effective Date.

 

  A.

Effective as of June 1, 2012, subject to adjustment as set forth below (the “9449 Expansion Effective Date) Landlord shall deliver sole and exclusive possession of the 9449 Expansion Space to Tenant, and upon such delivery: (i) the Original Premises, as defined in the Lease, is increased from 110,041 rentable square feet to 151,823 rentable square feet; and (ii) except as otherwise expressly set forth in this Amendment, the Original Premises and the 9449 Expansion Space, collectively, shall be deemed the “Premises” and the 9410 Building and the 9449 Building, collectively shall be deemed the “Building” (each as defined in and for all purposes under the Lease and this Amendment). With respect to the 9449 Expansion Space only, the Term shall commence on the 9449 Expansion Effective Date and end on the 9449 Expansion Expiration Date (hereinafter defined). During the Term as it so applies, the 9449 Expansion Space is subject to all the terms and conditions of the Lease (as modified hereby) except as expressly stated to the contrary herein and except that any allowances, abatements or other financial concessions granted with respect to the Original Premises shall not apply to the 9449 Expansion Space; provided that the foregoing shall not limit any such concessions which are expressly provided for herein with respect to the 9449 Expansion Space or expressly provided for in the Lease with respect to the Original Premises. For avoidance of doubt, the generality of the immediately previous sentence shall not be limited as a result of any provision of this Amendment which expressly confirms that certain provisions of the Lease shall be applicable to the 9449 Expansion Space.

 

  B.

The 9449 Expansion Effective Date shall be delayed to the extent that Landlord fails to deliver possession of the 9449 Expansion Space for any reason, including but not limited to, holding over by prior occupants. Any such delay in the 9449 Expansion Effective Date shall not subject Landlord to any liability for any loss or damage resulting therefrom.

 

II.

Extension. The Term of the Lease, as it applies to the 9449 Expansion Space only, is hereby extended and shall expire on May 31, 2020 (“9449 Extended Expiration Date), unless sooner terminated in accordance with the terms of the Lease or extended pursuant to the terms of this Amendment. That portion of the Term commencing the day immediately following the Original Premises Expiration Date (as such date may be extended pursuant to Section VII.D below) and ending on the 9449 Extended Expiration Date shall be referred to herein as the “9449 Extended Term”. During the 9449 Extended Term, the Original Premises shall no longer be deemed to be a part of the “Premises” and the 9410 Building shall no longer be deemed to be a part of the “Building” (each as used in the Lease or this Amendment), and Tenant shall have no further obligations under the Lease or this Amendment with respect to the Original Premises unless specifically set forth therein.

 

1


Notwithstanding the foregoing, at all times during the Term, for purposes of Articles XI and XII of the Lease only, the term “Premises” shall be deemed not to be a collective reference to both of the Original Premises and the 9449 Expansion Space, and the term “Building” shall be deemed not to be a collective reference to each of the 9410 Building and the 9449 Building; for avoidance of doubt, in the event any damage, destruction, or taking occurs with respect to any of the 9410 Building or the 9449 Building (or any respective portions thereof, including any portion of the Premises located therein), the provisions of Article XI and/or Article XII, as applicable, shall apply solely to the applicable “Building” or portion of the Premises within such Building.

 

III.

Basic Rent for 9449 Expansion Space From and After the 9449 Expansion Effective Date. From and after the 9449 Expansion Effective Date, Tenant shall pay Basic Rent with respect to the 9449 Expansion Space pursuant to the following “Basic Rent Schedules”:

With respect to the 9449 Office Space only:

 

Months of Term or Period

   Monthly Rate
Per Rentable
Square Foot
   Minimum Monthly Basic Rent*
*(assuming 24,000 rsf, and subject
to adjustment as described in
this Amendment)

9449 Expansion Effective Date — 5/31/13

   $0.80    $19,200.00

6/1/13-5/31/14

   $0.84    $20,160.00

6/1/14-5/31/15

   $0.87    $20,880.00

6/1/15-5/31/16

   $0.91    $21,840.00

6/1/16-5/31/17

   $0.95    $22,800.00

6/1/17-5/31/18

   $1.00    $24,000.00

6/1/18-5/31/19

   $1.04    $24,960.00

6/1/19-5/31/20

   $1.09    $26,160.00

With respect to the 9449 Storage Space only:

 

Months of Term or Period

   Monthly Rate
Per Rentable
Square Foot
   Maximum Monthly Basic Rent*
*(assuming 17,782 rsf, and subject
to adjustment as described in
this Amendment)

9449 Expansion Effective Date — 5/31/13

   $0.40    $7,113.00

6/1/13-5/31/14

   $0.42    $7,468.00

6/1/14-5/31/15

   $0.44    $7,824.00

6/1/15-5/31/16

   $0.46    $8,180.00

6/1/16-5/31/17

   $0.48    $8,535.00

6/1/17-5/31/18

   $0.50    $8,891.00

6/1/18-5/31/19

   $0.52    $9,247.00

6/1/19-5/31/20

   $0.54    $9,602.00

All such Basic Rent shall be otherwise payable by Tenant in accordance with the terms of the Lease. Notwithstanding anything to the contrary in this Amendment, other than as it may be abated in accordance with this Amendment, Basic Rent for the 9449 Office Space shall not be less than the “Minimum Monthly Basic Rent” set forth in the 9449 Office Space Basic Rent Schedule above, and Basic Rent for the 9449 Storage Space shall not be more than the “Maximum Monthly Basic Rent” set forth in the 9449 Storage Space Basic Rent Schedule above, regardless of whether Tenant elects to configure the 9449 Expansion Space with less than 24,000 rentable square feet of 9449 Office Space or more than 17,782 rentable square feet of 9449 Storage Space. In the event Tenant elects to utilize more than 24,000 rentable square feet of the Premises as office space, the Minimum Monthly Basic Rent shall increase accordingly.

 

2


Notwithstanding the above Basic Rent Schedules, as long as there has been no Event of Default by Tenant of the Lease, for the 2nd through 9th full calendar months of the Term immediately following the 9449 Expansion Effective Date (the Abatement Period), Tenant shall be entitled to an abatement of 8 full calendar months of Basic Rent with respect to the entire 9449 Expansion Space, as calculated pursuant to the foregoing schedules (the “Abated Basic Rent”). If an Event of Default by Tenant occurs under the Lease at any time during the Abatement Period, Tenant shall not be entitled to receive any further Abated Basic Rent. For avoidance of doubt, only Basic Rent shall be abated during the Abatement Period and all other additional rent and other costs and charges specified in this Lease shall remain as due and payable pursuant to the provisions of this Lease.

 

IV.

Building Costs and Property Taxes. 9449 Expansion Space From Expansion Effective Date Through 9449 Extended Expiration Date. Tenant shall be obligated to pay Tenant’s Share of Project Costs and Property Taxes accruing in connection with the 9449 Expansion Space in accordance with the terms of the Lease through the 9449 Extended Expiration Date. With respect to the 9449 Expansion Space, Tenant’s Share for the Project is 39.12%.

 

V.

Additional Security Deposit. No security deposit shall be required in connection with this Amendment.

 

VI.

Improvements to 9449 Expansion Space.

 

  A.

Condition of 9449 Expansion Space. Tenant has inspected the 9449 Expansion Space and agrees to accept the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment.

 

  B.

Any construction, alterations or improvements to the 9449 Expansion Space shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and reasonably approved by Landlord and shall be governed in all other respects by the provisions of Section 7.3 of the Lease, except that Tenant shall not be required to remove or replace any such construction, alterations, or improvements unless same: (i) are Non-Standard Improvements; or (ii) are a skylight, vertical shaft, or an addition to the 9449 Building, and at the time Landlord grants its approval for same, Landlord notifies Tenant that it shall be required to remove same on the 9449 Extended Expiration Date.

 

  C.

Landlord warrants to Tenant that the windows and seals, roof and heat pumps serving the 9449 Expansion Space (collectively, the “9449 Systems”) are in good working order as of the 9449 Expansion Effective Date. Provided that, if Tenant shall notify Landlord within 12 months following the 9449 Expansion Effective Date that any of the 9449 Systems are not in good working order and such condition is not caused by the negligence or willful misconduct of Tenant Parties, then such 9449 Systems shall be either replaced or repaired by Landlord such that they are in good operating condition (except that Tenant shall have 24 months following the 9449 Expansion Effective Date to notify Landlord of any such issues related to heat pumps). Any such compliance work required for the above, whether discovered prior to acceptance of the 9449 Expansion Space or during Tenant’s tenant improvement work, may be performed by Landlord concurrently with Tenant’s tenant improvement work (but shall not unreasonably interfere therewith) and such costs shall be at Landlord’s sole expense and shall not be included within Operating Expenses. In addition, Landlord warrants to Tenant that the fire sprinkler system, lighting, heating, ventilation and air conditioning systems and electrical systems serving the 9449 Expansion Space (“Other 9449 Systems”) shall be in good operating condition as of the day the 9449 Expansion Space are delivered to Tenant, and Tenant shall have thirty (30) days following the 9449 Expansion Effective Date to notify Landlord that any of the 9449 Systems are not in good working order; and provided that such condition is not caused by the negligence or willful misconduct of Tenant Parties, Landlord shall promptly repair or replace any such Other 9449 Systems at its sole cost and expense which shall not be included within Operating Expenses (and otherwise subject to the same conditions as set forth above for compliance work related to the 9449 Systems).

 

VII.

Other Pertinent Provisions. Landlord and Tenant agree that, effective as of the date of this Amendment (unless different effective dates are specifically referenced in this Section), the Lease shall be amended in the following additional respects:

 

  A.

Parking. Notwithstanding any contrary provision in Section 6.4 (Parking) of the Lease, (i) effective as of the 9449 Expansion Effective Date, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, an additional one hundred-sixty (160) unreserved parking spaces at the 9449 Building, at no additional cost to Tenant through the 9449 Extended Expiration Date.

 

  B.

SDN List. Tenant hereby represents and warrants that neither Tenant nor any officer, director, employee, partner, member or other principal of Tenant (collectively, Tenant Parties) is listed as a Specially Designated National and Blocked Person (SDN) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control. In the event Tenant or any Tenant Party is or becomes listed as an SDN, Tenant shall be deemed in breach of this Lease and Landlord shall have the right to terminate the Lease immediately upon written notice to Tenant.

 

3


  C.

Uses. Tenant acknowledges and agrees that notwithstanding the terms and conditions of Article I (Basic Lease Provisions)—Item 3 (Use of Premises) and the provisions of Article V (Uses), Tenant shall use only the 9449 Office Space for general office, manufacturing, laboratory, and warehouse purposes consistent with the Permitted Use set forth in Item 3 of the Basic Lease Provisions. Tenant’s architect, at Tenant’s sole cost and expense, shall promptly undertake a comprehensive evaluation of the Tenant’s initial intended use, (which shall be completed no later than December 31, 2011) which shall include, but shall not be limited to, addressing such issues as exiting requirements mandated by the City of San Diego and other code requirements, in determining the exact allocation of the 9449 Expansion Space between the 9449 Office Space and the 9449 Storage Space. The final space measurements of the initial configuration of the 9449 Office Space and 9449 Storage Space shall be reasonably determined by Landlord’s architect. Landlord’s determination of the rentable square footage of the 9449 Expansion Space allocation and applicable Basic Rent shall be conclusive. Landlord and Tenant shall promptly thereafter execute and deliver to each other a confirmation letter or amendment confirming such measurements and the Basic Rent initially due and payable with respect to the 9449 Office Space and the 9449 Storage Space in accordance with Section III.A above.

At any time and from time to time during the Term as it applies to the 9449 Expansion Space, Tenant, upon no less than thirty (30) days prior written notice to Landlord, may expand the portion of the 9449 Expansion Space allocated to the 9449 Storage Space; provided that Landlord shall first review and approve any proposed tenant improvements which may be required for any such reconfiguration (which review and approval shall not be unreasonably withheld, conditioned, or delayed), and which shall be otherwise subject to the terms and conditions of the Lease and completed within one hundred-fifty (150) days following Tenant’s receipt of Landlord’s approval thereto. Promptly following such completion, the final space measurements of the configuration of the 9449 Office Space and 9449 Storage Space shall be re-measured and confirmed in the same manner as the 9449 Expansion Space and 9449 Storage Space, together with a reallocation of Basic Rent due for the 9449 Expansion Space, pursuant to the foregoing paragraph.

Tenant may not convert any 9449 Office Space to 9449 Storage Space.

 

  D.

Right To Extend—9449 Expansion Space. Tenant shall have a one-time right to extend the 9449 Extended Term to December 31, 2022 (i.e. co-terminus with the Original Premises), pursuant and subject to the terms and conditions of Section 3.3 of the Lease (Right to Extend the Lease), as amended, except that (i) such right shall be exercised, if at all, not less than nine (9) and not more than twelve (12) months prior to the 9449 Extended Expiration Date and (ii) the rental rate during the extended term shall be based on the fair market value for similar age and design “R&D” buildings in the immediate surrounding area, excluding the tenant improvements [in the 9449 Expansion Space or 9449 Building] that Tenant has incurred the cost of installing. Upon such extension, as used herein, the “9449 Extended Expiration Date” shall mean the 9449 Extended Expiration Date as extended.

 

  E.

Emergency Generator.

1) During the Term as it applies to the 9449 Expansion Space, as extended from time to time, Tenant shall have the right to install a supplemental emergency generator (the “Generator”) to provide emergency additional electrical capacity to the 9449 Building. The Generator shall be placed at a location at the 9449 Building designated by Tenant and reasonably approved by Landlord. Notwithstanding the foregoing, Tenant’s right to install the Generator shall be subject to: (i) Landlord’s reasonable approval of the manner in which the Generator is installed, the manner in which any cables are run to and from the Generator to the Premises and the measures that will be taken to eliminate any vibrations or sound disturbances from the operation of the Generator; and (ii) the covenants, conditions and restrictions of record applicable to the Project, architectural review and any necessary approval by the local municipality and county governments or agencies having authority and jurisdiction over such matters. Landlord shall have the right to require Tenant to provide a reasonably acceptable enclosure (e.g. wood fencing and landscaping) to hide or disguise the existence of the Generator and to minimize any adverse effect that the installation of the Generator may have on the appearance of the 9449 Building and Project. Tenant shall be solely responsible for obtaining all necessary governmental and regulatory permits and approvals and for the cost of installing, operating, maintaining, repairing and removing the Generator. Tenant shall also be responsible for the cost of all utilities consumed and utility connections required in the operation of the Generator.

2) Tenant shall be responsible for assuring that the installation, maintenance, repair, operation and removal of the Generator does not damage the 9449 Building or Project and Tenant shall be responsible for any damages caused thereby. For avoidance of doubt, the installation, maintenance, operation, repair or removal of the Generator shall be subject to the indemnity provisions set forth in Section 10.3 of the Lease.

 

4


3) Tenant shall be responsible for the installation, operation, repair, cleanliness, maintenance and removal of the Generator and appurtenances, all of which shall remain the personal property of Tenant and shall be removed by Tenant at its own expense as of the 9449 Extended Expiration Date or any earlier expiration or termination of Tenant’s right to possession of the 9449 Expansion Space in accordance with the Lease and this Amendment. Tenant shall repair any damage caused by such removal, including the patching of any holes to match, as closely as possible, the color surrounding the area where the Generator and appurtenances were attached. Such maintenance and operation shall be performed in a manner to avoid any unreasonable interference with any other tenants or Landlord. Tenant agrees to maintain the Generator, including without limitation, any enclosure installed around the Generator, in good condition and repair. Tenant shall be responsible for performing any maintenance and improvements to any enclosure surrounding the Generator so as to keep such enclosure in good condition.

4) Tenant, subject to the reasonable rules and regulations enacted by Landlord, shall have unlimited access to the Generator and its surrounding area for the purpose of installing, operating, repairing, maintaining, using and removing the Generator.

5) Tenant shall only test the Generator before or after normal business hours.

6) Notwithstanding anything in this Amendment or the Lease to the contrary, Tenant may use the Generator for its intended purpose as and when needed (as reasonably determined by Tenant), without any restriction or hindrance from Landlord or any other tenant, subject only to applicable Laws and unreasonable disturbances to other tenants in the Project.

 

  F.

Signs. The terms and conditions of Section 5.2 of the Lease (“Signs”) shall be applicable to Tenant’s leasing of the 9449 Building and its rights to place any monument, building top and entry door signage in, on or around the 9449 Building during the 9449 Extended Term; such rights, shall be exclusive to Tenant with respect to the top of the 9449 Building and at no additional cost to Tenant; provided, however, that in the case of any sublease or assignment by Tenant (other than a Permitted Transfer), Landlord shall have the right to reasonably approve any signage to be placed on the top of the 9449 Building by any applicable subtenant or assignee.

 

  G.

Hazardous Materials. The terms and conditions of Section 5.3 of the Lease (“Hazardous Materials”) shall be applicable to Tenant’s leasing of the 9449 Building during the 9449 Extended Term, and in addition to its other obligations under Sections 5.3(f) and 10.3(b), Landlord shall indemnify the Tenant Parties for any losses, damages, judgments, fines, demands, claims, recoveries, and costs sustained or incurred by such Tenant Parties, arising directly or indirectly as a result of any Hazardous Materials conditions described in Section 5.3(f) (and such indemnification obligations shall survive as a part of Section 10.3(b) of the Lease).

 

  H.

Rooftop Rights. The terms and conditions of Section 7.6 of the Lease (“Communications Equipment”) shall be applicable to Tenant’s leasing of the 9449 Building during the 9449 Extended Term; except that, such License shall be exclusive to Tenant and applicable to the entire rooftop of the 9449 Building; and provided, however, in the case of any sublease or assignment by Tenant (other than a Permitted Transfer), Landlord shall have the right to reasonably approve any Antenna or other equipment to be placed on the top of the 9449 Building by any applicable subtenant or assignee.

 

  I.

Insurance. Tenant shall be permitted to provide the insurance required under the Lease by obtaining a blanket policy or policies to be maintained by Tenant and/or Nestle S.A. (“Tenant’s Parent Company”). The coverages afforded to Landlord and Landlord’s lenders under this Lease shall in no way be limited, diminished, or reduced under such blanket policy or policies. All or any portion of the coverages Tenant is required to maintain under the Lease may be maintained under policies that include deductibles larger than those otherwise required pursuant to the Lease, including, without limitation, as set forth on Exhibit D thereof, as long as the net worth and net current assets of Tenant’s Parent Company each exceed $75,000,000.00. Further, for so long as such insurance is maintained by a blanket policy or policies as described in this Section, the last sentence of paragraph 4 of Exhibit D of the Lease shall not be applicable or binding upon Tenant.

 

5


VIII.

GENERAL.

 

  A.

Effect of Amendments. The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment. If there is any conflict between the terms and conditions of the Lease and this Amendment, this Amendment shall govern and control.

 

  B.

Entire Agreement. The Lease, as amended by this Amendment embodies the entire understanding between Landlord and Tenant and can be changed only by a writing signed by Landlord and Tenant.

 

  C.

Counterparts. If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same Amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation.

 

  D.

Defined Terms. All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment.

 

  E.

Authority. If Tenant is a corporation, limited liability company or partnership, or is comprised of any of them, each individual executing this Amendment for the corporation, limited liability company or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of such entity and that this Amendment is binding upon such entity in accordance with its terms.

 

  F.

Attorneys’ Fees. The provisions of the Lease respecting payment of attorneys’ fees shall also apply to this Amendment.

 

  G.

Execution of Amendment. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

 

LANDLORD:     TENANT:
THE IRVINE COMPANY LLC,     PROMETHEUS LABORATORIES INC.,
a Delaware limited liability company     a California corporation
By:  

/s/ Steven M. Case

    By:  

/s/ Joseph M. Limber

  Steven M. Case     Printed Name:   Joseph M. Limber
  Executive President     Title:   President, CEO
  Office Properties      
By:  

/s/ Michael T. Bennett

    By:  

/s/ Peter Westlake

  Michael T. Bennett     Printed Name:   Peter Westlake
  Senior Vice President, Operations     Title:   CFO
  Office Properties      

 

6


LOGO


FOURTH AMENDMENT

THIS FOURTH AMENDMENT (the “Amendment”) is made and entered into as of May 9, 2016, by and between THE IRVINE COMPANY LLC, a Delaware limited liability company (“Landlord”), and PROMETHEUS LABORATORIES INC., a California corporation (“Tenant”).

RECITALS

 

A.

Landlord (formerly known as The Irvine Company, a Delaware corporation) and Tenant are parties to that certain lease dated June 22, 2005 which lease has been previously amended by a First Amendment dated January 25, 2010, a Second Amendment dated October 5, 2011 (“Second Amendment”) and a Third Amendment dated January 19, 2012 (collectively, the “Lease”). Pursuant to the Lease, Landlord has leased to Tenant space currently containing approximately 151,823 rentable square feet (the “Premises”) described as the 1st floor and the mezzanine level of the building located at 9410 Carroll Park Drive, San Diego, California (the “9410 Building”) comprising approximately 110,041 rentable square feet and the entire building located at 9449 Carroll Park Drive, San Diego, California (the “9449 Building”) comprising approximately 41,782 rentable square feet.

 

B.

The Lease by its terms is scheduled to expire on December 31, 2017 (the “Second 9410 Expiration Date”) with respect to the 9410 Building only and the parties desire to extend the Term of the Lease as to the 9410 Building only.

 

C.

Landlord and Tenant have agreed to amend the Lease to reflect the foregoing and other modifications to the Lease, subject to and pursuant to the following terms and conditions.

NOW, THEREFORE, in consideration of the above recitals which by this reference are incorporated herein, the mutual covenants and conditions contained herein and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

 

I.

Extension. The Term of the Lease, as it applies to the 9410 Building only, is hereby extended and shall expire on December 31, 2022 (“Second 9410 Extended Expiration Date”), unless sooner terminated in accordance with the terms of the Lease. That portion of the Term commencing the day immediately following the Second 9410 Expiration Date (“Second 9410 Extension Date”) and ending on the Second 9410 Extended Expiration Date shall be referred to herein as the “Second 9410 Extended Term”.

 

II.

Basic Rent for the 9410 Building. As of the Second 9410 Extension Date, the schedule of Basic Rent payable with respect to the 9410 Building during the Second 9410 Extended Term is the following:

 

Months of Term or Period

   Monthly Rate Per
Square Foot
     Monthly Basic Rent  

1/1/18 to 12/31/18

   $ 1.40      $ 154,057.00  

1/1/19 to 12/31/19

   $ 1.46      $ 160,660.00  

1/1/20 to 12/31/20

   $ 1.53      $ 168,363.00  

1/1/21 to 12/31/21

   $ 1.60      $ 176,066.00  

1/1/22 to 12/31/22

   $ 1.67      $ 183,768.00  

All such Basic Rent shall be payable by Tenant in accordance with the terms of the Lease.

 

Ill.

Project Costs and Property Taxes for 9410 Building. During the Second 9410 Extended Term, Tenant shall be obligated to pay Tenant’s Share of Project Costs and Property Taxes accruing in connection with the 9410 Building in accordance with the terms of the Lease.

 

IV.

Additional Security Deposit. No additional security deposit shall be required in connection with this Amendment.

 

V.

Improvements to Premises.

 

  A.

Condition of 9410 Building. Tenant is in possession of the 9410 Building and accepts the same “as is” without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment.

 

  B.

Alterations. Any construction, alterations or improvements to the 9410 Building shall be performed by Tenant at its sole cost and expense using contractors selected by Tenant and approved by Landlord and shall be governed in all respects by the provisions of Section 7.3 of the Lease.

 

VI.

Parking. Notwithstanding any contrary provision in Section 6.4 (Parking) of the Lease, effective as of the Second 9410 Extension Date, Landlord shall lease to Tenant, and Tenant shall lease from Landlord, 278 unreserved parking passes at the 9410 Building at no cost to Tenant through the Second 9410 Extended Term.

 

1


VII.

SDN List. Tenant hereby represents and warrants that neither Tenant nor any officer, director, employee, partner, member or other principal of Tenant (collectively, “Tenant Parties”) is listed as a Specially Designated National and Blocked Person (“SDN”) on the list of such persons and entities issued by the U.S. Treasury Office of Foreign Assets Control (OFAC). In the event Tenant or any Tenant Party is or becomes listed as an SDN, Tenant shall be deemed in breach of this Lease and Landlord shall have the right to terminate the Lease immediately upon written notice to Tenant.

 

VIII.

Right to Extend. Tenant shall have an additional one time right to extend the Term of the Lease with respect to the 9410 Building for an additional sixty (60) month period beyond the Second 9410 Extended Expiration Date, pursuant to and subject to the terms and conditions of Section 3.3 (Right to Extend this Lease) of the Lease; except that such right shall be exercised, if at all, not less than nine (9) and not more than twelve (12) months prior to the Second 9410 Extended Expiration Date.

 

IX.

Deleted Provision. Section VIII(d) of the Second Amendment (Right of First Offer) shall be deleted in its entirety and of no further force or effect.

 

X.

GENERAL.

 

  A.

Effect of Amendments. The Lease shall remain in full force and effect except to the extent that it is modified by this Amendment.

 

  B.

Entire Agreement. This Amendment embodies the entire understanding between Landlord and Tenant and can be changed only by a writing signed by Landlord and Tenant. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any rent abatement, improvement allowance, leasehold improvements, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment.

 

  C.

Counterparts; Digital Signatures. If this Amendment is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one and the same amendment. In any action or proceeding, any photographic, photostatic, or other copy of this Amendment may be introduced into evidence without foundation. The parties agree to accept a digital image (including but not limited to an image in the form of a PDF, JPEG, GIF file, or other e-signature) of this Amendment, if applicable, reflecting the execution of one or both of the parties, as a true and correct original.

 

  D.

Defined Terms. All words commencing with initial capital letters in this Amendment and defined in the Lease shall have the same meaning in this Amendment as in the Lease, unless they are otherwise defined in this Amendment.

 

  E.

Authority. If Tenant is a corporation, limited liability company or partnership, or is comprised of any of them, each individual executing this Amendment for the corporation, limited liability company or partnership represents that he or she is duly authorized to execute and deliver this Amendment on behalf of such entity and that this Amendment is binding upon such entity in accordance with its terms.

 

  F.

Certified Access Specialist. As of the date of this Amendment, there has been no inspection of the Building and Project by a Certified Access Specialist as referenced in Section 1938 of the California Civil Code.

 

  G.

Attorneys’ Fees. The provisions of the Lease respecting payment of attorneys’ fees shall also apply to this Amendment.

 

  H.

Brokers. Article XVIII of the Lease is amended to provide that the parties recognize the following parties as the brokers who negotiated this Amendment, and agree that Landlord shall be responsible for payment of brokerage commissions to such brokers pursuant to its separate agreements with such brokers: Irvine Realty Company (“Landlord’s Broker”) is the agent of Landlord exclusively and Hughes Marino, Inc. (“Tenant’s Broker”) is the agent of Tenant exclusively. By the execution of this Amendment, each of Landlord and Tenant hereby acknowledge and confirm (a) receipt of a copy of a Disclosure Regarding Real Estate Agency Relationship conforming to the requirements of California Civil Code 2079.16, and (b) the agency relationships specified herein, which acknowledgement and confirmation is expressly made for the benefit of Tenant’s Broker. If there is no Tenant’s Broker so identified herein, then such acknowledgement and confirmation is expressly made for the benefit of Landlord’s Broker. By the execution of this Amendment, Landlord and Tenant are executing the confirmation of the agency relationships set forth herein. The warranty and indemnity provisions of Article XVIII of the Lease, as amended hereby, shall be binding and enforceable in connection with the negotiation of this Amendment.

 

2


  I.

Execution of Amendment. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant.

 

  J.

Nondisclosure of Terms. Tenant hereby acknowledges that the provisions of Section 22.1 of the Lease (Nondisclosure of Lease Terms) are hereby restated in full force and effect relative to the terms and conditions of this Amendment and any other subsequent amendment, agreement or other modification of the Lease (as well as the Lease itself).

IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written.

 

LANDLORD:

 

             

TENANT:

 

THE IRVINE COMPANY LLC,      PROMETHEUS LABORATORIES INC.,
a Delaware limited liability company      a California corporation
By  

/s/ Douglas G. Holte

              By:  

/s/ Cathy Kerzner

       Douglas G. Holte                                     Printed Name:  

Cathy Kerzner

       Division President,                      Title:  

President and CEO

       Office Properties       
By  

/s/ Steven M. Case

              By:  

/s/ Peter Westlake

       Steven M. Case,                                     Printed Name:  

Peter Westlake

       Executive Vice President,                      Title:  

CFO

       Office Properties       

 

3

EX-10.12 16 d14529dex1012.htm EX-10.12 EX-10.12

Exhibit 10.12

[***] Certain information in this document has been excluded pursuant to Regulation S-K,

Item 601(b)(10). Such excluded information is not material and would likely cause

competitive harm to the registrant if publicly disclosed.

EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is entered into as of this 1ST day of September, 2017 (“Effective Date”) by and between CEDARS-SINAI MEDICAL CENTER, a California nonprofit public benefit corporation (“CSMC”), with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, and PRECISION IBD, INC., a Delaware corporation (“Licensee”), with offices at 1496 Neptune Ave., Encinitas, California 92024.

R E C I T A L S

A. CSMC owns and/or is entitled to grant license rights with respect to certain Patent Rights (as defined below) and Technology (as defined below) invented, collected or otherwise developed in the conduct of inflammatory bowel disease research at CSMC, including through the operation of its Inflammatory Bowel Disease Drug Discovery and Development Unit.

B. CSMC desires to have the Patent Rights and the Technology developed, used and commercialized in the Field of Use (as defined below) by Licensee, and Licensee desires to obtain an exclusive, worldwide license to conduct research in the Field of Use, and to develop, manufacture, use and sell Products (as defined below) in the Field of Use, using the Patent Rights and Technology in accordance with the terms of this Agreement. Other than the rights expressly granted by CSMC hereunder within the Field of Use, Licensee acknowledges that CSMC shall retain all other rights with respect to the Patent Rights and the Technology.

C. CSMC and Licensee intend that the execution, delivery and performance of this Agreement by each party, and the consummation of the transactions contemplated hereunder, shall not at any time threaten CSMC’s tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and Section 23701d of the California Revenue and Taxation Code, or cause CSMC to be in default under any of CSMC’s issued and outstanding tax-exempt bonds.

Now, THEREFORE, in consideration of the mutual covenants and premises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.

DEFINITIONS

1.1 Affiliate” or “Affiliates” shall mean any corporation, person or entity which controls, is controlled by, or is under common control with, a party to this Agreement without regard to stock or other equity ownership. For purposes hereof, the terms “control” and “controls” mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a corporation, person or entity, whether through the ownership of voting securities, by contract or otherwise.

1.2 Commercially Reasonable Efforts” shall mean, with respect to the performance of development or commercialization activities with respect to a Product by Licensee, the carrying out of such activities using efforts and resources comparable to the efforts and resources a similarly


situated company in the research-based bio-pharmaceutical industry for compounds or products of similar commercial and scientific potential at a similar stage in development or product life, taking into account relevant factors, including without limitation the competitive landscape, the nature and extent of market exclusivity (including without limitation patent coverage and regulatory exclusivity), the likelihood, timing or existence of generic products, technical, legal, scientific, and medical factors, such Product’s safety and efficacy, its time and cost to develop, the likelihood of regulatory approval, its reasonably expected or actual labeling, its reasonably expected or actual profitability, the amounts of marketing and promotional expenditures with respect to the Product, its reasonably expected or actual pricing, reimbursement and formulary status, and the cost of any studies necessary or reasonably useful to obtain favorable pricing, reimbursement or formulary status for the Product. “Commercially Reasonable Efforts” may be determined with reference to specific markets or group of markets.

1.3 Confidential Information” shall mean any confidential or proprietary information furnished by one party (the “Disclosing Party”) to the other party (the “Receiving Party”) in connection with this Agreement, including, without limitation, all specifications, know-how, trade secrets, technical information, drawings, software, models, business information and patent applications pertaining to the Patent Rights and Technology, and as further provided in Section 10 hereof.

1.4 FDA” shall mean the United States Food and Drug Administration, or any successor agency thereof.

1.5 Field of Use” shall mean products and services for human use, including but not limited to the diagnosis, prognosis, prophylaxis and/or treatment of diseases and disorders in humans.

1.6 Funding Agencies” shall mean any public or private granting agencies which have provided funding to CSMC or to any of the Inventors for the development of any of the Patent Rights or Technology prior to the Effective Date.

1.7 Future Patent Rights” shall mean any patents and/or patent applications claiming Inventions invented after the Effective Date through any use of the Patent Rights and Technology licensed hereunder arising from work conducted or overseen by the Inventors in connection with their employment by CSMC, and any patents and/or patent applications (including provisional patent applications) in any other country corresponding to any of the foregoing, and all divisions, continuations, continuations-in-part, reissues, reexaminations, supplementary protection certificates and extensions thereof, whether domestic or foreign, and any patent that issues thereon; provided that only those patents and patent applications which are owned or controlled by CSMC shall be deemed to be “Future Patent Rights”. Notwithstanding anything to the contrary in the foregoing, “Future Patent Rights” shall not include any patent right included in the Patent Rights, including any patents and/or patent applications which claim or cover any Related Invention(s).

1.8 Invention” shall mean all unpatented, patentable and patented inventions, discoveries, designs, apparatuses, systems, machines, methods, processes, uses, devices, models, composition of matter, technical information, trade secrets, know-how, codes, programs or configurations of any kind which are in or can otherwise be applied to the Field of Use.

 

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1.9 Inventors” shall mean [***].

1.10 Milestones” shall mean any and all milestones set forth in Schedule B of this Agreement.

1.11 MIRIAD Biobank” shall mean CSMC’s Mucosal Immunology Repository for Inflammatory and Digestive Diseases, a specialized biobank for advancing research in inflammatory diseases, which includes a biorepository collection of samples obtained from research subjects, which samples it uses, among other things, in the research and development of diagnostic and therapeutic products for the treatment of inflammatory diseases, and in the development of a database of information, including without limitation information relating to target identification and validation, patient stratification, and prediction of clinical efficacy.

1.12 Net Sales” shall mean the gross amount actually received or invoiced (in accordance with Section 4.2(f)(i)) for all sales of Products to third parties (other than Sublicensees) by Licensee, its Affiliates, Sublicensees, and affiliates of Sublicensees less [***]. If a Product is sold or provided as part of a system, package, or combination product or service that involve one or more products or services not covered by the Patent Rights (each, a “Combination Product”), Net Sales shall be calculated by [***]. In the event that no market price is available for the Product included in such Combination Product when supplied or priced separately, [***].

1.13 Patent Rights” shall mean (a) the patents and/or patent applications which are described on Schedule A of this Agreement, (b) any patents and/or patent applications which claim or cover any Related Invention(s), and (c) all patents and/or patent applications (including provisional patent applications) in any other country corresponding to any of the foregoing, and all divisions, continuations, continuations-in-part, reissues, reexaminations, supplementary protection certificates and extensions thereof, whether domestic or foreign, all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing, and any patent that issues thereon.

1.14 Product” or “Products” shall mean any Diagnostic Product or Therapeutic Product.

Diagnostic Product” shall mean any product and/or service in the Field of Use that: (a) (i) except for the license granted hereunder, would infringe a Valid Claim, or (ii) is wholly or partially developed through any use of the Technology and (b) that is marketed, indicated, approved and/or used for diagnostic or prognostic purposes, including without limitation the screening of patients for potential responsiveness to a particular therapeutic, prophylactic or other clinical intervention.

Therapeutic Product” shall mean any product and/or service in the Field of Use that: (a) (i) except for the license granted hereunder, would infringe a Valid Claim, or (ii) is wholly or partially developed through any use of the Technology and (b) is marketed, indicated, approved and/or used for therapeutic, prophylactic or preventative purposes.

For the sake of clarity, in the event that Licensee develops a therapeutic product and related diagnostic product that is wholly or partially developed through any use of the Technology, such therapeutic product of Licensee shall be deemed a Therapeutic Product and such

 

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related diagnostic product of Licensee shall be deemed a separate and distinct Diagnostic Product; provided that “Therapeutic Product” shall not include any product or service for which the sole contribution of a Product to its development is use of a Diagnostic Product to select patients for research, development, clinical trials, and/or commercialization of a product.

If a Product meets the definition of both a Diagnostic Product and a Therapeutic Product under this Section 1.14, then the Product shall be deemed a Therapeutic Product.

1.15 Related Inventions” shall mean any and all Inventions which (i) result from the services performed under the following agreements: (a) the Consulting Agreement between Licensee and [***]; (b) the Consulting Agreement between Licensee and [***]; (c) the Consulting Agreement between Licensee and [***]; (d) the Master Collaborative Research Agreement between CSMC and Licensee, effective as of the Effective Date (the “MCRA”); and/or (e) the Master Research Services Agreement between CSMC and Licensee, effective as of the Effective Date (the “MRSA”), as each may be amended; (ii) would have been reasonably anticipated at the outset to be developed; (iii) are related to the Technology and/or patents and/or patent applications described on Schedule A of this Agreement; and (iv) with respect to which CSMC owns or otherwise controls intellectual property rights.

1.16 Technology” shall mean information and materials in the Field of Use that (a) are included in and relate to the MIRIAD Biobank, (b) result from CSMC’s analysis of the MIRIAD Biobank, including any associated proprietary algorithms, or (c) identify single nucleotide polymorphisms, serological markers or any combination thereof and/or targets obtained through such analysis, which information and materials are provided by CSMC to Licensee under this Agreement. “Technology” shall further include any additional information and materials developed by any of the Inventors in the conduct of their research in connection with CSMC’s Inflammatory Bowel Disease Drug Discovery and Development Unit or that is incorporated in any Related Invention, including, but not limited to, know-how, trade secrets, unpublished patent applications, clinical or research data, software, bioinformatics, unpatented technology, technical information, statistical information and analyses, biological materials, chemical reagents, preclinical and clinical information, which information and materials are provided by CSMC to Licensee under this Agreement or any of the Agreements described in Section 1.15(d) or 1.15(e). With the exception of the information and materials that are included in and relate to the MIRIAD Biobank, for purposes of the definition of “Product,” “Technology” shall not include any information or materials developed after the Effective Date that, at the time of disclosure to Licensee, has already been first disclosed or made available to a third party, including, for example, any commercially available assays. As between the parties, the Technology is all owned by CSMC, except as otherwise set forth in Section 2.7.

1.17 Territory” shall mean the entire world.

1.18 “Valid Claim” shall mean a claim of an issued patent included within the Patent Rights, which claim has not (a) lapsed, been canceled or become abandoned, (b) been declared invalid or unenforceable by a non-appealable decision or judgment of a court or other appropriate body or authority of competent jurisdiction, or (c) been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. The term Valid Claim shall also include the claims of a

 

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pending patent application within the Patent Rights for a period of [***] years from the actual filing date of that patent application.

 

2.

LICENSE

2.1 Grant of Exclusive Rights. Subject to the terms of this Agreement, CSMC hereby grants to Licensee, and Licensee hereby accepts from CSMC, the exclusive license, with the right to grant sublicenses (subject to the terms of Section 2.2 hereof), under the Patent Rights and to the Technology, during the Agreement Term (as provided in Section 6 hereof) to conduct research and development in the Field of Use and to make, have made, use, import, offer for sale, have offered for sale, sell and/or have sold Products in the Field of Use in the Territory. The foregoing grant of exclusivity is made expressly subject to the following:

(a) All applicable laws and regulations, including, without limitation, the requirements of federal law as pertains to the manufacture of products within the United States;

(b) All applicable rules of the Funding Agencies;

(c) The rights of any co-owners of any Patent Rights and/or Technology, if any, which rights are set forth on Schedule A of this Agreement, as applicable;

(d) The following non-exclusive rights to the Patent Rights and Technology, which are retained by CSMC within the Field of Use:

(i) Subject to Licensee’s right to prior review to determine the patentability of any information contained therein (which shall expire after [***] days after Licensee’s receipt thereof), the right to submit for publication the scientific findings from research conducted by or through CSMC or its investigators (including the Inventors) related to the Patent Rights, provided such publications do not contain any Confidential Information of Licensee, in which case Licensee may require such Confidential Information to be removed prior to publication; and

(ii) the right (A) to exploit the Patent Rights, the Technology and any tangible or intangible information contained therein for CSMC’s research, internal teaching and other educationally-related, clinical and non-commercial clinical study purposes, where clinical use does not involve a third party funding grant to commercialize such information, and (B) to obtain research funding for further study and development thereof from governmental and other nonprofit organizations (including grant applications).

(e) Notwithstanding any other provision hereof to the contrary, all rights to the Patent Rights and Technology outside of the Field of Use are retained by CSMC.

2.2 Sublicensing.

(a) Permitted Sublicensing. Licensee shall have the right to grant sublicenses under any or all of the rights granted hereunder to its Affiliates and to (i) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (ii) private companies having at least $[***] in annual sales; or (iii) entities which have been approved in

 

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writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from Licensee within [***] days of receiving such request, such request shall be deemed approved (each, a “Sublicensee”). Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential sublicensee if such potential sublicensee has a level of science, management and investors commensurate with or greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it. In any business transaction that results, in whole or in part, with a third party selling any Product for which Licensee would owe CSMC Royalties pursuant to this Agreement if Licensee sold such Product, then Licensee shall grant a sublicense to such third party memorializing such grant of rights, any such third party shall be deemed to be a “Sublicensee” hereunder, and Royalties shall be due and payable by Licensee with respect to any and all sales of Products by such Sublicensee.

(b) Sublicensing Generally. Any Sublicensee shall be subject in all respects to the provisions contained in this Agreement and Licensee will remain primarily liable to CSMC for, and shall be responsible for monitoring and enforcing, performance of all of Licensee’s obligations hereunder by any such Sublicensee. Without limiting the generality of the foregoing, as an express condition of any such sublicense, any such Sublicensee shall be required to agree in writing to be bound by commercially reasonable reporting and record keeping, indemnification and inspection provisions, and the applicable provisions of this Agreement, including, without limitation, those pertaining to the payment of Royalties, use of CSMC’s name and marks, indemnification of CSMC and the use of CSMC’s Confidential Information. Sublicensees may further sublicense the rights granted hereunder to (a) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (b) private companies having at least $[***] in annual sales; and (c) entities which have been approved in writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from such Sublicensee within [***] days of receiving such request, such request shall be deemed approved. Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential subsublicensee if such potential subsublicensee has a level of science, management and investors commensurate with or greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it. Licensee shall promptly forward to CSMC a copy of any and all fully executed sublicense agreements and subsublicense agreements, any subsequent amendments, and all copies of Sublicensees’ profit sharing or royalty reports, in no event more than [***] days following execution or receipt thereof, as applicable. Licensee shall also keep CSMC reasonably informed with respect to the progress of any relations entered into with any Sublicensees. If Licensee shall conduct one or more audits of its Sublicensees hereunder during the term hereof, Licensee shall provide copies of any audit report indicating an underpayment or overpayment to CSMC on a timely basis. The covenants pertaining to the payment of Royalties, the use of CSMC’s name and marks, the indemnification of CSMC and the use of CSMC’s Confidential Information in any sublicense or assignment shall run for the benefit of CSMC, who shall be expressly stated as being a third-party beneficiary thereof with respect to the covenants set forth in this Agreement. Licensee understands and agrees that none of its permitted sublicenses hereunder shall reduce in any manner any of its obligations set forth in this Agreement.

 

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2.3 Subject (a) to the applicable rules of the Funding Agencies and (b) to the extent it would not impair or jeopardize any efforts of CSMC to obtain domestic or foreign rights thereto, CSMC shall promptly (but no later than [***] days after CSMC’s Technology Transfer Office receives an invention disclosure form with respect thereto) notify Licensee in writing and in adequate detail of any Inventions which constitute Future Patent Rights and associated Technology (the “Future Patent Right Notification”); provided that CSMC’s obligations with respect to Future Patent Rights set forth in this Section 2.3 shall be subject to any and all legal obligations of CSMC that exist as of the Effective Date. Such disclosures shall be deemed the Confidential Information of CSMC. Subject to the Funding Agency Rules, Licensee shall have, for a period of [***] days (the “Negotiation Period”) after receipt of the future Patent Right Notification, the exclusive first right to negotiate with CSMC to obtain one or more exclusive licenses in the Field of Use and the Territory to the Future Patent Rights and Technology set forth in such Future Patent Right Notification upon such terms and conditions as shall be agreed by the parties hereto, which terms and conditions shall include provisions for fair market value consideration for the grant of any such licenses. If Licensee declines or fails to pursue, or if the parties fail to execute an amendment to this Agreement to include such Future Patent Rights in the Field of Use during the [***] day period specified above, then CSMC shall have the right to commence discussions with any other party (the “Proposed Transaction”) concerning such Future Patent Rights and Technology, provided that such transaction shall (i) not conflict with any of Licensee’s rights and/or CSMC’s obligations under this Agreement and (ii) be on terms and conditions no more favorable to such third party than those last offered by CSMC to Licensee during the Negotiation Period. Subject to the provisions of this Section 2.3, Licensee acknowledges and agrees that CSMC expressly retains and reserves any and all right, title and interest in and to the Future Patent Rights, whether or not in the Field of Use and. accordingly, no license to any Future Patent Rights is granted to Licensee under this Agreement unless and until an amendment to this Agreement is executed with respect thereto by the parties, and upon such execution such Future Patent Rights shall be deemed Patent Rights.

2.4 Diligent Commercialization. Licensee acknowledges that it is important to CSMC, and a requirement of the United States Government under Title 35, Section 203 of the United States Code, that Licensee pursue the development, commercialization and marketing of Products. Without limiting the foregoing, Licensee shall use Commercially Reasonable Efforts to develop and make Products commercially available to the public as soon as commercially practicable within the Territory. As part of Licensee’s obligation to use such Commercially Reasonable Efforts, CSMC and Licensee shall agree on the Milestones set forth in Schedule B of this Agreement, and Licensee shall use Commercially Reasonable Efforts to achieve such Milestones. Licensee’s failure to achieve any particular Milestone shall not, in and of itself, signify that Licensee failed to exercise Commercially Reasonable Efforts. Within [***] days after each anniversary of the Effective Date, Licensee shall prepare and deliver to CSMC an annual written report describing the development and commercialization activities it has performed, or caused to be performed, since the preceding report. Each such report shall contain information reasonably required by CSMC to evaluate Licensee’s performance under this Agreement, including Licensee’s progress toward achievement of the Milestones.

2.5 Preference for United States Industry. To the extent that any of the Patent Rights have been developed using funding from the United States Government, Licensee agrees that any

 

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Products claimed by such Patent Rights that are made, used or sold in the United States shall be manufactured substantially in the United States, to the extent required under applicable law.

2.6 Access to Biobank and Biological Materials. CSMC maintains as of the Effective Date, and will continue to develop during the Agreement Term, the MIRIAD Biobank. Subject to availability and CSMC’s institutional policies and procedures for the transfer of biological materials, including the terms and conditions of the Material Transfer Terms which are attached as Schedule C of this Agreement, CSMC shall make available to Licensee during the Agreement Term the MIRIAD Biobank.

2.7 Technology Developed Under MCRA and MRSA. The parties acknowledge and agree that in accordance with the MCRA and MRSA, certain data, information, and results generated by CSMC and/or Licensee as a result of conducting the research under the MCRA or MRSA (defined as “Study Data” therein) shall be jointly owned by CSMC and Licensee or solely owned by Licensee to the extent expressly set forth in the applicable work order under the MRSA (“MRSA Work Order”). For purposes of Sections 2.1, 2.2 and 4.2, such jointly owned Study Data shall be deemed to be “Technology” as defined in Section 1.16 hereof. Furthermore, to the extent expressly set forth in the applicable MRSA Work Order, certain Inventions (as such term is defined therein) that necessarily use or necessarily incorporate any Precision Compound(s) (as such term is defined therein) provided by Licensee under the MRSA Work Order shall be owned, as between the parties, solely by Licensee. The parties acknowledge and agree that (a) if, under the MRSA Work Order, Licensee provides Precision Compound(s) for CSMC to use in connection with the Technology solely to potentially assist in the development of Diagnostic Product(s) to select patients for research, development, clinical trials, and/or commercialization of such Precision Compound(s), then in accordance with Section 1.14 of this Agreement, such Precision Compound shall not be deemed to be a “Therapeutic Product” for purposes of this Agreement; (b) regardless of the fact that certain Study Data is co-owned by Licensee and CSMC, to the extent that Licensee develops any Products through the use of such jointly-owned Study Data, Licensee shall be obligated to pay CSMC the applicable Royalty set forth in Section 4.2 of this Agreement with respect to such Products; and (c) regardless of the fact that certain Study Data and/or Inventions are solely owned by Licensee as described in the applicable MRSA Work Order, to the extent that Licensee develops any Diagnostic Products through the use of such Licensee-owned Study Data and/or Inventions, Licensee shall be obligated to pay CSMC the Diagnostic Product Royalty Rate with respect to such Diagnostic Products.

2.8 Key Persons. The following individuals are designated as “Key Persons” with respect to this Agreement: [***]. In the event that the services of any Key Person are lost to the projects covered by this Agreement (including, without limitation, the research conducted under the MCRA or MRSA) for any reason, the applicable party hereto shall notify the other party in writing, and may propose substitute personnel to such other party. The other party’s approval of such proposed substitute personnel shall not be withheld, conditioned or delayed unreasonably. In the event that the parties are unable to identify mutually acceptable substitute personnel within [***] days of the provision of such written notice, then the parties may terminate this Agreement in accordance with Section 6.2(f) hereof.

 

3.

REPRESENTATIONS AND WARRANTIES

 

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3.1 Rights to Technology. Except for the rights, if any, of the Funding Agencies or the United States Government, CSMC represents and warrants to Licensee that, to the best of its actual knowledge (without investigation outside of CSMC as to such representations and warranties) as of the Effective Date: (a) CSMC exclusively owns all right, title and interest in and to and is the rightful assignee of the Patent Rights and/or Technology, (b) CSMC has the power and authority to enter into this Agreement and has the right to grant the licenses set forth in this Agreement, (c) CSMC has not granted licenses to the Patent Rights and/or Technology to any other party that would restrict or otherwise conflict with the rights granted hereunder except as stated herein, (d) no holding, decision, or judgment has been rendered in any action or proceeding before any court or administrative authority denying the validity of CSMC’s right to register, or CSMC’s rights to own, use or license, any Patent Rights and/or Technology, (e) there are no claims, judgments or settlements to be paid by CSMC with respect the Patent Rights and/or Technology or pending claims or litigation relating to the Patent Rights and/or Technology. Except for the rights, if any, of the Funding Agencies or the United States Government, CSMC represents and warrants to Licensee that, to the best of the current, actual knowledge of the Inventors (without investigation outside of CSMC as to such representations and warranties), as of the Effective Date: (a) the Patent Rights are valid and enforceable, and (b) no third party is infringing upon or otherwise misappropriating any Patent Rights and/or Technology. Except for any potential or actual rights of Funding Agencies, CSMC is not aware that any additional rights or licenses are necessary for Licensee to exercise its licensed rights granted by CSMC under this Agreement. CSMC covenants and agrees that if at any time during the Agreement Term it becomes aware that any of the representations and/or warranties set forth in this Section 3.1 are no longer true or correct had they been given after the Effective Date, it shall notify Licensee in writing of the facts or circumstances thereof within [***] days of discovery.

3.2 Limited Warranty; LIMITATION OF LIABILITY.

(a) Limited Warranty. CSMC makes no representation or warranty other than those expressly specified in this Agreement. Except as otherwise expressly set forth in this Agreement, Licensee accepts the Patent Rights and the Technology on an “AS-IS” basis. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTIES CONCERNING PATENT RIGHTS OR TECHNOLOGY COVERED BY THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO PATENT RIGHTS, TECHNOLOGY OR ANY PRODUCT. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF PATENT RIGHTS, OR THAT ANY PRODUCT WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING PATENT RIGHTS COVERED BY THIS AGREEMENT.

(b) LIMITATION OF LIABILITY. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR

 

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LOSS OF PROFITS OR EXPECTED SAVINGS OR OTHER ECONOMIC LOSSES, OR FOR INJURY TO PERSONS OR PROPERTY) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, REGARDLESS OF WHETHER SUCH PARTY KNOWS OR SHOULD KNOW OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, CSMC’S AGGREGATE LIABILITY FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED THE GREATER OF (1) [***] ($[***]) OR (2) [***]. THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND, WHETHER BASED ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE), OR ANY OTHER GROUNDS.

3.3 Rights Retained by Funding Agencies. Licensee acknowledges that to the extent that the Patent Rights and Technology have been developed in part under one or more funding agreements (“Funding Agreements”) with one or more Funding Agencies, such Funding Agencies have certain statutory, non-exclusive rights relative thereto for use for government purposes as well as regulatory or statutory “march-in rights” (collectively, “Statutory Rights”). This Agreement is explicitly made subject to such Statutory Rights and, to the extent of any conflict between any such Statutory Rights and this Agreement, such Statutory Rights shall prevail. CSMC has included in Schedule A of this Agreement information regarding any and all such Funding Agreements that exist as of the Effective Date.

 

4.

CONSIDERATION

In consideration of the execution and delivery by CSMC of this Agreement, Licensee agrees as follows:

4.1 Equity Grant. As an upfront, nonrefundable payment, Licensee shall issue to CSMC two million five hundred seventy-five thousand (2,575,000) shares of Licensee’s common stock, which is equal, in the aggregate, to [***] percent ([***]%) of the outstanding shares of the capital stock of Licensee on a Fully Diluted Basis (as defined hereafter) (and, together with the shares to be issued to CSMC pursuant to Section 4.1(f) below, is equal to [***] percent ([***]%) of the outstanding shares of the capital stock of Licensee on a Fully Diluted Basis), as of the Effective Date, subject to execution of a Stock Issuance Agreement in the form attached hereto as Schedule D of this Agreement. Failure of Licensee to issue such shares shall render this Agreement null and void (ab initio). Such shares issued hereunder shall be of the same class and series as founders’ shares. A true and complete copy of Licensee’s capitalization table as of the Effective Date of the Agreement is set forth in Schedule E of this Agreement. For the purposes of this Agreement, “Fully Diluted Basis” shall include all of the issued and outstanding shares of common stock, preferred stock and other capital stock of the Licensee (calculated on an as-converted to common stock basis) (including the shares to be issued to CSMC pursuant to this Section 4.1 and Section 4.1(f) below) plus any then issued and outstanding options and warrants to purchase common stock (calculated on an as-exercised, as converted to common stock basis). As of the Effective Date, there are no unissued but reserved shares of common stock of Licensee for future issuance as options or stock grants under a stock incentive plan of Licensee.

 

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(a) Board Seat. CSMC shall have the right to designate an individual to serve on Licensee’s board of directors subject to the terms of a Voting Agreement in the form attached hereto as Schedule F of this Agreement for a period of [***] year following the Effective Date of this Agreement. Failure of Licensee and each of Licensee’s stockholders to execute such Voting Agreement shall render this Agreement null and void (ab initio). Following the expiration of this initial [***] year period and for the duration of the Agreement Term, if requested by Licensee, such designee shall resign from Licensee’s board of directors, and CSMC may designate an individual approved by the Licensee (the “Observer”) to receive copies of all notices, minutes, consents and other materials that Licensee provides to its board of directors at such time materials are provided to the board of directors, provided that provision of such copies does not create a potential conflict of interest between Licensee and CSMC or Licensee and the Observer, and the Observer will be allowed to attend Licensee’s board of directors meetings or calls in a non-voting observer capacity. A majority of Licensee’s board of directors will have the right to exclude the Observer from portions of board of directors committee meetings or omit to provide the Observer with certain information if the board of directors believes in good faith that such exclusion or omission is necessary in order to (i) avoid a potential conflict of interest between Licensee and CSMC or Licensee and the Observer, or (ii) preserve the attorney-client privilege. The individual(s) designated by CSMC as a member of Licensee’s board of directors and the Observer must be reasonably acceptable to a majority of Licensee’s board of directors, and CSMC shall cause such individual(s) to be bound by the confidentiality obligations set forth in Section 10 below.

(b) Purchase Right. CSMC shall have the right to purchase up to that amount of Financing Securities (as defined below) to be issued and sold to the Lead Investor(s) (as defined below) in the Next Financing. For purposes of this Section 4.1(b), “Lead Investor” means the investor(s) investing the largest amount of cash in the Next Financing, and “Next Financing” means the proposed issuance by Licensee of any preferred equity securities in a priced-round (e.g., Series A Preferred Stock) (such securities, the “Financing Securities”) to investors for cash (or in satisfaction of debt issued for cash).

(c) Future Offerings. In any private offering of Licensee’s equity securities in exchange for cash (or in satisfaction of debt issued for cash), CSMC may purchase for cash that number of the securities issued in such offering as is necessary for CSMC to maintain its pro rata ownership interest in the Licensee on a Fully-Diluted Basis. This right is in addition to CSMC’s rights under Sections 4.1(b). If both Section 4.1(b) and this Section 4.1(c) apply to an offering, the provision granting CSMC the greater purchase rights will govern.

(d) Purchase Terms and Procedure, Exceptions. In any offering subject to Section 4.1(b) or 4.1(c), CSMC’s purchase right shall be on the same terms as the other investors in the financing in question (including, in the case of Section 4.1(b), the Lead Investor), except that in the case of an offering subject to Section 4.1(c), CSMC shall not have any board representation or board meeting attendance rights (except as otherwise provided in Section 4.1(a)), (ii) Licensee will give CSMC notice (the “Notice”) of the terms of the offering, including the names of the investors, and the amounts to be invested by Lead Investor, and CSMC may elect to exercise its right of purchase, in whole or in part, by notice given to Licensee within [***] days after receipt of Licensee’s notice, and (iii) and if CSMC elects not to purchase, or fails to give an election notice within such period, CSMC’s purchase right will not apply to the offering if (and

 

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only if and to the extent) it is consummated within [***] days on the same or less favorable (to the investor) terms as stated in the Notice. CSMC’s purchase shall be completed at the same closing and at the same time as that of any of the third-party purchasers, in the first closing of the applicable financing (unless otherwise mutually agreed to in writing by the parties) unless such closing is prior to [***] days after the date that the Notice is delivered to CSMC, in which case such purchase may be made by CSMC in a subsequent closing within [***] days after the date that the Notice is delivered to CSMC. CSMC’s rights under Sections 4.1(b) and 4.1(c) will not apply to the issuance of stock or options to employees, board members and other service providers pursuant to a plan approved by Licensee’s board of directors, or to shares or convertible securities (e.g., warrants or convertible debt), issued as consideration in lending or leasing transactions, mergers or acquisitions, licenses, collaborations, partnerships and similar transactions, in each case approved by Licensee’s board of directors.

(e) Termination. The parties’ rights and obligations described in Sections 4.1(a), (b), (c), and (d) shall terminate and be of no further force or effect upon the earliest to occur of (i) immediately prior to the consummation of Licensee’s firm commitment initial public offering of its common stock under the Securities Act of 1933, as amended, or Licensee otherwise becoming a reporting company under the Securities Exchange Act of 1934, as amended, (ii) upon the consummation or closing of a Change of Control (as defined below), or (iii) such time as CSMC holds less than [***] percent ([***]%) of the shares of Licensee’s common stock issued pursuant to the first paragraph of this Section 4.1. “Change of Control” means (x) the acquisition of Licensee by another entity by means of any transaction or series of related transactions to which Licensee is party (including, without limitation, any stock acquisition, reorganization, merger or consolidation but excluding any sale of stock for capital raising purposes) other than a transaction or series of transactions in which the holders of the voting securities of Licensee outstanding immediately prior to such transaction continue to retain (either by such voting securities remaining outstanding or by such voting securities being converted into voting securities of the surviving entity), as a result of shares in Licensee held by such holders prior to such transaction, at least [***] percent ([***]%) of the total voting power represented by the voting securities of Licensee or such surviving entity outstanding immediately after such transaction or series of transactions; or (y) a sale, lease or other conveyance of all or substantially all of the assets of Licensee.

(f) Additional Equity Grant. As additional consideration for CSMC’s obligations under this Agreement, Licensee shall issue to CSMC three million three hundred fifty thousand (3,350,000) shares of Licensee’s common stock, as of the Effective Date, subject to execution of a Restricted Stock Issuance Agreement in the form attached hereto as Schedule G of this Agreement. Failure of Licensee to issue such shares shall render this Agreement null and void (ab initio). Such shares issued hereunder shall be of the same class and series as founders’ shares.

4.2 Royalties.

(a) Running Royalties for Products. Licensee agrees to pay and shall pay to CSMC the following non-refundable running royalties (each, a “Royalty”) in the amounts set forth below:

 

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(i) a running royalty of [***] on Net Sales of Diagnostic Products made, used or sold by Licensee, its Affiliates or any Sublicensee hereunder (“Diagnostic Product Royalty Rate”); and

(ii) a running royalty of [***] on Net Sales of Therapeutic Products made, used or sold by Licensee, its Affiliates or any Sublicensee hereunder (“Therapeutic Product Royalty Rate”).

(b) Permitted Deductions.

(i) For any portion of the Royalty Term for a Diagnostic Product in a country during which there is no Valid Claim that covers such Diagnostic Product in such country, the Diagnostic Product Royalty Rate applicable to such Diagnostic Product in such country shall be reduced by [***].

(ii) For any portion of the Royalty Term for a Therapeutic Product in a country during which there is no Valid Claim that covers the composition of matter of such Therapeutic Product in such country, the Therapeutic Product Royalty Rate applicable to such Therapeutic Product in such country shall be reduced by [***].

(iii) If Licensee is required to make any payment to a third party to obtain a license for the manufacture, use, sale or import of a Product or otherwise exploit the Patent Rights, Licensee shall be entitled to deduct up to [***] of such third party payments made in a particular calendar quarter against Royalties payable to CSMC for that quarter; provided, however, that in no event shall the Royalties payable to CSMC hereunder for any calendar quarter be reduced by operation of this Section 4.2(b)(iii) by more than [***]; provided, further, that any unused deduction earned in any calendar quarter may be carried forward from such calendar quarter to the subsequent calendar quarters and may be used in such subsequent calendar quarters, subject to the [***] limitation set forth in the immediately preceding proviso.

(c) Challenge of Patent Rights. Should Licensee, its Affiliate or any Sublicensee bring, directly or through a third party indirectly, an action challenging the validity, scope or enforceability of any Patent Rights, Licensee, the Affiliate or the Sublicensee will first provide CSMC with at least [***] days’ prior written notice that it intends so to do before filing such a challenge. Following the giving of such notice, Licensee, the Affiliate or the Sublicensee will continue to pay to CSMC any Royalties due hereunder at the applicable rate during the pendency of such action. Should the outcome of an action described in the first sentence of this Section 4.2(c) determine that any contested claim of a patent challenged by Licensee, the Affiliate or the Sublicensee is valid and infringed and enforceable against a Product, Licensee or the Affiliate or Sublicensee bringing the challenge, as applicable, will thereafter (i) pay to CSMC the Royalties due hereunder at the rate of [***] the applicable rate for all Products sold that would infringe such claim; and (ii) reimburse CSMC for all costs actually incurred by CSMC in connection with the applicable legal proceedings. In the event that a challenge of Patent Rights brought by Licensee, an Affiliate or a Sublicensee is partially or entirely successful, Licensee, the Affiliate and the Sublicensee will have no right to recoup any Royalties or other amounts paid before or during the period of the challenge. Notwithstanding anything to the contrary, this Section 4.2(c), above, shall not apply with respect to challenges that arise in connection with any

 

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arguments, or any other statements or allegations, made by or on behalf of Licensee, its Affiliate or any Sublicensee that (A) distinguish the inventions claimed in patents or patent applications owned or controlled (except by virtue of this Agreement) by Licensee, its Affiliate or any Sublicensee from those claimed in the Patent Rights (1) in the ordinary course of prosecution of such patents or patent applications owned or controlled by Licensee, its Affiliate or any Sublicensee, including any reissue or reexamination patents or patent applications or (2) in inter partes, post grant review proceedings, oppositions, nullity proceedings, reissue proceedings, reexamination proceedings, and other similar proceedings before the U.S. Patent and Trademark Office or other agency or tribunal in any jurisdiction, or in any arbitration or litigation, wherein such patents or patent applications owned or controlled by Licensee, its Affiliate or any Sublicensee have been challenged; and/or (B) challenge the validity, scope or enforceability of any Patent Right (1) as the result of a breach of CSMC’s representations, warranties or obligations hereunder, (2) as a result of any inequitable conduct of any individual associated with the filing and/or Prosecution of the application for such Patent Right, and/or (3) pursuant to a petition to the relevant governmental authority, made with the written approval of CSMC, in order to request the re-examination or re-issuance of a Patent Right in the course of maintaining such Patent Right. Notwithstanding anything to the contrary, this Section 4.2(c), above, shall not apply with respect to any patent challenges that arise in connection with any agreements, or any other statements or allegations, made by or on behalf of Licensee, its Affiliate or any Sublicensee after Licensee ceases to maintain its original license rights to such Patent Right (e.g., as a result of the termination or expiration of this Agreement).

(d) Arm’s-Length Transactions. On sales of Products which are made in other than an arms’-length transaction, the value of the Net Sales attributed under this Section 4.2 to such a transaction shall be that which would have been received in an arms’-length transaction, based on sales of like quality and quantity products on or about the time of such transaction.

(e) Duration of Royalty Obligations. The royalty obligations of Licensee as to each Product shall terminate on a country-by-country and Product-by-Product basis on the later of: (1) for any Product that infringes on a Valid Claim, concurrently with the last to expire of a Valid Claim that covers such Product, including any term extensions thereof, and (2) for any Product that does not infringe on a Valid Claim, ten (10) years from the date of First Commercial Sale of such Product in the applicable country (each, a “Royalty Term”).

(f) Payment and Accounting.

(i) Reports. Each payment of Royalties shall be accompanied by a report in the form attached as Schedule H of this Agreement, which sets forth in reasonable detail the number and each type of Product sold and the calculation of Net Sales applicable thereto, and such additional details as may be reasonably requested by CSMC for the determination of Royalties payable hereunder. Products shall be considered as being sold for the purpose of the calculation of Royalties under this Agreement as of the earlier of (a) the date on which the gross amounts for the sale of such Products are actually received, or (b) the date that is [***] days after the Products have been invoiced. Royalties shall be payable by Licensee quarterly, within [***] days after the end of each calendar quarter, based upon revenues accrued (in accordance with the foregoing sentence) during the immediately preceding calendar quarter. All copies of reports under this Section 4.2(f)(i) shall be sent by electronic mail to [***]. Except as otherwise provided herein,

 

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all amounts due hereunder shall be paid in United States dollars and shall be made without set off and free and clear of (and without any deduction or withholding for) any taxes, duties, levies, imposts or similar fees or charges. Licensee agrees to pay and shall pay to CSMC, or cause its Sublicensees to pay to CSMC, all Royalties resulting from the activities of its Sublicensees, within [***] days after the end of each calendar quarter.

(ii) Wire Transfer Instructions. All payments due hereunder shall be made by Licensee to CSMC in accordance with the following wire transfer instructions:

[***]

(iii) Records and Audits. Licensee shall create and maintain complete and accurate records and documentation concerning all sales of Products by Licensee, its Affiliates and Sublicensees, in sufficient detail to enable the Royalties that are payable hereunder to be determined. Licensee shall retain such records and documentation for not less than [***] years from the date of their creation. During the Agreement Term and for a period of [***] years thereafter, CSMC and its representatives shall have the right to audit such records and documentation as shall pertain to the determination and payment of. Such examiners shall have reasonable access during regular business hours to Licensee’s offices and the relevant records, files and books of account, and shall have the right to examine any other records reasonably necessary to determine the accuracy of the calculations provided by Licensee. The costs of any such audit shall be borne by CSMC, unless as a result of such inspection it is determined that the amounts payable by Licensee for any period are in error by greater than [***], in which case the costs of such audit shall be borne by Licensee. CSMC shall report the results of any such audit to Licensee within [***] days of completion. Thereafter, Licensee agrees it shall promptly pay to CSMC the amount of any underpayment discovered in such audit, or CSMC shall credit to Licensee against future Royalty payments the amount of any overpayment discovered in such audit, as the case may be. In addition, Licensee shall pay interest on any underpayment at the rate that is the lower of (i) [***] over the rate of interest announced by Bank of America in Los Angeles, California (or any successor in interest thereto or any commercially equivalent financial institution if no such successor exists) to be its “prime rate”, or (ii) the highest rate permitted by applicable law, from the date such amount was underpaid to the date payment is actually received.

(iv) Currency Transfer Restrictions. If any restrictions on the transfer of currency exist in any country or other jurisdiction so as to prevent Licensee from making payments to CSMC, Licensee shall take all commercially reasonable steps to obtain a waiver of such restrictions or to otherwise enable Licensee to make such payments. If Licensee is unable to do so, Licensee shall make such payments to CSMC in a bank account or other depository designated by CSMC in such country or jurisdiction, which payments shall be in the local currency of such country or jurisdiction, unless payment in United States dollars is permitted. Any payment by Licensee to CSMC in currencies other than United States dollars shall be calculated using the appropriate foreign exchange rate for such currency quoted in the California edition of The Wall Street Journal for the close of business of the last banking day of the calendar quarter in which such payment is being made.

(v) Late Charges. A service charge at the rate that is the lower of (i) [***] over the rate of interest announced by Bank of America in Los Angeles, California (or

 

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any successor in interest thereto or any commercially equivalent financial institution if no such successor exists) to be its “prime rate”, or (ii) the highest rate permitted by applicable law. shall be payable by Licensee on any portion of Licensee’s outstanding undisputed amounts payable by Licensee hereunder that are not paid to CSMC within [***] days past the due date.

(vi) Taxes. Licensee shall pay, or cause to be paid, any and all taxes required to be paid or withheld on any sales, licenses or other transfers for value of Products or Patent Rights (other than taxes imposed on the income or revenues of CSMC). Licensee shall secure and send to CSMC proof of any such taxes withheld and paid by Licensee, its Affiliates or Sublicensees.

 

5.

PATENT RIGHTS

5.1 Prosecution. Subject to Section 4.2(c), commencing on the Effective Date and continuing until the termination of the Agreement, Licensee shall assume, in coordination with CSMC, full responsibility for, and shall use Commercially Reasonable Efforts to pursue, the application, maintenance, reexamination, reissue, opposition and prosecution of any kind (collectively “Prosecution”) relating to the Patent Rights, including, but not limited to, payment of all costs, fees and expenses related thereto. Subject to the approval of CSMC (which approval shall not be unreasonably withheld), Licensee shall have the right to select counsel with respect to the responsibility assumed by Licensee in this Section 5.1. For all purposes of the patent Prosecution, CSMC shall be the named “client” of such patent counsel. Each party shall provide the other with copies of any and all material or communications with the United States Patent and Trademark Office, or any foreign patent office, and CSMC and Licensee shall be afforded the opportunity of prior review and comment on such action or paper.

(a) Foreign Filings. Should Licensee elect not to file for patent protection for the Patent Rights in a certain national jurisdiction in the Territory, Licensee shall notify CSMC of such election at least [***] days before a final due date which would result in the bar of patent protection for the Patent Rights in such national jurisdiction. In such event, CSMC may, at its sole option and expense, file for patent protection for the Patent Rights in the applicable national jurisdiction, and Licensee’s license under this Agreement with respect to such national jurisdiction shall terminate, allowing CSMC to freely dispose of its Patent Rights in the applicable national jurisdiction as it sees fit in its sole discretion, and such patent shall no longer be deemed to be Patent Rights for purposes of this Agreement.

(b) Abandonment, Disclaimers, etc. Licensee shall obtain the prior written consent of CSMC (which consent shall not be unreasonably withheld), prior to abandoning, disclaiming, withdrawing, seeking reissue, seeking reexamination or allowing to lapse any patent or patent application within the Patent Rights. In the event that Licensee shall elect to abandon the Prosecution (including the payment of maintenance fees or annuities) of any patent or patent application included in the Patent Rights, Licensee shall notify CSMC of such election at least [***] days before a final due date which would result in abandonment or bar of patentability of the patent or patent application. In such event, CSMC may, at its sole option and _expense, continue Prosecution of the patent application or patent; the patent application or patent shall no longer be deemed part of the Patent Rights under this Agreement; and all rights in the patent application or patent shall revert to CSMC. Licensee further agrees that it shall not file any

 

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continuation-in-part application relating to the Patent Rights without the prior written consent of CSMC, not to be unreasonably withheld, delayed, or conditioned, unless the additional disclosure or material to be included in the continuation-in-part application is necessary or appropriate to support the patentability of a claim recited in a parent application on which the continuation-in-part application is based.

5.2 Expenses. Except as otherwise expressly set forth herein, Licensee shall pay all expenses resulting from its obligations in Section 5.1 hereof. CSMC shall exercise reasonable efforts to cause the Inventors (to the extent they are available and on CSMC’s staff as employees) to cooperate fully with Licensee with respect to the Prosecution of the Patent Rights, and CSMC shall be reimbursed for all reasonable out-of-pocket expenses as such expenses are incurred.

5.3 CREATE Act. Licensee shall not invoke the Cooperative Research and Technology Enhancement Act of 2004, as set forth under Title 35, Section 102(c) of the United States Code (the “CREATE Act”), with respect to the Patent Rights without first obtaining the prior written consent of CSMC.

 

6.

TERM AND TERMINATION

6.1 Term. Unless earlier terminated as provided in Section 6.2 hereof, the term of this Agreement shall commence on the Effective Date and shall expire, on a country-by-country basis, upon the last to expire Royalty Term (the “Agreement Term”). Upon the expiration of this Agreement in accordance with this Section 6.1 (but not the earlier termination of this Agreement in accordance with Section 6.2), the license set forth in Section 2.1 shall become fully paid-up, irrevocable, and perpetual, provided that, in the event that Licensee breaches any of its surviving obligations under this Agreement as set forth in Section 13.13, then such license may be terminated by CSMC in accordance with Section 6.2(c).

6.2 Termination. Except as provided by Section 6.3 and/or 6.8 hereof, this Agreement shall terminate upon the earliest to occur of the following:

(a) Automatically if Licensee shall enter into a liquidating bankruptcy, be adjudged insolvent, liquidate, dissolve and/or if the business of Licensee shall be placed in the hands of a receiver, assignee, or trustee, whether by voluntary act of Licensee or otherwise; provided, however, that, if any such action is involuntary, termination shall not take place unless the action is not reversed within [***]. Further, Licensee shall give CSMC at least [***] days’ prior written notice before Licensee initiates any bankruptcy proceeding, and CSMC shall have the right to terminate this Agreement immediately upon receipt of such notice;

(b) Upon [***] days written notice of CSMC to Licensee if the performance by either party to this Agreement of any term, covenant, condition or provision hereof (i) shall jeopardize (A) the licensure of CSMC, (B) CSMC’s participation in the Medicare, Medi-Cal or other reimbursement or payment programs, (C) the full accreditation of CSMC by The Joint Commission or any other state or nationally recognized accreditation organization, or (D) CSMC’s tax-exempt status; or (ii) is deemed illegal or unethical by any recognized governmental agency or body. Upon the occurrence of any of the items set forth in this subparagraph (b), CSMC shall provide written notice to Licensee setting forth the reason for such

 

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termination and the parties shall promptly discuss in good faith reasonable means of avoiding such termination, including without limitation any required amendments to this Agreement, provided that, if termination cannot be avoided, such termination shall be effected at the end of such [***] day period;

(c) Upon [***] days’ written notice from CSMC if, within such [***] day period, Licensee shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity, which breach or default may include, without limitation, Licensee’s failure to use Commercially Reasonable Efforts to develop and make Products commercially available to the public in accordance with Section 2.4; provided, however, that Licensee may avoid such termination if, before the end of such [***]-day period, such breach or default has been cured by Licensee; and provided further that this termination right shall not apply to breaches of Section 4.2(c), the exclusive remedy for which is set forth therein;

(d) Upon [***] days’ written notice from Licensee if, within such [***] day period, CSMC shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity; provided, however, that CSMC may avoid such termination if, before the end of such [***] day period, such breach or default has been cured by CSMC;

(e) By Licensee upon [***] days’ written notice to CSMC in the event that Licensee has determined that it would not be commercially reasonable to continue to develop and/or commercialize Products, including without limitation as a result of: (i) failure to secure adequate capital commitment within a commercially reasonable timeframe; (ii) failure to initiate a Phase I, Phase II or Phase III clinical trial for at least [***] Product within a commercially reasonable timeframe due to the following reasons: (A) regulatory restrictions, prohibitions, or adverse decisions; (B) lack of sufficient funding to complete the clinical trials and/or obtain supplies of Products; (C) lack of interest from clinical investigators; or (D) difficulties in patient accrual; (iii) scientific or technical reasons; (iv) the approved labeling for the Product; (v) competitive products then being developed and/or commercialized; (v) manufacturing concerns, including costs of goods and materials; (vi) intellectual property protection; (vii) obligations imposed by regulatory authorities; and (viii) pricing concerns; provided that, such written notice to CSMC under this Section 6.2(e) must provide CSMC with a reasonable explanation for Licensee’s termination under this Section 6.2(e).

(f) Upon the mutual written agreement of the parties hereto (such termination to be effective as of the date mutually agreed upon in such written agreement).

6.3 Obligations Upon Termination. Upon any termination of this Agreement pursuant to Section 6.2 hereof, nothing herein shall be construed to release any party from any liability for any obligation incurred through the effective date of termination (e.g., confidentiality, reimbursement of patent expenses incurred prior to such date, etc.) or for any breach of this Agreement prior to the effective date of such termination. Licensee may, for a period of [***] year after the effective date of such termination, sell all tangible Products customarily classified as “inventory” that it has on hand at the date of termination, subject to payment by Licensee to CSMC

 

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of the applicable Royalty; provided, however, that any such action by Licensee does not subject CSMC to any of the occurrences set forth in Section 6.2(b) hereof.

6.4 Effect of Termination. In the event of any termination of this Agreement pursuant to Section 6.2, where such termination has not been caused by any action or inaction on the part of any Sublicensee of Licensee or by any breach by such Sublicensee of its obligations under its sublicense from Licensee, such termination shall be without prejudice to the rights of each non-breaching Sublicensee of Licensee and each non-breaching Sublicensee shall be deemed to be a licensee of CSMC under this Agreement, as applicable, at such Sublicensee’s written request, and CSMC shall be entitled to all rights and subject to all obligations under this Agreement (to the extent provided for in such sublicense). This Section 6.4, however, shall not be applicable if this Agreement has been terminated under Section 6.2(b) under circumstances where the application of this Section 6.4 would subject CSMC to any of the occurrences set forth in Section 6.2(b).

6.5 Right to Institute Legal Actions. Notwithstanding the provisions of Section 6.2 hereof, CSMC, on the one hand, and Licensee, on the other hand, may institute any other legal action or pursue any other remedy against the other party permitted by applicable law if the other party does not substantially cure any breach or default of any material obligation as provided herein.

6.6 Reversion of Rights. Notwithstanding anything to the contrary set forth herein (including, but not limited to, Section 5 hereof), full responsibility for Prosecution of the terminated Patent Rights shall, at CSMC’s sole expense from the date of reversion, revert to CSMC upon any termination of this Agreement.

6.7 Return of Data. In the event of any termination or expiration of this Agreement, Licensee shall, upon the request of CSMC, negotiate in good faith with CSMC for a reasonable period regarding the terms and conditions under which CSMC would receive copies of data, information and materials obtained or generated by or on behalf of Licensee in the course of conducting research and developing Products using the Patent Rights and the Technology.

6.8 Dispute. If either party reasonably and in good faith disagrees as to whether the other party has a basis for terminating this Agreement pursuant to Section 6.2, the non-terminating party may contest the allegation in accordance with Section 13.3. During the pendency of such a dispute, all of the terms and conditions of this Agreement shall remain in effect, and the parties shall continue to perform all of their respective obligations and retain their respective rights under this Agreement.

 

7.

INFRINGEMENT BY THIRD PARTIES

The parties agree as follows:

7.1 Enforcement. The parties shall notify each other in writing of any suspected or actual infringement of any Patent Rights by a third party and shall provide the other party with any available evidence thereof. After such notification, CSMC and Licensee shall consult for a period not to exceed [***] days whether enforcement of the Patent Rights by Licensee against such third party infringer is reasonably warranted, by determining whether a reasonably prudent licensee would institute litigation to enforce the patent in question in light of all relevant business and

 

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economic factors (including, but not limited to, the projected cost of such litigation, the likelihood of success on the merits, the probable amount of any damage award, the prospects for satisfaction of any judgment against the alleged infringer, the possibility of counterclaims against the parties hereto, the impact of any possible adverse outcome on Licensee and the effect any publicity might have on the parties’ respective reputations and goodwill). If, upon the expiration of such [***] day period, it is mutually determined by the parties that a suit should be filed by Licensee, Licensee shall have the right and the obligation to enforce, at its sole expense, the Patent Rights against infringement by such third party infringer. If, upon the expiration of such [***] day period, the parties have not agreed that a suit should be filed by Licensee, Licensee shall have the right, but not the obligation, to enforce, at its sole expense, the Patent Rights against infringement by such third party infringer or commence settlement negotiations with respect thereto. Upon Licensee’s undertaking to pay all expenditures reasonably incurred by CSMC, CSMC shall reasonably cooperate in any such enforcement and, as necessary, join as a party therein. Licensee shall reimburse CSMC for all expenses, including reasonable attorneys’ fees, incurred in connection with any such enforcement. In the event that Licensee does not file suit against or commence settlement negotiations with the infringer within [***] days of the expiration of the [***] day consultation period described above, then CSMC shall have the right, at its own expense, to enforce the Patent Rights licensed hereunder on behalf of itself and Licensee. Any damages or other recovery from an infringement action undertaken by Licensee shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to Licensee and (b) [***] to CSMC. If Licensee fails to prosecute any such action to completion, then any damages or other recovery from an infringement action undertaken or assumed by CSMC shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to CSMC and (b) [***] to Licensee.

7.2 Defense Of Patent Rights. In the event that any Patent Rights are the subject of a legal action seeking declaratory relief or of any reexamination or opposition proceeding instituted by a third party, the parties agree to promptly consult with each other concerning the defense of such actions or proceedings. If the parties agree that such defense should be undertaken, then Licensee shall bear the expenses, including attorneys’ fees, associated with such defense and in any recoupment of expenses. If the parties disagree, then the party desiring to defend the action or proceeding may proceed with such defense and will bear its own expenses, and be entitled to all sums recovered.

 

8.

INDEMNIFICATION

8.1 Indemnification by Licensee. Subject to Section 8.2 hereof, Licensee shall hold harmless, defend and indemnify CSMC and each of its officers, directors, employees (including the Inventors), and agents (each, an “Indemnified Party”, and collectively, the “Indemnified Parties”) from and against any and all claims, damages, losses, liabilities, costs and expenses (including reasonable attorneys’ fees and expenses) suffered or incurred by any of the Indemnified Party in any action, suit, litigation, arbitration or dispute of any kind brought by a third party (“Action”) arising or resulting from any negligence or willful acts or omissions on the part of Licensee, its Affiliates or Sublicensees in connection with (a) their use of the Patent Rights or Technology and/or (b) the exercise of their rights hereunder or under any sublicense, including, but not limited to (i) the preclinical development and clinical testing of Products, and (ii) the

 

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manufacture, sale, use, marketing, or other disposition of Products developed, manufactured, sold, marketed, used or otherwise disposed of under this Agreement; except to the extent any of the foregoing arise out of or result from (i) CSMC’s breach of any covenant, obligation, representation or warranty under this Agreement and/or (ii) the negligent or willful acts or omissions of any Indemnified Party.

8.2 Indemnification Procedure. CSMC shall promptly notify Licensee in writing of any claim or Action or material threat thereof brought against any Indemnified Party in respect of which indemnification may be sought and, to the extent allowed by applicable law, shall reasonably cooperate with Licensee in defending or settling any such claim or Action (at Licensee’s expense). Subject to this Section 8, Licensee shall defend any Action brought by a third party against any of the Indemnified Parties for which Licensee is obligated to indemnify pursuant to Section 8.1, provided that Licensee shall have the sole right to control the defense and/or settlement of any such Action with counsel of Licensee’s own choosing and reasonably acceptable to CSMC. No settlement of any Action against the Indemnified Party for which CSMC intends to seek indemnification (for itself or on behalf of any other Indemnified Party) shall be made without the prior joint written approval of Licensee and CSMC, which approval shall not be unreasonably withheld, delayed, or conditioned by either party, provided that Licensee shall have the right to settle any Action without the need to obtain CSMC’s approval, if such settlement is solely monetary in nature and admits no wrongdoing on the part of CSMC or the Indemnified Party. If CSMC or any other Indemnified Party does not permit Licensee to exclusively control the defense of any such Action, or if CSMC or any other Indemnified Party does not obtain the approval of Licensee to settle such Action, Licensee shall have no obligation to defend or indemnify the CSMC or any other Indemnified Party hereunder.

8.3 Insurance. Licensee shall obtain and maintain insurance policies (including products liability and general liability policies at such time as is appropriate) which are reasonable and necessary to cover its activities and to comply with the indemnification obligations set forth above. Such insurance policies shall name CSMC as an additional insured party and shall provide a minimum of $[***] in coverage per occurrence, and $[***] in the aggregate. Upon initiation of any human clinical studies of Diagnostic Products, Licensee shall have first increased its insurance coverage to a minimum of $[***] in the aggregate, and upon initiation of any human clinical studies of Therapeutic Products, Licensee shall have first increased its insurance coverage to a minimum of $[***] in the aggregate. Licensee shall provide CSMC with prompt written notice of any material change in coverage under such policies. If the parties determine that evidence of Licensee’s insurance coverage is necessary and appropriate, within [***] days of the Effective Date (subject to extension if reasonably required) and annually thereafter, Licensee shall provide CSMC with a certificate of insurance issued by the appropriate insurance company evidencing the insurance coverage required by this Section 8.3, together with copies of the endorsement which specifies CSMC as an additional insured and the declarations page for each such insurance policy. The certificate of insurance, endorsements and declarations pages (and any renewals or replacements thereof), if required, shall be sent to CSMC’s Technology Transfer Office by electronic mail at [***].

 

9.

USE OF NAMES

 

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9.1 CSMC Names and Marks. Licensee shall not, unless as required by any law or governmental regulation, use the name of CSMC, and/or any of its trademarks, service marks, trade names or fictitious business names or the name of any CSMC officer, faculty member, employee, student or volunteer (collectively, “CSMC Names and Marks”) without express prior written consent of the Vice President for Public Relations and Marketing of CSMC. Further, except as otherwise required by applicable law, prior to any reference by Licensee to CSMC Names and Marks in any manner, Licensee shall provide CSMC with a writing reflecting the proposed reference so that CSMC can review the reference within a reasonable period of time prior to the proposed use thereof by Licensee. Except as otherwise required by applicable law, this limitation includes, but is not limited to, use by Licensee in any regulatory filing, advertising, offering circular, prospectus, sales presentation, news release or trade publication; provided, however, Licensee shall have the right to include the following statement in such materials without seeking any additional permission from CSMC or its Vice President for Public Relations and Marketing: “On September 1, 2017, Precision IBD, Inc. entered into a license agreement with Cedars-Sinai Medical Center for the exclusive licensing of the [describe licensed assets].” In addition, certain specific language may be mutually agreed upon by the parties for Licensee’s use in certain contexts and with respect to certain topics, and once agreed upon, may be utilized by Licensee in connection with the approved contexts and topics without further permission of the applicable Licensor. Subject to compliance by Licensee with the foregoing, which shall be deemed conditions precedent to any use of CSMC Names and Marks by Licensee, Licensee shall ensure that the CSMC Names and Marks are used as scientifically or academically appropriate in the “byline” of any article, abstract, manuscript or any other publication related to the subject matter hereof.

9.2 No Endorsements by CSMC. By entering into this Agreement, CSMC does not directly or indirectly endorse any product or service provided, or to be provided, by Licensee whether directly or indirectly related to this Agreement. Licensee shall not state or imply that this Agreement is an endorsement by CSMC.

 

10.

CONFIDENTIALITY

10.1 Non-Disclosure. The parties hereto shall keep the terms of this Agreement and all business and scientific discussions relating to the business of the parties confidential except as otherwise set forth in this Agreement. All patient information to which a party is given access by the other party shall be subject to the provisions of the Confidentiality of Medical Information Act (Cal. Civ. Code §§56, et seq.) and the Health Insurance Portability and Accountability Act of 1996, and all regulations promulgated thereunder. It may, from time to time, be necessary for the parties, in connection with performance under this Agreement, to disclose Confidential Information (including know-how) to each other. The Receiving Party (as defined in Section 1.3 hereof) shall keep in confidence the Confidential Information of the Disclosing Party (as defined in Section 1.3 hereof), using the standard of care it normally uses for information of like character, and shall not disclose the Confidential Information to any third party or use it except as expressly authorized by the prior written consent of the Disclosing Party or as otherwise permitted by this Agreement. Notwithstanding the foregoing, (a) Licensee may disclose the Confidential Information received from CSMC, and also may provide a copy of this Agreement, to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees as shall be reasonably necessary to carry out the intent of this Agreement or any sublicense granted by Licensee as contemplated by this Agreement and (b) Licensee may provide a copy of this

 

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Agreement to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees, investors, acquirers, lenders, or other financial partners, for purposes of a potential business transaction or obtaining professional advice, if, but only if, with respect to each of (a) and (b) above, (i) such entity or person is subject to confidentiality obligations no less restrictive than those confidentiality provisions contained in this Section 10 and (ii) Licensee shall be fully responsible and liable for any action of such third party recipient which would constitute a breach of this Agreement if committed by Licensee as if Licensee had committed such action itself. Furthermore, Licensee may include a copy of this Agreement in legally required regulatory filings; provided that Licensee will seek confidential treatment of all financial terms of this Agreement in all such legally required regulatory filings. The Receiving Party’s obligations hereunder shall not apply to Confidential Information that the Receiving Party can show:

(a) Is or later becomes part of the public domain through no fault or neglect of the Receiving Party;

(b) Is received in good faith from a third party having no obligations of confidentiality to the Disclosing Party, provided that the Receiving Party complies with any restrictions imposed by the third party;

(c) Is independently developed by the Receiving Party without use of the Disclosing Party’s Confidential Information; or

(d) Is required by law or regulation to be disclosed (including, without limitation, in connection with FDA filings, filings with another government agency or as required under the California Public Records Act), provided that the Receiving Party uses reasonable efforts to restrict disclosure and to obtain confidential treatment.

10.2 Limits on Permitted Disclosures. Each party agrees that any disclosure or distribution of the other party’s Confidential Information within its own organization shall be made only as is reasonably necessary to carry out the intent of this Agreement. The parties further agree that all of their respective officers, employees, agents, representatives or approved sublicensees to whom any Confidential Information is disclosed or distributed shall have agreed to maintain its confidentiality.

10.3 Legally Required Disclosures. If a subpoena or other legal process concerning Confidential Information is served upon any party hereto pertaining to the subject matter hereof, the party served shall notify the other party immediately, the other party shall cooperate with the party served, at the other party’s expense, in any effort to contest the validity of such subpoena or other legal process. This Section 10.3 shall not be construed in any way to limit any party’s ability to satisfy any disclosure of its relationship with the other party required by any governmental authority.

10.4 Patent Rights and Technology as Confidential Information. The Patent Rights are understood by Licensee to be the Confidential Information of CSMC to the extent “unpublished” as such term is construed under the United States Patent Laws. As such, Licensee’s confidentiality obligations hereunder automatically extend to any and all Technology and to any

 

23


and all patent applications of CSMC relating to any Patent Rights, and to any and all communications with the United States Patent and Trademark Office, and any foreign patent office relating to any Patent Rights.

10.5 Return of Confidential Information. In the event of any termination of this Agreement, the Receiving Party shall promptly return all Confidential Information and any copies made thereof previously made available to the Receiving Party by the Disclosing Party.

10.6 Remedies. Both parties acknowledge and agree that it would be difficult to measure damages for breach by either party of the covenants set forth in this Section 10, and that injury from any such breach would be incalculable, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, either party shall be entitled, in addition to all other remedies available hereunder or under law or equity, to injunctive or such other equitable relief as a court may deem appropriate to restrain or remedy any breach of such covenants.

10.7 Term of Confidentiality. The obligations of confidentiality and nonuse set forth in this Section 10 shall survive for a period of [***] years beyond the termination or expiration of this Agreement.

 

11.

INFORMATION EXCHANGE

In addition to the Patent Rights and Technology, the parties shall cooperate to exchange such non-confidential information as may be appropriate and necessary to facilitate Licensee’s development and commercialization of Products incorporating any Patent Rights or Technology.

 

12.

PATENT MARKING

Licensee shall use Commercially Reasonable Efforts to actually or virtually mark all Products made, sold or otherwise disposed of by or on behalf of it or any of its Affiliates and Sublicensees as set forth under Title 35, Section 287(a) of the United States Code and shall respond to any request or disclosure under Title 35, Section 287(b)(4)(B) of the United States Code by only notifying CSMC of the request for disclosure.

 

13.

MISCELLANEOUS

13.1 Notices. Any notice, request, instruction or other document required by this Agreement shall be in writing and shall be deemed to have been given (a) if mailed with the United States Postal Service by prepaid, first class, certified mail, return receipt requested, at the time of receipt by the intended recipient, or (b) if sent by Federal Express or other overnight carrier, signature of delivery required, at the time of receipt by the intended recipient, addressed as follows:

In the case of CSMC to:

Cedars-Sinai Medical Center

8700 Beverly Boulevard

Los Angeles, California 90048-1865

Attention: Executive Vice President for Finance & CFO

 

24


with a copy to Vice President for Legal & Technology Affairs

or in the case of Licensee to:

Precision IBD, Inc.

1496 Neptune Ave

Encinitas, CA 92024

Attention: President

or to such other address or to such other person(s) as may be given from time to time under the terms of this Section 13.1.

13.2 Compliance with Laws. Each party shall comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this Agreement.

13.3 Dispute Resolution.

(a) Governing Law. For any dispute between the parties to this Agreement which arises from or relates to this Agreement (“Dispute”), the Agreement shall be construed and enforced in accordance with the laws of the United States of America and of the State of California, irrespective of choice of laws provisions.

(b) Arbitration. The parties shall settle any Dispute by submitting the matter to binding arbitration to be held in Los Angeles, California, if Licensee initiates such arbitration, and in San Diego, California, if CSMC initiates such arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in the English language. In any such arbitration, the arbitrator shall be appointed by agreement of the both parties or, if no agreement can be reached, by the American Arbitration Association pursuant to its rules, which arbitrator, in each case, shall be an experienced lawyer or judge (or retired lawyer or judge). The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment upon the award may be entered in any court having jurisdiction. All or a portion of the costs of the arbitration proceeding, including attorneys’ fees, may be awarded by the arbitrator to the party against whom the arbitrator rules.

13.4 Waiver. Failure of any party to enforce a right under this Agreement shall not act as a waiver of that right or the ability to assert that right relative to the particular situation involved.

13.5 Enforceability. If any provision of this Agreement shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of the remainder of this Agreement.

13.6 Modification. No change, modification, or addition or amendment to this Agreement, or waiver of any term or condition of this Agreement, is valid or enforceable unless in writing and signed and dated by the authorized officers of the parties to this Agreement.

13.7 Entire Agreement. This Agreement and the Schedules hereto (which are incorporated herein by this reference as if fully set forth herein) constitute the entire agreement

 

25


between the parties with respect to the subject matter hereof and thereof, and replace and supersede as of the date hereof and thereof any and all prior or contemporaneous agreements and understandings, whether oral or written, between the parties with respect to the subject matter of such agreements.

13.8 Construction. This Agreement has been prepared, examined, negotiated and revised by each party and their respective attorneys, and no implication shall be drawn and no provision shall be construed against any party to this Agreement by virtue of the purported identity of the drafter of this Agreement or any portion thereof.

13.9 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. This Agreement may be executed in.pdf format.

13.10 Attorneys’ Fees. In the event of any action at law or in equity between the parties hereto to enforce any of the provisions hereof, the unsuccessful party to such litigation shall pay to the successful party all reasonable costs and expenses, including reasonable attorneys’ fees, incurred therein by such successful party; and if such successful party shall recover a judgment in any such action or proceeding, such reasonable costs, expenses and attorneys’ fees may be included in and as part of such judgment.

13.11 Assignment; Successors.

(a) Neither this Agreement, nor any of the rights or obligations of a party may be assigned, in whole or in part, without the prior written consent of the other party, which consent may not be unreasonably withheld, delayed, or conditioned; provided, however, that either party may assign this Agreement, without the obligation to obtain the prior written consent of the other party, to an Affiliate, and. subject to Section 13.11(b), Licensee may transfer or assign this Agreement, without the obligation to obtain the prior written consent of CSMC, as part of a sale, regardless of whether such a sale occurs through an asset sale, stock sale, merger or other combination, or any other transfer of Licensee’s entire business, or that part of Licensee’s business that exercises all rights granted under this Agreement; and provided further that CSMC shall have the right to assign this Agreement, without the obligation to obtain the prior written consent of Licensee, as part of any reorganization or bond financing. Any attempt to transfer or assign this Agreement by either party that is inconsistent with this Section 13.11(a), above, shall be null and void. In the event of a bankruptcy, assignment is permitted only to a party that can provide adequate assurance of future performance, including diligent development and sales, of Products.

(b) Prior to any assignment, the new assignee must agree in writing to CSMC to be bound by this Agreement.

(c) Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of CSMC and Licensee.

(d) Notwithstanding anything to the contrary herein, Licensee shall be permitted to pledge and grant a security interest in any of Licensee’s rights, licenses and interests under this Agreement and upon any foreclosure of such security interest, Licensee’s rights, licenses

 

26


and interests under this Agreement shall inure to the benefit of the holder of such security interest. For the avoidance of doubt, Licensee shall have no right to pledge or grant a security interest in any of CSMC’s property or assets, including without limitation, the Patent Rights, Technology or MIRIAD Biobank.

13.12 Further Assurances. At any time and from time to time after the Effective Date, each party shall do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged or delivered, all such further acts, transfers, conveyances, assignments or assurances as may be reasonably required to consummate the transactions contemplated by this Agreement.

13.13 Survival. The following sections shall survive any expiration or earlier termination of this Agreement: 4.2, 6.4, 6.5, 8, 9, 10 (for the period set forth in Section 10.7), 12 and 13.

[signature page follows]

 

27


IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement as of the date first above written.

 

LICENSEE”:
PRECISION IBD, INC., A DELAWARE CORPORATION
By:   /s/ Scott L. Glenn
  Scott L. Glenn
  President & CEO
Date:   August 30, 2017

 

CSMC”:

CEDARS-SINAI MEDICAL CENTER, A CALIFORNIA NONPROFIT PUBLIC BENEFIT CORPORATION

By:   /s/ Shlomo Melmed
 

Shlomo Melmed, M.D.

 

Executive Vice President, Academic Affairs & Dean of the Medical Faculty

Date:  

August 31, 2017

 

By:   /s/ James D. Laur
 

James D. Laur, Esq.

 

Vice President for Legal & Technology Affairs

Date:  

August 31, 2017

 

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ACKNOWLEDGED AND AGREED:
“INVENTORS”:
/s/ [***]
[***]
/s/ [***]
[***]

/s/ [***]

[***]

 

29


AMENDMENT NUMBER ONE TO EXCLUSIVE LICENSE AGREEMENT

THIS AMENDMENT NUMBER ONE TO EXCLUSIVE LICENSE AGREEMENT (“Amendment No. 1”) is entered into by and between CEDARS-SINAI MEDICAL CENTER, a California nonprofit public benefit corporation (“CSMC”), with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, and PRECISION IBD, INC., a Delaware corporation (“Licensee”), with offices at 3525 Del Mar Heights Rd, #342, San Diego, California 92130.

R E C I T A L S

A.    CSMC and Licensee entered into the Exclusive License Agreement, effective on September 1, 2017 (the “Agreement”).

B.    CSMC and Licensee desire to amend certain terms of the Agreement, pursuant to Section 13.6 of the Agreement, in accordance with this Amendment No. 1.

C.    This Amendment No. 1 shall be effective as of March 22, 2019 (the “Amendment No. 1 Effective Date”).

NOW, THEREFORE, in consideration of the mutual covenants and premises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.

All capitalized terms used in this Amendment No. 1 and not otherwise defined in this Amendment No. 1 shall have the meanings assigned to such terms in the Agreement.

 

2.

Section 2.1(d)(i) of the Agreement is hereby deleted and replaced in its entirety with the following:

“Subject to Licensee’s right to prior review as set forth herein, the right to submit for publication the scientific findings from research conducted by or through CSMC or its investigators (including the Inventors) related to the Patent Rights and Technology; provided, that no such publications shall include any Confidential Information of Licensee. Licensee shall have the right to review any proposed publication of the scientific findings from research conducted by CSMC related to the Patent Rights on which an Inventor is named as a lead author (“Covered Publication”). CSMC shall deliver to Licensee a copy of the Covered Publication at least [***] days prior to submission for publication. Licensee may then, within [***] days of the delivery of such Covered Publication to Licensee: (a) require the deletion of any Confidential Information of Licensee which is included in the Covered Publication; or (b) request in writing from CSMC an reasonable extension of Licensee’s [***] day review period for a mutually agreed upon additional time period (of no more than [***] days from the date of such request), provided that such delay is requested by Licensee to protect patentable subject matter.”

 

30


3.

Notwithstanding anything to the contrary in the Agreement, the parties hereby agree that Licensee’s exclusive license to the Technology that is included in and relates to the MIRIAD Biobank or that results from CSMC’s analysis of the MIRIAD Biobank, as set forth in Sections 1.16 and 2.6 of the Agreement (the “MIRIAD Biobank Technology”), is limited to the following purpose only: (the “Precision Mission”). Accordingly, for the sake of clarity, Licensee shall not have any license, right or access to the MIRIAD Biobank Technology for any purpose outside of the Precision Mission.

 

4.

The definition of Diagnostic Product in Section 1.14 shall be deleted in its entirety and replaced with the following:

““Diagnostic Product” shall mean any product and/or service in the Field of Use that: (a) (i) except for the license granted hereunder, would infringe a Valid Claim, or (ii) is wholly or partially developed through any use of the Technology, including targets selected using the Technology, and (b) that is marketed, indicated, approved and/or used for diagnostic or prognostic purposes, including without limitation the screening of patients for potential responsiveness to a particular therapeutic, prophylactic or other clinical intervention.”

 

5.

The third paragraph of Section 1.14 of the Agreement shall be deleted in its entirety and replaced with the following:

“For the sake of clarity, in the event that Licensee develops a therapeutic product and related diagnostic product that is wholly or partially developed through any use of the Technology, such therapeutic product of Licensee shall be deemed a Therapeutic Product and such related diagnostic product of Licensee shall be deemed a separate and distinct Diagnostic Product; provided that “Therapeutic Product” shall not include (a) any product or service for which the sole contribution of a Product to its development is use of a Diagnostic Product to select patients for research, development, clinical trials, and/or commercialization of a product, (b) any product that is developed solely through the use of targets selected using the Technology; provided, that any such product may be considered a “Diagnostic Product” hereunder, (c) any Precision Compounds that are used in accordance with Section 2.7, and/or (d) any Precision Compounds that are used by Licensee (acting on its own or through consultants and without any involvement of CSMC, whether through the MRSA, the MRCA or otherwise) along with the Technology licensed under this Agreement solely to potentially assist in the development of Diagnostic Products to select patients for research, development, clinical trials and/or commercialization of such Precision Compounds; provided further that to the extent that Precision develops any Diagnostic Products through its use of the Technology and such Precision Compounds, Precision shall be obligated to pay CSMC the Diagnostic Product Royalty Rate with respect to such Diagnostic Products.”

 

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6.

Section 1.15 of the Agreement shall be deleted in its entirety and replaced with the following:

““Related Inventions shall mean any and all Inventions which (i) result from the services performed under the following agreements: (a) the Consulting Agreement between Licensee and [***]; (b) the Consulting Agreement between Licensee and [***]; (c) the Consulting Agreement between Licensee and [***]; (d) the Master Collaborative Research Agreement between CSMC and Licensee, effective as of the Effective Date, including Inventions described in Section 2.7 hereof (the “MCRA”); and/or (e) the Master Research Services Agreement between CSMC and Licensee, effective as of the Effective Date, including Inventions described in Section 2.7 hereof (the “MRSA”), as each may be amended; (ii) would have been reasonably anticipated at the outset to be developed; (iii) are related to the Technology and/or patents and/or patent applications described on Schedule A of this Agreement; and (iv) with respect to which CSMC owns or otherwise controls intellectual property rights.”

 

7.

A new Section 1.19 shall be added at the end of Article 1 of the Agreement:

“1.19 “Precision Compound” shall mean a proprietary compound which is owned by Precision or a third party and which was not developed through any use of CSMC’s Technology or Patent Rights.”

 

8.

A new Section 5.5 shall be added to the Agreement as follows:

5.5 Patent Schedule. Schedule A of this Agreement shall be updated from time to time, but not less frequently than [***], upon mutual agreement of the parties hereto, such agreement not to be unreasonably withheld, delayed, or conditioned, to include (a) Patent Rights filed on new Related Inventions; (b) changes to the patents and/or patent applications set forth on Schedule A of this Agreement made in the ordinary course of prosecution and maintenance of such patents and/or patent applications; and (c) subject to the provisions set forth in Section 2.3 of this Agreement, any Future Patent Rights which the parties have agreed pursuant to good faith negotiations to add to this Agreement. Each such update shall be made in writing, executed by duly authorized representatives of each of the parties hereto.”

 

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9.

The notice information for Licensee in Section 13.1 of the Agreement shall be deleted in its entirety and replaced with the following:

“or in the case of Licensee to:

Precision IBD, Inc.

3525 Del Mar Heights Rd, #342

San Diego, California 92130

Attention: Chief Executive Officer”

 

10.

Schedule A of the Agreement shall be deleted and replaced in its entirety with the Schedule A that is set forth in ATTACHMENT 1 to this Amendment No. 1.

 

11.

Paragraph 5 of Section II of Schedule C of the Agreement shall be deleted in its entirety and replaced with the following:

“Licensee shall have the right to distribute the Materials to Licensee’s third party contract research organizations or any other third party that Licensee engages under fee-for-service arrangements to perform contract research services for Licensee’s purposes, or to any actual Sublicensee or potential Sublicensee, provided that any transfer to such potential Sublicensee is subject to such potential Sublicensee’s agreement to material transfer terms regarding ownership of the Materials and intellectual property relating thereto and protection of confidential information that permit Licensee to comply with the terms of the Licensee Agreement and these Material Transfer Terms, and provided, further, that the Materials and/or any Materials contained or incorporated in the Licensee Materials are solely owned by CSMC. To the best of its actual, current knowledge and without further investigation, CSMC hereby represents that is has the right to provide the Materials to Licensee for the purposes contemplated by the License Agreement, including without limitation these Material Transfer Terms.”

 

12.

Schedule F of the Agreement shall be deleted in its entirety and replaced by the Amended and Restated Voting Agreement between Licensee and CSMC dated November 14, 2018, as set forth in ATTACHMENT 2 of this Amendment No. 1.

 

13.

The Parties acknowledge and agree that in addition to any consideration paid and payable to CSMC under the Agreement, effective November 2018, the Company contributed materials and equipment worth $[***] to CSMC for use in the laboratory of [***].

 

14.

In the event of any discrepancies or conflicting terms between this Amendment No. 1 and the Agreement, the terms of this Amendment No. 1 shall control.

 

15.

The Amendment No. 1 and the attachments hereto (which are incorporated herein by this reference as if fully set forth herein) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof, and replace and supersede as of the date hereof and thereof any and all prior or contemporaneous agreements and understandings, whether oral or written, between the parties with respect to the subject matter of such agreements.

 

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16.

This Amendment No. 1 and the rights and obligations of the parties hereunder shall be construed and enforced in accordance with the laws of the United States of America and of the State of California, irrespective of choice of laws provisions.

 

17.

This Amendment No. 1 may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. This Agreement may be executed in .pdf format.

 

18.

Except for the matters set forth in this Amendment No. 1, all other terms of the Agreement shall remain unchanged and in full force and effect.

[Signature Page Follows]

 

34


IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Amendment No. 1 as of the Amendment No. 1 Effective Date.

 

“LICENSEE”:
PRECISION IBD, INC., A DELAWARE CORPORATION

By: /s/ Scott L. Glenn                                                     

Scott L. Glenn

President & CEO

Date: March 26, 2019

 

“CSMC”:
CEDARS-SINAI MEDICAL CENTER, A CALIFORNIA NONPROFIT PUBLIC BENEFIT CORPORATION
By:  

/s/ Edward M. Prunchunas

  Edward M. Prunchunas
  Executive Vice President for Finance and CFO
Date: March 26, 2019

By:

 

/s/ James D. Laur

  James D. Laur
  Vice President for Technology Transfer & Business Affairs
Date: March 22, 2019

 

35


ATTACHMENT 1

Schedule A

Patent Rights

 

36


[***]

EX-10.13 17 d14529dex1013.htm EX-10.13 EX-10.13

Exhibit 10.13

[***] Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement”) is entered into as of this 22nd day of March, 2019 (“Effective Date”) by and between CEDARS-SINAI MEDICAL CENTER, a California non-profit public benefit corporation (“CSMC”), with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, and PRECISION IBD, INC., a Delaware corporation (“Licensee”), with an address at 3525 Del Mar Heights Rd, #342, San Diego, California 92130.

R E C I T A L S

A. CSMC owns and/or is entitled to grant license rights with respect to certain Patent Rights (as defined below) invented, collected or otherwise developed in the conduct of inflammatory bowel disease research at CSMC, including through the operation of its Inflammatory Bowel Disease Drug Discovery and Development Unit.

B. CSMC desires to have the Patent Rights developed, used and commercialized in the Field of Use (as defined below) by Licensee, and Licensee desires to obtain an exclusive, worldwide license to conduct research in the Field of Use, and to develop, manufacture, use and sell Products (as defined below) in the Field of Use, using the Patent Rights in accordance with the terms of this Agreement. Other than the rights expressly granted by CSMC hereunder within the Field of Use, Licensee acknowledges that CSMC shall retain all other rights with respect to the Patent Rights.

C. CSMC and Licensee intend that the execution, delivery and performance of this Agreement by each party, and the consummation of the transactions contemplated hereunder, shall not at any time threaten CSMC’s tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and Section 23701d of the California Revenue and Taxation Code, or cause CSMC to be in default under any of CSMC’s issued and outstanding tax-exempt bonds.

NOW, THEREFORE, in consideration of the mutual covenants and premises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

 

1.

DEFINITIONS

1.1 Affiliate” or “Affiliates” shall mean any corporation, person or entity which controls, is controlled by, or is under common control with, a party to this Agreement without regard to stock or other equity ownership. For purposes hereof, the terms “control” and “controls” mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a corporation, person or entity, whether through the ownership of voting securities, by contract or otherwise.

1.2 Commercially Reasonable Efforts” shall mean, with respect to the performance of development or commercialization activities with respect to a Product by Licensee, the carrying out of such activities using efforts and resources comparable to the efforts and resources a similarly situated company in the research-based bio-pharmaceutical industry for compounds or products of similar commercial and scientific potential at a similar stage in development or product life, taking into account relevant factors, including without

 

Page 1 of 19


limitation the competitive landscape, the nature and extent of market exclusivity (including without limitation patent coverage and regulatory exclusivity), the likelihood, timing or existence of generic products, technical, legal, scientific, and medical factors, such Product’s safety and efficacy, its time and cost to develop, the likelihood of regulatory approval, its reasonably expected or actual labeling, its reasonably expected or actual profitability, the amounts of marketing and promotional expenditures with respect to the Product, its reasonably expected or actual pricing, reimbursement and formulary status, and the cost of any studies necessary or reasonably useful to obtain favorable pricing, reimbursement or formulary status for the Product. “Commercially Reasonable Efforts” may be determined with reference to specific markets or group of markets.

1.3 Confidential Information” shall mean any confidential or proprietary information furnished by one party (the “Disclosing Party”) to the other party (the “Receiving Party”) in connection with this Agreement, including, without limitation, all specifications, know-how, trade secrets, technical information, drawings, software, models, business information and patent applications pertaining to the Patent Rights, and as further provided in Section 10 hereof.

1.4 “FDA” shall mean the United States Food and Drug Administration, or any successor agency thereof.

1.5 “Field of Use” shall mean products and services for human use, including but not limited to the diagnosis, prognosis, prophylaxis and/or treatment of diseases and disorders in humans.

1.6 “Funding Agencies” shall mean any public or private granting agencies which have provided funding to CSMC or to any of the Inventors for the development of any of the Patent Rights prior to the Effective Date.

1.7 “Inventors” shall mean [***].

1.8 Patent Rights” shall mean CSMC’s interest in and to: (a) the patents and/or patent applications which are described on Schedule A of this Agreement, (b) all patents and/or patent applications (including provisional patent applications) in any other country corresponding to any of the foregoing, and all divisions, continuations, reissues, reexaminations, supplementary protection certificates and extensions thereof, whether domestic or foreign, all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing, and (c) any patent that issues thereon.

1.9 Product” or “Products” shall mean any product and/or service in the Field of Use that, except for the license granted hereunder, would infringe a Valid Claim.

1.10 “Territory” shall mean the entire world.

1.11 Valid Claim” shall mean a claim of an issued patent included within the Patent Rights, which claim has not (a) lapsed, been canceled or become abandoned, (b) been declared invalid or unenforceable by a non-appealable decision or judgment of a court or other appropriate body or authority of competent jurisdiction, or (c) been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. The term Valid Claim shall also include the claims of a pending patent application within the Patent Rights for a period of [***] years from the actual filing date of that patent application.

 

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2.

LICENSE

2.1 Grant of Exclusive Rights. Subject to the terms of this Agreement, CSMC hereby grants to Licensee, and Licensee hereby accepts from CSMC, the exclusive license, with the right to grant sublicenses (subject to the terms of Section 2.2 hereof), under the Patent Rights, during the Agreement Term (as provided in Section 6 hereof) to conduct research and development in the Field of Use and to make, have made, use, import, offer for sale, have offered for sale, sell and/or have sold Products in the Field of Use in the Territory. The foregoing grant of exclusivity is made expressly subject to the following:

(a) All applicable laws and regulations, including, without limitation, the requirements of federal law as pertains to the manufacture of products within the United States;

(b) All applicable rules of the Funding Agencies;

(c) The rights of any co-owners of any Patent Rights, if any;

(d) The following non-exclusive rights to the Patent Rights, which are retained by CSMC within the Field of Use:

(i) Subject to Licensee’s right to prior review to determine the patentability of any information contained therein (which shall expire after [***] days after Licensee’s receipt thereof), the right to submit for publication the scientific findings from research conducted by or through CSMC or its investigators (including the Inventors) related to the Patent Rights, provided such publications do not contain any Confidential Information of Licensee, in which case Licensee may require such Confidential Information to be removed prior to publication; and

(ii) the right (A) to exploit the Patent Rights and any tangible or intangible information contained therein for CSMC’s research, internal teaching and other educationally-related, clinical and non-commercial clinical study purposes, where clinical use does not involve a third party funding grant to commercialize such information, and (B) to obtain research funding for further study and development thereof from governmental and other nonprofit organizations (including grant applications).

(e) Notwithstanding any other provision hereof to the contrary, all rights to the Patent Rights outside of the Field of Use are retained by CSMC.

2.2 Sublicensing.

(a) Permitted Sublicensing. Licensee shall have the right to grant sublicenses under any or all of the rights granted hereunder to its Affiliates and to (i) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (ii) private companies having at least $[***] in annual sales; or (iii) entities which have been approved in writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from Licensee within [***] days of receiving such request, such request shall be deemed approved (each, a “Sublicensee”). Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential sublicensee if such potential sublicensee has a level of science, management and investors commensurate with or

 

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greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it.

(b) Sublicensing Generally. Any Sublicensee shall be subject in all respects to the provisions contained in this Agreement and Licensee will remain primarily liable to CSMC for, and shall be responsible for monitoring and enforcing, performance of all of Licensee’s obligations hereunder by any such Sublicensee. Without limiting the generality of the foregoing, as an express condition of any such sublicense, any such Sublicensee shall be required to agree in writing to be bound by commercially reasonable reporting and record keeping, indemnification and inspection provisions, and the applicable provisions of this Agreement, including, without limitation, those pertaining to the use of CSMC’s name and marks, indemnification of CSMC and the use of CSMC’s Confidential Information. Sublicensees may further sublicense the rights granted hereunder to (a) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (b) private companies having at least $[***] in annual sales; and (c) entities which have been approved in writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from such Sublicensee within [***] days of receiving such request, such request shall be deemed approved. Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential subsublicensee if such potential subsublicensee has a level of science, management and investors commensurate with or greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it. Licensee shall promptly forward to CSMC a copy of any and all fully executed sublicense agreements and subsublicense agreements, any subsequent amendments, and all copies of Sublicensees’ profit sharing or royalty reports, in no event more than [***] days following execution or receipt thereof, as applicable. Licensee shall also keep CSMC reasonably informed with respect to the progress of any relations entered into with any Sublicensees. If Licensee shall conduct one or more audits of its Sublicensees hereunder during the term hereof, Licensee shall provide copies of any audit report indicating an underpayment or overpayment to CSMC on a timely basis. The covenants pertaining to the use of CSMC’s name and marks, the indemnification of CSMC and the use of CSMC’s Confidential Information in any sublicense or assignment shall run for the benefit of CSMC, who shall be expressly stated as being a third-party beneficiary thereof with respect to the covenants set forth in this Agreement. Licensee understands and agrees that none of its permitted sublicenses hereunder shall reduce in any manner any of its obligations set forth in this Agreement.

2.3 Diligent Commercialization. Licensee acknowledges that it is important to CSMC, and a requirement of the United States Government under Title 35, Section 203 of the United States Code, that Licensee pursue the development, commercialization and marketing of Products. Without limiting the foregoing, Licensee shall use Commercially Reasonable Efforts to develop and make Products commercially available to the public as soon as commercially practicable within the Territory.

2.4 Preference for United States Industry. To the extent that any of the Patent Rights have been developed using funding from the United States Government, Licensee agrees that any Products claimed by such Patent Rights that are made, used or sold in the United States shall be manufactured substantially in the United States, to the extent required under applicable law.

 

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3.

REPRESENTATIONS AND WARRANTIES

3.1 Rights to Technology. Except for the rights, if any, of the Funding Agencies or the United States Government, CSMC represents and warrants to Licensee that, to the best of its actual knowledge (without investigation outside of CSMC as to such representations and warranties) as of the Effective Date: (a) CSMC owns its right, title and interest in and to the Patent Rights as of the Effective Date of this Agreement, (b) CSMC has the power and authority to enter into this Agreement and has the right to grant the licenses set forth in this Agreement, (c) CSMC has not granted licenses to the Patent Rights to any other party that would restrict or otherwise conflict with the rights granted hereunder except as stated herein, (d) no holding, decision, or judgment has been rendered in any action or proceeding before any court or administrative authority (other than in routine patent prosecution activities before the U.S. Patent & Trademark Office and various foreign patent offices) denying the validity of CSMC’s right to register, or CSMC’s rights to own, use or license, any Patent Rights, and (e) there are no claims filed in state or federal court, judgments or settlements to be paid by CSMC with respect the Patent Rights or pending claims or litigation filed in state or federal court relating to the Patent Rights. CSMC covenants and agrees that if at any time during the Agreement Term it becomes aware that any of the representations and/or warranties set forth in this Section 3.1 are no longer true or correct had they been given after the Effective Date, it shall notify Licensee in writing of the facts or circumstances thereof within [***] days of discovery.

3.2 Limited Warranty; LIMITATION OF LIABILITY.

(a) Limited Warranty. CSMC makes no representation or warranty other than those expressly specified in this Agreement. Except as otherwise expressly set forth in this Agreement, Licensee accepts the Patent Rights on an “AS-IS” basis. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTIES CONCERNING PATENT RIGHTS COVERED BY THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO PATENT RIGHTS OR ANY PRODUCT. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF PATENT RIGHTS, OR THAT ANY PRODUCT WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING PATENT RIGHTS COVERED BY THIS AGREEMENT.

(b) LIMITATION OF LIABILITY. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS OR OTHER ECONOMIC LOSSES, OR FOR INJURY TO PERSONS OR PROPERTY) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, REGARDLESS OF WHETHER SUCH PARTY KNOWS OR SHOULD KNOW OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, CSMC’S AGGREGATE LIABILITY FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT

 

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MATTER SHALL NOT EXCEED [***]. THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND, WHETHER BASED ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE), OR ANY OTHER GROUNDS.

3.3 Rights Retained by Funding Agencies. Licensee acknowledges that to the extent that the Patent Rights have been developed in part under one or more funding agreements (“Funding Agreements”) with one or more Funding Agencies, such Funding Agencies have certain statutory, non-exclusive rights relative thereto for use for government purposes as well as regulatory or statutory “march-in rights” (collectively, “Statutory Rights”). This Agreement is explicitly made subject to such Statutory Rights and, to the extent of any conflict between any such Statutory Rights and this Agreement, such Statutory Rights shall prevail.

 

4.

CONSIDERATION

In consideration of the execution and delivery by CSMC of this Agreement, Licensee agrees as follows:

4.1 License Fee. Within [***] days of the execution of this Agreement, Licensee shall pay to CSMC a non-refundable license fee in an amount equivalent to $[***].

(a) Payment and Accounting.

(i) Wire Transfer Instructions. All payments due hereunder shall be made by Licensee to CSMC in accordance with the following wire transfer instructions:

[***]

(ii) Records and Audits. Licensee shall create and maintain complete and accurate records and documentation concerning all sales of Products by Licensee, its Affiliates and Sublicensees, in sufficient detail. Licensee shall retain such records and documentation for not less than [***] years from the date of their creation. During the Agreement Term and for a period of [***] years thereafter, CSMC and its representatives shall have the right to audit such records and documentation. Such examiners shall have reasonable access during regular business hours to Licensee’s offices and the relevant records, files and books of account, and shall have the right to examine any other records reasonably necessary to determine the accuracy of the calculations provided by Licensee.

(iii) Currency Transfer Restrictions. If any restrictions on the transfer of currency exist in any country or other jurisdiction so as to prevent Licensee from making payments to CSMC, Licensee shall take all commercially reasonable steps to obtain a waiver of such restrictions or to otherwise enable Licensee to make such payments. If Licensee is unable to do so, Licensee shall make such payments to CSMC in a bank account or other depository designated by CSMC in such country or jurisdiction, which payments shall be in the local currency of such country or jurisdiction, unless payment in United States dollars is permitted. Any payment by Licensee to CSMC in currencies other than United States dollars shall be calculated using the appropriate foreign exchange rate for such currency quoted in the California edition of The Wall Street Journal for the close of business of the last banking day of the calendar quarter in which such payment is being made.

 

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(iv) Late Charges. A service charge at the rate that is the lower of (i) [***] over the rate of interest announced by Bank of America in Los Angeles, California (or any successor in interest thereto or any commercially equivalent financial institution if no such successor exists) to be its “prime rate,” or (ii) the highest rate permitted by applicable law, shall be payable by Licensee on any portion of Licensee’s outstanding undisputed amounts payable by Licensee hereunder that are not paid to CSMC within [***] days past the due date.

(v) Taxes. Licensee shall pay, or cause to be paid, any and all taxes required to be paid or withheld on any sales, licenses or other transfers for value of Products or Patent Rights (other than taxes imposed on the income or revenues of CSMC). Licensee shall secure and send to CSMC proof of any such taxes withheld and paid by Licensee, its Affiliates or Sublicensees.

 

5.

PATENT RIGHTS

5.1 Prosecution. Commencing on the Effective Date and continuing until the termination of the Agreement, Licensee shall assume, in coordination with CSMC, full responsibility for, and shall use Commercially Reasonable Efforts to pursue, the application, maintenance, reexamination, reissue, opposition and prosecution of any kind (collectively “Prosecution”) relating to the Patent Rights, including, but not limited to, payment of all costs, fees and expenses related thereto. Subject to the approval of CSMC (which approval shall not be unreasonably withheld), Licensee shall have the right to select counsel with respect to the responsibility assumed by Licensee in this Section 5.1. For all purposes of the patent Prosecution, CSMC shall be the named “client” of such patent counsel. Each party shall provide the other with copies of any and all material or communications with the United States Patent and Trademark Office, or any foreign patent office, and CSMC and Licensee shall be afforded the opportunity of prior review and comment on such action or paper.

5.2 Abandonment, Disclaimers, etc. Licensee shall obtain the prior written consent of CSMC (which consent shall not be unreasonably withheld), prior to abandoning, disclaiming, withdrawing, seeking reissue, seeking reexamination or allowing to lapse any patent or patent application within the Patent Rights. In the event that Licensee shall elect to abandon the Prosecution (including the payment of maintenance fees or annuities) of any patent or patent application included in the Patent Rights, Licensee shall notify CSMC of such election at least [***] days before a final due date which would result in abandonment or bar of patentability of the patent or patent application. In such event, CSMC may, at its sole option and expense, continue Prosecution of the patent application or patent; the patent application or patent shall no longer be deemed part of the Patent Rights under this Agreement; and all rights in the patent application or patent shall revert to CSMC. Licensee further agrees that it shall not file any continuation-in-part application relating to the Patent Rights without the prior written consent of CSMC, not to be unreasonably withheld, delayed, or conditioned, unless the additional disclosure or material to be included in the continuation-in-part application is necessary or appropriate to support the patentability of a claim recited in a parent application on which the continuation-in-part application is based.

5.3 Expenses. Except as otherwise expressly set forth herein, Licensee shall pay all expenses resulting from its obligations in Section 5.1 hereof. CSMC shall exercise reasonable efforts to cause the Inventors (to the extent they are available and on CSMC’s staff as employees) to cooperate fully with Licensee with respect to the Prosecution of the Patent Rights, and CSMC shall be reimbursed for all reasonable out-of-pocket expenses as such expenses are incurred.

 

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5.4 CREATE Act. Licensee shall not invoke the Cooperative Research and Technology Enhancement Act of 2004, as set forth under Title 35, Section 102(c) of the United States Code (the “CREATE Act”), with respect to the Patent Rights without first obtaining the prior written consent of CSMC.

5.5 Patent Schedule. Schedule A of this Agreement shall be updated from time to time, but not less frequently than [***], upon mutual agreement of the parties hereto, such agreement not to be unreasonably withheld, delayed, or conditioned, to include changes to the patents and/or patent applications set forth on Schedule A of this Agreement made in the ordinary course of prosecution and maintenance of such patents and/or patent applications, including without limitation addition of new related patents and/or patent applications and removal of abandoned patents and/or patent applications. Each such update shall be made in writing, executed by duly authorized representatives of each of the parties hereto.

 

6.

TERM AND TERMINATION

6.1 Term. Unless earlier terminated as provided in Section 6.2 hereof, the term of this Agreement shall commence on the Effective Date and shall expire, on a country-by-country basis, upon the date on which the last Valid Claim expires (the “Agreement Term”). Upon the expiration of this Agreement in accordance with this Section 6.1 (but not the earlier termination of this Agreement in accordance with Section 6.2), the license set forth in Section 2.1 shall become fully paid-up, irrevocable, and perpetual, provided that, in the event that Licensee breaches any of its surviving obligations under this Agreement as set forth in Section 13.13, then such license may be terminated by CSMC in accordance with Section 6.2(c).

6.2 Termination. Except as provided by Section 6.3 and/or 6.8 hereof, this Agreement shall terminate upon the earliest to occur of the following:

(a) Automatically if Licensee shall enter into a liquidating bankruptcy, be adjudged insolvent, liquidate, dissolve and/or if the business of Licensee shall be placed in the hands of a receiver, assignee, or trustee, whether by voluntary act of Licensee or otherwise; provided, however, that, if any such action is involuntary, termination shall not take place unless the action is not reversed within [***] days. Further, Licensee shall give CSMC at least [***] days’ prior written notice before Licensee initiates any bankruptcy proceeding, and CSMC shall have the right to terminate this Agreement immediately upon receipt of such notice;

(b) Upon [***] days written notice of CSMC to Licensee if the performance by either party to this Agreement of any term, covenant, condition or provision hereof (i) shall jeopardize (A) the licensure of CSMC, (B) CSMC’s participation in the Medicare, Medi-Cal or other reimbursement or payment programs, (C) the full accreditation of CSMC by The Joint Commission or any other state or nationally recognized accreditation organization, or (D) CSMC’s tax-exempt status; or (ii) is deemed illegal or unethical by any recognized governmental agency or body. Upon the occurrence of any of the items set forth in this subparagraph (b), CSMC shall provide written notice to Licensee setting forth the reason for such termination and the parties shall promptly discuss in good faith reasonable means of avoiding such termination, including without limitation any required amendments to this Agreement, provided that, if termination cannot be avoided, such termination shall be effected at the end of such [***] day period;

 

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(c) Upon [***] days’ written notice from CSMC if, within such [***] day period, Licensee shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity, which breach or default may include, without limitation, Licensee’s failure to use Commercially Reasonable Efforts to develop and make Products commercially available to the public in accordance with Section 2.3; provided, however, that Licensee may avoid such termination if, before the end of such [***] period, such breach or default has been cured by Licensee; and provided further that this termination right shall not apply to breaches of Section 4.2(c), the exclusive remedy for which is set forth therein.

(d) Upon [***] days’ written notice from Licensee if, within such [***] day period, CSMC shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity; provided, however, that CSMC may avoid such termination if, before the end of such [***] day period, such breach or default has been cured by CSMC;

(e) By Licensee upon [***] days’ written notice to CSMC in the event that Licensee has determined that it would not be commercially reasonable to continue to develop and/or commercialize Products, including without limitation as a result of: (i) failure to secure adequate capital commitment within a commercially reasonable timeframe; (ii) failure to initiate a Phase I, Phase II or Phase III clinical trial for at least [***] within a commercially reasonable timeframe due to the following reasons: (A) regulatory restrictions, prohibitions, or adverse decisions; (B) lack of sufficient funding to complete the clinical trials and/or obtain supplies of Products; (C) lack of interest from clinical investigators; or (D) difficulties in patient accrual; (iii) scientific or technical reasons; (iv) the approved labeling for the Product; (v) competitive products then being developed and/or commercialized; (v) manufacturing concerns, including costs of goods and materials; (vi) intellectual property protection; (vii) obligations imposed by regulatory authorities; and (viii) pricing concerns; provided that, such written notice to CSMC under this Section 6.2(e) must provide CSMC with a reasonable explanation for Licensee’s termination under this Section 6.2(e).

(f) Upon the mutual written agreement of the parties hereto (such termination to be effective as of the date mutually agreed upon in such written agreement).

6.3 Obligations Upon Termination. Upon any termination of this Agreement pursuant to Section 6.2 hereof, nothing herein shall be construed to release any party from any liability for any obligation incurred through the effective date of termination (e.g., confidentiality, reimbursement of patent expenses incurred prior to such date, etc.) or for any breach of this Agreement prior to the effective date of such termination. Licensee may, for a period of [***] after the effective date of such termination, sell all tangible Products customarily classified as “inventory” that it has on hand at the date of termination; providedhowever, that any such action by Licensee does not subject CSMC to any of the occurrences set forth in Section 6.2(b) hereof.

6.4 Effect of Termination. In the event of any termination of this Agreement pursuant to Section 6.2, where such termination has not been caused by any action or inaction on the part of any Sublicensee of Licensee or by any breach by such Sublicensee of its obligations under its sublicense from Licensee, such termination shall be without prejudice to the rights of each non-breaching Sublicensee of Licensee and each non-breaching Sublicensee shall be deemed to be a licensee of CSMC under this Agreement, as applicable, at such Sublicensee’s written request, and CSMC shall be entitled to all rights and subject to all

 

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obligations under this Agreement (to the extent provided for in such sublicense). This Section 6.4, however, shall not be applicable if this Agreement has been terminated under Section 6.2(b) under circumstances where the application of this Section 6.4 would subject CSMC to any of the occurrences set forth in Section 6.2(b).

6.5 Right to Institute Legal Actions. Notwithstanding the provisions of Section 6.2 hereof, CSMC, on the one hand, and Licensee, on the other hand, may institute any other legal action or pursue any other remedy against the other party permitted by applicable law if the other party does not substantially cure any breach or default of any material obligation as provided herein.

6.6 Reversion of Rights. Notwithstanding anything to the contrary set forth herein (including, but not limited to, Section 5 hereof), full responsibility for Prosecution of the terminated Patent Rights shall, at CSMC’s sole expense from the date of reversion, revert to CSMC upon any termination of this Agreement.

6.7 Return of Data. In the event of any termination or expiration of this Agreement, Licensee shall, upon the request of CSMC, negotiate in good faith with CSMC for a reasonable period regarding the terms and conditions under which CSMC would receive copies of data, information and materials obtained or generated by or on behalf of Licensee in the course of conducting research and developing Products using the Patent Rights.

6.8 Dispute. If either party reasonably and in good faith disagrees as to whether the other party has a basis for terminating this Agreement pursuant to Section 6.2, the non-terminating party may contest the allegation in accordance with Section 13.3. During the pendency of such a dispute, all of the terms and conditions of this Agreement shall remain in effect, and the parties shall continue to perform all of their respective obligations and retain their respective rights under this Agreement.

 

7.

INFRINGEMENT BY THIRD PARTIES

The parties agree as follows:

7.1 Enforcement. The parties shall notify each other in writing of any suspected or actual infringement of any Patent Rights by a third party and shall provide the other party with any available evidence thereof. After such notification, CSMC and Licensee shall consult for a period not to exceed [***] days whether enforcement of the Patent Rights by Licensee against such third party infringer is reasonably warranted, by determining whether a reasonably prudent licensee would institute litigation to enforce the patent in question in light of all relevant business and economic factors (including, but not limited to, the projected cost of such litigation, the likelihood of success on the merits, the probable amount of any damage award, the prospects for satisfaction of any judgment against the alleged infringer, the possibility of counterclaims against the parties hereto, the impact of any possible adverse outcome on Licensee and the effect any publicity might have on the parties’ respective reputations and goodwill). If, upon the expiration of such [***] day period, it is mutually determined by the parties that a suit should be filed by Licensee, Licensee shall have the right and the obligation to enforce, at its sole expense, the Patent Rights against infringement by such third party infringer. If, upon the expiration of such [***] day period, the parties have not agreed that a suit should be filed by Licensee, Licensee shall have the right, but not the obligation, to enforce, at its sole expense, the Patent Rights against infringement by such third party infringer or commence settlement negotiations with respect thereto. Upon Licensee’s undertaking to pay

 

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all expenditures reasonably incurred by CSMC, CSMC shall reasonably cooperate in any such enforcement and, as necessary, join as a party therein. Licensee shall reimburse CSMC for all expenses, including reasonable attorneys’ fees, incurred in connection with any such enforcement. In the event that Licensee does not file suit against or commence settlement negotiations with the infringer within [***] days of the expiration of the [***] day consultation period described above, then CSMC shall have the right, at its own expense, to enforce the Patent Rights licensed hereunder on behalf of itself and Licensee. Any damages or other recovery from an infringement action undertaken by Licensee shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to Licensee and (b) [***] to CSMC. If Licensee fails to prosecute any such action to completion, then any damages or other recovery from an infringement action undertaken or assumed by CSMC shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to CSMC and (b) [***] to Licensee.

7.2 Defense Of Patent Rights. In the event that any Patent Rights are the subject of a legal action seeking declaratory relief or of any reexamination or opposition proceeding instituted by a third party, the parties agree to promptly consult with each other concerning the defense of such actions or proceedings. If the parties agree that such defense should be undertaken, then Licensee shall bear the expenses, including attorneys’ fees, associated with such defense and in any recoupment of expenses. If the parties disagree, then the party desiring to defend the action or proceeding may proceed with such defense and will bear its own expenses, and be entitled to all sums recovered.

 

8.

INDEMNIFICATION

8.1 Indemnification by Licensee. Subject to Section 8.2 hereof, Licensee shall hold harmless, defend and indemnify CSMC and each of its officers, directors, employees (including the Inventors), and agents (each, an “Indemnified Party,” and collectively, the “Indemnified Parties”) from and against any and all claims, damages, losses, liabilities, costs and expenses (including reasonable attorneys’ fees and expenses) suffered or incurred by any of the Indemnified Party in any action, suit, litigation, arbitration or dispute of any kind brought by a third party (“Action”) arising or resulting from any negligence or willful acts or omissions on the part of Licensee, its Affiliates or Sublicensees in connection with (a) their use of the Patent Rights and/or (b) the exercise of their rights hereunder or under any sublicense, including, but not limited to (i) the preclinical development and clinical testing of Products, and (ii) the manufacture, sale, use, marketing, or other disposition of Products developed, manufactured, sold, marketed, used or otherwise disposed of under this Agreement; except to the extent any of the foregoing arise out of or result from (i) CSMC’s breach of any covenant, obligation, representation or warranty under this Agreement and/or (ii) the negligent or willful acts or omissions of any Indemnified Party.

8.2 Indemnification Procedure. CSMC shall promptly notify Licensee in writing of any claim or Action or material threat thereof brought against any Indemnified Party in respect of which indemnification may be sought and, to the extent allowed by applicable law, shall reasonably cooperate with Licensee in defending or settling any such claim or Action (at Licensee’s expense). Subject to this Section 8, Licensee shall defend any Action brought by a third party against any of the Indemnified Parties for which Licensee is obligated to indemnify pursuant to Section 8.1, provided that Licensee shall have the sole right to control the defense and/or settlement of any such Action with counsel of Licensee’s own choosing and reasonably

 

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acceptable to CSMC. No settlement of any Action against the Indemnified Party for which CSMC intends to seek indemnification (for itself or on behalf of any other Indemnified Party) shall be made without the prior joint written approval of Licensee and CSMC, which approval shall not be unreasonably withheld, delayed, or conditioned by either party, provided that Licensee shall have the right to settle any Action without the need to obtain CSMC’s approval, if such settlement is solely monetary in nature and admits no wrongdoing on the part of CSMC or the Indemnified Party. If CSMC or any other Indemnified Party does not permit Licensee to exclusively control the defense of any such Action, or if CSMC or any other Indemnified Party does not obtain the approval of Licensee to settle such Action, Licensee shall have no obligation to defend or indemnify the CSMC or any other Indemnified Party hereunder.

8.3 Insurance. Licensee shall obtain and maintain insurance policies (including products liability and general liability policies at such time as is appropriate) which are reasonable and necessary to cover its activities and to comply with the indemnification obligations set forth above.

 

9.

USE OF NAMES

9.1 CSMC Names and Marks. Licensee shall not, unless as required by any law or governmental regulation, use the name of CSMC, and/or any of its trademarks, service marks, trade names or fictitious business names or the name of any CSMC officer, faculty member, employee, student or volunteer (collectively, “CSMC Names and Marks”) without express prior written consent of the Vice President for Public Relations and Marketing of CSMC. Further, except as otherwise required by applicable law, prior to any reference by Licensee to CSMC Names and Marks in any manner, Licensee shall provide CSMC with a writing reflecting the proposed reference so that CSMC can review the reference within a reasonable period of time prior to the proposed use thereof by Licensee. Except as otherwise required by applicable law, this limitation includes, but is not limited to, use by Licensee in any regulatory filing, advertising, offering circular, prospectus, sales presentation, news release or trade publication. In addition, certain specific language may be mutually agreed upon by the parties for Licensee’s use in certain contexts and with respect to certain topics, and once agreed upon, may be utilized by Licensee in connection with the approved contexts and topics without further permission of the applicable Licensor. Subject to compliance by Licensee with the foregoing, which shall be deemed conditions precedent to any use of CSMC Names and Marks by Licensee, Licensee shall ensure that the CSMC Names and Marks are used as scientifically or academically appropriate in the “byline” of any article, abstract, manuscript or any other publication related to the subject matter hereof.

9.2 No Endorsements by CSMC. By entering into this Agreement, CSMC does not directly or indirectly endorse any product or service provided, or to be provided, by Licensee whether directly or indirectly related to this Agreement. Licensee shall not state or imply that this Agreement is an endorsement by CSMC.

 

10.

CONFIDENTIALITY

10.1 Non-Disclosure. The parties hereto shall keep the terms of this Agreement and all business and scientific discussions relating to the business of the parties confidential except as otherwise set forth in this Agreement. All patient information to which a party is given access by the other party shall be subject to the provisions of the Confidentiality of Medical Information Act (Cal. Civ. Code §§56, et seq.) and the Health Insurance Portability and Accountability Act of 1996, and all regulations promulgated thereunder. It may, from time to

 

Page 12 of 19


time, be necessary for the parties, in connection with performance under this Agreement, to disclose Confidential Information (including know-how) to each other. The Receiving Party (as defined in Section 1.3 hereof) shall keep in confidence the Confidential Information of the Disclosing Party (as defined in Section 1.3 hereof), using the standard of care it normally uses for information of like character, and shall not disclose the Confidential Information to any third party or use it except as expressly authorized by the prior written consent of the Disclosing Party or as otherwise permitted by this Agreement. Notwithstanding the foregoing, (a) Licensee may disclose the Confidential Information received from CSMC, and also may provide a copy of this Agreement, to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees as shall be reasonably necessary to carry out the intent of this Agreement or any sublicense granted by Licensee as contemplated by this Agreement and (b) Licensee may provide a copy of this Agreement to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees, investors, acquirers, lenders, or other financial partners, for purposes of a potential business transaction or obtaining professional advice, if, but only if, with respect to each of (a) and (b) above, (i) such entity or person is subject to confidentiality obligations no less restrictive than those confidentiality provisions contained in this Section 10 and (ii) Licensee shall be fully responsible and liable for any action of such third party recipient which would constitute a breach of this Agreement if committed by Licensee as if Licensee had committed such action itself. Furthermore, Licensee may include a copy of this Agreement in legally required regulatory filings; provided that Licensee will seek confidential treatment of all financial terms of this Agreement in all such legally required regulatory filings. The Receiving Party’s obligations hereunder shall not apply to Confidential Information that the Receiving Party can show:

(a) Is or later becomes part of the public domain through no fault or neglect of the Receiving Party;

(b) Is received in good faith from a third party having no obligations of confidentiality to the Disclosing Party, provided that the Receiving Party complies with any restrictions imposed by the third party;

(c) Is independently developed by the Receiving Party without use of the Disclosing Party’s Confidential Information; or

(d) Is required by law or regulation to be disclosed (including, without limitation, in connection with FDA filings, filings with another government agency or as required under the California Public Records Act), provided that the Receiving Party uses reasonable efforts to restrict disclosure and to obtain confidential treatment.

10.2 Limits on Permitted Disclosures. Each party agrees that any disclosure or distribution of the other party’s Confidential Information within its own organization shall be made only as is reasonably necessary to carry out the intent of this Agreement. The parties further agree that all of their respective officers, employees, agents, representatives or approved sublicensees to whom any Confidential Information is disclosed or distributed shall have agreed to maintain its confidentiality.

10.3 Legally Required Disclosures. If a subpoena or other legal process concerning Confidential Information is served upon any party hereto pertaining to the subject matter hereof, the party served shall notify the other party immediately, the other party shall cooperate with the party served, at the other party’s expense, in any effort to contest the validity of such

 

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subpoena or other legal process. This Section 10.3 shall not be construed in any way to limit any party’s ability to satisfy any disclosure of its relationship with the other party required by any governmental authority.

10.4 Patent Rights as Confidential Information. The Patent Rights are understood by Licensee to be the Confidential Information of CSMC to the extent “unpublished” as such term is construed under the United States Patent Laws. As such, Licensee’s confidentiality obligations hereunder automatically extend to any and all patent applications of CSMC relating to any Patent Rights, and to any and all communications with the United States Patent and Trademark Office, and any foreign patent office relating to any Patent Rights.

10.5 Return of Confidential Information. In the event of any termination of this Agreement, the Receiving Party shall promptly return all Confidential Information and any copies made thereof previously made available to the Receiving Party by the Disclosing Party.

10.6 Remedies. Both parties acknowledge and agree that it would be difficult to measure damages for breach by either party of the covenants set forth in this Section 10, and that injury from any such breach would be incalculable, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, either party shall be entitled, in addition to all other remedies available hereunder or under law or equity, to injunctive or such other equitable relief as a court may deem appropriate to restrain or remedy any breach of such covenants.

10.7 Term of Confidentiality. The obligations of confidentiality and nonuse set forth in this Section 10 shall survive for a period of [***] years beyond the termination or expiration of this Agreement.

 

11.

INFORMATION EXCHANGE

In addition to the Patent Rights, the parties shall cooperate to exchange such non-confidential information as may be appropriate and necessary to facilitate Licensee’s development and commercialization of Products incorporating any Patent Rights.

 

12.

PATENT MARKING

Licensee shall use Commercially Reasonable Efforts to actually or virtually mark all Products made, sold or otherwise disposed of by or on behalf of it or any of its Affiliates and Sublicensees as set forth under Title 35, Section 287(a) of the United States Code and shall respond to any request or disclosure under Title 35, Section 287(b)(4)(B) of the United States Code by only notifying CSMC of the request for disclosure.

 

13.

MISCELLANEOUS

13.1 Notices. Any notice, request, instruction or other document required by this Agreement shall be in writing and shall be deemed to have been given (a) if mailed with the United States Postal Service by prepaid, first class, certified mail, return receipt requested, at the time of receipt by the intended recipient, or (b) if sent by Federal Express or other overnight carrier, signature of delivery required, at the time of receipt by the intended recipient, addressed as follows:

In the case of CSMC to:

 

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Cedars-Sinai Medical Center

8700 Beverly Boulevard

Los Angeles, California 90048-1865

Attention: Executive Vice President for Finance & CFO

with a copy to Vice President for Technology & Business Affairs

or in the case of Licensee to:

Precision IBD, Inc.

3525 Del Mar Heights Rd, #342

San Diego, California 92130

Attention: Chief Executive Officer

or to such other address or to such other person(s) as may be given from time to time under the terms of this Section 13.1.

13.2 Compliance with Laws. Each party shall comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this Agreement.

13.3 Dispute Resolution.

(a) Governing Law. For any dispute between the parties to this Agreement which arises from or relates to this Agreement (“Dispute”), the Agreement shall be construed and enforced in accordance with the laws of the United States of America and of the State of California, irrespective of choice of laws provisions.

(b) Arbitration. The parties shall settle any Dispute by submitting the matter to binding arbitration to be held in Los Angeles, California, if Licensee initiates such arbitration, and in San Diego, California, if CSMC initiates such arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in the English language. In any such arbitration, the arbitrator shall be appointed by agreement of the both parties or, if no agreement can be reached, by the American Arbitration Association pursuant to its rules, which arbitrator, in each case, shall be an experienced lawyer or judge (or retired lawyer or judge). The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment upon the award may be entered in any court having jurisdiction. All or a portion of the costs of the arbitration proceeding, including attorneys’ fees, may be awarded by the arbitrator to the party against whom the arbitrator rules.

13.4 Waiver. Failure of any party to enforce a right under this Agreement shall not act as a waiver of that right or the ability to assert that right relative to the particular situation involved.

13.5 Enforceability. If any provision of this Agreement shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of the remainder of this Agreement.

13.6 Modification. No change, modification, or addition or amendment to this Agreement, or waiver of any term or condition of this Agreement, is valid or enforceable unless in writing and signed and dated by the authorized officers of the parties to this Agreement.

 

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13.7 Entire Agreement. This Agreement and the Schedules hereto (which are incorporated herein by this reference as if fully set forth herein) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof, and replace and supersede as of the date hereof and thereof any and all prior or contemporaneous agreements and understandings, whether oral or written, between the parties with respect to the subject matter of such agreements.

13.8 Construction. This Agreement has been prepared, examined, negotiated and revised by each party and their respective attorneys, and no implication shall be drawn and no provision shall be construed against any party to this Agreement by virtue of the purported identity of the drafter of this Agreement or any portion thereof.

13.9 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. This Agreement may be executed in .pdf format.

13.10 Attorneys’ Fees. In the event of any action at law or in equity between the parties hereto to enforce any of the provisions hereof, the unsuccessful party to such litigation shall pay to the successful party all reasonable costs and expenses, including reasonable attorneys’ fees, incurred therein by such successful party; and if such successful party shall recover a judgment in any such action or proceeding, such reasonable costs, expenses and attorneys’ fees may be included in and as part of such judgment.

13.11 Assignment; Successors.

(a) Neither this Agreement, nor any of the rights or obligations of a party may be assigned, in whole or in part, without the prior written consent of the other party, which consent may not be unreasonably withheld, delayed, or conditioned; provided, however, that either party may assign this Agreement, without the obligation to obtain the prior written consent of the other party, to an Affiliate, and, subject to Section 13.11(b), Licensee may transfer or assign this Agreement, without the obligation to obtain the prior written consent of CSMC, as part of a sale, regardless of whether such a sale occurs through an asset sale, stock sale, merger or other combination, or any other transfer of Licensee’s entire business, or that part of Licensee’s business that exercises all rights granted under this Agreement; and provided further that CSMC shall have the right to assign this Agreement, without the obligation to obtain the prior written consent of Licensee, as part of any reorganization or bond financing. Any attempt to transfer or assign this Agreement by either party that is inconsistent with this Section 13.11(a), above, shall be null and void. In the event of a bankruptcy, assignment is permitted only to a party that can provide adequate assurance of future performance, including diligent development and sales, of Products.

(b) Prior to any assignment, the new assignee must agree in writing to CSMC to be bound by this Agreement.

(c) Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of CSMC and Licensee.

(d) Notwithstanding anything to the contrary herein, Licensee shall be permitted to pledge and grant a security interest in any of Licensee’s rights, licenses and interests under this Agreement and upon any foreclosure of such security interest, Licensee’s

 

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rights, licenses and interests under this Agreement shall inure to the benefit of the holder of such security interest. For the avoidance of doubt, Licensee shall have no right to pledge or grant a security interest in any of CSMC’s property or assets, including without limitation, the Patent Rights.

13.12 Further Assurances. At any time and from time to time after the Effective Date, each party shall do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged or delivered, all such further acts, transfers, conveyances, assignments or assurances as may be reasonably required to consummate the transactions contemplated by this Agreement.

13.13 Survival. The following sections shall survive any expiration or earlier termination of this Agreement: 4.1, 6.4, 6.5, 8, 9, 10 (for the period set forth in Section 10.7), 12 and 13.

[signature page follows]

 

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IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement as of the date first above written.

 

LICENSEE”:
PRECISION IBD, INC., A DELAWARE CORPORATION
By:   /s/ Scott L. Glenn
  Scott L. Glenn
  President & CEO

Date: 2019

 

“CSMC”:
CEDARS-SINAI MEDICAL CENTER, A CALIFORNIA NONPROFIT PUBLIC BENEFIT
By:   /s/ Edward M. Prunchunas
 

Edward M. Prunchunas

 

Executive Vice President, Finance Affairs & Chief Financial Officer

Date: 2019

 

By:   /s/ James D. Laur, JD
 

James D. Laur, JD

 

Vice President for Technology & Business Affairs

Date: 2019

 

Page 18 of 19


Schedule A

Patent Rights

[***]

 

Page 19 of 19

EX-10.14 18 d14529dex1014.htm EX-10.14 EX-10.14

Exhibit 10.14

[***] Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

EXCLUSIVE LICENSE AGREEMENT

THIS EXCLUSIVE LICENSE AGREEMENT (“Agreement) is entered into as of this 22nd day of March, 2019 (“Effective Date) by and between CEDARS-SINAI MEDICAL CENTER, a California nonprofit public benefit corporation (“CSMC”), with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, and PRECISION IBD, INC., a Delaware corporation (“Licensee”), with an address at 3525 Del Mar Heights Rd, #342, San Diego, California 92130.

R E C I T A L S

A. CSMC owns and/or is entitled to grant license rights with respect to certain Patent Rights (as defined below) invented, collected or otherwise developed in the conduct of inflammatory bowel disease research at CSMC, including through the operation of its Inflammatory Bowel Disease Drug Discovery and Development Unit.

B. CSMC desires to have the Patent Rights developed, used and commercialized in the Field of Use (as defined below) by Licensee, and Licensee desires to obtain an exclusive, worldwide license to conduct research in the Field of Use, and to develop, manufacture, use and sell Products (as defined below) in the Field of Use, using the Patent Rights in accordance with the terms of this Agreement. Other than the rights expressly granted by CSMC hereunder within the Field of Use, Licensee acknowledges that CSMC shall retain all other rights with respect to the Patent Rights.

C. CSMC and Licensee intend that the execution, delivery and performance of this Agreement by each party, and the consummation of the transactions contemplated hereunder, shall not at any time threaten CSMC’s tax-exempt status under Section 501(c)(3) of the Internal Revenue Code and Section 23701d of the California Revenue and Taxation Code, or cause CSMC to be in default under any of CSMC’s issued and outstanding tax-exempt bonds.

Now, THEREFORE, in consideration of the mutual covenants and premises herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. DEFINITIONS

1.1 Affiliate or “Affiliates shall mean any corporation, person or entity which controls, is controlled by, or is under common control with, a party to this Agreement without regard to stock or other equity ownership. For purposes hereof, the terms “control and “controls mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a corporation, person or entity, whether through the ownership of voting securities, by contract or otherwise.

1.2 Commercially Reasonable Efforts shall mean, with respect to the performance of development or commercialization activities with respect to a Product by Licensee, the carrying out of such activities using efforts and resources comparable to the efforts and resources a similarly situated company in the research-based bio-pharmaceutical industry for compounds or products of similar commercial and scientific potential at a similar stage in development or product life, taking into account relevant factors, including without limitation the competitive landscape, the nature and extent of market exclusivity (including without limitation patent coverage and regulatory exclusivity), the likelihood, timing or existence of generic products, technical, legal, scientific, and medical factors, such Product’s safety and

 

1


efficacy, its time and cost to develop, the likelihood of regulatory approval, its reasonably expected or actual labeling, its reasonably expected or actual profitability, the amounts of marketing and promotional expenditures with respect to the Product, its reasonably expected or actual pricing, reimbursement and formulary status, and the cost of any studies necessary or reasonably useful to obtain favorable pricing, reimbursement or formulary status for the Product. “Commercially Reasonable Efforts” may be determined with reference to specific markets or group of markets.

1.3 Confidential Information shall mean any confidential or proprietary information furnished by one party (the “Disclosing Party”) to the other party (the “Receiving Party”) in connection with this Agreement, including, without limitation, all specifications, know-how, trade secrets, technical information, drawings, software, models, business information and patent applications pertaining to the Patent Rights, and as further provided in Section 10 hereof.

1.4 FDA shall mean the United States Food and Drug Administration, or any successor agency thereof.

1.5 Field of Use shall mean products and services for human use, including but not limited to the diagnosis, prognosis, prophylaxis and/or treatment of diseases and disorders in humans.

1.6 Funding Agencies shall mean any public or private granting agencies which have provided funding to CSMC or to any of the Inventors for the development of any of the Patent Rights prior to the Effective Date.

1.7 Inventors shall mean [***]

1.8 Patent Rights shall mean CSMC’s interest in and to: (a) the patents and/or patent applications which are described on Schedule A of this Agreement, (b) all patents and/or patent applications (including provisional patent applications) in any other country corresponding to any of the foregoing, and all divisions, continuations, reissues, reexaminations, supplementary protection certificates and extensions thereof, whether domestic or foreign, all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing, and (c) any patent that issues thereon.

1.9 Product or “Products shall mean any product and/or service in the Field of Use that, except for the license granted hereunder, would infringe a Valid Claim.

1.10 Territory shall mean the entire world.

1.11 Valid Claim shall mean a claim of an issued patent included within the Patent Rights, which claim has not (a) lapsed, been canceled or become abandoned, (b) been declared invalid or unenforceable by a non-appealable decision or judgment of a court or other appropriate body or authority of competent jurisdiction, or (c) been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise. The term Valid Claim shall also include the claims of a pending patent application within the Patent Rights for a period of [***] years from the actual filing date of that patent application.

2. LICENSE

2.1 Grant of Exclusive Rights. Subject to the terms of this Agreement, CSMC hereby grants to Licensee, and Licensee hereby accepts from CSMC, the exclusive license, with the right to grant sublicenses (subject to the terms of Section 2.2 hereof), under the Patent Rights, during the Agreement Term (as provided in Section 6 hereof) to conduct research and development in the Field of Use and to make, have made, use, import, offer for sale, have offered for sale, sell and/or have sold Products in the Field of Use in the Territory. The foregoing grant of exclusivity is made expressly subject to the following:

 

2


(a) All applicable laws and regulations, including, without limitation, the requirements of federal law as pertains to the manufacture of products within the United States;

(b) All applicable rules of the Funding Agencies;

(c) The rights of any co-owners of any Patent Rights, if any;

(d) The following non-exclusive rights to the Patent Rights, which are retained by CSMC within the Field of Use:

(i) Subject to Licensee’s right to prior review to determine the patentability of any information contained therein (which shall expire after [***] days after Licensee’s receipt thereof), the right to submit for publication the scientific findings from research conducted by or through CSMC or its investigators (including the Inventors) related to the Patent Rights, provided such publications do not contain any Confidential Information of Licensee, in which case Licensee may require such Confidential Information to be removed prior to publication; and

(ii) the right (A) to exploit the Patent Rights and any tangible or intangible information contained therein for CSMC’s research, internal teaching and other educationally-related, clinical and non-commercial clinical study purposes, where clinical use does not involve a third party funding grant to commercialize such information, and (B) to obtain research funding for further study and development thereof from governmental and other nonprofit organizations (including grant applications).

(e) Notwithstanding any other provision hereof to the contrary, all rights to the Patent Rights outside of the Field of Use are retained by CSMC.

2.2 Sublicensing.

(a) Permitted Sublicensing. Licensee shall have the right to grant sublicenses under any or all of the rights granted hereunder to its Affiliates and to (i) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (ii) private companies having at least $[***] in annual sales; or (iii) entities which have been approved in writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from Licensee within [***] days of receiving such request, such request shall be deemed approved (each, a “Sublicensee”). Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential sublicensee if such potential sublicensee has a level of science, management and investors commensurate with or greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it.

(b) Sublicensing Generally. Any Sublicensee shall be subject in all respects to the provisions contained in this Agreement and Licensee will remain primarily liable to CSMC for, and shall be responsible for monitoring and enforcing, performance of all of Licensee’s obligations hereunder by any such Sublicensee. Without limiting the generality of the foregoing, as an express condition of any such sublicense, any such Sublicensee shall be required to agree in writing to be bound by commercially reasonable reporting and record keeping, indemnification and inspection provisions, and the applicable provisions of this Agreement, including, without limitation, those pertaining to the use of CSMC’s name and marks, indemnification of CSMC and the use of CSMC’s Confidential Information. Sublicensees may further sublicense the rights granted hereunder to (a) public companies listed on the NYSE or NASDAQ stock exchanges or any foreign equivalent thereof; (b) private companies having at least $[***] in annual sales; and (c) entities which have been approved in writing by CSMC (such consent not to be unreasonably withheld, delayed, or conditioned); provided that, in the event that CSMC has not responded to any request for approval from such Sublicensee within [***] of receiving such request, such request shall be deemed

 

3


approved. Without limiting the generality of the foregoing, it shall be unreasonable for CSMC to withhold approval of a potential subsublicensee if such potential subsublicensee has a level of science, management and investors commensurate with or greater than Licensee or which is otherwise of a reasonably sufficient level to carry out the rights and obligations being sublicensed to it. Licensee shall promptly forward to CSMC a copy of any and all fully executed sublicense agreements and subsublicense agreements, any subsequent amendments, and all copies of Sublicensees’ profit sharing or royalty reports, in no event more than [***] days following execution or receipt thereof, as applicable. Licensee shall also keep CSMC reasonably informed with respect to the progress of any relations entered into with any Sublicensees. If Licensee shall conduct one or more audits of its Sublicensees hereunder during the term hereof, Licensee shall provide copies of any audit report indicating an underpayment or overpayment to CSMC on a timely basis. The covenants pertaining to the use of CSMC’s name and marks, the indemnification of CSMC and the use of CSMC’s Confidential Information in any sublicense or assignment shall run for the benefit of CSMC, who shall be expressly stated as being a third-party beneficiary thereof with respect to the covenants set forth in this Agreement. Licensee understands and agrees that none of its permitted sublicenses hereunder shall reduce in any manner any of its obligations set forth in this Agreement.

2.3 Diligent Commercialization. Licensee acknowledges that it is important to CSMC, and a requirement of the United States Government under Title 35, Section 203 of the United States Code, that Licensee pursue the development, commercialization and marketing of Products. Without limiting the foregoing, Licensee shall use Commercially Reasonable Efforts to develop and make Products commercially available to the public as soon as commercially practicable within the Territory.

2.4 Preference for United States Industry. To the extent that any of the Patent Rights have been developed using funding from the United States Government, Licensee agrees that any Products claimed by such Patent Rights that are made, used or sold in the United States shall be manufactured substantially in the United States, to the extent required under applicable law.

3. REPRESENTATIONS AND WARRANTIES

3.1 Rights to Technology. Except for the rights, if any, of the Funding Agencies or the United States Government, CSMC represents and warrants to Licensee that, to the best of its actual knowledge (without investigation outside of CSMC as to such representations and warranties) as of the Effective Date: (a) CSMC owns its right, title and interest in and to the Patent Rights as of the Effective Date of this Agreement, (b) CSMC has the power and authority to enter into this Agreement and has the right to grant the licenses set forth in this Agreement, (c) CSMC has not granted licenses to the Patent Rights to any other party that would restrict or otherwise conflict with the rights granted hereunder except as stated herein, (d) no holding, decision, or judgment has been rendered in any action or proceeding before any court or administrative authority (other than in routine patent prosecution activities before the U.S. Patent & Trademark Office and various foreign patent offices) denying the validity of CSMC’s right to register, or CSMC’s rights to own, use or license, any Patent Rights, and (e) there are no claims filed in state or federal court, judgments or settlements to be paid by CSMC with respect to the Patent Rights or pending claims or litigation filed in state or federal court relating to the Patent Rights. CSMC covenants and agrees that if at any time during the Agreement Term it becomes aware that any of the representations and/or warranties set forth in this Section 3.1 are no longer true or correct had they been given after the Effective Date, it shall notify Licensee in writing of the facts or circumstances thereof within [***] days of discovery.

3.2 Limited Warranty; LIMITATION OF LIABILITY.

(a) Limited Warranty. CSMC makes no representation or warranty other than those expressly specified in this Agreement. Except as otherwise expressly set forth in this Agreement, Licensee accepts the Patent Rights on an “AS-IS” basis. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTIES CONCERNING PATENT RIGHTS

 

4


COVERED BY THIS AGREEMENT, INCLUDING WITHOUT LIMITATION, ANY EXPRESS OR IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AS TO PATENT RIGHTS OR ANY PRODUCT. EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, CSMC MAKES NO WARRANTY OR REPRESENTATION AS TO THE VALIDITY OR SCOPE OF PATENT RIGHTS, OR THAT ANY PRODUCT WILL BE FREE FROM AN INFRINGEMENT ON PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, OR THAT NO THIRD PARTIES ARE IN ANY WAY INFRINGING PATENT RIGHTS COVERED BY THIS AGREEMENT.

(b) LIMITATION OF LIABILITY. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOSS OF PROFITS OR EXPECTED SAVINGS OR OTHER ECONOMIC LOSSES, OR FOR INJURY TO PERSONS OR PROPERTY) ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER, REGARDLESS OF WHETHER SUCH PARTY KNOWS OR SHOULD KNOW OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR THE BREACH OF THE CONFIDENTIALITY PROVISIONS IN SECTION 10 OR IN ACCORDANCE WITH THE OBLIGATION TO INDEMNIFY SET FORTH IN SECTION 8, CSMC’S AGGREGATE LIABILITY FOR ALL DAMAGES OF ANY KIND RELATING TO THIS AGREEMENT OR ITS SUBJECT MATTER SHALL NOT EXCEED [***]. THE FOREGOING EXCLUSIONS AND LIMITATIONS SHALL APPLY TO ALL CLAIMS AND ACTIONS OF ANY KIND, WHETHER BASED ON CONTRACT, TORT (INCLUDING, BUT NOT LIMITED TO NEGLIGENCE), OR ANY OTHER GROUNDS.

3.3 Rights Retained by Funding Agencies. Licensee acknowledges that to the extent that the Patent Rights have been developed in part under one or more funding agreements (“Funding Agreements”) with one or more Funding Agencies, such Funding Agencies have certain statutory, nonexclusive rights relative thereto for use for government purposes as well as regulatory or statutory “march-in rights” (collectively, “Statutory Rights”). This Agreement is explicitly made subject to such Statutory Rights and, to the extent of any conflict between any such Statutory Rights and this Agreement, such Statutory Rights shall prevail.

4. CONSIDERATION

In consideration of the execution and delivery by CSMC of this Agreement, Licensee agrees as follows:

4.1 License Fee. Within [***] days of the execution of this Agreement, Licensee shall pay to CSMC a non-refundable license fee in an amount equivalent to $[***].

(a) Payment and Accounting.

(i) Wire Transfer Instructions. All payments due hereunder shall be made by Licensee to CSMC in accordance with the following wire transfer instructions:

[***]

(ii) Records and Audits. Licensee shall create and maintain complete and accurate records and documentation concerning all sales of Products by Licensee, its Affiliates and Sublicensees, in sufficient detail. Licensee shall retain such records and documentation for not less than five (5) years from the date of their creation. During the Agreement Term and for a period of [***] years

 

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thereafter, CSMC and its representatives shall have the right to audit such records and documentation. Such examiners shall have reasonable access during regular business hours to Licensee’s offices and the relevant records, files and books of account, and shall have the right to examine any other records reasonably necessary to determine the accuracy of the calculations provided by Licensee.

(iii) Currency Transfer Restrictions. If any restrictions on the transfer of currency exist in any country or other jurisdiction so as to prevent Licensee from making payments to CSMC, Licensee shall take all commercially reasonable steps to obtain a waiver of such restrictions or to otherwise enable Licensee to make such payments. If Licensee is unable to do so, Licensee shall make such payments to CSMC in a bank account or other depository designated by CSMC in such country or jurisdiction, which payments shall be in the local currency of such country or jurisdiction, unless payment in United States dollars is permitted. Any payment by Licensee to CSMC in currencies other than United States dollars shall be calculated using the appropriate foreign exchange rate for such currency quoted in the California edition of The Wall Street Journal for the close of business of the last banking day of the calendar quarter in which such payment is being made.

(iv) Late Charges. A service charge at the rate that is the lower of (i) [***] over the rate of interest announced by Bank of America in Los Angeles, California (or any successor in interest thereto or any commercially equivalent financial institution if no such successor exists) to be its “prime rate”, or (ii) the highest rate permitted by applicable law, shall be payable by Licensee on any portion of Licensee’s outstanding undisputed amounts payable by Licensee hereunder that are not paid to CSMC within [***] days past the due date.

(v) Taxes. Licensee shall pay, or cause to be paid, any and all taxes required to be paid or withheld on any sales, licenses or other transfers for value of Products or Patent Rights (other than taxes imposed on the income or revenues of CSMC). Licensee shall secure and send to CSMC proof of any such taxes withheld and paid by Licensee, its Affiliates or Sublicensees.

5. PATENT RIGHTS

5.1 Prosecution. Commencing on the Effective Date and continuing until the termination of the Agreement, Licensee shall assume, in coordination with CSMC, full responsibility for, and shall use Commercially Reasonable Efforts to pursue, the application, maintenance, reexamination, reissue, opposition and prosecution of any kind (collectively “Prosecution”) relating to the Patent Rights, including, but not limited to, payment of all costs, fees and expenses related thereto. Subject to the approval of CSMC (which approval shall not be unreasonably withheld), Licensee shall have the right to select counsel with respect to the responsibility assumed by Licensee in this Section 5.1. For all purposes of the patent Prosecution, CSMC shall be the named “client” of such patent counsel. Each party shall provide the other with copies of any and all material or communications with the United States Patent and Trademark Office, or any foreign patent office, and CSMC and Licensee shall be afforded the opportunity of prior review and comment on such action or paper.

(a) Foreign Filings. Should Licensee elect not to file for patent protection for the Patent Rights in a certain national jurisdiction in the Territory, Licensee shall notify CSMC of such election at least [***] days before a final due date which would result in the bar of patent protection for the Patent Rights in such national jurisdiction. In such event, CSMC may, at its sole option and expense, file for patent protection for the Patent Rights in the applicable national jurisdiction, and Licensee’s license under this Agreement with respect to such national jurisdiction shall terminate, allowing CSMC to freely dispose of its Patent Rights in the applicable national jurisdiction as it sees fit in its sole discretion, and such patent shall no longer be deemed to be Patent Rights for purposes of this Agreement.

 

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5.2 Abandonment, Disclaimers, etc. Licensee shall obtain the prior written consent of CSMC (which consent shall not be unreasonably withheld), prior to abandoning, disclaiming, withdrawing, seeking reissue, seeking reexamination or allowing to lapse any patent or patent application within the Patent Rights. In the event that Licensee shall elect to abandon the Prosecution (including the payment of maintenance fees or annuities) of any patent or patent application included in the Patent Rights, Licensee shall notify CSMC of such election at least [***] days before a final due date which would result in abandonment or bar of patentability of the patent or patent application. In such event, CSMC may, at its sole option and expense, continue Prosecution of the patent application or patent; the patent application or patent shall no longer be deemed part of the Patent Rights under this Agreement; and all rights in the patent application or patent shall revert to CSMC.

5.3 Expenses. Except as otherwise expressly set forth herein, Licensee shall pay all expenses resulting from its obligations in Section 5.1 hereof. CSMC shall exercise reasonable efforts to cause the Inventors (to the extent they are available and on CSMC’s staff as employees) to cooperate fully with Licensee with respect to the Prosecution of the Patent Rights, and CSMC shall be reimbursed for all reasonable out-of-pocket expenses as such expenses are incurred.

5.4 CREATE Act. Licensee shall not invoke the Cooperative Research and Technology Enhancement Act of 2004, as set forth under Title 35, Section 102(c) of the United States Code (the “CREATE Act”), with respect to the Patent Rights without first obtaining the prior written consent of CSMC.

5.5 Patent Schedule. Schedule A of this Agreement shall be updated from time to time, but not less frequently than once per calendar year, upon mutual agreement of the parties hereto, such agreement not to be unreasonably withheld, delayed, or conditioned, to include changes to the patents and/or patent applications set forth on Schedule A of this Agreement made in the ordinary course of prosecution and maintenance of such patents and/or patent applications, including without limitation addition of new related patents and/or patent applications and removal of abandoned patents and/or patent applications. Each such update shall be made in writing, executed by duly authorized representatives of each of the parties hereto.

6. TERM AND TERMINATION

6.1 Term. Unless earlier terminated as provided in Section 6.2 hereof, the term of this Agreement shall commence on the Effective Date and shall expire, on a country-by-country basis, upon the date on which the last Valid Claim expires (the “Agreement Term”). Upon the expiration of this Agreement in accordance with this Section 6.1 (but not the earlier termination of this Agreement in accordance with Section 6.2), the license set forth in Section 2.1 shall become fully paid-up, irrevocable, and perpetual, provided that, in the event that Licensee breaches any of its surviving obligations under this Agreement as set forth in Section 13.13, then such license may be terminated by CSMC in accordance with Section 6.2(c).

6.2 Termination. Except as provided by Section 6.3 and/or 6.8 hereof, this Agreement shall terminate upon the earliest to occur of the following:

(a) Automatically if Licensee shall enter into a liquidating bankruptcy, be adjudged insolvent, liquidate, dissolve and/or if the business of Licensee shall be placed in the hands of a receiver, assignee, or trustee, whether by voluntary act of Licensee or otherwise; provided, however, that, if any such action is involuntary, termination shall not take place unless the action is not reversed within [***] days. Further, Licensee shall give CSMC at least [***] days’ prior written notice before Licensee initiates any bankruptcy proceeding, and CSMC shall have the right to terminate this Agreement immediately upon receipt of such notice;

 

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(b) Upon [***] days written notice of CSMC to Licensee if the performance by either party to this Agreement of any term, covenant, condition or provision hereof (i) shall jeopardize (A) the licensure of CSMC, (B) CSMC’s participation in the Medicare, Medi-Cal or other reimbursement or payment programs, (C) the full accreditation of CSMC by The Joint Commission or any other state or nationally recognized accreditation organization, or (D) CSMC’s tax-exempt status; or (ii) is deemed illegal or unethical by any recognized governmental agency or body. Upon the occurrence of any of the items set forth in this subparagraph (b), CSMC shall provide written notice to Licensee setting forth the reason for such termination and the parties shall promptly discuss in good faith reasonable means of avoiding such termination, including without limitation any required amendments to this Agreement, provided that, if termination cannot be avoided, such termination shall be effected at the end of such [***] day period;

(c) Upon [***] days’ written notice from CSMC if, within such [***] day period, Licensee shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity, which breach or default may include, without limitation, Licensee’s failure to use Commercially Reasonable Efforts to develop and make Products commercially available to the public in accordance with Section 2.3; provided, however, that Licensee may avoid such termination if, before the end of such 90-day period, such breach or default has been cured by Licensee; and provided further that this termination right shall not apply to breaches of Section 4.2(c), the exclusive remedy for which is set forth therein. For the purposes of this Section 6.2(c), Licensee’s breach the License Agreement shall constitute a breach of this Agreement;

(d) Upon [***] days’ written notice from Licensee if, within such [***] day period, CSMC shall fail to cure fully any breach or default of any material obligation under this Agreement as described in such written notice detailing the facts of such breach with reasonable specificity; provided, however, that CSMC may avoid such termination if, before the end of such [***] day period, such breach or default has been cured by CSMC;

(e) By Licensee upon [***] days’ written notice to CSMC in the event that Licensee has determined that it would not be commercially reasonable to continue to develop and/or commercialize Products, including without limitation as a result of: (i) failure to secure adequate capital commitment within a commercially reasonable timeframe; (ii) failure to initiate a Phase I, Phase II or Phase III clinical trial for at least [***] within a commercially reasonable timeframe due to the following reasons: (A) regulatory restrictions, prohibitions, or adverse decisions; (B) lack of sufficient funding to complete the clinical trials and/or obtain supplies of Products; (C) lack of interest from clinical investigators; or (D) difficulties in patient accrual; (iii) scientific or technical reasons; (iv) the approved labeling for the Product; (v) competitive products then being developed and/or commercialized; (v) manufacturing concerns, including costs of goods and materials; (vi) intellectual property protection; (vii) obligations imposed by regulatory authorities; and (viii) pricing concerns; provided that, such written notice to CSMC under this Section 6.2(e) must provide CSMC with a reasonable explanation for Licensee’s termination under this Section 6.2(e).

(f) Upon the mutual written agreement of the parties hereto (such termination to be effective as of the date mutually agreed upon in such written agreement).

6.3 Obligations Upon Termination. Upon any termination of this Agreement pursuant to Section 6.2 hereof, nothing herein shall be construed to release any party from any liability for any obligation incurred through the effective date of termination (e.g., confidentiality, reimbursement of patent expenses incurred prior to such date, etc.) or for any breach of this Agreement prior to the effective date of such termination. Licensee may, for a period of [***] year after the effective date of such termination, sell all tangible Products customarily classified as “inventory” that it has on hand at the date of termination;

 

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provided, however, that any such action by Licensee does not subject CSMC to any of the occurrences set forth in Section 6.2(b) hereof.

6.4 Effect of Termination. In the event of any termination of this Agreement pursuant to Section 6.2, where such termination has not been caused by any action or inaction on the part of any Sublicensee of Licensee or by any breach by such Sublicensee of its obligations under its sublicense from Licensee, such termination shall be without prejudice to the rights of each non-breaching Sublicensee of Licensee and each non-breaching Sublicensee shall be deemed to be a licensee of CSMC under this Agreement, as applicable, at such Sublicensee’s written request, and CSMC shall be entitled to all rights and subject to all obligations under this Agreement (to the extent provided for in such sublicense). This Section 6.4, however, shall not be applicable if this Agreement has been terminated under Section 6.2(b) under circumstances where the application of this Section 6.4 would subject CSMC to any of the occurrences set forth in Section 6.2(b).

6.5 Right to Institute Legal Actions. Notwithstanding the provisions of Section 6.2 hereof, CSMC, on the one hand, and Licensee, on the other hand, may institute any other legal action or pursue any other remedy against the other party permitted by applicable law if the other party does not substantially cure any breach or default of any material obligation as provided herein.

6.6 Reversion of Rights. Notwithstanding anything to the contrary set forth herein (including, but not limited to, Section 5 hereof), full responsibility for Prosecution of the terminated Patent Rights shall, at CSMC’s sole expense from the date of reversion, revert to CSMC upon any termination of this Agreement.

6.7 Return of Data. In the event of any termination or expiration of this Agreement, Licensee shall, upon the request of CSMC, negotiate in good faith with CSMC for a reasonable period regarding the terms and conditions under which CSMC would receive copies of data, information and materials obtained or generated by or on behalf of Licensee in the course of conducting research and developing Products using the Patent Rights.

6.8 Dispute. If either party reasonably and in good faith disagrees as to whether the other party has a basis for terminating this Agreement pursuant to Section 6.2, the non-terminating party may contest the allegation in accordance with Section 13.3. During the pendency of such a dispute, all of the terms and conditions of this Agreement shall remain in effect, and the parties shall continue to perform all of their respective obligations and retain their respective rights under this Agreement.

7. INFRINGEMENT BY THIRD PARTIES

The parties agree as follows:

7.1 Enforcement. The parties shall notify each other in writing of any suspected or actual infringement of any Patent Rights by a third party and shall provide the other party with any available evidence thereof. After such notification, CSMC and Licensee shall consult for a period not to exceed [***] days whether enforcement of the Patent Rights by Licensee against such third party infringer is reasonably warranted, by determining whether a reasonably prudent licensee would institute litigation to enforce the patent in question in light of all relevant business and economic factors (including, but not limited to, the projected cost of such litigation, the likelihood of success on the merits, the probable amount of any damage award, the prospects for satisfaction of any judgment against the alleged infringer, the possibility of counterclaims against the parties hereto, the impact of any possible adverse outcome on Licensee and the effect any publicity might have on the parties’ respective reputations and goodwill). If, upon the expiration of such [***] day period, it is mutually determined by the parties that a suit should be filed by Licensee, Licensee shall have the right and the obligation to enforce, at its sole expense, the Patent Rights against

 

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infringement by such third party infringer. If, upon the expiration of such [***] day period, the parties have not agreed that a suit should be filed by Licensee, Licensee shall have the right, but not the obligation, to enforce, at its sole expense, the Patent Rights against infringement by such third party infringer or commence settlement negotiations with respect thereto. Upon Licensee’s undertaking to pay all expenditures reasonably incurred by CSMC, CSMC shall reasonably cooperate in any such enforcement and, as necessary, join as a party therein. Licensee shall reimburse CSMC for all expenses, including reasonable attorneys’ fees, incurred in connection with any such enforcement. In the event that Licensee does not file suit against or commence settlement negotiations with the infringer within [***] days of the expiration of the [***] day consultation period described above, then CSMC shall have the right, at its own expense, to enforce the Patent Rights licensed hereunder on behalf of itself and Licensee. Any damages or other recovery from an infringement action undertaken by Licensee shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to Licensee and (b) [***] to CSMC. If Licensee fails to prosecute any such action to completion, then any damages or other recovery from an infringement action undertaken or assumed by CSMC shall first be used to reimburse the parties, on a pro rata pari passu basis, for the costs and expenses incurred in such action, and shall thereafter be allocated between the parties as follows: (a) [***] to CSMC and (b) [***] to Licensee.

7.2 Defense Of Patent Rights. In the event that any Patent Rights are the subject of a legal action seeking declaratory relief or of any reexamination or opposition proceeding instituted by a third party, the parties agree to promptly consult with each other concerning the defense of such actions or proceedings. If the parties agree that such defense should be undertaken, then Licensee shall bear the expenses, including attorneys’ fees, associated with such defense and in any recoupment of expenses. If the parties disagree, then the party desiring to defend the action or proceeding may proceed with such defense and will bear its own expenses, and be entitled to all sums recovered.

8. INDEMNIFICATION

8.1 Indemnification by Licensee. Subject to Section 8.2 hereof, Licensee shall hold harmless, defend and indemnify CSMC and each of its officers, directors, employees (including the Inventors), and agents (each, an “Indemnified Party”, and collectively, the “Indemnified Parties”) from and against any and all claims, damages, losses, liabilities, costs and expenses (including reasonable attorneys’ fees and expenses) suffered or incurred by any of the Indemnified Party in any action, suit, litigation, arbitration or dispute of any kind brought by a third party (“Action”) arising or resulting from any negligence or willful acts or omissions on the part of Licensee, its Affiliates or Sublicensees in connection with (a) their use of the Patent Rights and/or (b) the exercise of their rights hereunder or under any sublicense, including, but not limited to (i) the preclinical development and clinical testing of Products, and (ii) the manufacture, sale, use, marketing, or other disposition of Products developed, manufactured, sold, marketed, used or otherwise disposed of under this Agreement; except to the extent any of the foregoing arise out of or result from (i) CSMC’s breach of any covenant, obligation, representation or warranty under this Agreement and/or (ii) the negligent or willful acts or omissions of any Indemnified Party.

8.2 Indemnification Procedure. CSMC shall promptly notify Licensee in writing of any claim or Action or material threat thereof brought against any Indemnified Party in respect of which indemnification may be sought and, to the extent allowed by applicable law, shall reasonably cooperate with Licensee in defending or settling any such claim or Action (at Licensee’s expense). Subject to this Section 8, Licensee shall defend any Action brought by a third party against any of the Indemnified Parties for which Licensee is obligated to indemnify pursuant to Section 8.1, provided that Licensee shall have the sole right to control the defense and/or settlement of any such Action with counsel of Licensee’s own choosing and reasonably acceptable to CSMC. No settlement of any Action against the Indemnified Party for which CSMC intends to seek indemnification (for itself or on behalf of any other Indemnified Party)

 

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shall be made without the prior joint written approval of Licensee and CSMC, which approval shall not be unreasonably withheld, delayed, or conditioned by either party, provided that Licensee shall have the right to settle any Action without the need to obtain CSMC’s approval, if such settlement is solely monetary in nature and admits no wrongdoing on the part of CSMC or the Indemnified Party. If CSMC or any other Indemnified Party does not permit Licensee to exclusively control the defense of any such Action, or if CSMC or any other Indemnified Party does not obtain the approval of Licensee to settle such Action, Licensee shall have no obligation to defend or indemnify the CSMC or any other Indemnified Party hereunder.

8.3 Insurance. Licensee shall obtain and maintain insurance policies (including products liability and general liability policies at such time as is appropriate) which are reasonable and necessary to cover its activities and to comply with the indemnification obligations set forth above.

9. USE OF NAMES

9.1 CSMC Names and Marks. Licensee shall not, unless as required by any law or governmental regulation, use the name of CSMC, and/or any of its trademarks, service marks, trade names or fictitious business names or the name of any CSMC officer, faculty member, employee, student or volunteer (collectively, “CSMC Names and Marks”) without express prior written consent of the Vice President for Public Relations and Marketing of CSMC. Further, except as otherwise required by applicable law, prior to any reference by Licensee to CSMC Names and Marks in any manner, Licensee shall provide CSMC with a writing reflecting the proposed reference so that CSMC can review the reference within a reasonable period of time prior to the proposed use thereof by Licensee. Except as otherwise required by applicable law, this limitation includes, but is not limited to, use by Licensee in any regulatory filing, advertising, offering circular, prospectus, sales presentation, news release or trade publication. In addition, certain specific language may be mutually agreed upon by the parties for Licensee’s use in certain contexts and with respect to certain topics, and once agreed upon, may be utilized by Licensee in connection with the approved contexts and topics without further permission of the applicable Licensor. Subject to compliance by Licensee with the foregoing, which shall be deemed conditions precedent to any use of CSMC Names and Marks by Licensee, Licensee shall ensure that the CSMC Names and Marks are used as scientifically or academically appropriate in the “byline” of any article, abstract, manuscript or any other publication related to the subject matter hereof.

9.2 No Endorsements by CSMC. By entering into this Agreement, CSMC does not directly or indirectly endorse any product or service provided, or to be provided, by Licensee whether directly or indirectly related to this Agreement. Licensee shall not state or imply that this Agreement is an endorsement by CSMC.

10. CONFIDENTIALITY

10.1 Non-Disclosure. The parties hereto shall keep the terms of this Agreement and all business and scientific discussions relating to the business of the parties confidential except as otherwise set forth in this Agreement. All patient information to which a party is given access by the other party shall be subject to the provisions of the Confidentiality of Medical Information Act (Cal. Civ. Code §§56, et seq.) and the Health Insurance Portability and Accountability Act of 1996, and all regulations promulgated thereunder. It may, from time to time, be necessary for the parties, in connection with performance under this Agreement, to disclose Confidential Information (including know-how) to each other. The Receiving Party (as defined in Section 1.3 hereof) shall keep in confidence the Confidential Information of the Disclosing Party (as defined in Section 1.3 hereof), using the standard of care it normally uses for information of like character, and shall not disclose the Confidential Information to any third party or use it except as expressly authorized by the prior written consent of the Disclosing Party or as otherwise permitted by this Agreement. Notwithstanding the foregoing, (a) Licensee may disclose the Confidential Information received from

 

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CSMC, and also may provide a copy of this Agreement, to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees as shall be reasonably necessary to carry out the intent of this Agreement or any sublicense granted by Licensee as contemplated by this Agreement and (b) Licensee may provide a copy of this Agreement to its Affiliates, officers, directors, employees, accountants, attorneys, consultants, agents, and potential or actual Sublicensees, investors, acquirers, lenders, or other financial partners, for purposes of a potential business transaction or obtaining professional advice, if, but only if, with respect to each of (a) and (b) above, (i) such entity or person is subject to confidentiality obligations no less restrictive than those confidentiality provisions contained in this Section 10 and (ii) Licensee shall be fully responsible and liable for any action of such third party recipient which would constitute a breach of this Agreement if committed by Licensee as if Licensee had committed such action itself. Furthermore, Licensee may include a copy of this Agreement in legally required regulatory filings; provided that Licensee will seek confidential treatment of all financial terms of this Agreement in all such legally required regulatory filings. The Receiving Party’s obligations hereunder shall not apply to Confidential Information that the Receiving Party can show:

(a) Is or later becomes part of the public domain through no fault or neglect of the Receiving Party;

(b) Is received in good faith from a third party having no obligations of confidentiality to the Disclosing Party, provided that the Receiving Party complies with any restrictions imposed by the third party;

(c) Is independently developed by the Receiving Party without use of the Disclosing Party’s Confidential Information; or

(d) Is required by law or regulation to be disclosed (including, without limitation, in connection with FDA filings, filings with another government agency or as required under the California Public Records Act), provided that the Receiving Party uses reasonable efforts to restrict disclosure and to obtain confidential treatment.

10.2 Limits on Permitted Disclosures. Each party agrees that any disclosure or distribution of the other party’s Confidential Information within its own organization shall be made only as is reasonably necessary to carry out the intent of this Agreement. The parties further agree that all of their respective officers, employees, agents, representatives or approved sublicensees to whom any Confidential Information is disclosed or distributed shall have agreed to maintain its confidentiality.

10.3 Legally Required Disclosures. If a subpoena or other legal process concerning Confidential Information is served upon any party hereto pertaining to the subject matter hereof, the party served shall notify the other party immediately, the other party shall cooperate with the party served, at the other party’s expense, in any effort to contest the validity of such subpoena or other legal process. This Section 10.3 shall not be construed in any way to limit any party’s ability to satisfy any disclosure of its relationship with the other party required by any governmental authority.

10.4 Patent Rights as Confidential Information. The Patent Rights are understood by Licensee to be the Confidential Information of CSMC to the extent “unpublished” as such term is construed under the United States Patent Laws. As such, Licensee’s confidentiality obligations hereunder automatically extend to any and all patent applications of CSMC relating to any Patent Rights, and to any and all communications with the United States Patent and Trademark Office, and any foreign patent office relating to any Patent Rights.

 

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10.5 Return of Confidential Information. In the event of any termination of this Agreement, the Receiving Party shall promptly return all Confidential Information and any copies made thereof previously made available to the Receiving Party by the Disclosing Party.

10.6 Remedies. Both parties acknowledge and agree that it would be difficult to measure damages for breach by either party of the covenants set forth in this Section 10, and that injury from any such breach would be incalculable, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, either party shall be entitled, in addition to all other remedies available hereunder or under law or equity, to injunctive or such other equitable relief as a court may deem appropriate to restrain or remedy any breach of such covenants.

10.7 Term of Confidentiality. The obligations of confidentiality and nonuse set forth in this Section 10 shall survive for a period of [***] years beyond the termination or expiration of this Agreement.

11. INFORMATION EXCHANGE

In addition to the Patent Rights, the parties shall cooperate to exchange such non-confidential information as may be appropriate and necessary to facilitate Licensee’s development and commercialization of Products incorporating any Patent Rights.

12. PATENT MARKING

Licensee shall use Commercially Reasonable Efforts to actually or virtually mark all Products made, sold or otherwise disposed of by or on behalf of it or any of its Affiliates and Sublicensees as set forth under Title 35, Section 287(a) of the United States Code and shall respond to any request or disclosure under Title 35, Section 287(b)(4)(B) of the United States Code by only notifying CSMC of the request for disclosure.

13. MISCELLANEOUS

13.1 Notices. Any notice, request, instruction or other document required by this Agreement shall be in writing and shall be deemed to have been given (a) if mailed with the United States Postal Service by prepaid, first class, certified mail, return receipt requested, at the time of receipt by the intended recipient, or (b) if sent by Federal Express or other overnight carrier, signature of delivery required, at the time of receipt by the intended recipient, addressed as follows:

In the case of CSMC to:

Cedars-Sinai Medical Center

8700 Beverly Boulevard

Los Angeles, California 90048-1865

Attention: Executive Vice President for Finance & CFO

with a copy to Vice President for Technology & Business Affairs

or in the case of Licensee to:

Precision IBD, Inc.

3525 Del Mar Heights Rd, #342

San Diego, California 92130

Attention: Chief Executive Officer

 

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or to such other address or to such other person(s) as may be given from time to time under the terms of this Section 13.1.

13.2 Compliance with Laws. Each party shall comply with all applicable federal, state and local laws and regulations in connection with its activities pursuant to this Agreement.

13.3 Dispute Resolution.

(a) Governing Law. For any dispute between the parties to this Agreement which arises from or relates to this Agreement (“Dispute”), the Agreement shall be construed and enforced in accordance with the laws of the United States of America and of the State of California, irrespective of choice of laws provisions.

(b) Arbitration. The parties shall settle any Dispute by submitting the matter to binding arbitration to be held in Los Angeles, California, if Licensee initiates such arbitration, and in San Diego, California, if CSMC initiates such arbitration, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration shall be held in the English language. In any such arbitration, the arbitrator shall be appointed by agreement of the both parties or, if no agreement can be reached, by the American Arbitration Association pursuant to its rules, which arbitrator, in each case, shall be an experienced lawyer or judge (or retired lawyer or judge). The decision of the arbitrator shall be final and binding on all parties to this Agreement, and judgment upon the award may be entered in any court having jurisdiction. All or a portion of the costs of the arbitration proceeding, including attorneys’ fees, may be awarded by the arbitrator to the party against whom the arbitrator rules.

13.4 Waiver. Failure of any party to enforce a right under this Agreement shall not act as a waiver of that right or the ability to assert that right relative to the particular situation involved.

13.5 Enforceability. If any provision of this Agreement shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall be reformed to comply with applicable law or stricken if not so conformable, so as not to affect the validity or enforceability of the remainder of this Agreement.

13.6 Modification. No change, modification, or addition or amendment to this Agreement, or waiver of any term or condition of this Agreement, is valid or enforceable unless in writing and signed and dated by the authorized officers of the parties to this Agreement.

13.7 Entire Agreement. This Agreement and the Schedules hereto (which are incorporated herein by this reference as if fully set forth herein) constitute the entire agreement between the parties with respect to the subject matter hereof and thereof, and replace and supersede as of the date hereof and thereof any and all prior or contemporaneous agreements and understandings, whether oral or written, between the parties with respect to the subject matter of such agreements.

13.8 Construction. This Agreement has been prepared, examined, negotiated and revised by each party and their respective attorneys, and no implication shall be drawn and no provision shall be construed against any party to this Agreement by virtue of the purported identity of the drafter of this Agreement or any portion thereof.

13.9 Counterparts. This Agreement may be executed simultaneously in one or more counterparts, each of which shall constitute one and the same instrument. This Agreement may be executed in .pdf format.

 

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13.10 Attorneys’ Fees. In the event of any action at law or in equity between the parties hereto to enforce any of the provisions hereof, the unsuccessful party to such litigation shall pay to the successful party all reasonable costs and expenses, including reasonable attorneys’ fees, incurred therein by such successful party; and if such successful party shall recover a judgment in any such action or proceeding, such reasonable costs, expenses and attorneys’ fees may be included in and as part of such judgment.

13.11 Assignment; Successors.

(a) Neither this Agreement, nor any of the rights or obligations of a party may be assigned, in whole or in part, without the prior written consent of the other party, which consent may not be unreasonably withheld, delayed, or conditioned; provided, however, that either party may assign this Agreement, without the obligation to obtain the prior written consent of the other party, to an Affiliate, and, subject to Section 13.11(b), Licensee may transfer or assign this Agreement, without the obligation to obtain the prior written consent of CSMC, as part of a sale, regardless of whether such a sale occurs through an asset sale, stock sale, merger or other combination, or any other transfer of Licensee’s entire business, or that part of Licensee’s business that exercises all rights granted under this Agreement; and provided further that CSMC shall have the right to assign this Agreement, without the obligation to obtain the prior written consent of Licensee, as part of any reorganization or bond financing. Any attempt to transfer or assign this Agreement by either party that is inconsistent with this Section 13.11(a), above, shall be null and void. In the event of a bankruptcy, assignment is permitted only to a party that can provide adequate assurance of future performance, including diligent development and sales, of Products.

(b) Prior to any assignment, the new assignee must agree in writing to CSMC to be bound by this Agreement.

(c) Subject to the limitations on assignment herein, this Agreement shall be binding upon and inure to the benefit of any successors in interest and assigns of CSMC and Licensee.

(d) Notwithstanding anything to the contrary herein, Licensee shall be permitted to pledge and grant a security interest in any of Licensee’s rights, licenses and interests under this Agreement and upon any foreclosure of such security interest, Licensee’s rights, licenses and interests under this Agreement shall inure to the benefit of the holder of such security interest. For the avoidance of doubt, Licensee shall have no right to pledge or grant a security interest in any of CSMC’s property or assets, including without limitation, the Patent Rights.

13.12 Further Assurances. At any time and from time to time after the Effective Date, each party shall do, execute, acknowledge and deliver, and cause to be done, executed, acknowledged or delivered, all such further acts, transfers, conveyances, assignments or assurances as may be reasonably required to consummate the transactions contemplated by this Agreement.

13.13 Survival. The following sections shall survive any expiration or earlier termination of this Agreement: 4.1, 6.4, 6.5, 8, 9, 10 (for the period set forth in Section 10.7), 12 and 13.

[signature page follows]

 

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IN WITNESS WHEREOF, the parties have caused their duly authorized representatives to execute this Agreement as of the date first above written.

 

“LICENSEE”:
PRECISION IBD, INC., A DELAWARE CORPORATION
By:  

/s/ Scott L. Glenn

  Scott L. Glenn
  President &. CEO
Date: March 27,2019
“CSMC”:
CEDARS-SINAI MEDICAL CENTER, A CALIFORNIA NONPROFIT PUBLIC BENEFIT CORPORATION
By:  

/s/ Edward M. Prunchunas

  Edward M. Prunchunas
  Executive Vice President, Finance Affairs & Chief Financial Officer
Date: March 26, 2019
By:  

/s/ James D. Laur, JD

  James D. Laur, JD
  Vice President for
  Technology & Business Affairs
Date: March 22, 2019

 

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Schedule A

Patent Rights

[***]

 

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EX-10.15 19 d14529dex1015.htm EX-10.15 EX-10.15

Exhibit 10.15

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[***] Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

COMPANION DIAGNOSTICS DEVELOPMENT

AND COLLABORATION AGREEMENT

This Companion Diagnostics Development and Collaboration Agreement (this “Agreement”) is made effective as of March 25, 2019 (the “Effective Date”) by and between Precision IBD, Inc., a Delaware corporation having a place of business at 3525 Del Mar Heights #342 Road San Diego, CA 92130 (“Precision”); and Millennium Pharmaceuticals, Inc., a Delaware corporation having a place of business at 40 Landsdowne Street, Cambridge, Massachusetts 02139 (“Millennium”) and a wholly owned subsidiary of Takeda Pharmaceutical Company Limited (“Takeda”). Hereinafter, each of Precision and Millennium are sometimes referred to individually as a “Party” and collectively as the “Parties”.

BACKGROUND

Precision is engaged in business that includes the development of translational platforms, with access to a greater-than [***] patient biorepository of clinical, phenotypic, genotypic and biomarker integrated data (as well as other sample and data banks) that enables the identification and prioritization of potential drugs and drug targets to specific patient populations for therapeutic intervention and production and sale of diagnostic products for those therapies.

Millennium and its Affiliates are engaged in business that includes the research, development and commercialization of pharmaceutical products.

Millennium wishes to collaborate with Precision in the identification and prioritization of potential IBD drug targets and drug candidates, and to develop, analytically and clinically validate, and file for regulatory approval for certain Assays/Tests for selection of patients who are eligible for treatment with MPI Drug(s).

The Parties wish to enter into this Agreement to establish a framework for their efforts with respect to these activities.

In consideration of the foregoing background and the mutual covenants and agreements set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, hereby agree as follows:

ARTICLE 1

DEFINITIONS

Capitalized terms not defined in the text are defined in Exhibit A, and have the meanings set forth therein, whether used in singular or plural forms.


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ARTICLE 2

GOVERNANCE

2.1    Joint Steering Committee.

(a)    Formation and Function. Within [***] after the Effective Date, the Parties shall form a joint steering committee (“Joint Steering Committee” or “JSC”) to oversee and manage the collaboration of the Parties under this Agreement. The responsibilities of the JSC shall include: (i) making such changes, or having such changes made, to the Work Plan as it deems necessary to accomplish Work Plan objectives, and reviewing and approving any other proposed amendments to the Work Plan, (ii) receiving and reviewing updates on Activities and other activities contemplated by this Agreement, (iii) reviewing and approving Activities or any Deliverables set forth in the Work Plan, (iv) ensuring the cooperation of the Parties in the performance of the Work Plan, and that the Parties are meeting their commitments for both human and financial support and are each fulfilling all of their respective obligations hereunder, (v) reviewing the recommendations, plans and other activities in support of this Agreement, (vi) resolving disputes escalated to the JSC in accordance with Section 2.6, and (vii) all other matters related to this Agreement or any Activities expressly delegated to the authority of the JSC hereunder or as the Parties otherwise agree.

(b)    Composition. The JSC will be comprised of up to [***] representatives from each Party (a total of up to [***] representatives), or such other number of representatives as the Parties may mutually agree. Each representative shall be an employee of a Party or one of its Affiliates and shall be appointed (and may be replaced at any time) by the relevant Party by prior written notice to the other Party. Each Party’s representatives will have appropriate seniority, experience and delegated authority to make decisions with respect to matters within the scope of the JSC’s responsibility. All JSC representatives will be subject to confidentiality obligations commensurate in scope to the provisions of Article 9. The Parties’ JSC representatives will serve in such capacities, on such terms and conditions, and for such duration, as determined by the Party appointing him or her. Each Party may designate an alternate representative to serve temporarily in the absence of a permanent representative designated by such Party. The JSC will also designate a coordinator who will attend all JSC meetings and coordinate logistics for the JSC, including meeting schedules, agendas and minutes (the “JSC Coordinator”). The JSC Coordinator may be changed at any time upon [***]. For purposes of clarity, the JSC Coordinator will not be counted as a Party representative or have any voting rights.

(c)    Meetings. The JSC will establish a regular meeting schedule that will provide for meetings [***], or at such other frequency as the Parties mutually agree. The JSC may conduct meetings in person or by teleconference or video conference. A quorum for a meeting of the JSC shall be [***] representative of each Party. The JSC may establish procedures for its internal operation at meetings. Additional non-voting employees of a Party or its Affiliates may from time to time be invited to attend JSC meetings, subject to the other Party’s prior consent, which shall not be unreasonably withheld, provided that such additional employees are subject to confidentiality obligations commensurate in scope to the provisions of Article 9.

 

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(d)    Actions or Decisions. All actions or decisions of the JSC must be made [***] of the Parties, acting through their respective JSC representatives, with each Party having collectively [***] vote in all such actions or decisions, regardless of the number of representatives or other employees a Party has in attendance at the JSC meeting. For clarity, the Parties may also act without a meeting of the JSC if they mutually agree in writing to such action. The JSC Coordinator will maintain a log summarizing all actions or decisions by the JSC, which must be signed by [***] representative of each Party each time such log is updated or revised. If the JSC is unable to agree on any matter within [***] days after such matter is first discussed at a JSC meeting, such matter shall be referred to the Senior Executives of the Parties. The Senior Executives shall negotiate in good faith to resolve such matter through discussions, provided that Millennium Senior Executive will have final decision making authority with respect to MPI Drug Development and Commercialization (subject to exercise of Diligent Efforts by Millennium to make MPI Drug available in the Territory) but not the Development or Commercialization of any Product which will be the decision of the Precision Senior Executive, subject to exercise of Diligent Efforts by Precision to make Product available in the Territory. Any matter that remains unresolved within [***] calendar days of such matter first being referred to the Senior Executives (or within a time period as mutually agreed to by the Parties), then such matter shall be resolved in accordance with Section 13.12.

(e)    Agendas. Each Party will use Diligent Efforts to notify the other Party at least [***] Business Days prior to the date of a JSC meeting of any agenda items it wishes to discuss at such meeting. Notwithstanding the foregoing, upon the mutual agreement of the Parties’ JSC representatives in attendance at a meeting, the JSC will be free to consider any matter related to this Agreement that is within the scope of its responsibilities and that is brought to its attention by either Party at such meeting.

(f)    Minutes. The JSC Coordinator will prepare minutes promptly following each meeting, reporting in reasonable detail the actions taken by the JSC during such meeting, issues requiring resolution, and resolutions of any previously reported issues. Such minutes will be reviewed, commented on if needed, and updated based on the JSC’s feedback prior to being circulated to all representatives of the JSC as final versions. The JSC Coordinator will revise such minutes as necessary.

(g)    Subcommittees. The JSC may from time to time establish subcommittees as it may deem desirable to accomplish Work Plan objectives, including, but not limited to, subcommittee(s) to address commercial considerations, to which the JSC may delegate certain responsibilities of the JSC hereunder; provided, however, that the JSC cannot delegate decision-making responsibilities to a subcommittee. All such subcommittees shall have equal representation from each of the Parties unless the JSC expressly directs otherwise.

2.2    Joint Project Team.

(a)    Formation. Within [***] calendar days after the Effective Date, the Parties shall establish a joint project team (the “JPT”) comprised of a reasonable number of representatives from each Party, as the Parties may mutually agree. Each representative shall be an employee of a Party or one of its Affiliates and shall be appointed (and may be replaced at

 

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any time) by the relevant Party by prior written notice to the other Party. Each Party’s representatives will have the appropriate seniority, experience, professional and technical qualifications, and ongoing familiarity with the Activities contemplated by this Agreement, to make decisions with respect to matters within the scope of the JPT’s responsibility. All JPT representatives will be subject to confidentiality obligations commensurate in scope to the provisions of Article 9.

(b)    Duties. The JPT will manage the Activities and will confer on a regular basis to facilitate the exchange of information between the Parties regarding their activities in the Territory with respect to the Development (including Clinical Trials) and Commercialization of the MPI Drugs and the Products as to the extent necessary for each Party to perform its obligations under this Agreement (including the exchange of information regarding the status and progress of the Activities), and to coordinate the Parties’ communication, operations and efforts with respect to the Work Plan. The JPT is responsible for: (i) defining development, regulatory and commercial strategy for review and approval by the JSC, (ii) determining successful achievement of Activities in accordance with applicable Deliverables set forth in the Work Plan, (iii) reviewing and commenting on applicable sections of Regulatory Submissions, (iv) coordinating communication and meetings with Regulatory Authorities, (v) reviewing Deliverables and (vi) all other matters related to this Agreement that are expressly delegated to the authority of the JPT by the JSC or as the Parties otherwise agree. The Project Managers and each joint sub-project team established will report to the JPT, at each meeting of the JPT, on the progress under the Work Plan and otherwise with respect to the collaboration of the Parties hereunder, including with respect to the progress of the Development and Commercialization of MPI Drugs for use with Products.

(c)    Meetings. The JPT will meet in accordance with a schedule to be established by mutual written agreement of the Parties, but no less frequently than [***]. The JPT will conduct the majority of its meetings via teleconference. In-person meetings of the JPT shall be at such locations as decided by the JPT. For clarity, the Parties may also act without a meeting of the JPT if they mutually agree in writing to such action. A quorum for a meeting of the JPT shall be [***] representative of each Party. The JPT may establish procedures for its internal operation at meetings. Additional non-voting employees of a Party or its Affiliates may from time to time be invited to attend JPT meetings, subject to the other Party’s prior consent, which shall not be unreasonably withheld, provided that such additional employees are subject to written confidentiality obligations commensurate in scope to the provisions of Article 9.

(d)    Management. The Project Managers who will be members of the JPT will act as co-chairpersons for each meeting of the JPT and will set the agendas for each JPT meeting. The co-chairpersons shall have no greater authority than any other JPT representative. The JPT will elect a secretary who will prepare minutes promptly after each meeting; such minutes shall report in reasonable detail all actions taken by the JPT during such meeting, any issues requiring resolution, and resolutions of previously reported issues. Such minutes are to be reviewed, commented on if needed, and updated per the Project Managers’ feedback prior to being sent to all representatives of the JPT. The secretary will revise such minutes as necessary. Any meeting minutes covering the acceptance of Deliverables or the determination of the achievement of Activities or Deliverables must be signed by the JPT co-chairpersons.

 

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(e)    Decisions. Decisions of the JPT must be made by [***] by the Parties, acting through their respective JPT representatives, with each Party’s representatives having collectively [***] vote in all decisions, regardless of the number of representatives or other employees a Party has in attendance at the JPT meeting. If the JPT is unable to agree on any matter, such matter shall be resolved in accordance with Section 2.6.

(f)    Sub-Project Teams. The JPT may, from time-to-time, establish sub-project teams with specific subject matter expertise, and such sub-project teams shall have responsibility for management of Activities contemplated by the Work Plans in such subject matter area.

2.3    Project Managers.

(a)    Role. Each Party will designate a single individual to serve as its manager under the Work Plan (each a “Project Manager”). A Project Manager will serve as the principal point of contact for the appointing Party for matters relating to that Party’s performance under the Work Plan and will be responsible for implementing and coordinating, on a day-to-day basis, all Activities and facilitating the exchange of information among the Parties regarding the performance of such Activities. The Project Managers may mutually delegate tasks and responsibilities to sub-managers or sub-project teams, working groups and other team members, as they deem appropriate to efficiently and effectively perform their respective obligations hereunder. Each Party may replace its Project Manager at any time upon written notice to the other Party.

(b)    Meetings. The Project Managers will meet as soon as practicable after the Effective Date and thereafter at least [***] and at such additional times as the Project Managers or the JSC deem reasonably appropriate. Meetings of the Project Managers may be conducted in person or by teleconference or video conference as mutually agreed by the Project Managers. Additionally, the Project Managers (or their designees) will maintain close regular communications with each other as to the status of the ongoing Activities and other activities under this Agreement. Each Project Manager will keep accurate and complete records of his or her activities and meetings and will, from time to time as requested by the JPT or JSC, provide the JPT or JSC with appropriate updates and information to keep the JPT and JSC apprised of each Party’s performance under this Agreement.

2.4    Authority. Notwithstanding anything to the contrary herein, none of the JSC, JPT or Project Managers shall have the power to amend this Agreement or the Work Plan (which may only be amended or modified as provided in Section 13.9) or to make any decision or require any Party to take any action that conflicts with the terms of this Agreement or that is expressly reserved to the Parties hereunder.

2.5    Governance Expenses. Each Party is responsible for all expenses incurred by its representatives in connection with performing their duties under this Article 2, including all costs of travel, lodging and meals in connection with meetings of the JSC, JPT and Project Managers.

 

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2.6    Escalation Process. Except as expressly set forth herein, any disputes with respect to matters within the scope of decision-making authority of the Project Managers or the JPT that cannot be resolved after good faith efforts, will be submitted to the JSC for resolution.

ARTICLE 3

WORK PLAN AND COLLABORATION TARGETS

3.1    Work Plan. The initial Work Plan has been agreed to by the Parties and is attached as Exhibit B and incorporated herein by reference. The Parties acknowledge that the initial Work Plan may not be comprehensive and may not address all of the following items with sufficient specificity, but will include: [***]. Consequently, the Parties agree that, from time to time, including subsequent to meetings with, or receipt of exchange of information or guidance, from a Regulatory Authority, the Work Plan may be modified and made more comprehensive by agreement of the JSC. Any agreed-to changes, modifications, amendments or addenda to the Work Plan are only effective when mutually agreed to in writing by Parties pursuant to the provisions of this Agreement.

3.2    Standards of Performance. Each Party will perform all Activities with the standards of care and skill to be reasonably expected and in accordance with the terms and conditions of this Agreement. The Parties will comply with: (i) Applicable Law, guidelines and industry standards, and current good practices applicable to the conduct of the Activities and the performance of their respective obligations hereunder (including reporting any reportable payments or transfers of value made to covered recipients pursuant to § 6002 of the Affordable Care Act of 2010, and other similar laws, in connection with the Activities), and (ii) any additional regulatory framework or other standards set forth in the Work Plan. Each Party will keep the other Party reasonably informed with respect to the progress of its Activities, directly or through the JPT and JSC.

3.3    Delays or Deviations. The Parties will use Diligent Efforts to start and complete all Activities (including delivery of all Deliverables) in accordance with the applicable timelines set forth in the Work Plan. Each Party will promptly notify the other Party in writing if: (i) delays in its performance of the Activities are anticipated or likely, or (ii) it encounters any issue that has (or would reasonably be expected to have) an impact on any Activities contemplated by the Work Plan. In the case of (i), the Party experiencing or anticipating delays shall also outline its proposed plan to remediate such delays, if such delays are within its reasonable control. The Parties agree to discuss such delays in good faith and shall attempt to reach agreement on any necessary adjustments or amendments to the timelines set forth in the Work Plan. Such discussions shall take place within the JPT or JSC; provided that any amendments to the Work Plan shall be made in accordance with all applicable provisions of this Agreement.

3.4    Performance by Affiliates and Subcontractors. Each Party may delegate performance of Activities, or portions thereof, to (a) a subcontractor that has been approved by the JPT, such approval not to be unreasonably withheld or (b) an Affiliate; provided that: (i) all Activities performed by an Affiliate or by an authorized subcontractor will be performed in accordance with the Work Plan and this Agreement, (ii) such authorized subcontractor will have entered into an appropriate written agreement with the Party utilizing such authorized

 

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subcontractor that: (A) contains obligations of confidentiality and restrictions on use of any Confidential Information and any proprietary materials commensurate in scope to the provisions of Article 9 (including with respect to duration); and (B) contains obligations for such authorized subcontractor to assign or exclusively license any Intellectual Property generated by such authorized subcontractor in performing such Activities to the applicable Party utilizing such authorized subcontractor to enable such Party comply with the provisions of Article 8 regarding ownership and Control of Foreground IP. Each Party is and remains solely and exclusively responsible for the conduct of any Activities by its Affiliate or authorized subcontractor under this Agreement. Millennium acknowledges and agrees, however, that, to the extent that Cedar-Sinai Medical Center is used by Precision as a subcontractor to perform any Activities, any Background IP or Diagnostic Foreground IP or Patient Selection IP resulting from such Activities may not be owned by Precision or assigned to Millennium; rather, any such resulting Intellectual Property will be licensed to Precision by Cedar-Sinai as Related Inventions pursuant to that certain Exclusive License Agreement by and between Precision and Cedar-Sinai Medical Center, dated September 1, 2017 (“Cedar-Sinai Agreement”) or otherwise; and shall, in turn, be subject to the licenses granted to Millennium in Section 8.3. Notwithstanding anything to the contrary herein, Millennium shall have the exclusive right to exploit any Compound Patient Selection IP resulting from Activities.

3.5    Selection of Collaboration Targets.

(a)    Prior to Effective Date, Precision supplied to Millennium a list of unnamed potential Collaboration Targets. The information on the foregoing list (“Target Information”) shall be used solely by the individual employees of Millennium or its Affiliates listed on Schedule 3.5(a)(i) (the “Authorized Individuals”) and solely for purposes of selecting the original Collaboration Targets. The Authorized Individuals shall not use or disclose such Target Information to any Third Party or to any other personnel of Millennium or its Affiliates; except as set forth below in this Section 3.5(a) with respect to Target Information regarding Collaboration Targets. The foregoing restrictions on use and disclosure of the Target Information may be referred to herein as the “Firewall.” Also prior to the Effective Date, Millennium picked [***] Targets of highest interest from that list as the original Collaboration Targets for further assessment by sending notice in writing to Precision, and Precision disclosed the names of such [***] Targets to the Authorized Individuals. The Target Information and names for such [***] Targets may be referred to herein as the “Original Target Information.” Millennium shall limit disclosure of the Original Target Information solely to the Authorized Individuals, other personnel of Millennium or its Affiliates in the functional groups listed on Schedule 3.5(a)(ii) (“Functional Groups”) and, subject to Precision’s prior consent, which shall not be unreasonably withheld, Millennium’s and its Affiliates’ business partners and subcontractors (provided that such Third Parties are subject to written confidentiality obligations commensurate in scope to the provisions of Article 9) who have a need to know such information for purposes of developing Development proposals with respect to such Targets to be presented to Functional Groups for approval for inclusion as a Collaboration Target under this Agreement and shall use the Original Target Information for no other purpose, except as set forth below in this Section 3.5(a). Within [***] calendar days after the Effective Date, Millennium shall nominate [***] original Collaboration Targets selected for further Development and a Work Plan will be created and implemented with respect to those [***] Collaboration Targets. Upon

 

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selection of such [***] Collaboration Targets, the Target Information and names for such Targets shall be treated like other Confidential Information of Precision, subject to the provisions of Article 9. After [***] calendar days following the Effective Date, the original Collaboration Targets not nominated by Millennium (each a, “Non-Nominated Target”) shall no longer be considered Collaboration Targets and Millennium’s license to Precision Intellectual Property granted under Article 8 shall not include the use and practice under the Precision Intellectual Property for the purpose of performing activities related to Non-Nominated Targets. For the avoidance of doubt, all Target Information disclosed by Precision to Millennium pursuant to this Section 3.5 shall be the Confidential Information of Precision.

(b)    If Millennium has not picked the [***] initial Collaboration Targets for further Development within [***] calendar days after the Effective Date, Millennium subsequently determines that a chosen Collaboration Target is no longer viable for Development or Precision terminates this Agreement with respect to a Target pursuant to Section 12.2(b), Millennium may request from Precision an updated list of potential unnamed Collaboration Targets and Precision will supply such list to Millennium as soon as practicable but no later than within [***] Business Days after receipt of Millennium’s written request. Any such list will be provided to the Authorized Individuals, and the Target Information contained therein shall be subject to the Firewall and shall be used solely for purposes of selecting Replacement Target(s) as set forth below in this Section 3.5(b). Upon receipt of such list of then available potential Collaboration Targets, Millennium may pick up to [***] of such Targets to be Collaboration Targets (each such chosen Target, a “Replacement Target”); provided that at any given time after the [***] calendar days following the Effective Date, the total number of Collaboration Targets may not exceed [***] unless an Additional Target is added pursuant to Section 3.5(c) below. Millennium will choose its Replacement Target(s) by sending notice in writing to Precision identifying Millennium’s Replacement Target of choice within [***] days of the Authorized Individuals’ receipt of the applicable Target list from Precision and, upon receipt of such notice, Precision will disclose the identity of such Target to Millennium. The Target Information and identity of such Replacement Target(s) may be referred to herein as the “Replacement Target Information.” Millennium shall limit disclosure of the Replacement Target Information solely to the Authorized Individuals, other personnel of Millennium or its Affiliates in the Functional Groups listed on Schedule 3.5(a)(ii) and, subject to Precision’s prior consent, which shall not be unreasonably withheld, Millennium’s and its Affiliates business partners and subcontractors (provided that such Third Parties are subject to written confidentiality obligations commensurate in scope to the provisions of Article 9) who have a need to know such information for purposes of developing Development proposals with respect to such Replacement Targets to be presented to Functional Group for approval for inclusion as a Collaboration Target under this Agreement. Upon receipt of such approval, each Replacement Target shall be considered a Collaboration Target and the Replacement Target Information shall be treated like other Confidential Information of Precision, subject to the provisions of Article 9, while the discontinued Collaboration Target shall be considered a Non-Nominated Target and Millennium’s license to Precision Intellectual Property granted under Article 8 shall not include the right to use and practice under the Precision Intellectual Property for the purpose of performing activities related to any such Non-Nominated Targets; provided that if Functional Groups do not approve the Developed proposal for such Replacement Target within [***] days

 

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after Precision’s disclosure of the identify of such Replacement Target to Millennium, such Target shall cease to be a Replacement Target and shall not become a Collaboration Target. A revised Work Plan, including FTE costs (if applicable), will be promptly approved by the Parties and implemented with respect to such Replacement Target.

(c)    If Millennium (with Precision’s concurrence) would like to expand the number of Collaboration Targets (“Additional Targets”) beyond [***], Millennium may request from Precision an updated list reflecting potential unnamed Additional Targets and Precision will supply such list to Millennium as soon as practicable but no later than within [***] Business Days after receipt of Millennium’s written request. Any such list will be provided to the Authorized Individuals and the Target Information contained therein shall be subject to the Firewall and shall be used solely for purposes of selecting Additional Target as set forth below in this Section 3.5(c). Millennium may choose [***] Additional Target by sending notice in writing to Precision identifying Millennium’s Additional Target of choice within [***] days of the Authorized Individuals’ receipt of the list of then available Targets from Precision. Upon Precision’s receipt of such notice, any additional financial terms beyond the milestones and royalties set forth in Exhibit C will be negotiated by the Parties in good faith to fairly reflect development efforts and activities undertaken by Precision with respect to such Additional Target after the Effective Date, and the Parties will discuss a reasonable timeframe for developing and presenting Development proposals with respect to such Additional Target to Functional Groups for approval for inclusion as a Collaboration Target under this Agreement. Upon receipt of such approval and agreement by the Parties with respect to the financial terms applicable to such Target, the Additional Target shall be considered a Collaboration Target and a revised Work Plan will be promptly approved by the Parties and implemented with respect to such Additional Target; provided that if such approval and agreement are not achieved within [***] days after Precision’s disclosure of the identity of such Additional Target to Millennium, such Target shall cease to be an Additional Target and shall not become a Collaboration Target.

(d)    Millennium’s right to request updated lists of Targets and to choose Replacement Targets as set forth above, shall expire on the [***] anniversary of the Effective Date, provided that this period shall be extended by [***] in the event that Precision terminates this Agreement with respect to a Target pursuant to Section 12.2(b) prior to the [***] anniversary of the Effective Date. Millennium’s right to request updated lists of Targets and to choose Additional Targets as set forth above, shall expire on the [***] anniversary of the Effective Date.

3.6    Exclusivity. This Agreement shall be exclusive during the Term as follows: (a) each Party will work exclusively with the other Party on Activities contemplated by this Agreement geared towards the Development and Commercialization of any assays and/or diagnostic products (including Assays/Tests and/or Products) for use with pharmaceutical products Directed to [***], or to any of the Collaboration Targets during the [***] period immediately following the Effective Date, and (b) thereafter during the Term, (i) Precision will work exclusively with Millennium with respect to [***] and each Collaboration Target once each such Collaboration Target is specified (for so long as it is a Collaboration Target), and (ii) each Party will work exclusively with the other Party on the Development and Commercialization of assays and/or diagnostic products (including the Assays/Tests and/or

 

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Products) for use with pharmaceutical products Directed to [***], or a Collaboration Target once each such Collaboration Target is specified (for so long as it is a Collaboration Target), or each Replacement Target chosen by Millennium in accordance with Section 3.5(b) above (for so long as it is under active consideration as a Collaboration Target by Millennium during the applicable [***] period set forth in Section 3.5(b) above), or Additional Target chosen by Millennium in accordance with Section 3.5(c) (for so long as it is under active consideration as a Collaboration Target by Millennium during the [***] period Millennium’s notice of such choice). Notwithstanding the foregoing, the exclusivity set forth in this Section 3.6 shall not apply to the activities or products of any acquirer of Precision, or its business or assets, or the Affiliates of such acquirer (other than Precision) that (1) were commenced prior to the effective date of such acquisition and/or (2) do not utilize any of the Foreground IP, or the Precision Background IP licensed to Millennium hereunder that was in Precision’s Control as of the effective date of such acquisition; provided that any such activities are subject to appropriate firewalls to ensure continued compliance with all of the term and conditions hereof. The Parties acknowledge that Cedar-Sinai Medical Center retains certain rights to conduct internal, non-commercial research using the technology and patents licensed to Precision under the Cedar-Sinai Agreement.

3.7    Other Activities. Except as expressly set forth herein, all Activities performed pursuant to this Agreement, and all rights and obligations of the Parties hereunder, are nonexclusive and nothing herein will prevent either Party or an Affiliate of either Party from entering into a similar agreement, collaboration or relationship with any Third Party or otherwise undertaking any activity. Except as expressly set forth herein, each Party and its respective Affiliates has the right to perform work for or together with Third Parties, or to undertake activities of its own accord, or with its Affiliates, that are substantially similar or identical to the Activities or other activities contemplated by this Agreement; provided that each Party will do so subject to the limitations set forth in Article 8 and Article 9 with respect to the use of Intellectual Property and Confidential Information.

3.8    Records. The Parties will maintain complete and accurate records of all Activities conducted pursuant to this Agreement, and all results, data, and developments made in conducting such Activities (collectively, “Records”). Records will reflect all work done and results achieved pursuant to the Work Plan in sufficient detail and in good scientific manner appropriate for Intellectual Property and regulatory purposes. In addition, Millennium’s Records shall include complete and accurate financial records, which are adequate to confirm the amounts owed to Precision under this Agreement. The Parties shall retain all Records for the time period required by Applicable Law and will allow for auditing by Regulatory Authorities of all such Records.

3.9    Audits. Each Party retains the right during the Term and for a period of [***] years thereafter, at reasonable times and with reasonable prior written notice to the other Party, to audit, through an independent auditor selected by the auditing Party and reasonably acceptable to the audited Party (provided that such independent auditor is subject to written confidentiality obligations commensurate in scope to the provisions of Article 9), the Records and any other relevant documentation maintained by the other Party, which shall include appropriate documentation relating to all Activities performed by its Affiliates, sublicensees and authorized subcontractors and Regulatory Approvals of the MPI Drugs and all MPI Drug Sales, for

 

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purposes of confirming compliance with this Agreement and amounts payable hereunder. The audited Party shall fully cooperate with the auditing Party, or its designee, in any audit conducted hereunder and to resolve any unsatisfactory audit findings, including any noncompliance with this Agreement. The results of any such audit shall be the Confidential Information of the audited Party. The auditing Party may not conduct such audit more than [***] per Calendar Year, except in cases where there is a need to audit for cause. The cost of any such audit shall be borne by the auditing Party, except if any such audit reveals an underpayment by the audited Party of more than [***] of amounts owed hereunder for the audited period, in which case the audited Party shall reimburse the auditing Party for the reasonable costs of such audit. Each Party shall pay the other Party underpaid amounts, or refund any overpayments revealed by any such audit, within [***] days of notice thereof.

ARTICLE 4

PAYMENTS FOR ACTIVITIES

4.1    Payment for Activities. Precision will invoice Millennium for amounts payable hereunder as set forth in Exhibit C attached as and incorporated herein by reference. Except as expressly set forth in Exhibit C, Millennium shall not reimburse Precision for any of Precision’s out of pocket costs and other expenses incurred by Precision in connection with the performance of Activities under this Agreement. Unless otherwise set forth in Exhibit C, Millennium will pay undisputed amounts in each invoice within [***] calendar days after receipt of such invoice. Precision will send invoices to Millennium by email to the following address:

[***]

Precision will reference in the invoices the purchase order number provided by Millennium.

4.2    Taxes. The amounts payable pursuant to this Agreement (“Payments”) shall not be reduced on account of any taxes unless required by Applicable Law. Millennium shall deduct and withhold from the Payments any taxes that it is required by Applicable Law to deduct or withhold. Notwithstanding the foregoing, if Precision is entitled under any applicable tax treaty to a reduction of rate of, or the elimination of, or recovery of, applicable withholding tax, it may deliver to Millennium or the appropriate governmental authority the prescribed forms necessary to reduce the applicable rate of withholding or to relieve Millennium of its obligation to withhold tax. In such case, Millennium shall apply the reduced rate of withholding, or not withhold, as the case may be, provided that Millennium is in receipt of evidence, in a form reasonably satisfactory to Millennium (e.g., Precision’s delivery of all applicable documentation at least [***] weeks prior to the time that the Payments are due). If, in accordance with the foregoing, Millennium withholds any amount, it shall pay to Precision the balance when due, make timely payment to the proper taxing authority of the withheld amount, and send Precision proof of such payment within [***] calendar days following that payment. The Parties will cooperate with each other in seeking any tax exemption or credits that may be available with respect to any MPI Drug or Product, including the tax credit available under Section 45C of the United States Internal Revenue Code by reason of a Party’s research and development expenditures contributing to the product being granted orphan designation by the FDA, or equivalent Applicable Law outside of the United States.

 

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4.3    Currency. All payments under this Agreement due to Precision are to be paid in United States dollars.

ARTICLE 5

CLINICAL MATTERS

5.1    Clinical Trials.

(a)    Supply of Products for Clinical Trials. Millennium will be [***]. Precision will be [***] in accordance with the Work Plan. Precision will ensure that adequate supplies of each Product, as defined by the JPT, are made available to the clinical testing laboratories engaged by or on behalf of Precision or Millennium to assist with and/or conduct diagnostic testing using the Product(s) in support of such Clinical Trials. Precision will also ensure that it maintains sufficient inventories of Consumables as are necessary for the conduct of such Clinical Trials. If, upon delivery, any shipments of the Products fail to meet the quality control specifications agreed upon by the Parties (“Quality Control Specifications”), Precision will, upon receipt of notice of such failure from Millennium or any clinical testing laboratory, provide a replacement shipment [***] in a timely manner that meets the Quality Control Specifications so as not to delay the applicable Clinical Trial. The Parties shall enter into: (i) a supply agreement governing the supply of each Product for use in clinical development (“Supply Agreement”), and (ii) a quality agreement governing the quality control, quality assurance and validation of such Assay/Test (“Quality Agreement”). The terms of such Supply Agreement, such Quality Agreement and any other related agreements deemed appropriate to support the supply of Products for use in the Clinical Trials to be conducted using such Products pursuant to the Work Plan shall be negotiated in good faith by the Parties and will contain terms and conditions reasonable and customary for agreements of such type, [***]. Precision’s obligations to supply Product and Consumables pursuant to this Section 5.1 shall be subject to the terms and conditions of the Supply Agreement and Quality Agreement.

(b)    Training. Precision will (i) ensure timely delivery of all materials, procedures and training necessary to utilize the Product(s) at the clinical testing laboratories, (ii) provide written instructions (including Interpretation Guidelines) and in-person training for all the clinical testing laboratories on the performance of the Product(s), as needed, and (iii) otherwise assist with diagnostic testing using the Product(s), in each case in support of the Clinical Trials in accordance with the applicable Work Plan. Millennium shall reimburse Precision for reasonable costs associated with any in-person training necessary to utilize the Product(s) at the clinical testing laboratories in accordance with the Work Plan. For clarity, Millennium shall be responsible for engaging and paying the clinical testing laboratories for the performance of diagnostic testing using the Product(s) in the Clinical Trials.

5.2    Materials.

(a)    Provision of Materials. As more particularly described in the Work Plan, Precision will provide Millennium: [***]. Millennium will furnish to Precision necessary [***], as needed to support

 

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Precision’s performance of the Activities. Without limiting the foregoing, Millennium will [***] needed to support Precision’s performance of the Activities on a schedule and reporting format approved by the JPT. Each Party will comply with obligations of confidentiality and restrictions on use of Confidential Information and proprietary materials set forth in Article 9 with respect to the materials furnished by the other Party hereunder, as applicable. Each Party understands and agrees that the biological materials furnished hereunder are experimental in nature, and therefore, each Party will handle such materials in accordance with any applicable documentation and written instructions provided by the furnishing Party, and applicable common scientific standards of care relating to such materials (including the use, storage, handling and disposal thereof). Each Party agrees not to use (or provide) Patient Samples in any way that would contravene Patient Sample Requirements.

(b)    Limited Use of Biological Materials. Except as described in Section 3.4 above, each Party agrees to retain possession of biological materials furnished by the other Party hereunder, and not to sell or otherwise provide such materials to any Third Party without the prior written consent of the furnishing Party. Each Party further agrees not to use the biological materials received hereunder, or any data or information generated therefrom for any purpose other than as expressly provided in this Agreement or the Work Plan.

(c)    Records of Use of Biological Materials. Each Party will keep records of its use of all biological materials furnished by the other Party hereunder, and upon completion of the Activities for which the materials have been provided, or upon any earlier expiration or termination of this Agreement, will account for all use of such materials and, at the option of the furnishing Party, either destroy or return to the furnishing Party all unused materials in accordance with Applicable Law and the instructions of the furnishing Party.

(d)    Ownership of Biological Materials. Notwithstanding anything herein to the contrary, each Party will own and retain all right, title and interest in and to all biological materials furnished by it pursuant to this Agreement or the Work Plan.

(e)    Patient Sample Requirements. Each Party acknowledges that certain of the materials transferred hereunder may consist of biological materials that are derived or collected from human subjects. Each Party further acknowledges that the transfer such biological materials and any data or information associated therewith (collectively, referred to as “Patient Sample”) is a highly sensitive matter, and therefore, each Party shall ensure that all Patient Samples transferred under this Agreement shall have been collected, processed, De-identified/coded, tracked, used, stored, handled, transported, manipulated and destroyed in a manner appropriate to ensure compliance with: (i) the terms and conditions of this Agreement, (ii) all obtained informed consents and any applicable requirements of an institutional review board, independent ethics committee, or any equivalent authority, and (iii) any applicable professional and ethical standards with respect to the use of such Patient Samples and Applicable Law, including privacy and patient confidentiality laws (collectively, (i), (ii) and (iii) are referred to as “Patient Sample Requirements”). Each Party shall follow all of its documented policies and procedures to ensure the protection of the autonomy and confidentiality of the human subjects from whom the Patient Samples were collected. For clarity, if collection of the Patient

 

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Samples was subject to any informed consent or required authorization, the furnishing Party shall ensure that such informed consent and/or authorization allows for the collection, transfer and use of Patient Samples as contemplated by this Agreement. Without limiting the foregoing, Millennium shall ensure that the informed consents and authorizations provided by subjects participating in Clinical Trials included in the Work Plan permit the provision of Patient Samples and information to Precision for use as contemplated by this Agreement, including for purposes of developing the Products. All Patient Samples delivered under this Agreement shall be labeled clearly in accordance with Patient Sample Requirements. Neither Party shall include any personally identifiable health information in the data or information that is part of such Patient Samples without the other Parties’ prior written consent, unless permitted by Patient Sample Requirements.

ARTICLE 6

REGULATORY MATTERS

6.1    Regulatory Approvals. Precision shall be responsible for obtaining and maintaining Regulatory Approvals for each Product. Precision shall ensure that each Product developed hereunder complies with Applicable Law and fulfills all statutory requirements, including the CE-marking in the European Union and requirements for comparable approvals in other countries in the Territory. Millennium shall be responsible for obtaining and maintaining Regulatory Approvals for MPI Drugs. The Parties shall agree on the regulatory Activities the Parties intend to undertake relating to Regulatory Submissions and Regulatory Approvals for MPI Drugs and the Products in the Territory through the JSC. Each Party shall use Diligent Efforts to obtain Regulatory Approvals in sufficient time to enable simultaneous market launch of each Product with the corresponding MPI Drug in the agreed countries in the Territory. The Parties shall cooperate and reasonably assist each other in the Regulatory Approval process and coordinate and align their Regulatory Submissions, and activities pertaining hereto as far as necessary.

6.2    Regulatory Authority Meetings and Regulatory Submissions.

(a)    Written Communications. Each Party will promptly furnish to the other Party a copy of any written communication that it receives from any Regulatory Authority pertaining to any Product within [***] Business Days of receipt.

(b)    Meetings with Regulatory Authorities Regarding Product. Except as otherwise provided herein, the Parties agree that with regard to each Product, Precision will remain solely responsible for all interactions with the CDRH and corresponding Regulatory Authorities in foreign jurisdictions, provided that Millennium will be entitled to participate in planning of all meetings with Regulatory Authorities relating to any Assay/Test or Product (whether such meetings are in person or by telephone or videoconference) and to review all pertinent documents related to any Assay/Test, Product and/or MPI Drug that are shared with Regulatory Authorities in preparation for such meetings, and Precision and Millennium will use reasonable efforts to coordinate their schedules with respect to meeting dates with Regulatory Authorities to allow for both Parties to attend such meetings. Precision shall notify Millennium of any unannounced Regulatory Authority inspection relating to any Product as soon as

 

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practicable following arrival of the Regulatory Authority at Precision’s facilities. Millennium will be entitled to attend and, if appropriate and permitted under Applicable Law, participate in all such meetings with Regulatory Authorities; provided that Precision may require (in its sole discretion) that Millennium not attend any discussions or inspections (or portions of discussions or inspections) with Regulatory Authorities that involve the Confidential Information of Precision unrelated to any MPI Drug or Product. In the event that Millennium does not participate in any such meeting, then as soon as practicable following its meeting with the Regulatory Authority, Precision shall schedule a separate meeting with Millennium in order to brief Millennium on the outcome and potential consequences of Precision’s meeting with the Regulatory Authority.

(c)    Meetings with Regulatory Authorities Regarding MPI Drug. The Parties agree that with regard to each MPI Drug, Millennium will remain solely responsible for all interactions with the Regulatory Authorities, including CDER and corresponding Regulatory Authorities in foreign jurisdictions, provided that Millennium will notify Precision at least [***] Business Days in advance of all applicable meetings with Regulatory Authorities that relate to any Product (whether such meetings are in person or by telephone or videoconference), and Millennium and Precision will use reasonable efforts to coordinate their schedules with respect to meeting dates with Regulatory Authorities to allow for both Parties to attend such meetings. Precision will be entitled to attend and, if appropriate and permitted under Applicable Law, participate in all such meetings with Regulatory Authorities; provided that Millennium may require (in its sole discretion) that Precision not attend any discussions (or portions of discussions) with Regulatory Authorities that involve the Confidential Information of Millennium unrelated to any Product. In the event that Precision does not participate in any such meeting, then as soon as practicable following its meeting with the Regulatory Authority, Millennium shall schedule a separate meeting with Precision in order to brief Precision on the outcome and potential consequences of Millennium’s meeting with the Regulatory Authority.

(d)    Regulatory Submissions Regarding Product. During the performance of the Work Plan, Precision will use Diligent Efforts to provide the JPT with access to all draft Regulatory Submissions relating to any Assay/Test or Product (including but not limited to IDEs, PMAs, and briefing documents for meetings with Regulatory Authorities) during the submission preparation phase. Millennium will provide comments, if any, back to Precision within [***] Business Days for each document. Precision will consider in good faith any comments from the JPT representatives of Millennium (or applicable sub-team) and will use Diligent Efforts to incorporate such comments into such draft Regulatory Submission. Joint dialogue between the Parties will take place for up to [***] Business Days following the review and comment period set forth above if reasonably requested by Millennium so that the final version can be compiled during this process. The final Regulatory Submissions for the Assay/Test or Product will be submitted by Precision to the relevant Regulatory Authorities.

6.3    Rights of Reference. Upon Millennium’s written request to Precision, Precision will send a letter to the FDA that authorizes the FDA to access Precision’s investigational device exemption application or pre-market approval for the relevant Product on behalf of Millennium for purposes of supporting Millennium’s Regulatory Submissions for MPI Drug for use with the Product. Upon Precision’s written request to Millennium, Millennium will send a letter to the

 

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FDA that authorizes the FDA to access Millennium’s drug application for the relevant MPI Drug on behalf of Precision for purposes of supporting Precision’s Regulatory Submissions for the Product for use with the MPI Drug. Such letters will be included in the Parties’ respective Regulatory Submissions. If necessary, the Parties will discuss alternate mechanisms to achieve appropriate rights of reference.

ARTICLE 7

SUPPLY AND COMMERCIALIZATION ACTIVITIES

7.1    Commercialization Plan. As part of the Work Plan, Precision shall have responsibility for the Commercialization of the Products in the Territory. Millennium shall have responsibility for Commercialization of the MPI Drugs in the Territory. The Parties, through the JSC, will adopt a commercialization plan regarding each Product (each a “Commercialization Plan”), which will include in reasonable detail: (a) principal strategies with respect to approval, launch, marketing, pricing alternatives and sale of the Product for use with the MPI Drug in the Territory and (b) the activities to be conducted by the Parties in furtherance of the strategies set forth in clause (a). Millennium will use Diligent Efforts to Commercialize the MPI Drugs for use with the Products in the Territory; and the Parties will use Diligent Efforts to perform all Activities set forth under the Commercialization Plan in accordance with the terms and conditions set forth in this Agreement and the Commercialization Plan. The Commercialization Plan will be incorporated into the Work Plan.

7.2    Manufacture and Supply of Commercial Products.

(a)    Manufacture. Precision will Manufacture the Products in accordance with Applicable Law, including QSR requirements and other applicable regional requirements in the Territory.

(b)    Supply. Precision will use Diligent Efforts to make each Product commercially available in the Territory at an appropriate price (based on the pricing alternatives set forth in Commercialization Plan for such Product) in sufficient quantities and within a reasonable timeframe. If requested by Millennium, Precision will supply to Millennium Product(s) in accordance with a separate definitive supply agreement, to be negotiated by the Parties, containing customary and reasonable terms.

(c)    Forecasts. In order to allow Precision to engage in appropriate Manufacturing and supply forecasting activities with regard to the Products, beginning at least [***] months prior to the anticipated date of the First Commercial Sale of the relevant MPI Drug, Millennium shall furnish Precision with a confidential, non-binding, good faith initial forecast (in units) for the Product for use with such MPI Drug. Thereafter and on a semi-annual basis, Millennium shall supply Precision with a confidential, non-binding, good faith rolling [***] year forecast (in units, broken-down by country (or regions and quarters)) as to Millennium’s predicted unit demand for the Product for use with the MPI Drug (it being agreed and understood that such forecasts shall be Confidential Information hereunder).

 

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(d)    Commercialization Capabilities. Precision will use Diligent Efforts to demonstrate Product scale-up and Commercialization capabilities prior to initiation of any Phase 3 Clinical Trial of the MPI Drug for use with such Product, in accordance with the Work Plan.

7.3    Markets and Security of Supply.

(a)    Markets. In the event that Millennium desires to enter one or more potential geographic markets which Precision does not consider a Commercially Reasonable Opportunity because of the anticipated financial return, or unexpected or excessive risks, Precision shall so notify Millennium and the Parties will meet and discuss in good faith potential solutions whereby the Product may be made available in such markets, if appropriate and permitted under Applicable Law.

(b)    Security of Supply. Precision will use Diligent Efforts to take the following actions to minimize the risk of an Inability to Supply occurring:

(i)    Alternate Manufacturing Facilities. As prioritized by the Work Plan, the JSC or any subcommittee(s) established to address commercial considerations, Precision will work diligently to qualify alternate Manufacturing facilities to Manufacture the various components of the Product.

(ii)    Safety Stock. Precision will maintain reasonable safety stock levels to bridge any supply obligations, if necessary.

In the event that Precision anticipates an Inability to Supply or an Inability to Supply occurs, Precision will promptly notify Millennium in writing and schedule a meeting to brief Millennium as to the reason for the Inability to Supply, and its expectations as to the magnitude and duration of the Inability to Supply. Such Inability to Supply will end upon Precision’s written notice to Millennium that the circumstances resulting in the Inability to Supply have ceased to exist and that Precision is able to meet its supply obligations.

ARTICLE 8

INTELLECTUAL PROPERTY

8.1    Deliverables. Ownership and rights with respect to any data or information embedded in the Deliverables will be determined in accordance with Sections 8.2 and 8.3 below.

8.2    Ownership of Intellectual Property.

(a)    Background or Separate Intellectual Property. Each Party retains all right, title and interest in and to: (i) such Party’s Background IP and (ii) such Party’s Separate IP. Each Party, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of its own Background IP and Separate IP.

(b)    Clinical Trial Information. Millennium shall have sole and exclusive ownership of all Clinical Trial Information (including Correlation Data), and all Clinical Trial Information shall be the Confidential Information of Millennium, except for Product Clinical

 

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Trial Test Results, which shall be jointly owned by the Parties and shall be the Confidential Information of both Parties. For clarity, any and all gene expression data or polygenic risk score generated by or on behalf of Precision in preparation for, or outside of, the Clinical Trials, without the use of Millennium Materials, shall be owned solely by Precision.

(c)    Foreground Intellectual Property. Inventorship of Foreground IP will be determined in accordance with U.S. patent laws. As between the Parties, ownership, as well as responsibility for prosecution, maintenance, abandonment and enforcement of Foreground IP will be as set forth below.

(i)    Diagnostic Foreground IP. All right, title and interest in and to all Diagnostic Foreground IP, irrespective of inventorship, hereby vests in Precision (or its designee). Millennium hereby assigns, and upon Precision’s written request Millennium will promptly execute assignment documents to transfer, to Precision (or its designee) any rights that it may have in or to any Diagnostic Foreground IP. Precision, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of Diagnostic Foreground IP.

(ii)    Compound Foreground IP. All right, title and interest in and to all Compound Foreground IP, irrespective of inventorship, hereby vests in Millennium. Precision hereby assigns, and upon Millennium’s written request Precision will promptly execute assignment documents to transfer, to Millennium any rights that it may have in or to any Compound Foreground IP. Millennium, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of such Compound Foreground IP. Notwithstanding the foregoing, in the event that a Collaboration Target becomes a Non-Nominated Target, any assignment of Compound Foreground IP related to such Non-Nominated Target made by Precision to Millennium shall automatically revert to Precision, and Millennium will promptly execute any assignment or related documents requested by Precision to restore to Precision any rights that it had in or to any such Compound Foreground IP.

(iii)    Other Foreground IP. Responsibility for prosecution, maintenance, abandonment and enforcement of a patent that covers both Diagnostic Foreground IP and Compound Foreground IP will be as set forth in Section 8.2(d). Ownership of any Other Arising IP will be according to inventorship (determined in accordance with U.S. patent law), with ownership vesting in the Party to whom the inventor(s) has (have) assigned, or is (are) obligated to assign, IP rights. The Party owning any Other Arising IP, in its sole discretion, is responsible for the filing, prosecution, maintenance, abandonment and enforcement of such Other Arising IP.

(iv)    Inventors. In the event a Party’s employees, agents, consultants and/or subcontractors are named as inventors in a patent application for the other Party’s Foreground IP, such Party shall ensure that any and all rights of such

 

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employees, agents, consultants and/or subcontractors to the other Party’s Foreground IP are assigned to such Party, to enable the assignments to the other Party as set forth above, subject to the last sentence of Section 3.4.

(d)    Combined Diagnostic and Compound Foreground IP.

(i)    Divisible Patent Applications and Patents. The Parties will endeavor to file Diagnostic Foreground IP and Compound Foreground IP in separate patent applications. If a patent application claims subject matter that covers both Compound Foreground IP and Diagnostic Foreground IP, then the JSC shall meet and consider the same and, to the extent possible, the Parties shall divide such patent application into two separate patent applications and resulting patents, of which one shall claim the Diagnostic Foreground IP and the other shall claim the Compound Foreground IP, with ownership of the Diagnostic Foreground IP vesting in Precision in accordance with Section 8.2(c)(i) and ownership of the Compound Foreground IP vesting in Millennium in accordance with Section 8.2(c)(ii). Millennium, in its sole discretion, shall be responsible for the filing, prosecution, maintenance, abandonment and enforcement of the patent application and patents covering the Compound Foreground IP, and Precision, in its sole discretion, shall responsible for the filing, prosecution, maintenance, abandonment and enforcement of the patent application and patents covering the Diagnostic Foreground IP.

(ii)    Indivisible Patent Applications and Patents. Subject to Section 8.2(d)(i) and consent of the other Party pursuant to clause (A) below, if a Party wishes to file or proceed with prosecution of a patent application that claims subject matter that covers both Compound Foreground IP and Diagnostic Foreground IP, which cannot be divided into two separate patent applications and must instead be filed as a single patent application (an “Indivisible Patent”), then such patent application will be jointly owned by the Parties, and any resulting patent (x) shall be owned by Precision if the granted claims only cover Diagnostic Foreground IP, (y) shall be owned by Millennium if the granted claims only cover Compound Foreground IP, or (z) shall remain jointly owned by the Parties if the granted claims cover both Compound Foreground IP and Diagnostic Foreground IP. The following provisions shall apply for any Indivisible Patent:

(A)    The Party seeking to file or proceed with the patent application must obtain the written consent from the other Party.

(B)    The Parties shall cooperate in the prosecution of such patent applications by allowing one Party to take the lead for patent prosecution and providing the other with sufficient comment and review rights with respect to all patent actions, including the filing of new applications, patent prosecution, and maintenance.

 

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(C)    If the Parties are unable to agree to which Party will take the lead in filing, prosecution and maintenance, the Parties shall together select an outside legal counsel (a “Patent Counsel”) to jointly represent them with respect to the filing, prosecution and maintenance of such Indivisible Patent and the costs and expenses of Patent Counsel shall be borne equally by the Parties.

(D)    Precision shall have the full, perpetual and exclusive right to the Indivisible Patent within the field of diagnostics products.

(E)    Millennium shall have the full, perpetual and exclusive right to the Indivisible Patent to exploit therapeutic products based on the MPI Compound or chemical genus that encompasses the MPI Compound.

(F)    Each Party shall use Diligent Efforts to promptly report in writing to the other Party, during the Term and for a period of [***] months thereafter, known or suspected unauthorized use by a Third Party of the Indivisible Patent of which such Party becomes aware and shall fully cooperate with and provide the other Party with all available evidence supporting such unauthorized use or suspected unauthorized use.

(G)    Each Party shall make any necessary assignments and provide any necessary documentation to support the ownership and rights set forth above. Subject to Sub-sections (D) and (E) above, each Party shall have the right to exercise and license any jointly owned Indivisible Patent without accounting to, or consent from, the other Party.

8.3    Licenses to Intellectual Property.

(a)    Precision License Grant to Millennium.

(i)    Where needed or useful for the selection or exploitation of MPI Drugs Directed to [***] or each specific Collaboration Target, Precision shall grant and hereby grants to Millennium and its Affiliates a nonexclusive, worldwide, fully paid-up, royalty-free license, with the right to grant and authorize sublicenses (including to its collaboration partners), under the Precision Background IP and any Precision Other Arising IP for the Development and Commercialization of MPI Drugs for use with Products solely (i) for the purpose of performing Activities and its obligations hereunder, and (ii) as necessary to Develop and Commercialize the MPI Drugs for use with the Products, in each case, only during the Term, unless Precision terminates this Agreement pursuant to Section l 2.2(b), or Millennium terminates Agreement pursuant to Section 12.2(c) or 12.2(d), and Millennium opts to continue the Development and Commercialization of any MPI Drug(s) for use with the associated Product(s), in which case such license shall survive with respect to such MPI Drug(s) for use with such Product(s) and be subject to payments to Precision as set forth in

 

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Section 12.5(a) and the terms of the applicable termination section. For the avoidance of doubt, the aforementioned license shall, with respect to Precision Background IP or Precision Other Arising IP, which is owned or otherwise controlled by a Third Party, be subject to (a) any pre-existing restrictions in Precision’s rights to grant a (sub-)license to Millennium to such Intellectual Property under a license agreement, other agreement or otherwise (the “Precision Upstream Agreements”), and (b) the terms and conditions in such Precision Upstream Agreements concerning such Intellectual Property, including (subject to clause (iii) below and Sections 8.6 and 8.7) the pass-through to Millennium of any such payment obligations based on Millennium’s exercise of such license, provided that Precision has diligently informed Millennium of any such restrictions or terms and conditions.

(ii)    Where needed or useful for the selection or exploitation of MPI Drugs Directed to [***] or each specific Collaboration Target. Precision shall grant and hereby grants to Millennium and its Affiliates an exclusive, worldwide, fully paid-up, royalty-free license, with the right to grant and authorize sublicenses (including to its collaboration partners) under the Product Foreground IP solely for the Development and Commercialization of MPI Drugs for use with the Products only during the Term, unless Precision terminates this Agreement pursuant to Section 12.2(b), or Millennium terminates Agreement pursuant to Section 12.2(c) or 12.2(d), and Millennium opts to continue the Development and Commercialization of any MPI Drug(s) for use with the associated Product(s), in which case such license shall survive with respect to such MPI Drug(s) for use with such Product(s) and be subject to payments to Precision as set forth in Section 12.5(a) and the terms of the applicable termination section. Precision shall also grant and hereby grants to Millennium and its Affiliates a nonexclusive, worldwide, fully paid-up, royalty-free license, with the right to grant and authorize sublicenses (including to its collaboration partners) under the Diagnostic Foreground IP solely for the Development and Commercialization of MPI Drug(s) for use with the Product(s) only during the Term, unless Precision terminates this Agreement pursuant to Section 12.2(b), or Millennium terminates Agreement pursuant to Section 12.2(c) or 12.2(d), and Millennium opts to continue the Development and Commercialization of any MPI Drug(s) for use with the associated Product(s), in which case such license shall survive with respect to such MPI Drug(s) for use with such Product(s) and be subject to payments to Precision as set forth in Section 12.5(a) and the terms of the applicable termination section. For the avoidance of doubt, the aforementioned license shall, with respect to Product Foreground IP or Diagnostic Foreground IP, which is owned or otherwise controlled by a Third Party, be subject to (a) any pre-existing restrictions in Precision’s rights to grant a (sub-)license to Millennium to such Intellectual Property under Precision Upstream Agreements and (b) the terms and conditions in such Precision Upstream Agreements concerning such Intellectual Property, including (subject to clause (iii) below and Sections 8.6 and 8.7) the pass-through to Millennium of any such payment

 

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obligations based on Millennium’s exercise of such license, provided that Precision has diligently informed Millennium of any such restrictions or terms and conditions.

(iii)    Notwithstanding anything in this Section 8.3, with respect to any Precision Upstream Agreements existing as of the Effective Date (including the Cedar-Sinai Agreement), any payment obligations incurred by Precision under such Precision Upstream Agreements based on Millennium’s exercise of the licenses set forth in this Section 8.3 shall not be passed through to Millennium, except to the extent that Millennium exercises any such license to: (A) continue the Development and Commercialization of any MPI Drug(s) for use with the associated Product(s) after termination of this Agreement, (B) Develop or Commercialize the Product(s) pursuant to Section 12.4 or otherwise in connection with the Product Transfer Activities, or (C) Develop or Commercialize any MPI Drug(s) pursuant to a Target License. Similarly, with respect to any Millennium Upstream Agreements existing as of the Effective Date, any payment obligations incurred by Millennium under such Millennium Upstream Agreements based on Precision’s exercise of the licenses set forth in this Section 8.3 shall not be passed through to Precision. In the event that Precision is in breach or default of the Cedar-Sinai Agreement, and Cedar-Sinai Medical Center terminates Precision’s rights with respect to such Precision Upstream Agreement, Millennium’s obligations, as sublicensee of such Precision Upstream Agreement shall continue and flow directly to Cedar-Sinai Medical Center, including the pass-through to Millennium of any payment obligations to Cedar-Sinai Medical Center based on Millennium’s exercise of such license.

(iv)    lf at any point during the Term that Millennium is engaged in the Development and Commercialization of MPI Drug(s) for use with the associated Product(s), including without limitation following the Product Transfer Activities, or after Precision terminates this Agreement with respect to a Product or a Target pursuant to Section 12.2(b), Millennium opts to Commercialize any MPI Drug Directed to a Collaboration Target, independent of the associated Product, which MPI Drug was Developed hereunder, Millennium may request a license from Precision for Commercialization of such MPI Drug (a “Target License Request”). Effective upon receipt of such Target License Request, which shall specify the MPI Drug that is the subject of the request, Precision shall grant, and hereby grants to Millennium an exclusive, worldwide license, with the right to grant and authorize sublicenses (including to its collaboration partners) to use the Target Information with respect to such Collaboration Target to Develop, Manufacture and Commercialize such MPI Drug (the “Target License”). During the Royalty Term, Millennium shall pay a [***] royalty to Precision on MPI Drug Sales of such MPI Drug pursuant to the Target License. For avoidance of doubt, the Target License shall not be subject to any of the milestones and royalties set forth in Exhibit C hereto, except for any milestone payments earned up to the date of Precision’s receipt of such Target License Request. In addition, Millennium shall pay Precision milestones equal to (1) [***] ($[***]) the first time aggregate

 

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annual MPI Drug Sales for such MPI Drug exceed [***] ($[***]) and (2) [***] ($[***]) the first time aggregate annual MPI Drug Sales for such MPI Drug exceed [***] ($[***]). Subject to such ongoing payment obligation and other surviving rights and obligations hereunder, upon receipt of the Target License Request, (A) this Agreement shall terminate with respect to such MPI Drug and any Assay(s)/Test(s) and Product(s) associated exclusively with such MPI Drug, (B) if such MPI Drug is the only MPI Drug Directed to the Target to which such MPI Drug is Directed that is being actively Developed or Commercialized for use with the associated Product by Millennium hereunder at the time such Target Licensed Request is received, this Agreement shall terminate with respect to such Target, (C) the Termination Consequences shall apply, and (D) any rights granted by Precision to Millennium in connection with the Product Transfer Activities with respect to the Product associated with such MPI Drug shall terminate, and Millennium shall transfer and assign (and hereby assigns) back to Precision any information, materials and agreements assigned to Millennium pursuant to such Product Transfer Activities.

(v)    Following the expiration of the Royalty Term (but not on the early termination of this Agreement) with respect to an MPI Drug in a country, subject to the terms and conditions of this Agreement, the licenses set forth in this Section 8.3 shall become perpetual and irrevocable; provided that the royalties set forth in Exhibit C shall no longer apply with respect to Millennium’s sales of such MPI Drug in such country. If Precision opts to discontinue the Manufacture of Product associated such MPI Drug at any point following the expiration of the Royalty Term, then it shall provide Millennium written notice of its decision at least [***] months prior to the anticipated date of such discontinuation and upon Precision’s receipt of a written request from Millennium, the Parties will meet and discuss in good faith potential solutions within such notice period whereby the Product may continue to be made available, if appropriate and permitted under Applicable Law.

(vi)    As and to the extent necessary for Precision to perform its obligations under this Agreement, Millennium will give Precision written notice of any commercial sublicenses granted pursuant to this Section 8.3(a), as well as any Affiliates and Third Parties granted rights to commercialize MPI Drugs for use with Product, as soon as practicable after the granting thereof through the JPT and/or JSC.

(b)    Millennium’s License Grant to Precision. Where needed, Millennium shall grant and hereby grants to Precision a worldwide, fully paid-up, royalty-free license, with the right to grant and authorize sublicenses (including to its collaboration partners) under the Millennium Background IP, Compound Foreground IP and Millennium Other Arising IP during the Term, unless terminated sooner as provided herein, for the sole purpose of performing Activities and Commercializing the Products for use with the MPI Drugs hereunder, which license shall be non-exclusive with respect to the Millennium Background IP and Millennium Other Arising IP, and exclusive under the Compound Foreground IP. Precision may sublicense

 

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the licenses granted by Millennium under this Section without Millennium’s prior written consent, provided that Precision gives MPI written notice of any such sublicense as soon as practicable after the granting thereof through the JPT and/or JSC. For the avoidance of doubt, the aforementioned license shall, with respect to Millennium Background IP, Compound Foreground IP or Millennium Other Arising IP, which is owned or otherwise controlled by a Third Party, be subject to (a) any pre-existing restrictions in Millennium’s rights to grant a (sub-)license to Precision to such Intellectual Property under a license agreement, other agreement or otherwise (the “Millennium Upstream Agreements”), and (b) the terms and conditions in such Millennium Upstream Agreements concerning such Intellectual Property, including (subject to Section 8.3(a)(iii) above and Sections 8.6 and 8.7) the pass-through to Precision of any such payment obligations based on Precision’s exercise of such license, provided that Millennium has diligently informed Precision of any such restrictions or terms and conditions.

(c)    Trademarks.

(i)    Precision’s Trademarks. Precision shall own all right, title and interest in and to any and all trademarks developed by or for Precision for use in connection with a Product. Where needed, Precision shall grant and hereby grants to Millennium a nonexclusive, worldwide, fully paid-up, royalty-free license to use such trademarks during the Term in connection with advertising, promoting and marketing MPI Drug for use with the Product.

(ii)    Millennium’s Trademarks. Millennium shall own all right, title and interest in and to any and all trademarks developed by or for Millennium for use in connection with a MPI Drug. Where needed, Millennium shall grant and hereby grants to Precision a nonexclusive, worldwide, fully paid-up, royalty-free license to use such trademarks during the Term in connection with advertising, promoting and marketing Product for use with the MPI Drug.

(d)    Use of Tacit Knowledge for Research Purposes. Each Party acknowledges that the other Party’s personnel may retain in their unaided memories knowledge gained in the course of this Agreement. Use of such knowledge (other than Confidential Information of the other Party) for research purposes will not be an infringement or misuse of the other Party’s Confidential Information or other Intellectual Property so long as the other Party’s Confidential Information or other Intellectual Property is not used, disclosed, commercialized or specifically conveyed to others and so long as the individual has not intentionally memorized the knowledge for the purpose of retaining it. For clarity, the foregoing shall not permit Millennium to use Target Information or Patient Selection Criteria other than as expressly provided in this Agreement, each of which is the Confidential Information of Precision.

8.4    Infringement of Patents by Third Parties. During the Term, each Party shall use Diligent Efforts to prosecute patent rights owned or Controlled by said Party related to this Agreement and to promptly report in writing to the other Party any existing, alleged or threatened infringement of IP rights licensed hereunder of which it becomes aware, and shall provide all information in such Party’s possession or control demonstrating such infringement.

 

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Precision shall have the first right, but not the obligation, to bring an appropriate suit or other action against any Third Party engaged in any existing, alleged or threatened infringement of Precision IP rights licensed to Millennium hereunder. In the event Precision elects not to take any action with respect to any IP that is exclusively licensed to Millennium hereunder, it shall so notify Millennium in writing within [***] calendar days of first becoming aware of such infringement, and Millennium shall have the right to commence a suit or take action to enforce the applicable patent(s) against Third Party perpetrating such infringement based on the exploitation of a drug Directed to [***] or a Collaboration Target for use in the Indication at its own expense and Takeda shall retain [***] of any recovery in connection with such suit or other action (after recouping its own expenses associated with such suit or action and reimbursing Precision for any of its expenses in connection with its assistance provided for accordance with this Section) and shall pay Precision the remaining [***] of such amounts. Each Party shall provide to the Party enforcing any such rights reasonable assistance in such enforcement, at such enforcing Party’s request and expense, including joining such action as a party plaintiff if required by Applicable Law to pursue such action. The enforcing Party shall keep the other Party regularly informed of the status and progress of such enforcement efforts and shall reasonably consider the other Party’s comments on any important aspects of such enforcement including determination of material litigation strategy, filing of dispositive papers to the competent court. Neither Party shall settle any claim, suit or action that it brought under this Section with respect to Precision IP rights licensed to Millennium hereunder without the prior written consent of the other Party, such consent not to be unreasonably withheld, delayed or conditioned.

8.5    No Implied Licenses. Nothing in this Agreement will be construed as conferring, explicitly or by implication, estoppel or otherwise any license, right, title, interest or immunity under any Background IP, Separate IP or Foreground IP, other than the rights set forth expressly in this Agreement regardless of whether such other Intellectual Property is dominant or subordinate to any Intellectual Property developed under this Agreement or are required to exploit any Intellectual Property developed under this Agreement. Furthermore, neither of the Parties has provided to the other Party and neither Party will provide to the other Party, and neither of the Parties have received from the other Party and neither Party will receive from the other Party, any consideration for the rights and licenses granted herein, except that which is expressly provided herein for the-specific rights expressly granted herein.

8.6    Relevant Third Party IP. If a Party (i) becomes aware of any other Intellectual Property that, on its face, without further analysis, may constitute Relevant Third Party IP or (ii) receives notice from a Third Party alleging that the performance of Activities or the Development, Manufacture or Commercialization of a MPI Drug or Product under this Agreement infringe, misappropriate or otherwise violate a Third Party’s Intellectual Property, in either instance of (i) or (ii), such Party will promptly notify the other Party.

(a)    Upon the provision of any such notification, subject to Section 8.7 below, the Parties will enter into discussions and any necessary protective agreements to determine: (i) whether a license to such Relevant Third Party IP is necessary or useful to each Party, (ii) whether a Party or the Parties should negotiate a license to such Relevant Third Party IP, (iii) which Party or Parties should negotiate for such licenses, (iv) any cost-sharing or other

 

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financial arrangements between the Parties in connection therewith to the extent such Relevant Third Party IP may be necessary or useful in order to Develop and/or Commercialize both MPI Drug(s) and Product(s), and (v) any related licenses to be granted among the Parties with respect to any such Relevant Third Party IP, in addition to what is contemplated by this Agreement.

(b)    If either Party desires to bring an opposition, action for declaratory judgment, nullity action, interference, declaration for non-infringement, reexamination, inter partes review, post-grant review or other attack upon the validity, title, or enforceability of Relevant Third Party IP (“Invalidation Action”), the Parties will promptly confer to determine whether to bring such action or whether (and the manner in which) to settle such action. Neither Party shall bring an Invalidation Action without the other Party’s prior written consent (not to be unreasonably denied, conditioned or delayed).

8.7    Other Third Party IP. For the avoidance of doubt, Millennium is solely responsible, in its sole discretion and at its sole cost and expense, for obtaining and maintaining any licenses or other rights to access or use any Relevant Third Party IP that may be necessary or useful in order to Develop and/or Commercialize a MPI Drug. Similarly, Precision is solely responsible, in its sole discretion and at its sole cost and expense, for obtaining and maintaining any licenses or other rights to access or use any Relevant Third Party IP that may be necessary or useful in order to Develop and/or Commercialize a Product. Precision will use Diligent Efforts to provide Millennium notice of any Intellectual Property of any Third Party that, to Precision’s Knowledge, would be infringed or misappropriated by the exploitation of Target Information by Millennium as contemplated by this Agreement.

ARTICLE 9

CONFIDENTIAL INFORMATION

9.1    Confidentiality Requirement. Except as necessary to exercise its rights or perform its obligations under this Agreement, or as otherwise permitted by the terms of this Agreement or by the Disclosing Party, the Receiving Party shall, during the Term and for a period of [***] years thereafter: (a) not use any Confidential Information of the Disclosing Party; (b) maintain the Disclosing Party’s Confidential Information in confidence using the same degree of care that the Receiving Party uses for its own Confidential Information, but in no event using less than reasonable care; and (c) not disclose or transfer any Confidential Information of the Disclosing Party to any Third Party, provided that such disclosure shall be permitted to the Receiving Party’s Affiliates and its and its Affiliates’ directors, officers, employees, consultants, agents. advisors, business partners and authorized subcontractors, in each case, who require such Confidential Information to exercise its rights or perform its obligations under this Agreement and who are bound by obligations of confidentiality and non-use commensurate in scope to the provisions of Article 9.

9.2    Authorized Disclosure. Confidential Information may be disclosed by the Receiving Party to the extent such disclosure is required to comply with Applicable Law or a court order, provided that the Receiving Party gives prior written notice to the Disclosing Party regarding such disclosure, and provides reasonable cooperation to the Disclosing Party in seeking, confidential treatment of such disclosure to the maximum extent permitted by Applicable Law.

 

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9.3    Terms of this Agreement. The Parties acknowledge that the terms and contents of this Agreement (including Work Plan attached hereto) will be treated as the Confidential Information of both Parties. Each Party shall have the right to disclose the terms and contents of this Agreement to actual and potential investors and acquirers in the context of diligence for or closing of such investment or acquisition, subject to the other Party’s prior consent, which shall not be unreasonably withheld, provided that such actual and potential investors and acquirers are subject to confidentiality obligations commensurate in scope to the provisions of Article 9.

9.4    Publicity. Except as required by Applicable Law, no Party will issue any press release or make any public disclosure of the existence or terms of this Agreement, without the prior written approval of such press release or public disclosure by the other Party; provided that if, in the reasonable opinion of a Party’s counsel, a public disclosure is required by Applicable Law or court order, including in a filing with the United States Securities and Exchange Commission, such Party will provide the proposed disclosure to the other Party at least [***] Business Days in advance of such filing or other disclosure for the other Party’s review and comment. The other Party will provide its comments as soon as practicable. Except as otherwise required by Applicable Law, the Party whose announcement has been reviewed shall remove any Confidential Information of the reviewing Party that the reviewing Party deems to be inappropriate for disclosure and requests in writing that the publishing Party remove from such announcement within the applicable review period.

9.5    Use of Name. Except as expressly set forth herein, no right, express or implied, is granted to either Party by this Agreement to use in any manner any trademark, logo or trade name of either Party without the prior written consent of the owning Party. Except as permitted pursuant to Section 9.4, no Party will make, place or disseminate any advertising, public relations, promotional material or any material of any kind using the name of the other Party or any subsidiary or Affiliate of the other Party or use their trademark, logo or trade name, without the prior written approval of the owning Party.

9.6    Publications. The Parties shall reasonably cooperate in developing a publication strategy with respect to the Activities. Each Party shall have the right to publish or present data related to the Activities or any portion thereof for their publication objectives (a “Publication”) in accordance with this Section 9.6. Millennium shall be responsible for and control the timing and scope of any Publication of Clinical Trial information; provided, that any Clinical Trial Information disclosure which specifically relates to the use of the Product in a Clinical Trial, shall be subject to the prior written consent of Precision. For avoidance of doubt, the publishing Party shall have no right to publish the non-publishing Party’s Confidential Information without the affirmative written consent of the non-publishing Party. The publishing Party will provide the non-publishing Party with an advance copy of any proposed Publication containing the non-publishing Party’s Confidential Information at least [***] calendar days prior to such submission for publication or presentation for the non-publishing Party’s review and written consent. The non-publishing Party will have the right to (a) provide comments on such Publication, which shall be given due consideration by the publishing Party, and/or (b) request

 

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removal of any of its Confidential Information from proposed Publication, which request the non-publishing Party shall comply with. The publishing Party shall postpone the Publication for up to an additional [***] calendar days to allow for filing or registration of Intellectual Property protection upon reasonable request of the non-publishing Party. For clarity, (i) a non-publishing Party’s failure to redact any of its Confidential Information from a Publication, or silence around the same, and (ii) expiration of the review and/or postponement periods described herein, is not affirmative written consent by the non-publishing Party to the inclusion of its Confidential Information in a Publication under this Section.

9.7    Equitable Relief. Each Receiving Party agrees that monetary damages may not be an adequate remedy for breach of this Article 9 and that the Disclosing Party shall be entitled to seek injunctive or other equitable relief to prevent disclosure of its Confidential Information.

ARTICLE 10

REPRESENTATIONS, WARRANTIES AND COVENANTS

10.1    Representations, Warranties and Covenants of Precision. Precision represents and warrants to and covenants with Millennium that:

(a)    as of the Effective Date, Precision is a corporation duly organized, validly existing and in corporate good standing under the laws of the state of Delaware;

(b)    Precision has the legal power and authority to execute, deliver and perform this Agreement;

(c)    the execution, delivery and performance of this Agreement by Precision has been duly authorized by all necessary corporate action;

(d)    this Agreement constitutes the legal, valid and binding obligation of Precision, enforceable against Precision in accordance with the terms hereof, subject to the effect of (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to rights of creditors generally and (ii) rules of law and equity governing specific performance, injunctive relief and other equitable remedies;

(e)    the execution, delivery and performance of this Agreement will not cause or result in a violation of any Applicable Law;

(f)    in connection with the subject matter of this Agreement: (i) none of Precision’s employees, agents, officers or directors is a “Foreign Official” as defined in the U.S. Foreign Corrupt Practices Act, (ii) Precision will not make, accept or request any payment, either directly or indirectly, of money or other assets to any Third Party where such payment would constitute violation of Applicable Law, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act 2010, (iii) regardless of legality, Precision shall neither make, accept nor request any such payment for the purpose of improperly influencing the decisions or actions of any Third Party, and (iv) Precision shall report any suspected or actual violation of this Section 10.1(f) to Millennium promptly upon becoming aware of the same;

 

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(g)    to the extent that Precision furnishes any Patient Samples to Millennium pursuant to the Work Plan, Precision has complied with all Patient Sample Requirements;

(h)    Precision’s performance of the Activities under the Work Plan will not violate the terms of any other contractual or legal obligation Precision may owe to any Third Party, including, without limitation, Cedar-Sinai Medical Center and for the duration of the Term, Precision shall not, and shall cause its Affiliates not to, grant to any Third Party rights that encumber, diminish or conflict with the rights granted to Millennium hereunder; and

(i)    Precision has the right to grant the licenses to Millennium that are set forth in Section 8.3(a).

10.2    Representations, Warranties and Covenants of Millennium. Millennium represents and warrants to and covenants with Precision that:

(a)    as of the Effective Date, Millennium is a corporation duly organized, validly existing and in good standing under the laws of Delaware;

(b)    Millennium has the legal power and authority to execute, deliver and perform this Agreement;

(c)    the execution, delivery and performance by Millennium of this Agreement has been duly authorized by all necessary corporate action;

(d)    upon the execution and delivery of this Agreement, this Agreement constitutes the legal, valid and binding obligation of Millennium, enforceable against Millennium in accordance with its terms, subject to the effect of (i) applicable bankruptcy, insolvency, reorganization, moratorium or similar Laws relating to rights of creditors generally and (ii) rules of law and equity governing specific performance, injunctive relief and other equitable remedies;

(e)    the execution, delivery and performance of this Agreement will not cause or result in a violation of any Applicable Law;

(f)    in connection with the subject matter of this Agreement: (i) none of Millennium’s employees, agents, officers or directors is a “Foreign Official” as defined in the U.S. Foreign Corrupt Practices Act, (ii) Millennium will not make, accept or request any payment, either directly or indirectly, of money or other assets to any Third Party where such payment would constitute violation of Applicable Law, including the U.S. Foreign Corrupt Practices Act and the UK Bribery Act 2010, (iii) regardless of legality, Millennium shall neither make, accept nor request any such payment for the purpose of improperly influencing the decisions or actions of any Third Party, and (iv) Precision shall report any suspected or actual violation of this Section 10.2(f) to Precision promptly upon becoming aware of the same;

(g)    to the extent that Millennium furnishes any Patient Samples to Precision pursuant to the Work Plan, Millennium has complied with all Patient Sample Requirements; and

 

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(h)    Millennium has the right to grant the licenses to Precision that are set forth in Section 8.3(b).

10.3    Disclaimer of Warranties. THE REPRESENTATIONS AND WARRANTIES SET FORTH ABOVE ARE IN LIEU Of ANY AND ALL OTHER WARRANTIES AND REPRESENTATIONS, EXPRESS, IMPLIED, OR STATUTORY, AND EACH PARTY HEREBY DISCLAIMS ANY AND ALL ADDITIONAL WARRANTIES OR REPRESENTATIONS, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY IMPLIED WARRANTIES Of MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR FOR NON-INFRINGEMENT OF A PATENT, TRADEMARK OR OTHER INTELLECTUAL PROPERTY RIGHTS.

ARTICLE 11

INDEMNIFICATION

11.1    Indemnification by Precision. Precision will indemnify, defend and hold harmless the Millennium Indemnified Parties from and against all Losses resulting from Claims brought against any Millennium Indemnified Party by a Third Party, to the extent such Claims and Losses arise out of: (a) any negligence, recklessness or willful misconduct of a Precision Indemnified Party, (b) any misrepresentation, inaccuracy, breach, or nonfulfillment of any covenant, agreement, representation or warranty of Precision contained in this Agreement, (c) any violation of Applicable Law by a Precision Indemnified Party, or (d) the Development, Commercialization, or Manufacture by or on behalf of Precision of a Product, which is approved, or is under Development pursuant hereto, as a companion or complementary diagnostic to a MPI Drug, (including personal injury or death caused by the use of such Product, or an allegation of infringement of any Intellectual Property rights of any Third Party arising from such Development, Commercialization, or Manufacture of such Product). In all cases in (a) through (d) above, such indemnification obligations will not apply to the extent that Losses or Claims arise out of any of the circumstances described under Section 11.2(a)-(d).

11.2    Indemnification by Millennium. Millennium will indemnify, defend, and hold harmless the Precision Indemnified Parties from and against all Losses resulting from Claims brought against any Precision Indemnified Party by a Third Party, to the extent such Claims and Losses arise out of: (a) any negligence, recklessness or willful misconduct of a Millennium Indemnified Party, (b) any misrepresentation, inaccuracy, breach, or nonfulfillment of any covenant, agreement, representation or warranty of Millennium contained in this Agreement, (c) any violation of Applicable Law by a Millennium Indemnified Party, (d) the Development, Commercialization, or Manufacture of (i) an MPI Drug, including any MPI Drug for which a Product is approved, or is under Development pursuant hereto, as a companion or complementary diagnostic to a MPI Drug (including personal injury or death caused by the use or administration of such MPI Drug, or an allegation of infringement of any Intellectual Property rights of any Third Party arising from such Development, Commercialization, or Manufacture of such MPI Drug) or (ii) any Product by or on behalf of Millennium or its Affiliates following the Product Transfer Activities. In all cases in (a) through (d) above, indemnification obligations will not apply to the extent that Losses or Claims arise out of any of the circumstances described under Section 11.1(a)-(d).

 

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11.3    Procedure. A party seeking indemnification under Section 11.1 or 11.2 (an “Indemnified Party”) shall notify the other Party (the “Indemnifying Party”) upon becoming aware of any Claim that may be subject to indemnification under this Article 11. Failure to provide such notice shall not constitute a waiver or release of the Indemnified Party’s rights to indemnification, except to the extent that such delay or failure materially prejudices the Indemnifying Party. The Indemnifying Party shall control the defense of such Claim at its sole cost and expense. The Indemnified Party shall cooperate reasonably with the Indemnifying Party and its legal representatives in connection with the investigation and defense of any Claim or Losses covered by this Article 11. Neither Party may enter into any settlement, consent judgment or other voluntary final disposition of any Claim or Losses for which an Indemnified Party seeks indemnification hereunder without the prior written consent of the other Party, such consent not to be unreasonably withheld. The Indemnified Party will take commercially reasonable measures to mitigate risks and Losses related to any such Claim.

11.4    Insurance. During the Term and for a reasonable period thereafter, each Party shall, at its own expense, procure and maintain reasonable and customary clinical trial insurance with a limit of not less than $[***] each occurrence, and other liability insurance as appropriate for claims arising out of the performance of its activities under this Agreement, or in each case the equivalent amount in self-insurance. Without limiting the foregoing, prior to the First Commercial Sale of a MPI Drug for use with a Product under this Agreement, each Party shall procure and maintain commercial general liability insurance with a limit of not less than $[***] each occurrence and errors and omissions insurance with a limit of not less than $[***] each occurrence. It is expressly understood that this requirement does not in any way represent that the types and minimum limits of insurance specified are sufficient or adequate to protect a Party’s interests or liability and such insurance shall not be construed to create a limit of a Party’s liability with respect to its indemnification obligations under this Article 11. Each Party shall provide the other Party with prompt written notice of cancellation, non-renewal or material change in such insurance.

11.5    Limitation on Liability. EXCEPT WITH RESPECT TO THE GROSS NEGLIGENCE, RECKLESSNESS OR WILLFUL MISCONDUCT OR A BREACH OF ARTICLE 9 BY A PARTY OR FOR AMOUNTS SOUGHT BY THIRD PARTIES IN CLAIMS THAT ARE SUBJECT TO EACH PARTIES’ RESPECTIVE INDEMNITY OBLIGATIONS UNDER THIS ARTICLE 11, NEITHER PARTY NOR ANY OF ITS AFFILIATES WILL BE LIABLE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING ANY CLAIMS FOR LOSS OF BUSINESS OR GOODWILL, LOSS OF REVENUE OR LOSS OF PROFITS) ARISING FROM THIS AGREEMENT.

ARTICLE 12

TERM AND TERMINATION

12.1    Term. This Agreement commences on the Effective Date and will remain in effect on a country-by-country and MPI Drug-by-MPI Drug basis until the expiration of the Royalty Term with respect to such MPI Drug in such country (“Term”), unless and until the Parties mutually agree to terminate the Agreement, or this Agreement is terminated as provided

 

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herein. When the Term expires with respect to an MPI Drug in a country, this Agreement shall also expire with respect to the associated Product and, if the Term expires with respect to all MPI Drugs Directed to a Target in a country, this Agreement shall expire with respect to the Target to which such MPI Drugs are Directed and all associated Products, in such country.

12.2    Termination Rights.

(a)    By Millennium With or Without Cause. This Agreement may be terminated by Millennium, in whole (i.e., with respect to all MPI Drugs, Targets and Products) or with respect to a given Target (including the associated MPI Drugs, Assays/Tests and Products), at any time with cause (other than a material breach of the Agreement by Precision, which shall be subject to Section 12.2(c) below) or without cause, upon [***] calendar days prior written notice to Precision. In the event that Millennium decides to discontinue the Agreement pursuant to this Section 12.2(a), the Parties shall reasonably cooperate to provide for an orderly wind down of the Activities with respect to the terminated Product(s) within the [***] day notice period and Precision shall still be eligible for all milestone payments earned up to the effective date of such termination. In the event that Millennium is actively Developing or Commercializing more than one MPI Drug Directed to a particular Target, for use with a Product, Millennium may terminate this Agreement in accordance with this Section 12.2(a) on a MPI Drug-by-MPI Drug basis, in which case this Agreement will also terminate with respect to any Assay(s)/Test(s) and Product(s) associated exclusively with terminated MPI Drug but will not terminate with respect to associated Target, unless such MPI Drug is the only MPI Drug Directed to the Target to which such MPI Drug is Directed that is being actively Developed or Commercialized by Millennium for use with a Product hereunder at the time of such notice of termination is provided. Prior to issuing a notice of termination pursuant to this Section 12.2(a), Millennium shall provide Precision the basis for its termination, if terminated for cause (including due to any MPI Drug Development failure or lack of commercial viability determination). In the event of a termination of this Agreement, in whole or in part with respect to a given Target, Assay/Test and/or Product, by Millennium pursuant to this Section 12.2(a) or Section 8.3(a)(iv), the following shall apply:

(i)    The JSC shall coordinate the wind-down of the Activities with respect to the terminated Assay(s)/Test(s) and/or Product(s), or shall establish an appropriate committee to coordinate such wind-down.

(ii)    Millennium, as soon as reasonably practical following written request from Precision, shall transfer to Precision, and shall assign and hereby assigns to Precision (effective upon such termination) any rights, title and interest that Millennium may have in and to, as applicable, any and all information, materials, data, results, Deliverables and the like (A) developed or produced by Millennium or Precision pursuant to the Activities (other than the Clinical Trial Information, Millennium Materials, Millennium Background IP, and Compound Foreground IP) related exclusively to such terminated Assay(s)/Test(s) and Product(s) and (B), in the event of termination of a Target, developed or produced by Precision hereunder related to such Target, and

 

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(iii)    Effective upon the effective date of such termination, Millennium shall grant, and hereby grants, to Precision, a non-exclusive, perpetual, irrevocable, transferable, royalty-free, fully paid-up license, including the right to grant and authorize sublicenses, under the Compound Foreground IP and Millennium Other Arising IP, for the sole purpose, and only to the extent necessary, to Develop, Manufacture and Commercialize the terminated Assay(s)/Test(s) and Product(s), independent of the terminated MPI Drug(s) ((i)-(iii), collectively, the “Termination Consequences”). For avoidance of doubt, this Section 12.2(a)(iii) does not grant Precision any right to make, have made, use, sell, offer to sell or import the MPI Drug(s) associated with the Product.

(b)    By Precision for Lack of Scientific Merit or Technical Challenges. This Agreement may be terminated by Precision on a Product-by-Product or Target-by-Target basis, upon [***] calendar days prior written notice to Millennium in case of lack of scientific merits or insurmountable technical challenges in developing such Assay(s)/Test(s) or Product(s), or Assays/Tests or Products associated with such Target generally, despite using Diligent Efforts. Prior to issuing such notice of termination, Precision shall provide Millennium with a written report describing in detail the basis for its determination relating to scientific merit or technical challenges associated with the Work Plan. Upon such termination, the Parties shall reasonably cooperate to provide for an orderly wind down of the Activities with respect to the terminated Product(s) and Precision shall still be eligible for all payments earned up to the date of termination. Upon termination of this Agreement with respect to a Product pursuant to this Section 12.2(b), this Agreement shall also terminate with respect to the associated MPI Drug. Similarly, upon termination of this Agreement with respect to a Target pursuant to this Section 12.2(b), this Agreement shall also terminate with respect to all MPI Drugs Directed to such Target and all Products associated with such Target. Solely to the extent that Millennium intends to continue the Development and Commercialization of the applicable MPI Drug(s) with a Product(s) that has been terminated pursuant to this Section 12.2(b), Millennium may provide Precision with written notice of such intent, and the Product Transfer Activities shall apply, subject to the payment obligations set forth in Section 12.5(a), and the licenses granted to Millennium in Section 8.3 shall survive, for so long as such Development and Commercialization continues.

(c)    By Either Party for Material Breach. This Agreement may be terminated by either Party in the event that the other Party commits a material breach of this Agreement and the breaching Party fails to cure such breach within [***] calendar days of receiving a written notice of default from the non-breaching Party, such termination to take effect upon delivery of written notice of termination to the breaching Party within [***] calendar days following expiration of the cure period; provided that if such breach is primarily related to a particular Product or MPI Drug, such termination right may only be exercised with respect to such Product (and the associated MPI Drug(s)) or MPI Drug (and the associated Product), and not this Agreement in its entirety. Upon termination of this Agreement with respect to a MPI Drug pursuant to this Section 12.2(c), this Agreement shall terminate with respect to the Target to which such MPI Drug is Directed, and all MPI Drugs and Products associated with such Target, if such MPI Drug is the only MPI Drug Directed to such Target that is being actively Developed

 

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or Commercialized for use with the associated Product by Millennium hereunder at the time of such termination. If the Parties reasonably and in good faith disagree as to whether there has been a material breach, the Party that disputes that there has been a material breach may contest the allegation in accordance with Section 13.12. Upon such termination, the Parties shall fully cooperate to provide for an orderly wind down of the applicable Activities and Precision shall still be eligible for all milestone payments earned up to the date of termination.

(d)    By Either Party for Insolvency.

(i)    Either Party may terminate this Agreement immediately by written notice to the other Party if the other Party becomes insolvent, makes or has made an assignment for the benefit of creditors, is the subject of proceedings in voluntary or involuntary bankruptcy proceedings on behalf of or against it (except for involuntary bankruptcy proceedings that are dismissed within [***] calendar days) or has a receiver or trustee appointed for substantially all of its property.

(ii)    All licenses granted under or pursuant to this Agreement are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11 of the United States Code and other similar laws in any jurisdiction outside the U.S. (collectively, the “Bankruptcy Laws”), licenses of rights to “intellectual property” as defined under the Bankruptcy Laws. If a case is commenced during the Term by or against a Party under Bankruptcy Laws then, unless and until this Agreement is rejected as provided pursuant to such Bankruptcy Laws, such Party (in any capacity, including debtor-in-possession) and its successors and assigns (including a Title 11 trustee) shall perform all of the obligations in this Agreement intended to be performed by such Party. If a case is commenced during the Term by or against a Party under the Bankruptcy Laws, this Agreement is rejected as provided for under the Bankruptcy Laws, and the non-bankrupt Party elects to retain its rights hereunder as provided for under the Bankruptcy Laws, then the Party subject to such case under the Bankruptcy Laws (in any capacity, including debtor-in-possession) and its successors and assigns (including a Title 11 trustee), shall provide to the non-bankrupt Party copies of all patents and information necessary for the non-bankrupt Party to prosecute, maintain and exploit its licenses under the terms of this Agreement. All rights, powers and remedies of the non-bankrupt Party as provided herein are in addition to and not in substitution for any and all other rights, powers and remedies now or hereafter existing at law or in equity (including the Bankruptcy Laws) in the event of the commencement of a case by or against a Party under the Bankruptcy Laws. In particular, it is the intention and understanding of the Parties to this Agreement that the rights granted to the Parties under this Section are essential to the Parties’ respective businesses and the Parties acknowledge that damages are not an adequate remedy.

12.3    Rights to Termination. If Precision exercises its rights under Section 12.2(c) or 12.2(d) or in the event of a termination of this Agreement in its entirety or with respect to a given Target, Assay/Test and/or Product pursuant to Section 8.3(a)(iv), the Termination Consequences

 

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will apply. If Millennium exercises its rights Section 12.2(c) and Millennium intends to continue the Development and Commercialization of a MPI Drug(s) with a terminated Product(s), Millennium may provide Precision with written notice of such intent, and the Product Transfer Activities will apply, subject to (a) the obligations to work in good faith to enable Precision to continue to Develop and Commercialize the affected Product(s) set forth in Section 12.4 and (b) the payment obligations set forth in Section 12.5(a).

12.4    Millennium Alternative to Termination. If Millennium has the right to terminate this Agreement pursuant to Section 12.2(c) due to a breach that renders Precision unable to Develop and Commercialize a Product(s) pursuant to the Work Plan but elects to not exercise such right and continue the Activities with respect to such Product(s), the Agreement shall continue in full force and effect, and the Parties shall discuss in good faith potential approaches to cure the breach giving rise to such right. If the Parties are unable, despite good faith discussions, to agree to an approach to enable Precision to continue to Develop and Commercialize the affected Product(s), then, upon Millennium’s request and solely to the extent Millennium intends to continue the Development and Commercialization of the applicable MPI Drug(s) with the Product(s):

(a)    All of Millennium’s remaining payment obligations under this Agreement with respect to such MPI Drug(s) and Product(s) that are achieved after such transfer with respect to the affected Product(s) shall be reduced by ([***]%).

(b)    The JSC shall coordinate the transfer of Precision’s Activities with respect to such Product(s) to Millennium or its designee, or shall establish an appropriate committee to coordinate such transfer.

(c)    Precision, as soon as reasonably practical, shall provide to Millennium, as applicable and to the extent permitted under any relevant Third Party contract(s): (i) any information, materials, data, results, and the like developed by or for the benefit of Precision pursuant to this Agreement relating to such Product(s); and (ii) other Deliverables that are necessary in the continued Development and Commercialization of such Product(s).

(d)    At Millennium’s request, Precision shall assign to Millennium any and all agreements under which Precision engages a Third Party to conduct Development or Commercialization activities, which agreements are specific to such Product(s), or if such assignment is not permitted under the relevant agreement, or such agreement is not specific to the affected Product(s): (i) grant to Millennium other rights to provide to Millennium the benefit of such agreement with respect to such Product(s), to the extent permitted under the terms of such agreement; or (ii) to the extent assignment or granting of rights is not permitted under the terms of such agreement, the Parties shall discuss in good faith an alternative solution to enable Millennium to receive the benefit of the terms of such agreement with respect to such Product(s).

(e)    At Millennium’s reasonable request, which Precision agrees shall not be unreasonably denied, Precision shall continue to supply such Product(s) (to the extent previously so supplied by Precision) for a time period to be mutually agreed upon by the Parties (not to exceed [***], which Product will be provided at Precision’s standard price for such Product. If

 

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necessary, at Millennium’s reasonable request, Precision shall also provide technical assistance reasonably necessary to assist Millennium in the start-up of Manufacturing of such Product at Millennium’s cost and expense.

(f)    Subject to the applicable payment obligations set forth in this Agreement, Precision shall grant and hereby grants to Millennium a worldwide license, with the right to grant and authorize sublicenses (including to its collaboration partners) under the Precision Background IP, Precision Foreground IP and Precision Other Arising IP, for the sole purpose, and only to the extent reasonably necessary, to continue the Development and Commercialization of such Product(s) for use with such MPI Drug(s) hereunder. Precision shall take such other actions and execute such other instruments, assignments and documents as may be reasonably necessary to allow for the continued Development and Commercialization of such Product(s) by Millennium, including grant of appropriate (sub-)licenses that may be useful to Millennium in addition to what is contemplated by this Agreement, where needed, on terms to be negotiated by the Parties. The actions set forth in (b)-(f) above may be referred to herein as the “Product Transfer Activities.”

(g)    In the event of transfer of Precision’s Activities with respect to the affected Product(s), all licenses granted by Millennium to Precision for the purpose of performing such Activities with respect to such Product(s) shall terminate following such transfer.

12.5    Effect of Termination.

(a)    Payment Obligation. Termination of this Agreement does not relieve Millennium, from any of its payment obligations set forth in Exhibit C that have accrued prior to the effective date of the termination of this Agreement. Except as otherwise expressly set forth herein, if Millennium proceeds to Commercialize any MPI Drug for use with a Product after the termination of this Agreement, including without limitation pursuant to any surviving licenses, Millennium’s obligations to pay Precision milestones and royalties set forth in Exhibit C shall survive, provided that all Millennium’s remaining payment obligations with respect to such Product shall be reduced by ([***]%). For clarity, the foregoing shall not be deemed to grant Millennium any rights or licenses under Precision’s Background IP, Separate IP or Foreground IP.

(b)    Termination of Licenses. All licenses and rights granted by one Party to the other Party under this Agreement shall terminate with respect to any terminated Target(s) Product(s), and/or MPI Drug(s); provided, for clarity, that such termination shall not apply to the extent such licenses and rights expressly survive termination of this Agreement.

(c)    Confidential Information of Millennium. Upon any expiration or termination of this Agreement, Precision will dispose of all tangible embodiments, and render inaccessible or useless all electronic embodiments, of any Confidential Information of Millennium provided to Precision by Millennium hereunder, except that Precision may retain one copy thereof for legal archival purposes or to the extent reasonably necessary to exercise any surviving rights hereunder.

 

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(d)    Confidential Information of Precision. Upon any expiration or termination of this Agreement, Millennium will dispose of all tangible embodiments, and render inaccessible or useless all electronic embodiments, of any Confidential Information of Precision provided to Millennium by Precision hereunder, except that Millennium may retain one copy thereof for legal archival purposes or to the extent reasonably necessary to exercise any surviving rights hereunder.

12.6    Survival. Except as otherwise expressly set forth in this Agreement, upon expiration or termination of this Agreement, all rights and obligations of the Parties shall terminate with respect to the expired or terminated Targets, Products and/or MPI Drugs. Termination of this Agreement by either Party for any reason does not affect the rights and obligations of the Parties accrued prior to the effective date of the termination of this Agreement. All rights and obligations of the Parties set forth herein that expressly or by their nature survive the expiration or termination of this Agreement, including Sections 3.8 and 3.9 (for the period set forth in Section 3.9), 5.2(b), 8.1, 8.2, any and all applicable Target Licenses and payment obligations in Section 8.3(a)(iv), 8.5, Article 1, Article 4 (with respect to amounts accrued prior to termination and any payment obligations that expressly survive expiration or termination) Article 9, Article 11, Article 12 (as applicable), and Article 13, will continue in full force and effect subsequent to and notwithstanding the expiration or termination of this Agreement until they are satisfied or by their nature expire and bind the Parties and their legal representatives, successors, and permitted assigns.

12.7    References to Targets. For clarity, with respect to terminations by Target described in this Article 12, a “Target” shall refer to the [***] or a Collaboration Target, as applicable.

ARTICLE 13

GENERAL PROVISIONS

13.1    Notice. Notices provided for herein must be in writing and delivered by hand or overnight courier service, or mailed (certified or registered) as follows:

If to Millennium:

Millennium Pharmaceuticals, Inc.

40 Landsdowne Street

Cambridge, MA 02139

Attention: Chief Counsel

If to Precision:

Precision IBD, Inc.

3525 Del Mar Heights Rd #342

San Diego, CA 92130-2122

Attn: President

 

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With a copy to:

Wilson Sonsini Goodrich & Rosati

28 State Street

Boston, MA 02109

Attn: [***]

All notices and other communications given to any Party in accordance with the provisions of this Agreement are deemed to have been given on the date of receipt if delivered by hand or overnight courier service, or on the date [***] Business Days after dispatch by certified or registered mail return receipt requested (postage prepaid) if mailed, in each case delivered, sent or mailed (properly addressed) to such Party to its address as set forth in this Section, or to such other address that such Party may have notified the other Party from time to time.

13.2    Governing Law. This Agreement is governed by, construed and enforced in accordance with the laws of the State of New York, other than its conflict of laws principles directing the application of any other law; provided that those matters pertaining to the validity or enforceability of patent rights shall be interpreted and enforced in accordance with the laws of the territory in which such patent rights exist. The provisions of the United Nations Convention on Contracts for the International Sale of Goods (1980) do not apply to this Agreement.

13.3    Relationship. This Agreement does not establish any Party as the legal representative or agent of the other, nor does any Party have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against, or in the name of or on behalf of, any other Party. This Agreement does not constitute, create or in any way be interpreted as a joint venture, partnership or formal business organization of any kind, including for tax purposes.

13.4    Force Majeure. No Party will lose any rights hereunder or be liable to the other Parties for Losses on account of failure of performance by the defaulting Party, if the failure is occasioned by government or court action (e.g. injunction), war, terrorism, fire, explosion, flood, strike, lockout, embargo, widespread market shortage of materials or utilities or an act of God, provided that the Party claiming force majeure has exerted all Diligent Efforts to avoid or remedy such force majeure. Such excuse will continue as long as the condition preventing the performance continues. Upon cessation of such condition, the affected Party will promptly resume performance hereunder. Each Party agrees to give the other Party prompt written notice of the occurrence of any such condition, the nature thereof, and the extent to which the affected Party will be unable to perform its obligations hereunder. Each Party further agrees to use Diligent Efforts to correct the condition as quickly as possible and to give the other Party prompt written notice when it is again fully able to perform its obligations hereunder.

13.5    Headings; Internal References. The headings used herein are included for convenience only and are not to be used in construing or interpreting this Agreement.

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unreasonably withheld; provided however, that: (a) each Party may assign this Agreement and all of its rights and obligations hereunder, without such consent, to an entity that acquires all or substantially all of the business or assets to which this Agreement pertains, whether by merger, consolidation, reorganization, acquisition, sale, license or otherwise, and (b) each Party may assign this Agreement and all of its rights and obligations hereunder, without such consent, to an Affiliate. This Agreement is binding upon and will inure to the benefit of the successors and permitted assigns of each respective Party. Any assignment not in accordance with this Section shall be null and void.

13.7    Entire Agreement. This Agreement constitutes the entire agreement among the Parties with respect to the matters set forth herein, and supersedes all prior agreements (including the Prior CDA) and understandings, both written and oral, among the Parties with respect thereto.

13.8    Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement will nevertheless remain in full force and effect so long as the economic and legal substance of the underlying transaction, taken as a whole, is not affected in any manner materially adverse to either Party. Upon such determination that: (a) any term or other provision is invalid, illegal or incapable of being enforced, and (b) the economic or legal substance of the underlying transaction, taken as a whole, is affected in a manner materially adverse to either Party, the Parties will negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible in a mutually acceptable manner to the fullest extent permitted by Applicable Law in order that the underlying transaction be completed as originally contemplated to the fullest extent possible.

13.9    Waivers; Amendment. The failure of either Party to insist, in any one or more instances, upon the performance of any of the terms, covenants or conditions of this Agreement or to exercise any right hereunder, will not be construed as a waiver or relinquishment of the future performance of any such term, covenant or conditions or the future exercise of such right, and the obligation of the other Party with respect to such future performance will continue in full force and effect. Any such waiver shall only be effective if made in writing, signed by the waiving Party. No item or provision of this Agreement (including the Work Plan) may be altered or amended except by a writing signed by both Parties.

13.10    Counterparts. This Agreement and any amendments may be executed (including via facsimile or other reliable electronic means of transmitting signed copies such as emailed scanned signed copies) in any number of counterparts, each of which will be deemed an original, but all of which together will constitute one and same instrument.

13.11    No Construction Against Drafter. The Parties acknowledge and agree that each Party has participated in the drafting and negotiation of this contract and have had a free and equal opportunity to do so, that each Party has been represented by counsel or had an opportunity to be represented by counsel, and that the provisions of this Agreement will not be construed against any Party as the drafter.

 

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13.12    Dispute Resolution. All disputes arising out of or in connection with this Agreement or any Work Plan will be finally settled by a sole neutral through a binding, non reviewable and non appealable alternative dispute resolution process in accordance with the then existing Non Administered Arbitration Rules of the International Institute for Conflict Prevention and Resolution (http://www.cpradr.org/). The place of arbitration will be New York, New York, United States. The neutral’s award may be entered as a final judgment in any court having jurisdiction. Notwithstanding the Parties’ agreement to arbitrate, unless the Parties agree in writing in any particular case, claims and disputes between the Parties relating to or arising out of, or for which resolution depends on a determination of the interpretation, validity, enforceability or infringement of, patents or trademarks or the misappropriation of trade secrets, shall not be subject to arbitration under this agreement, and the Parties may pursue whatever rights and remedies may be available to them under law or equity, including without limitation litigation in a court of competent jurisdiction, with respect to such claims and disputes.

13.13    Debarment and Exclusion. Each Party certifies that it is not debarred under subsections 306(a) or (b) of the US Federal Food Drug and Cosmetic Act US Generic Drug Enforcement Act of 1992; 21 USC 335a (a) or (b), and that it has not and will not use in any capacity the services of any person debarred under such law to conduct Activities. Each Party further certifies that none of its Affiliates in the United States are excluded from any federal health care program, including but not limited to Medicare and Medicaid.

13.14    Order of Precedence. In the event of a conflict between any terms and conditions contained in the body of this Agreement and any terms and conditions contained in the Work Plan or Commercialization Plan, the terms and conditions contained in the body of this Agreement will prevail; provided, however, that if the Work Plan or Commercialization Plan contains an express statement that specific terms of such Work Plan or Commercialization Plan are intended to supersede specific contrary terms contained in the body of this Agreement, such express terms in such Work Plan or Commercialization Plan will prevail.

[Signature Page Follows]

 

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IN WITNESS WHEREOF, the Parties, through their duly authorized representatives, have executed this Agreement and have caused it to be effective as of the Effective Date set forth above.

 

MILLENNIUM PHARMACEUTICALS, INC.   PRECISION IBD, INC.
BY:  

/s/ [***]

  BY:  

/s/ [***]

NAME: [***]

TITLE: HEAD OF EXTERNAL INNOVATION

 

NAME: [***]

TITLE: PRESIDENT/CEO

 

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EXHIBIT A

DEFINITIONS

Activities” means the activities to be undertaken by or on behalf of a Party pursuant to the Work Plan under this Agreement, on the terms contained herein.

Additional Targets” has the meaning set forth in Section 3.5(c).

Affiliate” means any corporation or other business entity that is controlled by, controlling, or under common control with the affected Party or Third Party, wherein control means direct or indirect ownership of at least 50% (or such lesser percentage which is the maximum allowed to be owned by a foreign corporation in a particular jurisdiction) of the stock entitled to vote in the election of directors (or in the case of an entity that is not a corporation, for the election of the corresponding managing authority) or the power to direct or cause the direction of the management and policies of such corporation or other business entity, directly or indirectly, whether through ownership of voting securities, by contract or otherwise. For clarity, a corporation or other business entity is only considered an Affiliate for as long as such control exists.

Agreement” has the meaning set forth in the preamble.

Applicable Law” means all applicable laws, statutes, rules, regulations, court orders or injunctions having the effect of law of any federal, national, multinational, state, provincial, county, city or other political subdivision, agency or other body, domestic or foreign, including but not limited to any applicable rules, regulations, or other requirements of Regulatory Authorities that may be in effect from time to time.

Assay/Test” means each diagnostic (CDx) assay to be initially developed and validated and further developed into a Product pursuant to the Work Plan. For clarity, each Assay/Test will be associated with either the [***] or a Collaboration Target.

Authorized Individuals” has the meaning set forth in Section 3.5(a).

Background IP” means all Intellectual Property, other than Foreground IP, that is necessary for purposes of carrying out Activities under this Agreement and that is: (a) Controlled by a Party on the Effective Date, or (b) generated or become Controlled by a Party after the Effective Date. For clarity, to the extent a Party obtains, after the Effective Date, Control of Intellectual Property owned by a Third Party that is necessary or useful to the performance of Activities under this Agreement, such rights will be included in such Party’s Background IP.

Bankruptcy Laws” has the meaning set forth in Section 12.2(d)(ii).

Business Day” means a day other than Saturday, Sunday or any other day on which commercial banks located in the State of New York, are authorized or obligated by Applicable Law to close.

 

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Calendar Quarter” means the respective periods of three (3) consecutive calendar months ending on March 31, June 30, September 30 and December 31; provided, however, that (a) the first Calendar Quarter of the Term shall extend from the Effective Date to the end of the first complete Calendar Quarter thereafter; and (b) the last Calendar Quarter of the Term shall end upon the expiration or termination of this Agreement.

Calendar Year” means the twelve (12) month period ending on December 31; provided however, that (a) the first Calendar Year of the Term, shall begin on the Effective Date and end on December 31, 2019; and (b) the last Calendar Year of the Term shall end on the effective date of expiration or termination of this Agreement.

CDER” means the Center For Drug Evaluation and Research, a branch of the FDA.

CDRH” means the Center For Devices and Radiological Health, a branch of the FDA.

Cedar-Sinai Agreement” has the meaning set forth in Section 3.4.

chemical genus that encompasses the MPI Compound” (as used in this Agreement) means, with respect to an MPI Compound, the chemical genus recited in a Valid Claim of a patent, which is owned or Controlled by Millennium, claiming the composition of matter of such MPI Compound.

Claim” means any claim, suit, demand, lawsuit or legal action against a Party.

Clinical Trial” means a clinical investigation of the MPI Drug undertaken by Millennium as part of the MPI Drug development.

Clinical Trial Information” means all study reports, data, results and other information generated by or on behalf of Millennium in the course of a Clinical Trial, including all such study reports, data, results and other information relating to clinical outcomes.

Clinical Trial Tissue Samples” means all relevant human tissue samples or such other biological materials collected from a Clinical Trial in Millennium’s possession and/or Control.

Collaboration Target” means any Target selected by Millennium pursuant to Section 3.5. For clarity, Collaboration Targets exclude [***].

Commercialization” and “Commercialize” shall refer to all activities undertaken relating to the Manufacture for commercial sale, pre-marketing, marketing, distribution and sale of a Product or MPI Drug, and the process of Commercialization.

Commercialization Plan” has the meaning set forth in Section 7.1.

Commercially Reasonable Opportunity” means a specific business opportunity that it would be reasonable for Precision to pursue taking into account all factors, including the present and future market potential of the relevant Product, competitive market conditions, patient unmet need and overall financial return from the specific business opportunity and other related business opportunities.

 

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Compound Foreground IP” means any and all Foreground IP that relates to (a) the composition of a MPI Compound or chemical genus that encompasses the MPI Compound; (b) therapeutic use of the MPI Compound, including therapeutic uses with selected patients; (c) formulations of the MPI Compound; (d) forms of the MPI Compound; (e) methods of utilizing the MPI Compound; or (f) methods of selecting patients for treatment (or non-treatment) specifically for the MPI Compound (the “Compound Patient Selection IP”). The Compound Patient Selection IP and diagnostic methods included in (b) and (e) of this definition, do not include any such methods that extend to (i) a Target or therapeutic pathway generally, or (ii) therapeutic agents other than the MPI Compound or chemical genus that encompasses such MPI Compound.

Confidential Information” means (i) confidential and proprietary data and information of a Party that is provided to the other Party in connection with this Agreement, whether prior to (including pursuant to the Confidentiality Agreement made and entered into by and between the Parties as of the 18th day of May 2018 (the “Prior CDA”)), on or after the Effective Date, including know-how, trade secrets, tools, methods, methodologies, processes, techniques, apparatus, designs, specifications, samples, technical descriptions, study proposals, study data, computer source code, customer lists, pricing information, product development plans, marketing plans, personnel information, financial information and business strategies, and any other information that a reasonable person would conclude is intended to remain confidential, due to its nature or the circumstances under which it is disclosed and any other non-public information that the Disclosing Party designates as proprietary or confidential pursuant to the terms herein. Confidential Information also includes any reports, study data, notes, summaries, abstracts, or drafts of Confidential Information or oral presentations, reports, or discussions referring to, describing, elaborating upon, verifying or otherwise relating to the Disclosing Party’s Confidential Information that are created by the Receiving Party. Notwithstanding the foregoing, Confidential Information does not include any information that: (a) is within the public domain prior to the time of the disclosure by the Disclosing Party or thereafter becomes within the public domain other than as a result of disclosure by the Receiving Party or any of its representatives in violation of this Agreement, (b) was, on or before the date of disclosure, in the possession of the Receiving Party or one of its Affiliates without burden of confidentiality, as evidenced by contemporaneous written records, (c) is acquired by the Receiving Party from a Third Party having the right to disclose without burden of confidentiality, or (d) is independently developed by the Receiving Party without reference to or reliance upon the Disclosing Party’s Confidential Information, as evidenced by contemporaneous written records.

Consumables” means any and all buffers, primers, probes, preamplification materials and other reagents or consumables that are necessary for the use of a Product, and any improvements or updates thereto.

Control” or “Controlled” means with respect to any Intellectual Property or other assets, possession by Millennium or its respective Affiliates or Precision, as of the time of inquiry, of the right (whether by ownership, license or otherwise, other than pursuant to this Agreement) to

 

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grant to the other Party access, ownership, a license, sublicense or other right to or under such Intellectual Property or assets for the specific purposes provided for herein without any conflict with any other obligation or violating the terms of any agreement or other arrangement of the Controlling Party, with any Third Party.

Correlation Data” means Clinical Trial Information, and other data and information derived therefrom, that correlates, associates, connects or relates Product Clinical Trial Test Results to patient response to the associated MPI Drug in a Clinical Trial conducted using the Product pursuant to the Work Plan.

De-identified” means the process by which health information no longer identifies an individual and with respect to which there is no reasonable basis to believe that the information can be used to identify or re-identify an individual, as set forth in §164.514 of the Privacy Rule of the United States Health Insurance Portability and Accountability Act of 1996 (“HIPAA”).

Deliverable” means the documents and reports produced by Precision pursuant to the Work Plan under this Agreement. For clarity, Deliverable does not include any data or information embedded in the documents or reports.

Development” means all research, non-clinical and clinical drug development activities, including toxicology, pharmacology, and other non-clinical efforts, statistical analysis, formulation development, delivery system development, statistical analysis, the performance of any such research or Clinical Trials, including the Manufacturing for use in Clinical Trials, or other activities reasonably necessary in order to obtain, but not maintain, Regulatory Approval. “Development” shall exclude all Commercialization. When used as a verb, “Develop” means to engage in Development activities.

Diagnostic Foreground IP” means any and all (a) Product Foreground IP; and (b) Foreground IP that relates to generally applicable (i.e., not specific to the MPI Compound or chemical genus that encompasses such MPI Compound): (i) methods of using Patient Selection Criteria and other methods for selecting patients for treatment (or non-treatment), (ii) using gene expression data with polygenic risk scores and other methods to define Assay(s)/Test(s), (iii) using Assay(s)/Test(s) to define patient populations for potential treatment, (iv) creating Product(s) using patient samples through a clinical trial or otherwise to validate use of an Assay(s)/Test(s) to select a patient population and become a diagnostic product, but does not determine response to any drug, (v) using a diagnostic product in a clinical trial, (vi) methods of treating a patient population based on Patient Selection Criteria, with an active agent, (vii) methods for selecting patients for treatment (or non-treatment), and/or (viii) diagnostic methods.

Diligent Efforts” means the carrying out of Activities by a Party in [***]. Diligent Efforts requires inter alia that [***], and [***], to carry out Activities pursuant to the Agreement, including, as applicable, the obligations, activities and timelines set forth in the Work Plan. Diligent Efforts requires that a Party: [***]. Diligent Efforts with respect to a particular country or indication will change over time, reflecting changes in the status of a product, as applicable, and the country(ies) involved. [***].

 

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Directed” means, with respect to a pharmaceutical product, (a) targeting, interacting with, and/or binding to a Target and (b) exerts its primary diagnostic, prophylactic or therapeutic activity as a result of such targeting, interaction or binding.

Disclosing Party” means the Party disclosing its Confidential Information the Receiving Party.

Effective Date” has the meaning set forth in the preamble.

FDA” means the United States Food and Drug Administration, or any successor agency thereto.

Firewall” has the meaning set forth in Section 3.5(a).

First Commercial Sale” means, on a country-by-country basis, the first sale of a MPI Drug under this Agreement by Millennium, its Affiliates or its sublicensees to an end user or prescriber for use, consumption or resale of the MPI Drug where Regulatory Approval of the MPI Drug has been obtained and where the sale results in a recordable MPI Drug Sale. Sale of a MPI Drug under this Agreement by Millennium to an Affiliate or a sublicensee of Millennium shall not constitute a First Commercial Sale unless such Affiliate or such sublicensee is the end user of such MPI Drug and such sale results in a MPI Drug Sale. Also, sale of a MPI Drug under this Agreement by Millennium, its Affiliates or its sublicensees in a jurisdiction where Regulatory Approval for that MPI Drug has not yet been attained shall not constitute a First Commercial Sale under this Agreement.

Foreground IP” means any and all Intellectual Property generated in the performance of Activities by either Party or its Affiliates or subcontractors, either solely or jointly with the other Party, and includes Diagnostic Foreground IP, Compound Foreground IP and Other Arising IP. For clarity, Foreground IP excludes all Background IP.

Functional Groups” has the meaning set forth in Section 3.5(a).

GMP” means current good manufacturing practices set forth in the quality system regulation 21 CFR Part 820, governing the methods used in, and the facilities and controls used for, the design, manufacture, packaging, labeling, storage, installation, and servicing of all finished devices intended for human use.

IDE” means an approved or considered approved Investigational Device Exemption under 21 CFR 812 and section 520(g) of the US Federal Food Drug and Cosmetic Act.

Inability to Supply” means Precision’s inability to supply pertinent testing laboratories on a country-by-country or region-by-region basis (as specified in Millennium forecast) the relevant Product in quantities adequate to fulfill [***] of Millennium’s forecasted quantities of the Product for use with the MPI Drug for [***].

Indemnified Party” means the Party seeking indemnification pursuant to Article 11 hereof. “Indemnifying Party” means the Party from which an Indemnified Party seeks indemnification.

Indication” means inflammatory bowel disease or immune medicated diseases of the bowel including [***].

 

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Indivisible Patent” has the meaning set forth in Section 8.2(d)(ii).

Intellectual Property” or “IP” means any form of intellectual property rights, including, but not limited to, (i) any and all national, regional, and international patents and patent applications (including design or utility model patents and patent applications and similar or equivalent applications), including, but not limited to, all priority applications, provisionals, divisionals, continuations, continuations-in-part, continued prosecution applications, patents of addition, restorations, extensions, registration or confirmation patents, patents resulting therefrom or from post-grant proceedings, re-issues, re-examinations, extensions, supplementary protection certificates, or any other governmental granted exclusivity in the nature of a patent; (ii) copyrights (including moral rights), whether registered or unregistered and pending applications to register the same, works of authorship or creation, including but not limited to all derivatives thereof, semiconductor chip protection, in each case whether or not copyrightable or otherwise protectable under intellectual property laws or property rights laws; (iii) trademarks, service marks, domain names, trade names or trade dress; (iv) trade secrets and confidential ideas, discoveries, know-how, concepts, methods, processes, techniques, databases, systems and technical developments, machines, manufactures, compositions, formulae, technology, algorithms, models, inventions other proprietary information, and any improvements to and derivatives from any of the foregoing, whether or not such are patentable or otherwise protectable under trade secret or other intellectual property laws or property rights laws; and (v) any registrations, applications and certificates directed to any of the foregoing described in (i)-(iv), and continuations, continuations in part, extensions, renewals, divisions, re-issues and re-examinations relating thereto, including the right to apply for registrations, certificates, or renewals with respect to any of (i)-(iv), and the right to prosecute, enforce, obtain damages relating to, settle or release any past, present, or future infringement or misappropriation of any of (i)-(iv).

Intended Use” means the use of human tissue samples with the Product that detects the expression of specific gene(s), human biological marker(s) of Indication and/or a set of biological parameters identified and agreed upon by Parties as an aid in selection of a specific subpopulation of patients with a diagnosis of the Indication for treatment with an MPI Drug.

Interpretation Guidelines” means a written recommendation to assist the Product user in interpreting the Product’s results, such written recommendation having been validated with appropriate data.

Invalidation Action” has the meaning set forth in Section 8.6(b).

Joint Project Team” or “JPT” has the meaning set forth in Section 2.2(a).

Joint Steering Committee” or “JSC” has the meaning set forth in Section 2.1(a).

JSC Coordinator” has the meaning set forth in Section 2.1(b).

Knowledge” means, as applied to a Party, that such Party shall be deemed to have knowledge of a particular fact or other matter to the extent that such Party has actual knowledge of such fact or other matter, provided that such Party made a reasonable inquiry into such fact or other matter.

 

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Loss” means any and all liabilities, damages, settlements, penalties, fines, costs or expenses, including reasonable attorneys’ fees, resulting from a Claim brought by a Third Party.

Manufacture” means all activities related to the manufacturing, or any ingredient or component thereof, for Development and Commercialization, labeling, packaging, in-process and final testing, release or any ingredient or component thereof, quality assurance activities related to manufacturing and release, ongoing stability tests and regulatory activities related to any of the foregoing. When used as a verb, “Manufacture” means to engage in Manufacturing activities.

Millennium” has the meaning set forth in the preamble.

Millennium Indemnified Party” means Millennium and its Affiliates and their respective officers, directors, employees, agents and representatives, together with successors and assigns of any of the foregoing.

Millennium Materials” has the meaning set forth in Section 3.1.

Millennium Upstream Agreements” has the meaning set forth in Section 8.3(b).

MPI Compound” means each compound owned or otherwise Controlled by Millennium that is Directed against the relevant Target, which Target is either the [***] or a Collaboration Target.

MPI Drug” means the pharmaceutical product based on the MPI Compound which has been Developed and/or Commercialized for treatment of the Indication by Millennium in connection with this Agreement.

MPI Drug Sales” means with respect to any MPI Drug, the gross amounts invoiced and/or received by Millennium, its Affiliates and their respective (sub)licensees for sales of such MPI Drug to unaffiliated Third Parties, less the following deductions, to the extent reasonable and customary, provided to unaffiliated entities and actually allowed and taken with respect to such sales:

[***]

Non-Nominated Target” has the meaning set forth in Section 3.5(a).

Original Target Information” has the meaning set forth in Section 3.5(a).

Other Arising IP” means Foreground IP that is neither Diagnostic Foreground IP nor Compound Foreground IP.

Party” or “Parties” have the meaning set forth in the preamble.

 

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Patent Counsel” has the meaning set forth in Section 8.2(d)(ii)(C).

Patient Sample” has the meaning set forth in Section 5.2(e).

Patient Sample Requirements” has the meaning set forth in Section 5.2(e).

Patient Selection Criteria” means any combination of genetic, genomic polymorphism(s), clinical, serology and/or other data developed pursuant to the Work Plan or otherwise developed by or on behalf of Precision to identify a specific subpopulation of patients with a diagnosis of the Indication, which subpopulation shall be identified and agreed upon by Parties pursuant to the Work Plan and form the basis for the Activities.

Payments” has the meaning set forth in Section 4.2.

PMA” means any premarket approval application for a class III medical device, including all information submitted with or incorporated by reference. “PMA” includes a new drug application for a device under section 520(1) of the US Federal Food Drug and Cosmetic Act.

Precision” has the meaning set forth in the preamble.

Precision Indemnified Parties” means Precision and its officers, directors and employees.

Precision Materials” means any clinical study specimens or such other biological materials (e.g., blood, fluid, cell, and tissue samples from human subjects, including any tangible materials derived from the Precision Materials such as: genes, gene fragments, gene sequences, proteins, protein fragments, protein sequences, probes, DNA, RNA, cDNA libraries, plasmids, vectors, expression systems, cells, cell lines, organisms, antibodies or other biological substances; and any constituents, progeny, unmodified derivatives, replications thereof) in Precision’s possession and/or Control furnished to Millennium by or on behalf of Precision pursuant to the Work Plan.

Precision Upstream Agreements” has the meaning set forth in Section 8.3(a)(i).

Product” means each set of one or more Assays/Tests configured in one or more test kits, as mutually agreed upon by the Parties pursuant to the Work Plan, which has been Manufactured using GMP and QC release tested and developed with sufficient analytical validation, as necessary to support being labeled as “investigational use only” and used for the purposes of Clinical Trials, or otherwise clinically-validated or approved for the Intended Use.

Product Clinical Trial Test Results” means Clinical Trial Information, and other data and information derived therefrom, generated through use of the Product with Clinical Trial Tissue Samples collected prior to administration of MPI Drug. For clarity, Product Clinical Trial Test Results excludes all Correlation Data.

Product Foreground IP” means any and all Foreground IP which primarily relates to an Assay/Test or Product, including, without limitation, any Foreground IP that relates to the composition or Manufacture of an Assay/Test or Product or any algorithm incorporated or included therein.

 

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Product Transfer Activities” has the meaning set forth in Section 12.4(f).

Project Manager” has the meaning set forth in Section 2.3(a).

Publication” has the meaning set forth in Section 9.6.

QSR” means the applicable regulations set forth in FDA’s Quality System Regulations at 21 C.F.R. Part 820.

Quality Control Specifications” has the meaning set forth in Section 5.1(a).

Receiving Party” means any Party receiving another Party’s Confidential Information.

Records” has the meaning set forth in Section 3.7.

Regulatory Approval” means in each regulatory jurisdiction, the approvals (including pricing approvals), clearances, exemptions, product and/or establishment licenses, registrations or authorizations necessary and sufficient for the development, manufacture, use, clinical trial use, storage, import, export, transport, commercialization, marketing, distribution, and sale of a product in such jurisdiction in accordance with Applicable Law.

Regulatory Authority” means the applicable governmental authority in a given regulatory jurisdiction that has responsibility for granting Regulatory Approvals.

Regulatory Exclusivity” means any exclusive marketing rights or data protection or other exclusivity rights conferred by any Regulatory Authority with respect to a MPI Drug in a country or jurisdiction in the Territory, other than a patent right, including orphan drug exclusivity, pediatric exclusivity, rights conferred in the U.S. under the Biologics Price Competition and Innovation Act, or under the Drug Price Competition and Patent Term Restoration Act, 21 U.S.C. 355, as amended, in the EU under Directive 2001/83/EC, as amended, and Regulation (EC) No. 1901/2006, as amended, or rights similar thereto in other countries or regulatory jurisdictions in the Territory.

Regulatory Submission” means any formal regulatory applications, filings, registrations or submissions, made to any Regulatory Authority in a jurisdiction.

Relevant Third Party IP” means any U.S. or foreign patents owned, licensed or otherwise controlled by a Third Party the rights to which may be necessary or useful in performance of Activities or Development, Manufacture or Commercialization of a MPI Drug or Product pursuant to this Agreement.

Replacement Target” has the meaning set forth in Section 3.5(b).

Replacement Target Information” has the meaning set forth in Section 3.5(b).

 

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Royalty Term” means, on a country-by-country and MPI Drug-by-MPI Drug basis, the period commencing on the First Commercial Sale of such MPI Drug in such country in the Territory and ending upon the latest of:

[***]

Senior Executives” means in the case of Precision, the President (or an authorized representative designated by such President, and in the case of Millennium, the Chief Medical & Scientific Officer of Takeda (or an authorized representative designated by such Chief Medical & Scientific Officer).

Separate IP” means any Intellectual Property that a Party generates, invents, develops, acquires or obtains Control of after the Effective Date and independent of its performance of its obligations under this Agreement and without reference to or reliance on any Confidential Information that such Party received from another Party under this Agreement.

Takeda” has the meaning set forth in the preamble.

Target” means each individual human biological marker of Indication.

Target Information” has the meaning set forth in Section 3.5(a).

Target License” has the meaning set forth in Section 8.3(a)(iv).

Target License Request” has the meaning set forth in Section 8.3(a)(iv).

Term” has the meaning set forth in Section 12.1.

Termination Consequences” has the meaning set forth in Section 12(a).

Territory” means those countries or jurisdictions that have been mutually agreed upon by the Parties, through the JSC, JPT or any other subcommittee(s) established to address commercial considerations, for Commercialization of each Product pursuant to the Work Plan.

Third Party” means any individual, partnership, corporation, limited liability company, or any other entity who is not a Party to this Agreement or an Affiliate of a Party.

Valid Claim” means (a) a claim of an issued and unexpired patent to the extent such claim has not expired or irretrievably lapsed or been abandoned, dedicated to the public, revoked, held invalid or unenforceable by a patent office, court or other governmental agency of competent jurisdiction in a final order, from which no further appeal can be taken, and which claim has not been disclaimed, denied or admitted to be invalid or unenforceable through reissue, re-examination or disclaimer or otherwise; or (b) a claim within a patent application has not been pending for more than [***] years from the earliest filing date to which such claim or the applicable patent application is entitled to claim priority and which claim has not been revoked, cancelled, withdrawn, held invalid or abandoned.

 

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Work Plan” means [***].

 

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EXHIBIT B

[***]

 

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EXHIBIT C

FINANCIAL TERMS

 

Technology Access Fee to Precision.      

Millennium shall pay to Precision the following technology access fee within [***] Business Days of the Effective Date:

 

•   $[***]

 

    

  
Activities Paid by Millennium.      

Millennium shall pay to Precision the amounts set forth below for Precision’s FTE expenses associated with Activities quarterly. First payment shall be made within [***] Business Days of Effective Date and any subsequent payments shall be made within [***] calendar days of Millennium’s receipt of corresponding invoice from Precision at the beginning of each quarter:

 

 

  
         

Fiscal Year

   1Q19      2Q19      3Q19      4Q19      1Q20      2Q20      3Q20      4Q20      TOTAL         
      FTE#      [***]        [***]        [***]        [***]        [***]        [***]        [***]        [***]        [***]     
      R&D Spend $M      [***]        [***]        [***]        [***]        [***]        [***]        [***]        [***]        [***]     
     

Millennium shall pay to Precision the following one-time milestone payments, which shall be paid to Precision within [***] calendar days following the achievement of the applicable milestone and Millennium’s receipt of corresponding invoice from Precision. Each Party shall provide the other Party with prompt written notice of its achievement of the applicable milestones. If, for any reason, a milestone event corresponding to a milestone payment set forth below does not occur prior to the occurrence of the next sequential milestone event set forth below, which later milestone precludes the necessity to achieve the earlier milestone event, then such prior non occurring milestone event shall be deemed to occur concurrently with the occurrence of such next sequential milestone event. Each milestone payment by Millennium shall be payable only once regardless of the number of times that such milestone event is achieved. Neither Party shall have final decision making authority over a dispute as to whether a milestone has been achieved.

 

(a)   Patient selection biomarker discovery and validation in patient samples – successful completion

 

•   $[***]

 

Successful completion defined by below deliverables

 

[***]

 

[***]

 

[***]

 

(b)   Assay/Test development – successful completion

 

•   $[***]

 

Successful completion defined by below deliverables

 

[***]

 

[***]

 

[***]

 

    

    

 

 

 

 

    

    

 

 

 

 

  

 

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(c)   Assay/Test analytical validation – successful completion

 

•   $[***]

 

Successful completion defined by below deliverables

 

[***]

 

[***]

 

[***]

 

[***]

 

Analytical validation establishes the performance characteristics of a test, and instrument that are acceptable in terms of its sensitivity, specificity, accuracy, precision, and other relevant performance characteristics using a specified technical protocol (which may include specimen collection, handling and storage procedures). This is validation of the CDx test’s/instrument’s technical performance but is not demonstrating clinical utility of the item.

 

(d)   Product clinical utility validation – successful completion

 

•   $[***]

 

•   [***]

 

(e)     [***]

 

•   $[***]

 

(f)      [***]

 

•   $[***]

 

(g)     [***]

 

•   $[***]

 

The following sales achievement milestones shall be payable if Regulatory Approval for the Commercialization of the MPI Drug includes use of corresponding Product:

 

(h)     [***]

 

•   $[***]

 

(i)     [***]

 

•   $[***]

 

The sales achievement milestone payments set forth above shall each be payable one-time only, upon the first time during the Term that the total aggregate MPI Drug Sales of a MPI Drug directed to the [***] in any Calendar Year.

  
Milestones related to Collaboration Targets.       Millennium shall pay to Precision the following one-time milestone payments, which shall be paid to Precision within [***] calendar days following the achievement of the applicable milestone for each Collaboration Target and Millennium’s receipt of corresponding invoice from Precision. Each Party shall provide the other Party with prompt written notice of its achievement of the applicable milestones. If, for any reason, a milestone event corresponding to a milestone payment set forth below does not occur prior to the occurrence of the next sequential milestone event set forth below, which later milestone precludes the necessity to achieve the earlier milestone event, then such prior   

 

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non-occurring milestone event shall be deemed to occur concurrently with the occurrence of such next sequential milestone event. Each milestone payment by Millennium shall be payable only once per Collaboration Target regardless of the number of times that such milestone event is achieved. Neither Party shall have final decision making authority over a dispute as to whether a milestone has been achieved.

 

(a)    Collaboration Target Proposal (based on preliminary patient selection criteria (PSC); target validation (TV) feasibility and drug tractability assessment – associated with successful project start (PS) transition)

 

•   [***]

 

(b)    Patient selection biomarker discovery and validation in patient samples – successful completion

 

•   [***]

 

[***]

 

•   [***]

 

(c)    CDx Assay/Test development – successful completion

 

•   [***]

 

[***]

 

•   [***]

 

(d)    Assay/Test analytical verification and clinical validation – successful completion

 

•   [***]

 

[***]

 

•   [***]

 

[***]

 

(e)    IDE Application Acceptance

 

•   [***]

 

[***]

 

•   [***]

 

(f)    Product clinical validation – successful completion

 

•   [***]

 

•   [***]

 

(g)    [***]

 

•   [***]

 

(h)    [***]

 

•   [***]

 

(i)    [***]

 

•   [***]

 

The following sales achievement milestones shall be payable if Regulatory Approval for the Commercialization of the MPI Drug includes use of corresponding Product:

 

(j)    [***]

 

•   [***]

 

(k)    [***]

 

•   [***]

 

The sales achievement milestone payments set forth above shall each be payable one-time only for each Collaboration Target, upon the first time during the Term that the total aggregate MPI Drug Sales of a MPI Drug directed to the relevant Collaboration Target in any Calendar Year.

  

 

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Royalties to Precision.      

During the Royalty Term, Millennium shall pay a royalty to Precision on MPI’s Drug Sales for MPI Drugs directed to the [***] or Collaboration Targets on a country-by-country basis and MPI Drug-by-MPI Drug basis as follows if Regulatory Approval (i.e., the approved label or labelling) for the Commercialization of the MPI Drug requires use of the corresponding Product:

 

(a)    MPI Drug directed against [***]

 

•   [***]% MPI Drug Sales of such MPI Drug

 

(b)    MPI Drug directed against Target associated with a Collaboration Target

 

•   [***]% MPI Drug Sales of each such MPI Drug

 

During the Royalty Term, Millennium shall pay a royalty to Precision on MPI’s Drug Sales for MPI Drugs directed to the [***] or Collaboration Targets on a country-by-country basis and MPI Drug-by-MPI Drug basis as follows if Regulatory Approval (i.e., the approved label or labelling) for the Commercialization of the MPI Drug identifies, or includes data with respect to, a type of diagnostic test that includes the corresponding Product but does not require use of such Product:

 

(a)    MPI Drug directed against [***]

 

•   [***]% MPI Drug Sales of such MPI Drug

 

(b)    MPI Drug directed against Target associated with a Collaboration Target

 

•   [***]% MPI Drug Sales of each such MPI Drug

 

Required use of the Product. For clarity, the approved label for an MPI Drug shall be deemed to require use of the corresponding Product, if the indication and usage section of such label defines the patient population in whom the MPI Drug is approved and such patient population is includes (as an identified subpopulation) the specific subpopulation of patients identified by the Product consistent with the Intended Use, or if the warnings and precautions section of such label identifies a type of diagnostic test to be used in a manner consistent with the Intended Use that includes such Product. For clarity, all sales of a MPI Drug having a label meeting the applicable description above shall be subject to the foregoing royalties, even if the administration of the Product occurs or is required only prior to an initial (or other individual) dosing with the MPI Drug.

 

Royalty Reduction. The royalty rates set forth above for MPI Drug Sales in a country shall be reduced by [***]% at the end of the first to occur [***] period during which one or more Third Parties sells a number of equivalent units of a generic version of the MPI Drug, in the country during such time period, greater than or equal to [***]% of the aggregate combined number of equivalent units of such MPI Drug and all generic version(s) of such MPI Drug sold in the country during such time period.

 

With respect to each MPI Drug, within [***] following the end of each Calendar Quarter after the First Commercial Sale of such MPI Drug, Millennium shall provide Precision with a report containing the following information for the applicable Calendar Quarter for such MPI Drug: the amount of gross sales of the MPI Drug, an itemized calculation of MPI Drug Sales showing deductions provided for in the definition of “MPI Drug Sales,” a calculation of the royalty payment due on such sales, an accounting of the number of units of the MPI Drug sold, the exchange rate for each country in which the MPI Drug was sold, the application of the reductions, if any. Millennium shall pay all amounts due to Precision for such Calendar Quarter at the time of the submission of such quarterly report. The rate of exchange to be used in computing the amount of currency equivalent in U.S. Dollars owed to Precision under this Agreement shall be the monthly average exchange rate between each currency of origin and United States dollars as reported by Wall Street Journal, East Coast Edition or an equivalent resource as mutually agreed by the Parties in writing.

  

 

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Schedule 3.5(a)(i)

[***]


CONFIDENTIAL

Execution Version

 

Schedule 3.5(a)(ii)

[***]

EX-10.16 20 d14529dex1016.htm EX-10.16 EX-10.16

Exhibit 10.16

[***] Certain information in this document has been excluded pursuant to Regulation S-K, Item 601(b)(10). Such excluded information is not material and would likely cause competitive harm to the registrant if publicly disclosed.

LICENSE AGREEMENT

This License Agreement (this “Agreement”) is entered into as of March 18, 2020 (the “Effective Date) by and between Alloy Therapeutics, LLC, a Delaware limited liability company with offices located at 44 South Main Street, 2nd Floor, Hanover, NH 03755 (“ATX”), and Prometheus Biosciences INC, with its offices located at 9410 Carroll Park Drive, San Diego CA 92121 (“LICENSEE”). ATX and LICENSEE may each be referred to individually as a “Party”, and collectively as the “Parties”.

RECITALS

WHEREAS, ATX Controls (as defined below) the ATX Technology (as defined below); and

WHEREAS, LICENSEE is engaged in the research, development and commercialization of pharmaceutical products; and

WHEREAS, LICENSEE desires to use the ATX Technology to generate antibodies for preclinical development, clinical development and commercialization; and

WHEREAS, ATX desires to grant to LICENSEE a license to use the ATX Technology for such purposes, subject to the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:

 

1.

DEFINITIONS

 

  1.1

Capitalized Terms. For purposes of this Agreement (including its appended schedules and exhibits), the capitalized terms used in this Agreement shall have the defined meanings set forth below or elsewhere in this Agreement. Capitalized singular, plural, and other variant forms of the defined terms shall have the corresponding meanings.

 

  (a)

Affiliate” means, with respect to a Party, any company or other entity controlled by, controlling, or under common control with such Party, where the term “controlled by” (with correlative meanings for the terms “controlling” and “under common control with”) means for purposes of this definition the possession, through ownership or control, directly or indirectly, of more than 50% of the voting power, which voting power in the case of a corporation is entitled to vote for the election of directors, or otherwise has the actual right and ability to control and direct the management and business affairs.


  (b)

Antibody” means an immunoglobulin molecule capable of specific binding to a biological target, such as a polypeptide, carbohydrate, polynucleotide, lipid, etc., through at least one antigen recognition site, located in the variable region of the immunoglobulin molecule. The term “Antibody” encompasses not only full-length immunoglobulin molecules, but also any antigen-binding fragments thereof, fusion proteins comprising an antibody or antigen-binding fragment thereof, and any other modified configuration of the antibody or antigen-binding fragment thereof comprising an antigen recognition site.

 

  (c)

ATX Antibody” means any Antibody isolated by or on behalf of LICENSEE from the ATX Mice using the ATX Technology pursuant to this Agreement.

 

  (d)

ATX Indemnitee” has the meaning provided in Section 11.2.

 

  (e)

ATX Know-How” means the Know-How listed on Exhibit A, attached hereto.

 

  (f)

ATX Mouse” means a genetically modified humanized mouse provided by ATX to LICENSEE under this Agreement, as further described in Exhibit B, attached hereto.

 

  (g)

ATX Platform” means the ATX Know-How and the ATX Mice.

 

  (h)

ATX Platform Improvement” means any optimization, modification or improvement to the ATX Platform Controlled by ATX after the Effective Date.

 

  (i)

ATX Technology” means the ATX Platform and the ATX Platform Improvements.

 

  (j)

Business Day(s)” means any day other than Saturday, Sunday, or bank or other national holidays in the United States.

 

  (k)

Change of Control” means, with respect to a Party: (i) a merger or consolidation of such Party with a Third Party that results in the voting securities of such Party outstanding immediately prior thereto, or any securities into which such voting securities have been converted or exchanged, ceasing to represent at least fifty percent (50%) of the combined voting power of the surviving entity or the parent of the surviving entity immediately after such merger or consolidation; (ii) a transaction or series of related transactions in which a Third Party, together with its Affiliates, becomes the beneficial owner of fifty percent (50%) or more of the combined voting power of the outstanding securities of such Party; or (iii) the sale or other transfer to a Third Party of all or substantially all of such Party’s business. Notwithstanding the foregoing to the contrary, a transaction, or series of related transactions, intended to raise funds through

 

2


  the sale of equity or convertible debt securities to current or future investors shall not constitute a Change of Control.

 

  (l)

Confidential Information” has the meaning provided in Section 9.1.

 

  (m)

Controlled” means, in reference to any information, materials, Patent Rights or other intellectual property, that the applicable Party owns, possesses, or has a license to such information, materials, Patent Rights or other intellectual property (including through control of an Affiliate or through a license from an Affiliate or Third Party) with the right or ability to grant the other Party a license or a sublicense or other right (as applicable) under same as provided in this Agreement without violating the terms of any agreement or other arrangement with any Third Party or increasing a financial obligation to any Third Party other than royalties proportional to net sales of a product or service or payments the Party receiving such license or sublicense or other right agrees to reimburse the first Party.

 

  (n)

Development Milestone” has the meaning provided in Section 4.5.

 

  (o)

Discovery Period” has the meaning provided in Section 10.1.

 

  (p)

EMA” means the European Medicines Agency, an agency of the European Union, or any successor agency thereto having the administrative authority to regulate the marketing of human pharmaceutical products or biological therapeutic products, delivery systems and devices in the European Union.

 

  (q)

FDA” means the United States Food and Drug Administration, or any successor agency thereto having the administrative authority to regulate the marketing of human pharmaceutical products or biological therapeutic products, delivery systems and devices in the United States of America.

 

  (r)

FD&C Act” means the United States Federal Food, Drug and Cosmetic Act, as amended.

 

  (s)

Field” means any field of use.

 

  (t)

First Commercial Sale” means, with respect to any Product, the first sale of such Product by LICENSEE or any of its Affiliates or Sublicensees to a Third Party for distribution, use or consumption in a country or jurisdiction in the Territory after Regulatory Approval for the commercial sale of such Product has been obtained in such country or jurisdiction.

 

  (u)

Governmental Authority” means any (i) federal, state, local, municipal, foreign or other government, (ii) governmental or quasi-governmental authority of any nature (including any governmental division, subdivision, department, agency, bureau, branch, office, commission, council, board, instrumentality, officer, official, representative, organization, unit, body or entity and any court or other tribunal), (iii) multinational governmental

 

3


  organization or body, or (iv) entity or body exercising, or entitled to exercise, any executive, legislative, judicial, administrative, regulatory, police, military or taxing authority or power of any nature.

 

  (v)

IND” means an investigational new drug application as defined in the FD&C Act and applicable regulations promulgated thereunder by the FDA or (b) the equivalent application to the equivalent Regulatory Authority in any other regulatory jurisdiction, the filing of which is necessary to initiate or conduct clinical testing of a pharmaceutical product in humans in such jurisdiction.

 

  (w)

Know-How” means all know-how, whether or not reduced to writing, technical information, data, ideas, concepts, materials (including but not limited to chemical and biological materials), techniques, specifications, processes, software, algorithms, practices, methods, material compositions, formulas, discoveries, inventions, trade practices, and trade secrets, whether or not patentable.

 

  (x)

LICENSEE Data” means anonymized data concerning the performance of the ATX Mice that are generated from discovery work performed by or on behalf of LICENSEE during the Discovery Period; provided however, LICENSEE Data shall not include [***].

 

  (y)

LICENSEE Indemnitee” has the meaning provided in Section 11.1.

 

  (z)

Losses” has the meaning provided in Section 11.1.

 

  (aa)

Partnered Antibody” has the meaning provided in Section 3.1.

 

  (bb)

Partnered Antibody Program” has the meaning provided in Section 3.1.

 

  (cc)

Partnered Antibody Program Patents” has the meaning provided in Section 3.2.

 

  (dd)

Patent Rights” means any and all original (priority-establishing) patent applications filed anywhere in the world, including provisional and non-provisional applications, and all related applications thereafter filed including a common priority right, including any continuations, continuations-in-part, divisional and substitute applications, any patents issued or granted from any such patent applications, and any reissues, renewals, reexaminations, extensions (including by virtue of any supplementary protection certificates) of any such patents, and any confirmation patents, inventor’s certificates or registration patents or patents of addition based on any such patents, and all foreign counterparts or equivalents in any country or jurisdiction of any of the foregoing.

 

  (ee)

Phase II Clinical Trial” means a human clinical trial of a compound or product that would satisfy the requirements of U.S. 21 C.F.R. Part

 

4


  312.21(b), as amended, and is intended to explore a variety of doses, dose response, and duration of effect, and to generate evidence of clinical safety and effectiveness for a particular indication or indications in a target patient population, or a similar clinical study prescribed by the relevant Regulatory Authorities in a country other than the United States.

 

  (ff)

Phase III Clinical Trial” means a human clinical trial of a compound or product that would satisfy the requirements of U.S. 21 C.F.R. Part 312.21(c), as amended, and is intended to (a) establish that the compound or product is safe and efficacious for its intended use, (b) define contraindications, warnings, precautions and adverse reactions that are associated with the compound or product in the dosage range to be prescribed, and (c) support Regulatory Approval for such compound or product, or a similar clinical study prescribed by the relevant Regulatory Authorities in a country other than the United States.

 

  (gg)

Product” means a pharmaceutical composition, formulation or other product comprising one or more Partnered Antibody(ies), in final form suitable for human use. For the sake of clarity, such human use further comprises diagnostic and therapeutic uses.

 

  (hh)

Platform Assisted Antibody” means any Antibody discovered, invented, developed, enhanced, adapted, derived, modified, or improved from an ATX Antibody and any optimized form thereof (including, but not limited to, optimization through affinity maturation or sequence optimization).

 

  (ii)

Regulatory Approval” means receipt of all approvals, licenses, registrations, or authorizations of any country, federal, supranational, state or local regulatory agency, ministry, department, bureau or other government entity that are necessary for the use or sale of a particular Product in the jurisdiction for a particular indication, including any approvals for importation, manufacture, pricing, and/or reimbursement where necessary for effective market entry.

 

  (jj)

Regulatory Authority” means any country, federal, supranational, state or local regulatory agency, ministry, department, bureau or other governmental entity having authority in any country, region, or supra-national jurisdiction to grant a Regulatory Approval, such as the FDA, EMA or any equivalent governmental entity in any other country.

 

  (kk)

Selection Notice” has the meaning provided in Section 3.1.

 

  (ll)

Selection Period” has the meaning provided in Section 10.1.

 

  (mm)

Sublicensee” means a Third Party or Affiliate to whom LICENSEE has granted a license or sublicense of the right to use, have used, make, have made, market, have marketed, offer for sale, have offered to sell, sell, have

 

5


  sold, export and/or import one or more Partnered Antibodies and/or Products.

 

  (nn)

Territory” means the entire world.

 

  (oo)

Third Party” means any entity other than ATX or LICENSEE or an Affiliate of ATX or LICENSEE.

 

2.

LICENSE TO ATX TECHNOLOGY; RESTRICTIVE COVENANTS; TECHNOLOGY TRANSFER

 

  2.1

License Grant.

 

  (a)

License to ATX Technology. Subject to the terms and conditions of this Agreement, (i) ATX hereby grants to LICENSEE a worldwide, non-exclusive license under all of ATX’s patent and other intellectual property rights to use the ATX Technology solely for antibody discovery, including without limitation, immunizing ATX Mice, isolating ATX Antibodies or cells that produce ATX Antibodies from the ATX Mice, cloning of the ATX Antibodies, modification of the ATX Antibodies to produce Platform Assisted Antibodies, and in vitro and in vivo characterization of the ATX Antibodies and Platform Assisted Antibodies for internal, non-clinical research purposes; and (ii) with respect to ATX Antibodies and Platform Assisted Antibodies that are selected by LICENSEE for inclusion into a Partnered Antibody Program, ATX hereby grants to LICENSEE a worldwide, assignable (solely pursuant to Section 12.6) license under all of ATX’s patent and other intellectual property rights covering the ATX Technology to make, or have made, use, offer for sale, sell, import, develop, manufacture and commercialize Partnered Antibodies as Products in the Field in the Territory. LICENSEE shall have the right to sublicense (through multiple tiers) its rights under Section 2.1(a)(ii), subject to Section 3.4.

 

  (b)

No Sublicenses. Except in connection with LICENSEE’s right to assignment under Section 12.6, LICENSEE shall not sublicense or otherwise transfer its rights granted under Section 2.1(a)(i).

 

  (c)

Right to Subcontract. LICENSEE may exercise its rights under Section 2.1(a)(i) through one or more Third Party subcontractors, provided that any such Third Party subcontractor having direct access to any ATX Mice shall be subject to the prior written approval by ATX, further provided that: (i) such Third Party subcontractor is bound by written obligations of confidentiality and non-use as restrictive as those set forth in this Agreement; and (ii) LICENSEE remains liable for any act or omission of such Third Party subcontractor to the same extent as if LICENSEE had performed such act or made such omission hereunder.

 

6


  (d)

License to ATX. Subject to the terms and conditions of this Agreement, LICENSEE hereby grants to ATX a limited, worldwide, royalty-free, fully-paid up, non-exclusive license to use the LICENSEE Data solely for the purpose of marketing the ATX Platform and developing ATX Platform Improvements. LICENSEE will use commercially reasonable efforts to provide ATX with the LICENSEE Data listed in Exhibit D.

 

  2.2

No Implied Licenses. Except as expressly provided for herein, no other right or license under any Know How or Patent Rights Controlled by a Party is granted to the other Party.

 

  2.3

Restrictive Covenants. LICENSEE agrees that it:

 

  (a)

shall abide by all industry accepted guidelines applicable to the use, handling and disposal of genetically modified animals and comply in all material respects with all applicable laws and regulations which relate to the use of the ATX Technology;

 

  (b)

shall use diligent efforts to ensure that the ATX Mice and any progeny thereof do not come into contact with any mice other than ATX Mice, and in particular shall not intentionally or recklessly breed ATX Mice with each other or any other mice;

 

  (c)

shall not make any genetic modifications to the ATX Mice or any progeny thereof;

 

  (d)

shall not sequence the genome of the ATX Mice or any progeny thereof or otherwise “reverse engineer” the ATX Mice or any progeny thereof;

 

  (e)

shall not derive embryonic or other stem cells from the ATX Mice or any progeny thereof that could be used to make ATX Mice;

 

  (f)

shall not use the ATX Technology, except in accordance with the license grants set forth in Section 2.1(a); and

 

  (g)

shall not transfer the ATX Technology other than to an approved Third Party subcontractor.

 

  2.4

Technology Transfer. In furtherance of the license to ATX Technology that is granted to LICENSEE pursuant to Section 2.1(a), ATX and LICENSEE shall cooperate to arrange for and complete an orderly transfer from ATX to LICENSEE, or to make such other mutually acceptable arrangements as are reasonably necessary, to provide LICENSEE with access to the ATX Know-How within [***] Business Days after the Effective Date.

 

3.

PARTNERED ANTIBODY PROGRAMS

 

  3.1

Selection of Partnered Antibodies. LICENSEE shall have the right, from time to time and by written notice to ATX (the “Selection Notice”), to select certain ATX

 

7


  Antibodies and Platform Assisted Antibodies (each such selected individual Antibody, a “Partnered Antibody,” and such set of Antibodies, a “Partnered Antibody Program”), subject to the limitations set forth in Section 10.1 and Exhibit C, for further research, development and commercialization as Products. Each Selection Notice shall set forth the sequence of each ATX Antibody selected to be a Partnered Antibody. In addition, if the sequence for any ATX Antibody or Platform Assisted Antibody is included in a filing for Patent Rights by LICENSEE or publicly disclosed by LICENSEE, and LICENSEE has not yet provided a Selection Notice that includes the relevant ATX Antibody; then within [***] days after the date of such filing or public disclosure, LICENSEE will notify ATX of such filing or public disclosure and identify the sequence for each ATX Antibody included therein. In that case, LICENSEE will be deemed to have provided a Selection Notice for that Partnered Antibody Program as of the date of the filing for Patent Rights or public disclosure, again subject to the limitations set forth in Section 10.1 and Exhibit C.

 

  3.2

Partnered Antibody Program Patents. LICENSEE shall have the sole right to develop the patent strategy and file for Patent Rights that claim [***] Antibodies identified in a Selection Notice, any Platform Assisted Antibodies derived therefrom, compositions and formulations that comprise such Antibodies and/or Platform Assisted Antibodies (including Products), any use of such Antibodies and/or Platform Assisted Antibodies or compositions or formulations, and methods of making such Antibodies and/or Platform Assisted Antibodies or compositions or formulations (such Patent Rights, the “Partnered Antibody Program Patents”). LICENSEE shall bear all costs, expenses and fees of counsel and other professional advisors incurred with respect to its preparation, filing, prosecution, maintenance, enforcement or defense of Partnered Antibody Program Patents.

 

  3.3

Ownership and Use of Partnered Antibodies, Partnered Antibody Program Patents, and LICENSEE Data. Regardless of inventorship and without limitation on the provisions of Section 6.1(b), LICENSEE shall own any Partnered Antibodies and Partnered Antibody Program Patents and, for the avoidance of doubt, the LICENSEE Data. Should LICENSEE fail to pay when due the payments required hereunder after [***] days’ notice from ATX including a demand for payment, LICENSEE, and its assignees and licensees, shall immediately cease all commercial use of the Partnered Antibodies, Partnered Antibody Program Patents, and LICENSEE Data.

 

  3.4

Sublicenses to Partnered Antibody Programs. Each sublicense granted by LICENSEE to a Sublicensee of LICENSEE’s rights granted under Section 2.1(a)(ii) shall be subject and subordinate to this Agreement and shall contain provisions consistent with the terms and conditions of this Agreement. Except as to sublicenses to Affiliates, subcontractors and service providers, LICENSEE shall as soon as reasonably practicable provide ATX with a copy of any executed sublicense agreement granting a sublicense to a Sublicensee hereunder (which copy may be redacted to remove provisions which are not necessary to monitor compliance with this Section 3.4). Each such sublicense agreement shall contain the following

 

8


  provisions: (a) a requirement that the Sublicensee comply with the confidentiality and non-use provisions of this Agreement with respect to ATX Confidential Information; and (b) a requirement that the Sublicensee submit reports with respect to Products to LICENSEE to the extent necessary or relevant to the reports required to be made or records required to be maintained under this Agreement. Notwithstanding any sublicense, LICENSEE shall remain primarily liable to ATX for the performance of all of LICENSEE’s and its Sublicensees’ obligations under, and LICENSEE’s and its Sublicensees’ compliance with all provisions of, this Agreement.

 

4.

FEES AND PAYMENTS

 

  4.1

Upfront Fee. LICENSEE shall pay to ATX a non-refundable, non-creditable upfront fee in the amount of [***] which shall be due on the earlier of (a) [***], or (b) [***] days after the Effective Date.

 

  4.2

Annual Fee. LICENSEE shall pay to ATX a non-refundable, non-creditable annual fee in the amount of [***] on each anniversary of the Effective Date during the Discovery Period.

 

  4.3

Mouse Fee. LICENSEE shall pay to ATX a fee in the amount of [***] per ATX Mouse delivered to LICENSEE. LICENSEE shall be responsible for the shipping and handling costs related to the delivery of the ATX Mice to LICENSEE.

 

  4.4

Partnered Antibody Program Fee. After LICENSEE’s actual or deemed provision of a Selection Notice to ATX in accordance with Section 3.1, LICENSEE shall pay to ATX, in accordance with Section 4.9, a non-refundable, non-creditable fee in the amount of [***] for each Partnered Antibody Program (the “Partnered Antibody Program Fee”). Thereafter, on each anniversary of the date of such payment of the Partnered Antibody Program Fee, LICENSEE shall pay to ATX a non-refundable, non-creditable fee in the amount of [***] for each Partnered Antibody Program that has not been irrevocably, unconditionally and fully abandoned by written notice to ATX prior to or on such anniversary. For clarity, such abandonment shall include the express abandonment of all Partnered Antibody Program Patents for such Partnered Antibody Program.

 

  4.5

Development Milestone Payments. For each Product, if any of the events listed below in this Section 4.5 (each, a “Development Milestone”) is achieved by LICENSEE or any assignee or Sublicensee of LICENSEE, then LICENSEE shall notify ATX within [***] days after the successful completion of each Development Milestone, and in accordance with Section 4.9, LICENSEE shall pay to ATX the non-refundable, non-creditable payment listed opposite that Development Milestone below:

 

   Milestone for each Product    Development Milestone Payment
   [***]    [***]
   [***]    [***]

 

9


   [***]    [***]

 

  4.6

Commercial Payments. Upon the First Commercial Sale of each Product, whether achieved by LICENSEE or any assignee or Sublicensee of LICENSEE, LICENSEE shall notify ATX and, in accordance with Section 4.9, shall pay to ATX the following schedule of non-refundable, non-creditable Commercial Payments:

 

   Commercial Payment Date    Commercial Payment Amount
   
   [***]    [***]
   
   [***]    [***]
   
  

[***]

   [***]
   
  

[***]

   [***]
   
  

[***]

   [***]
   
  

[***]

   [***]

 

  4.7

Sublicensee Fees. In the event LICENSEE sublicenses its rights in and to a Partnered Antibody Program to one or more Sublicensee(s), LICENSEE shall notify ATX in accordance with Section 3.4 and shall pay to ATX, in accordance with Section 4.9, a one-time fee of [***].

 

  4.8

Payments. The Development Milestones set forth herein are intended to be successive, meaning for clarity that if a Product does not achieve a particular milestone, such skipped milestone event shall be deemed to have been achieved upon the achievement by such Product of any subsequent milestone event. The milestone payment for any such skipped milestone event shall be due concurrently with the payment of the milestone payment in respect of such subsequent milestone event. All payments shall be made in US dollars by wire transfer from a US bank account designated by LICENSEE to a US bank account designated by ATX. For the avoidance of doubt, the Parties acknowledge and agree that the Development Milestone payments, Commercial Payments, and other payments due hereunder were negotiated as arms-length payments for the rights and licenses granted hereunder, including access to the ATX Know-How relating to the discovery, identification and characterization of Partnered Antibodies and the right to seek Partnered Antibody Program Patents. In determining the amounts payable hereunder, the Parties have taken into account the likely duration of protection in any Patent Rights included in the ATX Technology, and have agreed on payment periods that may exceed such duration in light of the value of the use of any such Patents Rights during the period of time that they remain in effect and the value of the use of other proprietary intellectual property after such duration, in order to facilitate the calculation and payment of amounts due. It is expressly acknowledged and agreed that any portion of any payments made that LICENSEE may allocate to the use of any such Patent Rights licensed by ATX is attributable to the use of any such Patent Rights during the duration of its validity.

 

10


  4.9

Invoicing. ATX shall provide an invoice for each payment due under this Article 4, and the applicable payment will be due within [***] days after receipt of the invoice.

 

5.

TAX; RECORDS; AUDITS; REPORTS

 

  5.1

Tax Matters.

 

  (a)

LICENSEE Payments to ATX Without Withholding. LICENSEE shall make all payments to ATX under this Agreement without deduction or withholding for taxes except to the extent that any such deduction or withholding is required by law in effect at the time of payment.

 

  (b)

LICENSEE Payment of Tax. Any tax required to be withheld on amounts payable to ATX under this Agreement shall promptly be paid by LICENSEE on behalf of ATX to the appropriate Governmental Authority, and LICENSEE shall furnish ATX with proof of payment of such tax. Any such tax required to be withheld shall be an expense of and borne by ATX, unless it results from a change in the tax domicile of LICENSEE, in which case LICENSEE shall promptly pay ATX any portion of such tax that is not refundable to, or does not create a right to claim a credit against corporate income taxes payable by, ATX.

 

  5.2

Records; Audits.

 

  (a)

LICENSEE shall keep, and cause its Affiliates and Third Party subcontractors, assignees or Sublicensees to keep, complete and accurate records of all matters related to the research and development of the ATX Antibodies and/or Partnered Antibodies relevant to the determination of any payment to be made by LICENSEE under this Agreement, including without limitation, records relating to the milestone events covered in Sections 4.5, for [***] years after the close of the year to which they relate. At the request and expense of ATX, LICENSEE and its applicable Affiliates and its Third Party subcontractors or Sublicensees shall permit an independent certified public accountant appointed by ATX and reasonably acceptable to LICENSEE, at reasonable times and upon [***] Business Days prior notice, to examine in confidence such records as may be necessary to verify the satisfaction of any of LICENSEE’s obligations, or the correctness or completeness of any payment made, under this Agreement.

 

  (b)

The foregoing right of examination may be exercised only once per calendar year. Results of any such examination shall be limited to information relating to the applicable payment obligations. The accountant shall disclose to ATX only whether the applicable payments were correct or incorrect and the amount of any discrepancy between an amount due and an amount paid.

 

11


  5.3

Reports. On each anniversary of the Effective Date, LICENSEE shall provide ATX with a written report describing the progress during the previous year of the development and licensing of Partnered Antibody Programs and Products, if any, by LICENSEE or Sublicensees, and providing a summary of Partnered Antibody Program Patents. The form and substance of such annual report shall be at LICENSEE’s reasonable discretion but shall include (a) a listing of each active Partnered Antibody Program and a statement as to whether LICENSEE has included any additional Platform Assisted Antibodies as Partnered Antibodies within that particular Partnered Antibody Program, and (b) such information as ATX may reasonably request to estimate the timing and amount of payments due to ATX under this Agreement.

 

6.

INTELLECTUAL PROPERTY

 

  6.1

Ownership.

 

  (a)

ATX Technology. As between the Parties, the ATX Technology and all intellectual property rights therein is and shall remain the sole property of ATX and all rights to any ATX Technology generated under this Agreement shall solely vest in ATX.

 

  (b)

Antibodies. As described above, LICENSEE shall have a license that includes the right to commercialize Partnered Antibodies as Products and shall own any Partnered Antibodies and Partnered Antibody Program Patents. LICENSEE acknowledges that it shall have no right to commercialize, license, or assign any rights to commercialize ATX Antibodies and/or Platform Assisted Antibodies not included in a Partnered Antibody Program, regardless of inventorship. For the sake of clarity, the foregoing sentence shall not limit the exercise by LICENSEE, or its Sublicensee, of its rights to enforce Partnered Antibody Program Patents against Third Parties.

 

7.

REPRESENTATIONS, WARRANTIES, AND DISCLAIMERS OF WARRANTIES

 

  7.1

Mutual Representations and Warranties. Each Party represents and warrants to the other that: (a) it is duly organized and validly existing under the laws of its jurisdiction of incorporation or formation, and has full corporate or other power and authority to enter into this Agreement and to carry out the provisions hereof; (b) it is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder, and each person executing this Agreement on its behalf has been duly authorized to do so by all requisite corporate or partnership action; and (c) this Agreement is legally binding upon it, enforceable in accordance with its terms, and does not conflict with any agreement, instrument or understanding, oral or written, to which it is a Party or by which it may be bound, nor violate any applicable law or regulation of any court, governmental body or administrative or other agency having jurisdiction over it.

 

  7.2

ATX Representations. ATX represents to LICENSEE as of the Effective Date that:

 

12


  (a)

ATX’s rights in the ATX Technology are valid, subsisting and enforceable;

 

  (b)

ATX has, and will continue to have, all necessary rights and licenses to grant to LICENSEE the rights and permissions granted pursuant to this Agreement;

 

  (c)

The ATX Technology is free and clear of any encumbrances, liens, pledges, charges, security interests, leases, adverse claims or encumbrances of any kind or character whatsoever;

 

  (d)

The consummation of this Agreement will not, with respect to ATX’s rights in and to ATX Technology: (i) result in the loss or impairment of such rights; (ii) trigger any additional obligations or liabilities on LICENSEE or its Sublicensees for such rights; (iii) give rise to any rights of any Third Party to terminate such rights; (iv) trigger or otherwise give rise to payment of any additional amounts with respect to such rights; or (v) require the consent of any Third Party in respect of such rights;

 

  (e)

ATX has not granted any Third Party any right, license or interest in or under, nor assigned, transferred, conveyed or encumbered any right, title and interest in and to, any of the ATX Technology that is in conflict with the rights and licenses granted to LICENSEE under this Agreement;

 

  (f)

To ATX’s knowledge, neither the use of the ATX Technology, including the ATX Mice, nor the practice by ATX of the ATX Technology has infringed, misappropriated or otherwise violated, and does not infringe, misappropriate or otherwise violate, the Patent Rights of any Third Party;

 

  (g)

ATX and, to ATX’s knowledge after due inquiry and diligence, its licensor have not received notice from, or been prosecuted through a legal action by, any Third Party claiming that the use or exploitation of the ATX Technology infringes any Third Party’s Patent Rights or Know-How;

 

  (h)

To ATX’s knowledge after due inquiry and diligence, no additional licenses to intellectual property rights owned or controlled by Third Parties are required for use of the ATX Technology as contemplated under this Agreement; and

 

  (i)

No consent by any Third Party or governmental entity is required with respect to the execution and delivery of this Agreement by ATX or the consummation by ATX of the transactions contemplated hereby.

 

  7.3

Disclaimer. EXCEPT AS EXPRESSLY SET FORTH HEREIN, THE ATX TECHNOLOGY IS PROVIDED “AS IS” AND ATX EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION THE WARRANTIES OF DESIGN, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, OR NONINFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHTS OF

 

13


  ANY THIRD PARTY. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, ATX DOES NOT WARRANT, AND DISCLAIMS ANY WARRANTIES WITH REGARDS TO: (A) THE SUCCESS OF ANY PARTNERED ANTIBODY PROGRAM OR PRODUCT, (B) THE SAFETY OR USEFULNESS FOR ANY PURPOSE OF THE ATX TECHNOLOGY, ANY PARTNERED ANTIBODY OR PRODUCT; AND/OR (C) THE VALIDITY OR ENFORCEABILITY OF THE PARTNERED ANTIBODY PROGRAM PATENTS.

 

  7.4

Limitation of Liability. EXCEPT FOR LIABILITY FOR BREACH OF ARTICLE 9 OR IN THE CASE OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT (ALL OF THE FOREGOING, THE “EXCEPTIONS”), NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER; PROVIDED THAT THIS SECTION 7.4 SHALL NOT BE CONSTRUED TO LIMIT LICENSEE’s PAYMENT OBLIGATIONS HEREUNDER WITH RESPECT TO MILESTONES OR OTHER FEES OR EITHER PARTY’S INDEMNIFICATION OBLIGATIONS UNDER ARTICLE 11. OTHER THAN IN THE CASE OF THE EXCEPTIONS AND IN CONNECTION WITH A PARTY’S INDEMNIFICATION OBLIGATIONS UNDER ARTICLE 11, NEITHER PARTY WILL BE LIABLE FOR MORE THAN THE CONSIDERATION RECEIVED BY ATX FROM LICENSEE UNDER THIS AGREEMENT, INCLUDING MILESTONES OR OTHER FEES.

 

8.

COMPLIANCE WITH LAW

From the Effective Date until termination or expiration of this Agreement, ATX and LICENSEE shall comply (and shall cause their respective Affiliates and Sublicensees to comply) in all material respects with all applicable laws and regulations concerning any of their activities hereunder.

 

9.

CONFIDENTIALITY

 

  9.1

Confidential Information. Except to the extent expressly authorized by this Agreement or agreed in writing by the Parties, each Party agrees that, during the Discovery Period and for a period of [***] years thereafter, the receiving Party shall keep confidential and shall not publish or otherwise disclose, and shall not use for any purpose other than as expressly permitted in this Agreement, any information furnished to it by the other Party pursuant to this Agreement, or the terms and conditions of this Agreement (collectively, “Confidential Information”). For the avoidance of doubt, as long as LICENSEE retains license rights to any Partnered Antibodies and/or Products hereunder, data and other information relating thereto shall be considered LICENSEE’s Confidential Information. Each Party may use such Confidential Information of the other Party only to the extent required to accomplish the purposes of this Agreement or exercise its rights under the licenses granted to it under this Agreement. Each Party shall use at least the same standard

 

14


  of care to protect the other Party’s Confidential Information as it uses to protect proprietary or confidential information of its own, but in no event less than reasonable care. Each Party shall promptly notify the other upon discovery of any unauthorized use or disclosure of the other Party’s Confidential Information. The Parties further acknowledge that each Party has disclosed to the other Party (or its Affiliates), prior to the Effective Date, certain Confidential Information pursuant to non-disclosure and/or material transfer agreements entered into between the Parties (or a Party’s Affiliates), that limit the disclosure and use of such information by the receiving Party. The Parties hereby agree that any such Confidential Information earlier disclosed by one Party to the other (or its Affiliates) under such earlier agreements shall be deemed to be the Confidential Information of the disclosing Party and subject to all the terms of this Article 9, as well as the additional terms covering such information and materials (if any) under the earlier agreements.

 

  9.2

Exceptions. The obligations of non-disclosure and non-use under Section 9.1 shall not apply as to particular Confidential Information of a disclosing Party to the extent that the receiving Party can prove by competent written evidence that such Confidential Information: (a) is at the time of receipt, or thereafter has become, through no act or failure to act on the part of the receiving Party (or its Affiliates or Sublicensees or Third Party subcontractors), published, generally known or otherwise available in the public domain; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its records; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently discovered or developed by the receiving Party without reference to Confidential Information belonging to the disclosing Party; or (e) is the subject of a written permission to disclose provided by the disclosing Party.

 

  9.3

Authorized Disclosure. Each Party may disclose Confidential Information belonging to the other Party solely to the extent such disclosure is reasonably necessary in connection with the following:

 

  (a)

prosecuting Patent Rights as permitted by this Agreement; hereunder;

 

  (b)

in connection with regulatory filings and communications for Partnered Antibody Programs and/or Products that such Party has a license or right to develop under this Agreement;

 

  (c)

prosecuting or defending litigation;

 

  (d)

complying with applicable court orders or governmental laws or regulations;

 

  (e)

disclosure to Affiliates, Sublicensees, Third Party subcontractors, clinical or non-clinical institutions, and consultants (including their potential entities) on a need to know basis and only for purposes of performance of such Party’s obligations under this Agreement, and provided, in each case, that any such Affiliate, Sublicensee, or Third Party subcontractor, clinical or

 

15


  non-clinical institutions, and consultants (including their potential entities) agrees to be bound by similar terms of written confidentiality and non-use at least equivalent in scope to those set forth in this Article 9; or

 

  (f)

disclosure to existing or potential Third Party investors, financial institutions, funding sources, merger partners, acquirers, and professional advisors (including lawyers, accountants, and investment bankers) solely as reasonably necessary in the context of a potential transaction to which the Confidential Information is material, provided that any such Third Party agrees to be bound by similar terms of confidentiality and non-use at least equivalent in scope to those set forth in this Article 9.

Notwithstanding the foregoing, in the event a Party is required to make a disclosure of the other Party’s Confidential Information pursuant to Section 9.3(d) or 9.3(f), it shall, except where impracticable, give reasonable advance notice to the other Party of such planned disclosure and use reasonable efforts to secure, or to assist the other Party in securing, confidential treatment of and/or a protective order regarding such information. In the case of authorized disclosure set forth in Section 9.3(a) through 9.3(f) above such Party shall disclose only such Confidential Information of the other Party as is required to be disclosed. Each Party agrees that it shall cooperate fully with the other with respect to all disclosures regarding this Agreement as required under the regulations of Securities and Exchange Commission in the US or similar regulatory agency in any other country including requests for confidential information or proprietary information of either Party to be included in any such disclosure. Authorized disclosure of the Confidential Information pursuant to this Section 9.3 shall not be deemed exceptions pursuant to Section 9.2 unless and until publicly available.

 

  9.4

Publicity. No disclosure of the existence, or the terms, of this Agreement may be made by either Party, and neither Party shall use the name, trademark, trade name or logo of the other Party, its Affiliates or their respective employees in any publicity, promotion, news release or disclosure relating to this Agreement or its subject matter, without the prior express written consent of the other Party, except as may be required by law. Either Party may make subsequent public disclosure of the same contents as previously done pursuant to the foregoing of this Section 9.4.

 

  9.5

Return of Confidential Information. Upon termination of this Agreement, the receiving Party shall promptly return to the disclosing Party or destroy the disclosing Party’s Confidential Information, including all copies thereof, except for archive copies of electronic databases maintained in the ordinary course of business and for non-commercial purposes or to the extent that retention of such Confidential Information is reasonably necessary for the receiving Party to exploit any continuing rights it may have and/or to fulfil its obligations contemplated herein, including its obligations of non-disclosure and non-use hereunder. Any such destruction requested by the disclosing Party shall be certified in writing to the disclosing Party by an authorized officer of the receiving Party. The return and/or destruction of such Confidential Information as provided above shall not relieve the receiving Party of its obligations under this Agreement.

 

16


10.

TERM AND TERMINATION

 

  10.1

Discovery Period and Selection Period. The period of LICENSEE’s access to the ATX Technology under this Agreement shall commence on the Effective Date and shall continue for a period of [***] years from the Effective Date (the “Discovery Period”). The period of time during which LICENSEE may select Partnered Antibodies from among the ATX Antibodies as provided in Section 3.1 shall be the Discovery Period plus an additional [***] following expiration of the Discovery Period (such period, including the Discovery Period, the “Selection Period”) LICENSEE shall have the right to add Platform Assisted Antibodies to the corresponding Partnered Antibody Program both during the Selection Period and after the Selection Period provided that all applicable Partnered Antibody Program annual fees have been paid through the current year.

 

  10.2

Termination for Cause. Each Party shall have the right to terminate this Agreement upon [***] days’ prior written notice to the other Party upon the breach by such other Party of any material obligation under this Agreement, provided that such notice has given sufficient detail of the basis for the material breach and the breaching Party has not cured such material breach within the [***] day period following such written notice.

 

  10.3

Termination by LICENSEE Without Cause. At any time, LICENSEE may terminate this Agreement for any or no reason by providing ATX at least [***] days prior written notice.

 

  10.4

Termination for Insolvency. Either Party may terminate this Agreement by written notice to the other with immediate effect if the other Party becomes insolvent, is compelled to file bankruptcy, is determined otherwise imminently subject to control by a bankruptcy trustee, liquidator or administrator or the equivalent, or upon an assignment of a substantial portion of the assets for the benefit of creditors by the other Party pursuant to the laws of the jurisdiction in which such Party is doing business; provided that in the case of any involuntary bankruptcy proceeding such right to terminate shall only become effective if the Party consents to the involuntary bankruptcy or such proceeding is not dismissed within [***] days after the filing thereof.

 

  10.5

Termination of Discovery Period for Change of Control. ATX may terminate the Discovery Period of this Agreement upon written notice to LICENSEE in the event that there is a Change of Control of LICENSEE. LICENSEE shall give ATX written notice of any such Change of Control within [***] days of the effective date thereof. For clarity, a decision by ATX to terminate the Discovery Period will begin the [***] year period of the Selection Period during which LICENSEE may continue to select Partnered Antibody Programs in accordance with Section 3.1.

 

  10.6

Effect of Termination or Expiration; Surviving Obligations.

 

  (a)

In the event LICENSEE selects Partnered Antibodies under this Agreement, or Partnered Antibodies are otherwise designated as provided herein, (a) the

 

17


  right of use set forth in Section 3.3, (b) the license grant set forth in Sections 2.1(a)(ii), and (c) Article 4 shall each survive termination or expiration of this Agreement until the Partnered Antibody Program including such Partnered Antibodies is irrevocably, unconditionally and fully abandoned; but only for as long as LICENSEE continues to meet its payment obligations under Article 4. Upon LICENSEE’s payment of each and all of the Development Milestone payments and Commercial Payments provided for hereunder for a particular Product, the license grant set forth in Section 2.1 (a)(ii) for that particular Product shall become fully paid-up, irrevocable and perpetual.

 

  (b)

Upon early termination by either Party or expiration of this Agreement, at ATX’s written request, LICENSEE and its Affiliates shall return or destroy, as directed by ATX, the ATX Technology, the ATX Antibodies, the Partnered Antibodies and Product, except as may be reasonably required in order to exercise any rights surviving such termination or expiration.

 

  (c)

Termination or expiration of this Agreement shall not relieve the Parties of any obligation accruing prior to such termination or expiration. The following provisions of this Agreement shall survive termination or expiration of this Agreement: Article 1, Article 3, Article 4, Article 5, Section 6.1, Article 7, Article 9, Section 10.1, Section 10.6, Article 11 and Article 12.

 

  10.7

Exercise of Right to Terminate. The use by either Party hereto of a termination right provided for under this Agreement shall not in and of itself give rise to the payment of damages or any other form of compensation or relief to the other Party with respect thereto.

 

11.

INDEMNIFICATION

 

  11.1

Indemnification by ATX. ATX hereby agrees to indemnify, defend and hold harmless LICENSEE and its Affiliates and their respective directors, officers, employees and agents (each, a “LICENSEE Indemnitee”) from and against any and all claims, suits, actions, demands, liabilities, damages, expenses and/or loss, including reasonable legal expense and attorneys’ fees (collectively, “Losses”), to which any LICENSEE Indemnitee may become subject, to the extent such Losses result from any claim, demand, action or other proceeding against the LICENSEE Indemnitee by any Third Party to the extent based upon the breach by ATX of any representation, warranty, covenant or agreement made by ATX in this Agreement, except to the extent such Losses result from the negligence or willful misconduct of any LICENSEE Indemnitee or the breach by LICENSEE of any representation, warranty, covenant or agreement made by LICENSEE in this Agreement. For avoidance of doubt, such indemnification shall not apply to any Loss caused by the sale of any Product by LICENSEE to any Third Party.

 

  11.2

Indemnification by LICENSEE. LICENSEE hereby agrees to indemnify, defend and hold harmless ATX and its Affiliates and their respective directors, officers,

 

18


  employees and agents (each, a “ATX Indemnitee”) from and against any and all Losses to which any ATX Indemnitee may become subject, to the extent such Losses result from any claim, demand, action or other proceeding against the ATX Indemnitee by any Third Party to the extent based upon: (i) the manufacture, use, handling, storage, sale or other disposition of any Product and/or Partnered Antibody by LICENSEE, its Affiliates or Sublicensees, or (ii) the breach by LICENSEE of any representation, warranty, covenant or agreement made by LICENSEE in this Agreement; except, in each case, to the extent such Losses result from the negligence or willful misconduct of any ATX Indemnitee or the breach by ATX of any representation, warranty, covenant or agreement made by ATX in this Agreement.

 

  11.3

Control of Defense. Any Party or any of its indemnitees entitled to indemnification under this Article 11 shall give notice to the indemnifying Party of any Losses for which it is claiming indemnification promptly after learning of such Losses, and the indemnifying Party shall assume the defense of such Losses with counsel reasonably satisfactory to the indemnified Party. If such defense is assumed by the indemnifying Party with counsel so selected, the indemnifying Party shall not be liable for any settlement of such Losses made by the indemnified Party without consent of the indemnifying Party (provided that such consent is not unreasonably withheld or delayed), and shall not be obligated to pay the fees and expenses of any separate counsel retained by the indemnified Party with respect to such Losses or indemnification claim.

 

  11.4

Insurance. Each Party shall maintain at its expense insurance coverage consistent with normal business practices and adequate to cover the risks associated with its performance of any activities hereunder, and each Party acknowledges and agrees that the maintenance of such insurance coverage shall not relieve either Party of its obligations under this Agreement. Each Party shall provide a certificate of insurance (or evidence of self-insurance) evidencing such coverage to the other upon request.

 

12.

GENERAL PROVISIONS

 

  12.1

Governing Law; Venue. This Agreement shall be governed by, and construed and enforced in accordance with, the laws and regulations of the State of New York, as well as United States federal law and regulations, without giving effect to any conflicts of laws principles. Any legal suit, action or proceeding arising out of or related to this Agreement or the licenses granted hereunder shall be instituted exclusively in the federal courts of the United States or the courts of the State of New York, in each case located in the State of New York, and each Party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding, and irrevocably waives any objection based on inconvenient forum or lack of personal jurisdiction. Service of process, summons, notice or other document by mail to such Party’s address set forth herein shall be effective service of process for any suit, action or other proceeding brought in any such court.

 

19


  12.2

Equitable Relief. The Parties agree that irreparable damage may occur which may not be adequately compensated by monetary damages alone if Section 9 of this Agreement is breached. It is accordingly agreed that the Parties shall be entitled to seek equitable relief (including an injunction or specific performance) to enforce a Party’s rights under Section 9 in addition to any other remedy to which a Party is entitled at law.

 

  12.3

Entire Agreement; Modification. This Agreement, including its appendices and exhibits, which are hereby incorporated by reference, is both a final expression of the Parties’ agreement and a complete and exclusive statement with respect to all of its terms. In the event of any inconsistency between the terms of the body of this Agreement and the terms of any appendices or exhibits, the body of this Agreement shall control. This Agreement supersedes all prior and contemporaneous agreements and communications between the Parties, whether oral, written or otherwise, concerning the subject matter contained herein. No rights or licenses with respect to any intellectual property of either Party are granted or deemed granted hereunder or in connection herewith, other than those rights expressly granted in this Agreement. This Agreement may only be modified or supplemented in a writing expressly stated for such purpose and signed by the Parties to this Agreement.

 

  12.4

Relationship of the Parties. The Parties’ relationship, as established by this Agreement, is solely that of independent contractors. This Agreement does not create any partnership, joint venture or similar business relationship between the Parties. Neither Party is a legal representative or agent of the other Party, and neither Party can assume or create any obligation, representation, warranty or guarantee, express or implied, on behalf of the other Party for any purpose whatsoever.

 

  12.5

Non-Waiver. The failure of a Party to insist upon strict performance of any provision of this Agreement or to exercise any right arising out of this Agreement shall neither impair that provision or right nor constitute a waiver of that provision or right, in whole or in part, in that instance or in any other instance. Any waiver by a Party of a particular provision or right to be effective must be in writing signed by such Party, and shall be limited to the specified matter and, if applicable, the specified period of time in such writing.

 

  12.6

Assignment.

 

  (a)

Except as expressly provided hereunder, neither this Agreement nor any rights or obligations hereunder may be assigned or otherwise transferred by LICENSEE without the prior written consent of ATX (which consent shall not be unreasonably withheld).

 

  (b)

LICENSEE may assign this Agreement and any of its rights and obligations hereunder to an Affiliate, or an acquirer of all or substantially all of its therapeutic business, provided that prompt notice of such assignment is given to ATX (as a condition of the assignment being binding on ATX) and that LICENSEE or the relevant successor-in-interest shall remain liable to

 

20


  ATX for the complete and timely performance by its assignee of the obligations so assigned.

 

  (c)

ATX may assign this Agreement to any successor owner of the ATX Technology and may assign or grant a security interest in any payments (and related rights to receive reports or other notices) to any reputable financial institution or funding source.

 

  (d)

The rights and obligations of the Parties under this Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the Parties. Any assignment not in accordance with this Agreement shall be void.

 

  12.7

No Third Party Beneficiaries. This Agreement is neither expressly nor impliedly made for the benefit of any Third Party other than those Parties executing it.

 

  12.8

Severability. If, for any reason, any part of this Agreement is adjudicated invalid, unenforceable or illegal by a court of competent jurisdiction, all other portions shall remain in full force and effect, and the Parties shall use their reasonable efforts to substitute for the invalid, unenforceable or illegal provision a valid, enforceable and legal provision which conforms as nearly as possible with the original intent of the Parties.

 

  12.9

Notices. All notices, requests, permissions, waivers and other communications hereunder shall be in writing and shall be deemed to have been duly given or delivered (a) when sent, if sent by electronic mail, provided the electronic mail receipt is promptly confirmed by telephone or electronic mail, (b) when delivered, if delivered personally to the intended recipient and (c) [***] days following sending by overnight delivery via a reputable international courier service that maintains record of receipt and, in each case, addressed to a Party at the following address for such Party.

If to ATX:

Alloy Therapeutics, LLC c/o Ulysses Diversified Holdings

44 South Main Street, 2nd Floor

Hanover, NH 03755

Attention: [***]

Email: [***]

with copy to (which shall not constitute notice):

Attention: [***]

Email: [***]

If to LICENSEE:

Prometheus Biosciences, Inc.

9410 Carroll Park Drive

 

21


San Diego, CA 92121

Attention: [***] VP, Development

Email: [***]

with a copy to (which shall not constitute notice):

9410 Carroll Park Drive

San Diego, CA 92121

Attention: [***]

Email: [***]

 

  12.10

Force Majeure. Each Party shall be excused from liability for the failure or delay in performance of any obligation under this Agreement by reason of any event beyond such Party’s reasonable control, including but not limited to Acts of God, fire, flood, explosion, earthquake, or other natural forces, war, terrorism, civil unrest, accident, destruction or other casualty, any lack or failure of transportation facilities, any lack or failure of supply of raw materials, any strike or labor disturbance, or any other event similar to those enumerated above. Such excuse from liability shall be effective only to the extent and duration of the event(s) causing the failure or delay in performance and provided that the Party has not caused such event(s) to occur and continues to use diligent, good faith efforts to avoid the effects of such event and to perform the obligation. Notice of a Party’s failure or delay in performance due to force majeure must be given to the other Party within [***] days after its occurrence. All delivery dates under this Agreement that have been affected by force majeure shall be tolled for the duration of such force majeure. The Party failing or delaying in performance of any obligation under this Agreement by reason of such force majeure event shall use reasonable effort to recover from such force majeure event to perform its obligations, provided that in no event shall any Party be required to prevent or settle any labor disturbance or dispute. Notwithstanding the foregoing, should the event(s) of force majeure suffered by a Party extend beyond a [***]-month period, the other Party may then terminate this Agreement by written notice to the non-performing Party, with the consequences of such termination as set forth in Section 10.6.

 

  12.11

Headings; Interpretation. The heading references herein and the table of contents hereto are for convenience purposes only, do not constitute a part of such agreements and shall not be deemed to limit or affect any of the provisions hereof or thereof. Unless otherwise specified, the words “herein” and similar terms shall be considered as pertaining to the agreement in which they appear in its entirety and not only to an isolated portion thereof.

 

  12.12

Counterparts. This Agreement may be executed (including by use of industry standard signature software, such as DocuSign®) and sent by email in PDF format and in one or more counterparts, each of which shall be deemed an original, and together shall constitute one and the same agreement and shall become effective when one or more counterparts have been signed by each of the Parties and delivered to the other Party, it being understood that both Parties need not sign the same counterpart.

[SIGNATURE PAGE FOLLOWS]

 

22


IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the Effective Date.

 

ALLOY THERAPEUTICS, LLC
By:   /s/ Errik Anderson
Name:   Errik Anderson
Title:   CEO
LICENSEE
By:   /s/ Christopher Slavinsky
Name:   Christopher Slavinsky
Title:   General Counsel & Head of BD

 

[SIGNATURE PAGE TO ATX/LICENSEE LICENSE AGREEMENT]


ATX LICENSE AGREEMENT

EXHIBIT A

[***]

 

[***]


ATX LICENSE AGREEMENT

EXHIBIT B

[***]


ATX LICENSE AGREEMENT

EXHIBIT C

[***]


ATX LICENSE AGREEMENT

EXHIBIT D

[***]

EX-10.17 21 d14529dex1017.htm EX-10.17 EX-10.17

Exhibit 10.17

[***] Certain information in this document has been excluded pursuant to Regulation S-K,

Item 601(b)(10). Such excluded information is not material and would likely cause

competitive harm to the registrant if publicly disclosed.

CO-DEVELOPMENT AND MANUFACTURING AGREEMENT

by and between

PROMETHEUS BIOSCIENCES, INC.

and

DR. FALK PHARMA GMBH


CO-DEVELOPMENT AND MANUFACTURING AGREEMENT

This CO-DEVELOPMENT AND MANUFACTURING AGREEMENT (this “Agreement”) is entered into as of July 30, 2020 (the “Effective Date”) by and between

PROMETHEUS BIOSCIENCES, INC., a Delaware Corporation (file number 6193517) and having a principle place of business at 9410 Carroll Park Dr., San Diego, CA 92121, U.S. (“Prometheus”), and

DR. FALK PHARMA GMBH a German Corporation registered with the Commercial Register of the Amtsgericht Freiburg under HRB 3266 and having offices at Leinenweberstraße 5, 79108 Freiburg im Breisgau, Germany (“Falk”).

Prometheus and Falk are sometimes referred to individually as a “Party” and collectively as the “Parties.”

RECITALS

WHEREAS, Prometheus has rights to certain technology and intellectual property rights with respect to (i) Antibodies that shall be used as an active pharmaceutical ingredient (API) of a medicinal product and that are manufactured using genetic engineering, and with respect to (ii) their companion diagnostics. In particular, but not limited to, Prometheus has technology and intellectual property rights with respect to PR600, [***]. The [***]([***]) is a ligand of [***] encoded by the gene tumor necrosis factor receptor superfamily 8 (or TNFSF8). [***] is a member of the tumor necrosis factor superfamily and is important in [***]

WHEREAS, Prometheus filed the patent application [***] dated [***], an extract of which is enclosed as Exhibit A, for a patent relating to [***]

WHEREAS, Prometheus entered into the License Agreement (“ATX Agreement”) dated March 18, 2020 with Alloy Therapeutics, LLC (hereinafter referred to as “ATX”) by which ATX granted to Prometheus (i) a worldwide, non-exclusive license under all of ATX’s patent and other intellectual property rights to use the ATX Technology (as defined) solely for antibody discovery, including without limitation, immunizing ATX Mice (as defined), isolating ATX Antibodies (as defined) or cells that produce ATX Antibodies from the ATX Mice, cloning of the ATX Antibodies, modification of the ATX Antibodies to produce Platform Assisted Antibodies (as defined), and in vitro and in vivo characterization of the ATX Antibodies and Platform Assisted Antibodies for internal, non-clinical research purposes; and (ii) with respect to ATX Antibodies and ATX Platform Assisted Antibodies that are selected by Prometheus for inclusion into an ATX Partnered Antibody Program (as defined), ATX granted to Prometheus a worldwide, assignable (solely pursuant to Section 12.6 of the ATX Agreement) license under all of ATX’s patent and other intellectual property rights covering the ATX Technology to make, or have made, use, offer


for sale, sell, import, develop, manufacture and commercialize ATX Partnered Antibodies (as defined) as Products. Prometheus shall have the right to sublicense (through multiple tiers) its rights under Section 2.1(a)(ii), subject to Section 3.4. of the ATX Agreement. A true and correct copy of the ATX Agreement is enclosed as Exhibit B. A copy of the grant of additional rights to Falk by ATX is attached as Exhibit C.

WHEREAS, Prometheus (formerly “Precision IBD, Inc.”) entered into the Exclusive License Agreement (“CSMC Agreement”) dated September 1, 2017 with Cedars-Sinai Medical Center (“CSMC”), a California nonprofit public benefit corporation with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, U.S., by which CSMC granted to Prometheus a worldwide exclusive license, with the right to grant sublicenses (subject to the terms of Section 2.2 of the CSMC Agreement), under the CSMC Patent Rights (as defined) and to the CSMC Technology (as defined) to conduct research and development and to make, have made, use, import, offer for sale, have offered for sale, sell and/or have sold CSMC Products (as defined). A true copy of the CSMC Agreement is enclosed as Exhibit D. A copy of the grant of additional rights to Falk by CSMC and the CSMC Inventors (as defined) is attached as Exhibit E.

WHEREAS, PR600 is developed by Prometheus and is [***] according to the Outline Development Plan attached as Exhibit F.

WHEREAS, Prometheus possesses resources and expertise in the development and manufacturing of Antibodies and companion diagnostics, and Falk possesses general resources and expertise in the development and commercialization of medicinal products for human use, in particular, in the field of gastroenterology and hepatology.

WHEREAS, according to Article 3(1) and No 1 of Annex 1 of the Regulation (EC) No 726/2004 of the European Parliament and of the Council of 31 March 2004 laying down Union procedures for the authorisation and supervision of medicinal products for human and veterinary use and establishing a European Medicines Agency no medicinal product developed by means of the biotechnological processes recombinant DNA technology, controlled expression of genes coding for biologically active proteins in prokaryotes and eukaryotes including transformed mammalian cells, or hybridoma and monoclonal antibody methods may be placed on the market within the European Union unless a marketing authorisation has been granted by the European Union in accordance with the provisions of the Regulation (EC) No 726/2004.

WHEREAS, Prometheus desires to co-develop with Falk, and Falk desires to co-develop with Prometheus, the Prometheus Technology (as defined below) according to this Agreement for the consideration and on the terms set forth in this Agreement.

NOW, THEREFORE, in consideration of the foregoing premises and the mutual promises, covenants and conditions contained in this Agreement, the Parties hereby agree as follows:

ARTICLE 1

DEFINITIONS

Affiliate” means, with respect to either Party, any person, firm, trust, corporation, partnership or other entity or combination thereof that directly or indirectly controls, is controlled by or is under common control with such Party; the term “control” (including, with correlative


meaning, the terms “controlled by” or “under common control with”) meaning direct or indirect ownership of fifty percent (50%) or more, including ownership by one or more trusts with substantially the same beneficial interests, of the voting and equity rights of such person, firm, trust, corporation, partnership or other entity or combination thereof, or the power to direct the management of such person, firm, trust, corporation, partnership or other entity or combination thereof.

Alloy Payments” has the meaning set forth in Article 8.3.

Antibody” means an immunoglobulin molecule capable of specific binding to a biological target, such as a polypeptide, carbohydrate, polynucleotide, lipid, etc., through at least one antigen recognition site, located in the variable region of the immunoglobulin molecule. The term “Antibody” encompasses not only full-length immunoglobulin molecules, but also any antigen-binding fragments thereof, fusion proteins comprising an antibody or antigen-binding fragment thereof, and any other modified configuration of the antibody or antigen-binding fragment thereof comprising an antigen recognition site.

API” means active pharmaceutical ingredient.

ATX” means Alloy Therapeutics, LLC, a Delaware limited liability company with offices located at 44 South Main Street, 2nd Floor, Hanover, NH 03755, U.S., a wholly owned subsidiary of Alloy Therapeutics, Inc., a Delaware corporation with offices located at 44 Hartwell Avenue, Lexington, MA 02421, U.S.

ATX Agreement” means the License Agreement dated March 18, 2020 entered into by and between Prometheus and Alloy Therapeutics, LLC, a Delaware limited liability company with offices located at 44 South Main Street, 2nd Floor, Hanover, NH 03755, U.S., a wholly owned subsidiary of Alloy Therapeutics, Inc., a Delaware corporation with offices located at 44 Hartwell Avenue, Lexington, MA 02421, U.S.

ATX Antibody” means any Antibody isolated by or on behalf of Prometheus from the ATX Mice using the ATX Technology pursuant to the ATX Agreement.

ATX Know-How” means the Know-How listed on Exhibit A, attached to the ATX Agreement.

ATX Mouse” means a genetically modified humanized mouse provided by ATX to Prometheus under the ATX Agreement, as further described in Exhibit B attached to the ATX Agreement.

ATX Partnered Antibody” means ATX Antibodies and ATX Platform Assisted Antibodies selected by Prometheus according to Section 3.1 of the ATX Agreement.

ATX Partnered Antibody Program” means the set of ATX Partnered Antibodies, subject to the limitations set forth in Section 10.1 and Exhibit C of the ATX Agreement.

ATX Platform” means the ATX Know-How and the ATX Mice.


ATX Platform Assisted Antibodies” means any Antibody discovered, invented, developed, enhanced, adapted, derived, modified, or improved from an ATX Antibody and any optimized form thereof (including, but not limited to, optimization through affinity maturation or sequence optimization).

ATX Technology” means the ATX Platform and the ATX Platform Improvements.

Breaching Party” has the meaning set forth in Article 11.3(a).

Business Day” means any day other than a day on which the commercial banks in New York, New York and in Stuttgart, Germany are authorized or required to be closed.

Calendar Quarter” means each successive period of three (3) calendar months commencing on January 1, April 1, July 1 and October 1, except that the first Calendar Quarter of the Term commences on the Effective Date and ends on the day immediately before the first to occur of January 1, April 1, July 1 or October 1 after the Effective Date, and the last Calendar Quarter ends on the last day of the Term.

Calendar Year” means each successive period of twelve (12) calendar months commencing on January 1 and ending on December 31, except that the first Calendar Year of the Term commences on the Effective Date and ends on December 31 of the year in which the Effective Date occurs and the last Calendar Year of the Term commences on January 1 of the year in which the Term ends and ends on the last day of the Term.

[***]

CSMC” means Cedars-Sinai Medical Center, a California nonprofit public benefit corporation with offices at 8700 Beverly Boulevard, Los Angeles, California 90048-1865, U.S.

CSMC Agreement” means the Exclusive License Agreement dated September 1, 2017 entered into by and between Prometheus and CSMC.

CSMC Inventors” means Janine Bilsborough, Ph.D., Dermot McGovern, M.D., Ph.D., and Stephan R. Targan, M.D.

CSMC MIRIAD Biobank” means CSMC’s Mucosal Immunology Repository for Inflammatory and Digestive Diseases, a specialized biobank for advancing research in inflammatory diseases, which includes a biorepository collection of samples obtained from research subjects, which samples it uses, among other things, in the research and development of diagnostic and therapeutic products for the treatment of inflammatory diseases, and in the development of a database of information, including without limitation, information relating to target identification and validation, patient stratification, and prediction of clinical efficacy.

CSMC Patent Rights” means (a) the patents and/or patent applications which are described on Schedule A of the CSMC Agreement, (b) any patents and/or patent applications which claim or cover any CSMC Related Invention(s), and (c) all patents and/or patent applications


(including provisional patent applications) in any other country corresponding to any of the foregoing, and all divisions, continuations, continuations-in-part, reissues, reexaminations, supplementary protection certificates and extensions thereof, whether domestic or foreign, all claims of continuations-in-part that are entitled to the benefit of the priority date of any of the foregoing, and any patent that issues thereon.

CSMC Product” or “CSMC Products” mean any Diagnostic Product or Therapeutic Product as defined in the CSMC Agreement (i.e. – as a short and non-binding description—products that, inter alia, relate to a claim of the CMS Patent Rights or to the CMS Technology and are marketed, indicated, approved and/or used for diagnostic or prognostic purposes or for therapeutic, prophylactic or preventative purposes).

CSMC Related Inventions” mean any and all Inventions which (i) result from the services performed under the following agreements: (a) the Consulting Agreement between Prometheus and [***]; (b) the Consulting Agreement between Prometheus and [***]; (c) the Consulting Agreement between Prometheus and [***]; (d) the Master Collaborative Research Agreement between CSMC and Prometheus, effective as of September 1, 2017 (the “MCRA”); and/or (e) the Master Research Services Agreement between CSMC and Prometheus, effective as of September 1, 2017 (the “MRSA”), as each may be amended; (ii) would have been reasonably anticipated at the outset to be developed; (iii) are related to the CSMC Technology and/or patents and/or patent applications described on Schedule A of the CSMC Agreement; and (iv) with respect to which CSMC owns or otherwise controls intellectual property rights.

CSMC Technology” means information and materials that (a) are included in and relate to the MIRIAD Biobank, (b) result from CSMC’s analysis of the MIRIAD Biobank, including any associated proprietary algorithms, or (c) identify single nucleotide polymorphisms, serological markers or any combination thereof and/or targets obtained through such analysis, which information and materials are provided by CSMC to Prometheus under the CSMC Agreement. “CSMC Technology” shall further include any additional information and materials developed by any of the CSMC Inventors in the conduct of their research in connection with CSMC’s Inflammatory Bowel Disease Drug Discovery and Development Unit or that is incorporated in any Related Invention, including, but not limited to, know-how, trade secrets, unpublished patent applications, clinical or research data, software, bioinformatics, unpatented technology, technical information, statistical information and analyses, biological materials, chemical reagents, preclinical and clinical information, which information and materials are provided by CSMC to Prometheus under the CSMC Agreement or any of the Agreements described in Section 1.15(d) or 1.15(e) of the CSMC Agreement. With the exception of the information and materials that are included in and relate to the CSMC MIRIAD Biobank, for purposes of the definition of “CSMC Product,” “CSMC Technology” shall not include any information or materials developed after the September 1, 2017 that, at the time of disclosure to Prometheus, has already been first disclosed or made available to a third party, including, for example, any commercially available assays.

Claims” has the meaning set forth in Article 8.1.

CMC Information” means information related to the chemistry, manufacturing and controls of Product, as specified by the FDA, EMA and other applicable Regulatory Authorities.


Commercialization”, with a correlative meaning for “Commercialize” and “Commercializing”, means all activities undertaken after obtaining Regulatory Approvals relating specifically to the pre-launch, launch, promotion, detailing, medical education and medical liaison activities, marketing, pricing, reimbursement, sale and distribution of Product, including strategic marketing, sales force detailing, advertising, medical education and liaison, and market and Product support, and all customer support, Product distribution, invoicing and sales activities; provided, however, “Commercialization” excludes any activities relating to the Development or manufacture of Product.

Commercially Reasonable Efforts” means, with respect to a Party’s obligations under this Agreement, the carrying out of such obligations with a level of efforts and resources consistent with the commercially reasonable practices of a similarly-sized company with a similarly-sized infrastructure to support and carry out operations in the pharmaceutical, biotechnology or diagnostic industry (as applicable) for the development or commercialization of a similarly-situated product as the Product at a similar stage of development or commercialization, taking into account efficacy, safety, patent and regulatory exclusivity, anticipated or approved labeling, present and future market potential, competitive market conditions, the profitability of the Product in light of pricing and reimbursement issues, including rebates under risk sharing schemes, and all other relevant factors; provided, “Commercially Reasonable Efforts” shall require that the Party: (a) assign responsibility for such obligations or tasks to specific employee(s) who are held accountable for progress and monitor such progress on an on-going basis, (b) set and seek to achieve specific and meaningful objectives for carrying out such obligations, and (c) make and implement decisions and allocate resources designed to advance progress with respect to such objectives.

Confidential Information” means any and all Information, whether in oral, written, graphic, or electronic form, which meets all of the following requirements: (a) it is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; (b) it has commercial value because it is secret; (c) it has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

Control” means, with respect to any material, Information, or Intellectual Property, that a Party (a) owns or (b) has a license (other than a license granted to such Party under this Agreement) to such material, Information, or Intellectual Property, and in each case, has the ability to grant to the other Party access, a license or a sublicense (as applicable) to the foregoing on the terms and conditions set forth in this Agreement without violating the terms of any then-existing agreement or other arrangement with any Third Party.

Copyrights” means all copyrights, whether registered or unregistered, in published and unpublished works of authorship, all registrations and applications therefore, all moral rights therein, all rights and priorities with respect thereto afforded under the applicable Law of any jurisdiction worldwide, and all renewals, extensions, restorations and reversions thereof.


Cover,” “Covering” or “Covers” means, as to a Product and Patent, that, in the absence of a license granted under, or ownership of, such Patent, the making, using, keeping, selling, offering for sale or importation of such Product would infringe such Patent or, as to a pending claim included in such Patent, the making, using, keeping, selling, offering for sale or importation of such Product would infringe such Patent if such pending claim were to issue in an issued patent without modification.

Crohn’s Disease Indication” means the gastroenterological condition known as Crohn’s Disease that can be diagnosed or treated.

Default Notice” has the meaning set forth in Article 11.3(a).

Develop” or “Development” means, with respect to a Product, all activities related to research, pharmaceutical, preclinical and other non-clinical testing, test method development and stability testing, toxicology, formulation, process development, clinical studies, including clinical trials, statistical analysis and report writing, the preparation and submission of Regulatory Approval Applications, regulatory affairs with respect to the foregoing and all other activities necessary or reasonably useful or otherwise requested or required by a Regulatory Authority as a condition or in support of obtaining or maintaining a Regulatory Approval for such Product. When used as a verb, “Develop” means to engage in Development.

Development Plan” has the meaning set forth in Article 4.2(a) and (b).

Dollars” or “$” means U.S. dollars.

Effective Date” has the meaning set forth in the preamble.

EMA” means the European Medicines Agency or any successor entity.

European Region” means (i) the United Kingdom of Great Britain and Northern Ireland; (ii) the member states of the European Union as it is constituted as of the Effective Date and thereafter; (iii) Switzerland; and (iv) the countries of the European Economic Area excluding Malta and the Republic of Cyprus.

Executive Officers” has the meaning set forth in Article 3.1(d).

Falk” has the meaning set forth in the preamble.

Falk Indemnitees” has the meaning set forth in Article 9.1.

Falk Know-How” means all Confidential Information that is Developed by Falk or its Affiliates under this Agreement and controlled by Falk or any of its Affiliates and that is necessary or useful for the Development, manufacture or Commercialization of a Licensed Compound or Product.

Falk Net Sales” means, Net Sales resulting from sales of Products by Falk or Affiliates of Falk to Third Parties; for the avoidance of doubt: Third Parties receiving sales of Products by Falk or Affiliates may be the holders of the marketing authorization for such Products (without being granted a sublicense to manufacture) or may not be the holders of the marketing authorization for such Product.


Falk Technology” means any Know-How and any Intellectual Property that is Developed under this Agreement and Controlled by Falk or any of its Affiliates and that is necessary or useful to Develop, manufacture, or Commercialize a Licensed Compound or Product.

Falk Territory” means the European Region, Australia and New Zealand

FD&C Act” means the U. S. Federal Food, Drug, and Cosmetic Act, as amended.

FDA” means the U. S. Food and Drug Administration or any successor entity.

Field” means the use of a Product or Licensed Compound in the palliation or prevention, treatment, or diagnostic use for human diseases, disorders, and conditions.

Firm Order” means an order as defined in Article 7.7.

First Commercial Sale” means, with respect to any Product and country, the first sale of such Product in a country by Falk, its Affiliates or their respective designees to any Third Party, in the Falk Territory, after such Product has been granted Regulatory Approval as required for Commercialization by the competent Regulatory Authorities in such country.

Good Clinical Practices” or “GCP” means the then-current standards, practices and procedures promulgated or endorsed by the FDA as set forth in the guidelines entitled “Guidance for ICH E6 Good Clinical Practice: Consolidated Guidance,” including related regulatory requirements imposed by the FDA and comparable regulatory standards, practices and procedures promulgated by the EMA or other Regulatory Authority applicable to the Territory as such standards, practices and procedures may be updated from time to time.

Good Laboratory Practices” or “GLP” means the then-current good laboratory practice standards promulgated or endorsed by the FDA as defined in 21 C. F. R. Part 58, and comparable regulatory standards promulgated by the EMA or other Regulatory Authority applicable to the Territory, as such standards may be updated from time to time.

Good Manufacturing Practices” or “GMP” means the then-current good manufacturing practice standards promulgated or endorsed by FDA as set forth in the United States Code of Federal Regulations, Title 21, Parts 210, 211, 601, 610 and 820, applicable ICH guidelines regarding good manufacturing practice, including but not limited to, ICH Q7, and comparable regulatory standards promulgated by the EMA or other Regulatory Authority applicable to the Territory, as such standards may be updated from time to time.

Governmental Authority” means any multi-national, federal, state, local, municipal, provincial or other governmental authority of any nature (including any governmental division, prefecture, subdivision, department, agency, bureau, branch, office, commission, council, court or other tribunal).

Indemnified Party” has the meaning set forth in Article 9.3.

Indemnifying Party” has the meaning set forth in Article 9.3.


Indication” means any disease or condition arising in the Field that can be diagnosed or treated.

Information” means any data, results, technology, business or financial information or information of any type whatsoever, in any tangible or intangible form, including Know-How, trade secrets, practices, techniques, methods, processes, inventions, developments, specifications, formulations, formulae, materials or compositions of matter of any type or kind (patentable or otherwise), software, algorithms, marketing reports, expertise, technology, test data (including pharmacological, biological, chemical, biochemical, preclinical test data, clinical test data and data resulting from non-interventional studies), CMC Information, stability data and other study data and procedures.

Intellectual Property” means: (i) all Inventions, Patents, copyrights, Trademarks, Trade Secrets, Know-How, and all other intellectual property and proprietary rights and goodwill associated with the foregoing; (ii) data, databases, results, algorithms, inventions, processes, designs, devices, formulas and techniques and all intellectual property and proprietary rights and goodwill associated with the foregoing; (iii) computer software (including source code, object code, firmware, operating systems and specifications) and all intellectual property and proprietary rights and goodwill associated with it; (iv) copies and tangible embodiments of any of the foregoing, in whatever form or medium. For the avoidance of doubt, all property and proprietary rights and goodwill shall also include all rights to sue for past, present and future infringement, misappropriation, dilution, misuse or other violation of any of the foregoing, including for injury to goodwill, and to recover all proceeds relating to any of the foregoing, including licenses, royalties, income, payments, claims, damages (including attorneys’ payments and expert payments) and proceeds of suit under the laws of any jurisdiction worldwide.

Inventions” means any or all ideas, results, improvements, discoveries, inventions, materials, processes, formulas, know-how or other innovations whether or not patentable.

JSC” has the meaning set forth in Article 3.1(a).

Key Country” means France, Germany, Italy, Japan, Spain, United Kingdom of Great Britain and Northern Ireland, or the U.S.

Knowledge” means, with respect to a Party, (i) the actual knowledge of the Executive Officers of such Party, or (ii) the knowledge that any of such individuals reasonably should have gained through operating in the ordinary course of business with a level of efforts and resources consistent with the business practices of a similarly-sized company with a similarly-sized infrastructure to support and carry out its operations.

Know-How” means all Confidential Information that (a) is necessary or useful for the Development, manufacture or Commercialization of the Licensed Compound or a Product in the Field and (b) (i) with respect to Prometheus is Controlled by Prometheus or its Affiliates of the Effective Date or during the Term or (ii) with respect to Falk is Developed and Controlled by Falk or its Affiliates during the Term under this Agreement.


Law” or “Laws” means all applicable laws, statutes, rules, regulations, ordinances, guidance documents and other pronouncements having the effect of law or any “soft laws” issued by any federal, national, multinational, state, provincial, county, city or other political or similar subdivision, domestic or foreign such as a guidance or advisory statement for industry issued by a Regulatory Authority without the effect of law. For the avoidance of doubt, GCP, GLP, GMP and other guidance of Regulatory Authorities and harmonization bodies such as the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH) shall be deemed as Law or Laws under this Agreement.

Licensed Compound” means [***], the PR600 compound.

Marketing Authorization Application” or “MAA” means an application to the appropriate Regulatory Authority for approval to Commercialize a Product (but excluding Pricing Approval) in any particular jurisdiction and all amendments and supplements thereto.

Net Sales” means, with respect to a Product, the total amount billed or invoiced on sales of such Product during such period, less the following normal and customary bona-fide deductions and allowances actually taken:

(i) [***]

(ii) [***]

(iii) [***]

(iv) [***]

(v) [***]

(vi) [***]

(vii) [***]

Non-Breaching Party” has the meaning set forth in Article 11.3(a).

Non-Conforming Products” has the meaning set forth in Article 7.10.


Non-Governmental Authority” means (i) any public body (including, but not limited to, the National Institute of Clinical Excellence and the Scottish Medicines Consortium in the U. K.; the Institute for Quality and Efficiency in Healthcare in Germany; the Technical Scientific Commission in Italy; the Directorate of Pharmacy and Healthcare Products in Spain; and the National Union of Health Insurance Funds and the National Authority of Health in France), or (ii) any non-Governmental Authority (including “Sick Funds” in Germany) with the authority to control, approve, recommend or otherwise determine pricing and reimbursement of biologic and diagnostic products, including those with authority to enter into risk-sharing schemes or to impose retroactive price reductions, discounts, or rebates, or (iii) ethics committees as independent bodies established in accordance with a law in the Territory and empowered to give opinions for the conduct of clinical trials or other studies taking into account the views of laypersons, in particular patients or patients´ organizations.

Outline Development Plan” shall mean the development plan attached as Exhibit F.

Out-of-Pocket-Costs” shall mean all amounts to be paid by a Party to Third Parties in connection with the Development of a Product or Products. “Out-of-Pocket Costs” shall include, by way of illustration, payments to Third Parties such as contract research organizations, manufacturers, including contract manufacturing organizations, investigators, study staff, individuals participating in the trial, and insurance companies.

Party” or “Parties” has the meaning set forth in the preamble.

Patents” means (a) pending patent applications, issued patents, utility models and designs; (b) reissues, substitutions, confirmations, registrations, validations, re-examinations, additions, continuations, continued prosecution applications, continuations-in-part, or divisions of or to any of the foregoing; (c) any other patent application claiming priority to any of the foregoing anywhere in the world; and (d) extension, renewal or restoration of any of the foregoing by existing or future extension, renewal or restoration mechanisms, including supplementary protection certificates or the equivalent thereof.

PR600” means [***]. According to the information provided by Prometheus, PR600 [***].

Product” or “Products” means a product or a class of products (i) serving as a therapeutic monoclonal Antibody in the Field in connection with the Licensed Compound and currently classified as a medicinal product, and (ii) its companion diagnostics currently classified as a medical device. For the avoidance of doubt, Products shall also include Products as investigational medicinal products or investigational medical devices and clinical supplies.

Program” means the Development of the Licensed Compound and Products and the Prometheus Technology to manufacture the Licensed Compound or Products.

Prometheus” has the meaning set forth in the preamble.

Prometheus Indemnitees” has the meaning set forth in Article 9.2.


Prometheus Know-How” means all Confidential Information Controlled by Prometheus or any of its Affiliates as of the Effective Date or during the Term that is necessary or useful for the Development, manufacture or Commercialization of the Licensed Compound or a Product.

Prometheus Net Income” means the gross amounts, received by Prometheus or its Affiliates as licence fees, licence option payments, sublicense fees, royalties, upfront and/or milestone payments (in particular but not limited to in cases of the grant of a combined license to manufacture and to Commercialize) and other financial inflow including premiums on investments (unless such premiums are proportionate) and any other kinds of revenue whatsoever received by Prometheus or its Affiliates in respect of the grant of licenses regarding the Prometheus Technology or the Falk Technology other than Net Sales.

Prometheus Net Sales” means Net Sales resulting from sales of Products by Prometheus or Affiliates of Prometheus to Third Parties; for the avoidance of doubt: Third Parties receiving sales of Products by Prometheus or Affiliates may be the holders of the marketing authorization for such Products (without being granted a sublicense to manufacture) or may not be the holders of the marketing authorization for such Product.

Prometheus Technology” means any Know-How and any Intellectual Property Controlled by Prometheus or any of its Affiliates as of the Effective Date or during the Term that is, in each case, necessary or useful to Develop, manufacture, or Commercialize the Licensed Compound or a Product.

Prometheus Territory” means the Territory excluding the Falk Territory.

Publication” has the meaning set forth in Article 11.3.

Quality Agreement” means the quality agreement as defined in Article 7.1.

Regulatory Approval” means, with respect to a Product in a country in the Territory, any and all approvals (including biologic license applications) licenses, permits, registrations or authorizations of and notifications to any Regulatory Authority necessary to test or otherwise Develop, to produce or otherwise manufacture, to commercially distribute, sell, market or otherwise Commercialize, and/or to otherwise use, as applicable, such Product in such country, including, where applicable, (a) pricing or reimbursement approval in such country, (b) pre-and post-approval marketing authorizations (including any prerequisite manufacturing approval or authorization related thereto), (c) labeling approval, and (d) approvals for clinical trials.

Regulatory Authority” means, in a particular country or jurisdiction, any applicable Governmental Authority or Non-Governmental Authority involved in granting Regulatory Approval in such country or jurisdiction.

Regulatory Exclusivity” means with respect to a Product in a country in the Falk Territory, the period of time during which: (a) Falk has been granted the exclusive legal right by a Regulatory Authority (or is otherwise entitled to the exclusive legal right by operation of applicable Law) in such country to market and sell the Product; or (b) the data and information submitted by Falk to the relevant Regulatory Authority in such country for purposes of obtaining Regulatory Approval may not be disclosed, referenced or relied upon in any way by a Third Party


or such Regulatory Authority to support the Regulatory Approval or marketing of any product by a Third Party in such country, or if such data and information is disclosed, referenced or relied upon to support a Regulatory Approval granted to a Third Party in such country, the product may not be placed on the market for any Indication.

Regulatory Materials” means regulatory applications, dossiers, submissions, notifications, communications, correspondence, registrations, Regulatory Approvals or other filings made to, received from or otherwise conducted or exchanged with a Regulatory Authority to Develop, manufacture, Commercialize or otherwise use a Product in a particular country or jurisdiction.

Royalty Term” means, with respect to a Product in a country within the Territory, and on a country-by-country basis, the period commencing on the date on which the first royalty payment is made by a Party in such country and ending upon the later of: (a) the expiration of the last Valid Claim of any patent of the Prometheus Technology or Falk Technology that Covers such Product in such country; (b) ten (10) years after the First Commercial Sale of such Product in such country; or (c) expiration of Regulatory Exclusivity, in such country arising from the first Regulatory Approval granted for such Product.

Technology” means (a) collectively, Know-How and Intellectual Property and, in particular but not limited to, inventions, discoveries, improvements, trade secrets and proprietary methods, whether or not patentable, including methods of manufacture or use of, and structural and functional information relating to the Licensed Compound or Products and which is (b) (i) with respect to Prometheus Controlled by Prometheus or its Affiliates of the Effective Date or during the Term in particular but not limited to under this Agreement or under the Program or (ii) with respect to Falk is Developed and Controlled by Falk or its Affiliates during the Term under this Agreement.

Term” has the meaning set forth in Article 11.1(b).

Territory” means the entire world.

Third Party” means any entity other than Prometheus or Falk or an Affiliate of either of them.

Third Party Claim” has the meaning set forth in Article 6.5.

Trade Secrets” means trade secrets, proprietary confidential business, financial, economic, scientific, engineering and technical information or Know-How, and any other proprietary confidential information meeting the definition of a trade secret under the U. S. Uniform Trade Secrets Act or the Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure.

Trademarks” means, collectively, trademarks, service marks, trade dress, logos, brand names, trade names, corporate names and Internet domain names (in each case, whether or not registered), including all variations, derivations, combinations, applications, registrations, and renewals therefore, and all rights and priorities with respect thereto afforded under the applicable Law of any jurisdiction worldwide, together with all goodwill associated therewith.


UC Indication” means the gastroenterological condition known as ulcerative colitis that can be diagnosed or treated.

U.S.” means the United States of America, including all possessions and territories thereof.

Valid Claim” means, in respect of any Patent filed in any jurisdiction within the Falk Territory, a claim (a) of any issued, unexpired Patent, which has not, in the country of issuance, been donated to the public, disclaimed, held invalid or unenforceable by a court of competent jurisdiction in an unappealed or unappealable decision, or (b) of any patent application, which has not, in the country in question, been cancelled, withdrawn, or abandoned.

ARTICLE 2

LICENSES

2.1 License Grant by Prometheus to Falk. Prometheus hereby grants to Falk the following licenses related to the Licensed Compound and Products:

(a) Commercialization: an exclusive, royalty bearing license, including the right to sublicense (such right subject to prior notice to Prometheus), to any Prometheus Technology and Falk Technology, in each case solely for the Commercialization of the Licensed Compound or Products in the Field in the Falk Territory; the Commercialization shall be performed according to Falk´s reasonable discretion;

(b) Development: a co-exclusive (co-exclusive together with Prometheus) license, including the right to sublicense, to any Prometheus Technology and Falk Technology, in each case solely for the Development of the Licensed Compound or Products in the Field in the Falk Territory;

(c) Manufacturing: a non-exclusive license including, the right to sublicense, to any Prometheus Technology and Falk Technology, in each case solely for the manufacture and import of the Licensed Compound or Products.

2.2 License Grant by Falk to Prometheus. Falk hereby grants to Prometheus the following licenses related to the Licensed Compound and Products:(a) Commercialization: an exclusive, royalty bearing license, including the right to sublicense (such right subject to prior notice to Falk), to any Prometheus Technology and Falk Technology, in each case solely for the Commercialization of the Licensed Compound or Products in the Field in the Prometheus Territory; the Commercialization shall be performed according to Prometheus´ reasonable discretion;

(b) Development: a co-exclusive (co-exclusive together with Falk) license, including the right to sublicense to any Prometheus Technology and Falk Technology, in each case solely for the Development of the Licensed Compound or Products in the Field in the Prometheus Territory;


(c) Manufacturing: a non-exclusive license including the right to sublicense to any Prometheus Technology and Falk Technology, in each case for the manufacture and import of the Licensed Compound or Products.

2.3 Negative Covenant. The Parties shall not, and will not permit any of their Affiliates or any Third Party to, use or practice any of their Intellectual Property or any Intellectual Property of the other Party contrary to, or beyond, the scope of the licenses granted to it under Article 2.1 or 2.2, respectively.

2.4 No Implied Licenses. Except as explicitly set forth in this Agreement, neither Party may be deemed by estoppel or implication to have granted the other Party any license, covenant or other right to any Intellectual Property of such Party.

ARTICLE 3

JOINT STEERING COMMITTEE

3.1 Formation, Role and Members.

(a) Formation and Role. Within [***] ([***]) days after the Effective Date, the Parties shall establish a joint steering committee (the “JSC”) for the overall coordination and oversight of certain of the Parties’ activities under this Agreement. The role of the JSC is:

(i) to review, discuss, approve, and implement the overall strategy proposed for the joint Development of the Licensed Compound and Products in the Falk Territory, including the Development Plan, and more specifically each of its three phases: pharmaceutical plan; pre-clinical plan; and, the clinical plan;

(ii) to set and review the overall regulatory strategy for and Regulatory Approvals, and other submissions to Regulatory Authorities with respect to the Falk Territory;

(iii) to review, discuss, approve, and implement the overall strategy for the Commercialization of a Product in the Falk Territory;

(iv) to review, discuss, and make arrangements for the manufacturing, import, and distribution of the Licensed Compound and Products, including, the manufacture of clinical supplies, provided that where Prometheus has entered into binding agreements with Third Parties before the Effective Date for the provision of such manufacturing, important and distribution, the JSC, such arrangements shall be exempt from Article 3.3, Decision Making as set forth herein below; and

(v) to perform such other functions as expressly set forth in this Agreement or as mutually determined by the Parties in writing.


The JSC has only the powers expressly assigned to it in this Article 3.1 and elsewhere in this Agreement. The JSC has no power to interpret, amend, modify, or waive compliance with this Agreement. In particular, approvals of the JSC shall not amend, modify, or waive compliance with this Agreement. The JSC members will discharge their responsibilities in good faith and in a timely manner.

(b) Members. Each Party shall initially appoint [***] ([***]) voting representatives to the JSC, each of whom will be an officer or employee of such Party having sufficient seniority within the applicable Party to make decisions arising within the scope of the JSC’s responsibilities. The JSC may change its size from time to time by mutual written consent of the Parties and each Party may replace its representatives at any time upon written notice to the other Party; provided, however, that the JSC will at all times consist of equal numbers of members appointed by each Party. If a JSC representative from either Party is unable to attend or participate in a meeting of the JSC, the Party who designated such representative may designate an appropriately qualified substitute representative for the meeting. The JSC will have a chairperson appointed by Falk. The role of the chairperson is to convene and preside at all meetings of the JSC and to ensure the preparation of meeting minutes, but the chairperson has no additional powers or rights beyond those held by other JSC representatives.

3.2 Meetings. The JSC shall meet at least [***] during the Term in person or by videoconference or teleconference unless the Parties mutually agree in writing to a different frequency for such meetings. Either Party may also call a special meeting of the JSC (by videoconference or teleconference) upon at least [***] ([***]) Business Days’ prior written notice to the other Party if such Party reasonably believes that a significant matter must be addressed before the next regularly scheduled meeting, and such Party shall provide the JSC no later than [***] ([***]) Business Days before the special meeting with materials reasonably adequate to enable an informed decision to be made by its members. Each Party shall pay for its own expenses relating to such meetings. As appropriate, other employee representatives or agents of the Parties may attend JSC meetings as non-voting observers or presenters. The chairperson of the JSC shall prepare reasonably detailed written minutes of all JSC meetings that reflect and include all material decisions made at such meetings. The JSC chairperson shall send draft meeting minutes to each member of the JSC for review and approval within [***] ([***]) Business Days after each JSC meeting. Such minutes will be approved unless [***] members of the JSC objects to the accuracy of such minutes within [***] ([***]) Business Days of receipt.

3.3 Decision Making. Actions to be taken by the JSC will be taken only [***] vote. If the JSC fails to reach [***] on a matter before it for decision for a period in excess of [***] ([***]) Business Days, either Party may submit the matter in writing to the other, and the Parties shall refer such dispute to (i) the CEO of Prometheus and (ii) the Managing Director, Medicine and Pharmaceutics, of Falk (the “Executive Officers”) for resolution in accordance with the decision-making procedures described in Article 12.2. Each Party retains the rights, powers, and discretion granted to it under this Agreement and neither Party shall delegate to or vest any such rights, powers, or discretion in the JSC unless such delegation or vesting of rights is expressly provided for in this Agreement or the Parties expressly so agree in writing. Without limiting the foregoing, the JSC does not have the power to interpret, amend, modify, or waive compliance with this Agreement.


3.4 No Compensation. No compensation shall be paid to any of the members of the JSC in respect of their service as JSC members. Any out-of-pocket expenses incurred by the JSC members in performing the JSC’s duties hereunder shall be the responsibility of the Party appointing such member.

3.5 Conflict of Interest Matters. Both Parties’ representatives’ votes on the JSC pursuant to this Article 3.5 must be consistent with their obligations under Article 3.1(a), and must be exercised reasonably and in good faith.

ARTICLE 4

DEVELOPMENT AND REGULATORY MATTERS

4.1 Overview. The Parties desire and intend to collaborate with respect to the Development of the Licensed Compound and of Products in the Field, as and to the extent set forth in this Agreement and as outlined in the Development Plan.

4.2 Development Plan.

(a) General. The Parties shall use Commercially Reasonable Efforts to jointly Develop Products pursuant to the Outline Development Plan as well as a detailed and comprehensive written global development plan as agreed by the Parties according to Article 4.2(b) (the “Development Plan”) that specifies all joint Development and Development activities for the Licensed Compound and for Products in the Territory as well as the budgets for Out-of-Pocket-Costs relating to such activities (where such budgets shall be described in detail on an annual spend basis). The Development Plan shall comprise the Development of Licensed Products for the diagnosis and treatment in the Crohn’s Disease Indication and in the UC Indication. The Development Plan, including the budget for Out-of-Pocket Costs, shall be subject to the agreement and approval of both Parties via the JSC. The Parties currently estimate the combined Out-of-Pocket-Costs for the Development of Licensed Products for the diagnosis and treatment in the Crohn’s Disease Indication and in the UC Indication at [***] ([***]).

(b) Preparation of the Development Plan. The Development Plan shall be created in phases. Within [***] ([***]) month of the Effective Date, Prometheus shall submit to Falk a draft of the Development Plan relating to the pharmaceutical phase of Development and describing in as much detail as reasonably possible its plan and time frame with respect to the pharmaceutical phase of Development of the Products. Thereafter, depending on the progress of the pharmaceutical phase of Development and as directed by the JSC, Prometheus shall submit to Falk as soon as practicable a draft of the pre-clinical phase of the Development Plan. Depending on the progress of the pre-clinical phase of Development and as directed by the JSC, Prometheus shall submit to Falk a draft of the clinical phase of the Development Plan. The Parties shall agree on each draft of the Development Plan relating to a certain phase of the Development of the Products within [***] ([***]) month of the submission by Prometheus, provided that the draft is suitable for obtaining Regulatory Approvals for a Product or several Products in the Territory and provided that the draft is in accordance with the Outline Development Plan and with the principles of co-Development outlined in Exhibit G. The Parties shall make good faith efforts to agree on a proposed Development Plan and rely upon the decision-making process set forth in Article 3.3,


however, in the event the Parties fail to agree on a proposed draft of the Development Plan after such good faith efforts, Prometheus shall have the final say regarding decisions relevant for Development and regulatory affairs relating to the Prometheus Territory and Falk shall have the final say regarding decisions relevant for Development and regulatory affairs relating to the Falk Territory and such final decisions of the one or the other Party shall form part of, and be incorporated in, the agreed Development Plan. The agreed Development Plan shall be signed by each Party and shall constitute the Development Plan according to Article 4.2(a).

(c) Additional Development. In the event of a need for Development of a Product beyond the scope of the Development Plan as mutually agreed solely in the Falk Territory (“Additional Falk Development”), Falk shall have the right to, and shall be responsible for conducting, such Additional Falk Development and Falk shall bear all costs related to such Additional Falk Development. The general cost sharing principle provided for in Section 4.3 of this Agreement shall not apply to costs incurred by Falk in conducting the Additional Falk Development and as such, Falk shall be the sole owner of any Intellectual Property or Technology relating to, or derived from such Additional Falk Development. In the event of a need for Development of a Product beyond the scope of the Development Plan as mutually agreed solely in the Prometheus Territory (“Additional Prometheus Development”), Prometheus shall have the right to, and shall be responsible for conducting, such Additional Prometheus Development and Prometheus shall bear all costs related to such Additional Prometheus Development. The general cost sharing principle provided for in Section 4.3 of this Agreement shall not apply to costs incurred by Prometheus in conducting the Additional Prometheus Development and as such, Prometheus shall be the sole owner of any Intellectual Property or Technology relating to, or derived from such Additional Prometheus Development. Each Party may request the right to use the results of the other Party’s Additional Development by giving notice to the other Party and sharing the Out-of-Pocket-Costs of the other Party relating to such results in accordance with the general cost sharing principle forest forth in Section 4.3 of this Agreement. In addition, in the event a request of the right to use the results of the Additional Development of the other Party is accepted, all other provisions of this Agreement relating to the co-funding of Out-of-Pocket-Cost (including but not limited to the reporting, invoicing, etc.) and related to Technology Developed and co-funded under this Agreement (including but not limited to the ownership of Intellectual Property Rights) shall apply.

(d) Development Plan Updates. The JSC shall periodically (or at the request of one of the Parties) review the then-current Development Plan, and if the JSC determines an amendment is needed to the then-current Development Plan, the designated member(s) of the JSC shall collaborate to prepare an amendment to the then-current Development Plan, for review, comment and approval by the JSC. Such amended Development Plan will reflect any changes to the Development of a Product in the Field. Once approved by the JSC in writing or by approved meeting minutes, the amended Development Plan becomes effective and supersedes the previous Development Plan as of the date of such approval.

(e) Performance. Each Party shall use Commercially Reasonable Efforts to conduct the Development activities allocated to such Party, if any, in the Development Plan in a timely and effective manner. Each Party shall conduct its activities under the Development Plan in a good scientific manner and comply in all material respects with all applicable Laws.


(f) Resources. Each Party shall commit such resources as necessary to perform their obligation as set forth herein or by the JSC and shall use personnel with such skills and experiences as are designed to accomplish efficiently and expeditiously the objectives of such part of the development of the Licensed Compound and Products as set forth herein or by the JSC and each update thereof. In connection with the performance of its obligations hereunder, each Party shall maintain and utilize such scientific staff, laboratories, offices and other facilities as are reasonably designed for such purposes.

4.3 Co-Funding of Out-of-Pocket-Costs. Each Party shall be responsible for its own and its Affiliates´ costs in connection with its Development activities as provided for in the Development Plan. However, Out-of-Pocket-Costs compliant with budgets agreed in the Development Plan shall be allocated according to the following algorithm: [***] ([***]) of such Out-of-Pocket-Costs to Falk and [***] ([***]) of such Out-of-Pocket- Costs to Prometheus. Each Party shall reimburse the other Party according to this algorithm upon a duly-issued invoice and upon accurate reporting and recording of such Out-of-Pocket-Costs. Reporting of Out-of-Pocket-Costs and invoicing of reimbursements shall be on a continued basis within [***] after a Calendar Quarter relating to such Calendar Quarter. Payments of reimbursements shall be due within [***] ([***]) days after receipt of the receiving Party´s invoice.

4.4 Transfer of Prometheus Know-How and other Prometheus Technology. Subsequent to the agreement on the Development Plan, Prometheus shall transfer all necessary materials and disclose Prometheus Technology including but not limited to the provision with all material data pertaining to the CMC, the safety and the efficacy of the Products in existence that is in Prometheus’s or its Affiliates Control as of the Effective Date to Falk to perform its rights and responsibilities under this Agreement.

4.5 Development Reports. Each Party shall provide the other Party with a written report detailing its Development activities under this Agreement and the results and Out-of-Pocket-Costs of such activities at least [***] ([***]) Business Days in advance of each regularly scheduled JSC meeting in a format as required by Laws or otherwise approved by the JSC. The Parties shall discuss the status, progress and results of each Party’s respective Development activities under this Agreement at such regularly scheduled JSC meetings.

4.6 Development Records. Each Party shall maintain complete, current and accurate records of all Development activities conducted by it hereunder, and all data and other Information and Out-of-Pocket-Costs resulting from such activities in a format as required by Laws or otherwise approved by the JSC. Such records shall fully and properly reflect all work done and results achieved and Out-of-Pocket-Costs occurred in the performance of the Development activities in good scientific manner appropriate for regulatory and patent purposes. Each Party shall document all research, non-clinical studies and clinical trials in formal written study records according to applicable Laws, including applicable national and international guidelines such as GCP and GLP. The Parties may review and copy such records maintained by the other Party at during reasonable business hours, and upon reasonable notice, to obtain access to the original records.


4.7 Compliance with Laws. Each Party shall conduct its activities under this Agreement in a good scientific manner and comply in all material respects with all applicable Laws, including applicable national and international guidelines such as GCP and GLP.

4.8 Regulatory Matters.

(a) Regulatory Matters in the Prometheus Territory. Prometheus shall be responsible for preparing, obtaining, and maintaining Regulatory Approvals and other submissions to Regulatory Authorities in the Prometheus Territory in accordance with the Development Plan or otherwise approved by the JSC. Prometheus shall be responsible for conducting communications with the Regulatory Authorities with respect to Products in the Prometheus Territory, in each case in accordance with the terms of this Agreement and the Development Plan. Falk shall reasonably assist and cooperate with Prometheus in connection with the preparation and filing of such Regulatory Approvals and submissions, as reasonably requested by Prometheus. For the avoidance of doubt, Prometheus shall be responsible and have the final say for all such regulatory matters and activities in the Prometheus Territory.

(b) Regulatory Activities in the Falk Territory. Falk shall be responsible for preparing, obtaining, and maintaining Regulatory Approvals and other submissions to Regulatory Authorities in the Falk Territory in accordance with the Development Plan. Falk shall be responsible for conducting communications with the Regulatory Authorities with respect to Products in the Falk Territory, in each case in accordance with the terms of this Agreement and the Development Plan. Falk shall promptly inform Prometheus of any upcoming meetings with the Regulatory Authorities so that Falk shall provide Prometheus with the opportunity to attend and participate in any such meetings with the Regulatory Authorities. Prometheus shall reasonably assist and cooperate with Falk in connection with the preparation and filing of such Regulatory Approvals and submissions, as reasonably requested by Falk. For the avoidance of doubt, Falk shall be responsible and have the final say for all such regulatory matters and activities in the Falk Territory.

(c) Regulatory Updates. Each Party shall keep the other Party informed of regulatory developments relating to a Product in the Field in its respective territory, either the Prometheus Territory or Falk Territory, through regular reports at JSC meetings and shall promptly notify the other Party in writing of any action or decision by any Regulatory Authority in its respective territory relating to a Product.

(d) Regulatory Materials Review; No Harmful Actions. Each Party shall provide the other Party for review and comment all draft Regulatory Materials for which it is responsible, at least [***] ([***]) Business Days (or if a shorter filing deadline, as soon as practicable) in advance of the intended date of submission to a Regulatory Authority and shall consider in good faith any comments thereto provided by the other Party. Each Party shall promptly notify the other Party of any Regulatory Materials submitted to or received from any Regulatory Authorities and shall provide the other Party with copies thereof within [***] ([***]) Business Days after submission or receipt. If a Party reasonably believes that the other Party is taking or intends to take any action with respect to the Licensed Compound or a Product that is substantially likely to have a material adverse impact upon the Development or regulatory status of a Product, such Party may bring the matter to the attention of the JSC which shall decide on the


matter as soon as possible. A Party shall not proceed with any such action or alternative course of action brought to the attention of the JSC until the decision is made by the JSC. Article 12 shall remain unaffected.

(e) Notification of Threatened Action. Each Party shall immediately notify the other Party of any information it receives regarding any threatened or pending action, inspection or communication by or from any Third Party, including a Regulatory Authority, which may affect the Development, manufacturing, Commercialization or regulatory status of the Licensed Compound or a Product in their respective territory. Upon receipt of such information, the Parties shall convene a JSC meeting and otherwise consult with each other to arrive at a mutually acceptable procedure for taking appropriate action.

4.9 Pharmacovigilance. The Parties shall enter into a Pharmacovigilance Agreement following the Effective Date of this Agreement at a time to be agreed upon by the JSC, wherein the Parties shall ensure shared access to the safety database for a Product during the Term, and after its expiry in the event either or both Parties continue to Commercialize the Product. For clarity, Prometheus shall provide ongoing support to Falk in relation to monitoring the safety of the Product during the Term and as required per applicable Laws.

ARTICLE 5

COMPENSATION FOR LICENSES AND DEVELOPMENT

5.1 Up-Front Payments. The Up-front payments shall be made in two installments per this Section 5.1. Falk will pay Prometheus by wire transfer of immediately available funds:

(a) an initial up-front, non-refundable, non-creditable fee of $ [***] ([***]) within [***] ([***]) Business Days following the Effective Date (subject to the receipt of an appropriate invoice from Prometheus); and

(b) within [***] ([***]) Business Days following the signature of the part of the Development Plan relating to the pharmaceutical phase of Development of the Products by both Parties in accordance with Article 4.2(b) of this Agreement (subject to the receipt of an appropriate invoice from Prometheus), a second up-front non-refundable non-creditable fee in the amount of $ [***]).

5.2 Co-Funding of Development Costs. Falk will co-fund the costs of Development as provided for under Article 4.3.

5.3 Milestone Payments. The milestone payments shall be non-refundable and made in two installments per this Section 5.3. Falk will pay Prometheus by wire transfer of immediately available funds:

(a) within [***] ([***]) Business Days following the [***] a first milestone payment of $[***] ([***]); and


(b) within [***] ([***]) Business Days following [***], a second milestone payment of $[***] ([***]).

5.4 Royalties for Prometheus. Falk will pay royalties to Prometheus for the utilization of the Prometheus Technology based on the aggregate Falk Net Sales of all Products sold in the Falk Territory during a Calendar Year at the rates set forth in the table below:

 

Calendar Year Net Sales (in Dollars) for all

Products in the Falk Territory

   Royalty Rates as a Percentage (%) of Net Sales

Calendar Year Net Sales up to and including

$[***] ([***])

   [***] ([***])

Calendar Year Net Sales that exceed

$[***] ([***])

   [***] ([***])

The obligation to pay royalties will be imposed only once with respect to the same unit of Product.

5.5 Royalties for Falk. Prometheus will pay royalties to Falk for the utilization of the Falk Technology in the Prometheus Territory based on:

(a) the aggregate Prometheus Net Sales of all Products sold in the Prometheus Territory during a Calendar Year at the rates set forth in the table below:

 

Calendar Year Net Sales (in Dollars) for all Products in the Prometheus Payment Territory

   Royalty Rates as a Percentage (%) of Net Sales

Calendar Year Net Sales up to and including

$[***] ([***])

   [***] ([***])

Calendar Year Net Sales that exceed

$[***] ([***])

   [***] ([***])

The obligation to pay royalties will be imposed only once with respect to the same unit of Product; and


(b) the aggregate Prometheus Net Income earned in the Prometheus Territory at the rate of [***]%.

5.6 Royalty Reports and Payment Due. Following the event giving rise to royalty payments according to Article 5.4 or 5.5 and continuing for the remainder of the Royalty Term, within [***] ([***]) days after the end of each Calendar Quarter, the Party owing the royalty payment will deliver a report to the other Party specifying on a Product-by-Product and country-by-country basis, as applicable: (a) the Products sold in the Territory in such Calendar Quarter; (b) Net Sales or Net Income in the relevant Calendar Quarter; (c) a summary of the then-current exchange rate methodology then in use; and (d) royalties payable on such Net Sales or Net Income, and a summary of the calculation of such royalties. Within [***] ([***]) days of receipt of the report, the receiving Party will send a due invoice to the Party owing the royalty payment and such Party shall pay all royalty payments due within [***] ([***]) days after receipt of the receiving Party´s invoice.

5.7 Expiration of the Royalty Term. Following the expiration of the Royalty Term for a Product in a country, the Net Sales of such Product or the Net Income related to such Product in such country shall no longer be included for the purpose of determining royalty payments under this Agreement.

5.8 Payment Method; Late Payments. Any payments due hereunder shall be in Dollars by wire transfer of immediately available funds into an account designated by the Party that is owed such payment. If the Party does not receive payment of any sum due to it on or before the due date, simple interest will thereafter accrue on the sum due until the date of payment at the per annum rate of [***] ([***]%) over the then-current prime rate as reported in The Wall Street Journal or the maximum rate allowable by applicable Laws, whichever is lower.

5.9 Records. The Parties shall keep (and shall ensure that its Affiliates keep) such records as are required to determine, in accordance with U.S. generally accepted accounting principles or international financial reporting standards, as applicable, and this Agreement, the sums due under this Agreement. The Parties shall retain all such books, records and accounts until the later of (a) [***] ([***]) years after the end of the period to which such books, records and accounts pertain and (b) the expiration of the applicable tax statute of limitations (or any extensions thereof), or for such longer period as may be required by applicable Laws.

5.10 Audits. Either Party may have an independent certified public accountant, reasonably acceptable to the other Party, have access during normal business hours, and upon reasonable prior written notice, to examine only those records of the Party (and its Affiliates and sublicensees, as applicable) as may be reasonably necessary to determine, with respect to any Calendar Year ending not more than [***] ([***]) years before such Party’s request, the correctness or completeness of any report or payment made under this Agreement. If the audit report concludes that additional amounts were owed by the audited Party, the audited Party shall pay the additional amounts, with interest from the date originally due as provided in Article 5.8 within [***] ([***]) days after the date on which such audit report is delivered to both Parties. If an audit discloses a variance to the detriment of a Party of more than [***] ([***]%) from the amount of the original report or payment calculation, then the audited Party shall bear the full cost of the performance of such audit.


5.11 Taxes.

(a) Taxes on Income. Each Party shall pay all taxes imposed on its share of income arising directly or indirectly from the efforts of the Parties under this Agreement.

(b) Tax Cooperation. The Parties agree to cooperate with one another and use reasonable efforts to reduce or eliminate tax withholding or similar obligations in respect of payments made by one Party to the other Party under this Agreement. To the extent a Party is required to deduct and withhold taxes on any payment to the other Party, it shall pay the amounts of such taxes to the proper Governmental Authority in a timely manner and promptly transmit to the other Party an official tax certificate or other evidence of such withholding sufficient to enable the other Party to claim such payment of taxes. The other Party shall provide the deducting Party any tax forms that may be reasonably necessary in order for it not to withhold tax or to withhold tax at a reduced rate under an applicable bilateral income tax treaty. Each Party shall provide the other with reasonable assistance to enable the recovery, as permitted by applicable Law, of withholding taxes, value added taxes, or similar obligations resulting from payments made under this Agreement, such recovery to be for the benefit of the Party bearing such withholding tax or value added tax.

ARTICLE 6

INTELLECTUAL PROPERTY MATTERS

6.1 Ownership of Technology.

(a) Technology as of the Effective Date. Prometheus shall solely Control the Prometheus Technology which is in existence as of the Effective Date. Upon receipt of the upfront payment set forth under Article 5.1(a), however, such parts of the Prometheus Technology which are owned by Prometheus or its Affiliates shall be jointly owned by Prometheus and Falk at a share of seventy-five percent (75%) for Prometheus and a share of twenty-five percent (25%) for Falk. Accordingly, Prometheus hereby assigns a share of twenty-five percent (25%) in its rights in any such solely-owned Prometheus Technology to Falk under the condition of the receipt of the upfront payment set forth in Article 5.1(a). Falk hereby accepts such conditional assignment.

(b) Technology after the Effective Date. In consideration of the co-funding of the Out-of-Pocket-Costs according to Article 4.3, the Parties agree that the Prometheus Technology and the Falk Technology arising from, or in connection with, the Development of a Product or Products and which are owned by a Party or its Affiliates shall be jointly owned by Prometheus and Falk at a share of seventy-five percent (75%) for Prometheus and a share of twenty-five percent (25%) for Falk. Accordingly, the Parties agree that the assignment of a share of twenty-five percent (25%) of joint ownership of any Prometheus Technology (if owned by Prometheus or its Affiliates) to Falk according to Article 6.1(a) shall not only comprise the Prometheus Technology which is in existence as of the Effective Date but also the Prometheus Technology owned by Prometheus or its Affiliates that is generated during the Term. In addition, Falk hereby assigns a share of seventy-five percent (75%) of its rights in any Falk Technology owned by Falk or its Affiliates to Prometheus and Prometheus hereby accepts such assignment.


(c) Further Provisions regarding Assignment. In addition to the assignments according to Article 6.1(a) and (b) each Party shall have its employees, agents or independent contractors or its Affiliates or sublicensees or their employees, agents or independent contractors to assign, its ownership or its relevant share in the ownership relating to Prometheus Technology or the Falk Technology, as applicable, to the relevant Party as required to achieve joint ownership regarding Prometheus Technology and the Falk Technology as provided for under Article 6.1(a) and (b) above. The Parties will execute, and shall have their respective employees, agents or independent contractors or their Affiliates or sublicensees or their respective employees, agents or independent contractors to execute, all such actions and documents as may reasonably be required to procure the joint ownership according to Article 6.1(a) and (b) and to perfect such assignment.

6.2 Disclosure of Technology. Notwithstanding Article 4.4, 4.5 and 4.6, Prometheus shall promptly disclose to Falk all Prometheus Technology, and Falk shall promptly disclose to Prometheus all Falk Technology, including any invention disclosures, or other similar documents, submitted to it by its employees, agents or independent contractors describing the Prometheus Technology or the Falk Technology, as applicable, and all Information relating to such Technology.

6.3 Protection of Intellectual Property. The Parties shall cooperate in preparing, filing, prosecuting and maintaining their rights in the Prometheus Technology and in the Falk Technology. If not otherwise provided for by agreement between the Parties on a case by case basis Prometheus shall prepare, file, prosecute and maintain the rights in the Prometheus Technology and in the Falk Technology in the Prometheus Territory and Falk shall prepare, file, prosecute and maintain the rights in the Prometheus Technology and in the Falk Technology in the Falk Territory, in each case in the name and for the account of both Parties. Each Party shall keep the other Party reasonably informed in connection with their prosecution, registration and other protection of the rights in the Prometheus Technology and in the Falk Technology. Each Party shall have the right to review and provide comments to the other Party on any material filings relating to the Prometheus Technology and to the Falk Technology which shall be considered by the other Party in good faith.

6.4 Intellectual Property Enforcement in the Falk Territory.

(a) Notification. If either Party becomes aware of any existing or threatened infringement of any Falk Technology or Prometheus Technology in the Falk Territory by a Third Party (“Falk Territory Infringement”), such Party shall promptly notify the other Party in writing to that effect and the Parties will consult with each other regarding any actions to be taken with respect to such Falk Territory Infringement. If either Party becomes aware of any existing or threatened infringement of any Falk Technology or Prometheus Technology in the Prometheus Territory by a Third Party (“Prometheus Territory Infringement”), such Party shall promptly notify the other Party in writing to that effect and the Parties will consult with each other regarding any actions to be taken with respect to such Prometheus Territory Infringement.

(b) Enforcement Rights. For any Falk Territory Infringement or Prometheus Territory Infringement, each Party shall share with the other Party all Information available to it regarding such actual or alleged infringement. The Parties shall jointly determine whether to bring one or more action(s) against any person or entity engaged in such Falk Territory Infringement or


Prometheus Territory Infringement, and which Party should lead such enforcement. If the Parties do not agree on the lead of such enforcement Prometheus shall lead the enforcement in the Prometheus Territory and Falk shall lead the enforcement in the Falk Territory.

(c) Collaboration. Each Party shall provide to the enforcing Party reasonable assistance in any enforcement action under this Article 6.4, at such enforcing Party’s request and expense, including joining such action as a party plaintiff if required by applicable Laws to pursue such action or otherwise ensure adequate standing. The enforcing Party shall keep the other Party regularly informed of the status and progress of such enforcement efforts, shall reasonably consider the other Party’s comments on any such efforts, and shall seek consent of the other Party in any important aspects of such enforcement, including determination of litigation strategy and filing of material papers to the competent court, which consent will not be unreasonably withheld, conditioned or delayed. The non-enforcing Party may obtain separate representation in such matter by counsel of its own choice and at its own expense, but such Party shall at all times cooperate fully with the enforcing Party. Neither Party may settle any claim, suit or action that it brought under this Article 6.4 without the consent of the other Party, which consent will not be unreasonably withheld, conditioned or delayed.

6.5 Infringement of Third Party Rights in the Falk Territory and the Prometheus Territory. If a Licensed Compound or Product used or sold under this Agreement becomes the subject of a Third Party’s claim or assertion of infringement of an Intellectual Property Right within the Falk Territory or the Prometheus Territory (each such claim or assertion a “Third Party Claim”), each Party shall promptly notify the other Party and the Parties shall agree on and enter into a common interest agreement, pursuant to which the Parties will agree to work toward their shared, mutual interest in the outcome of such potential dispute, and thereafter, the Parties shall promptly meet to consider the Third Party Claim and the appropriate course of action. Article 6.4 shall apply accordingly.

6.6 Cost Sharing. Reasonable Out-of-Pocket-Costs of the Parties arising from the protection and enforcement of Prometheus Technology and of the Falk Technology according to Article 6.3 and 6.4 and of Third Party Claim according to Article 6.5 shall be allocated according to the following algorithm: twenty-five percent (25%) of such Out-of-Pocket-Costs to Falk and seventy-five percent (75%) of such Out-of-Pocket-Costs to Prometheus. Each Party shall reimburse the other Party according to this algorithm upon due invoice and upon due reporting by analogy to Article 5.6. Furthermore, Article 5.9 and 5.10 shall apply by analogy. If an enforcing Party recovers monetary damages in claims, suits or action during the enforcement of Prometheus Technology or the Falk Technology according to Article 6.4, such recovery will be shared according to the following algorithm: [***] ([***]%) of such recovery to Falk and [***] ([***]%) of such recovery to Prometheus. For the avoidance of doubt: in the event of a Third Party Claim any damages, costs of other financial burdens owed to the respective Third Party shall be deemed reasonable Out-of-Pocket Costs. In any case Article 9 shall remain unaffected.


ARTICLE 7

MANUFACTURE AND SUPPLY OF LICENSED COMPOUND AND PRODUCTS

7.1 Manufacture and Supply of Licensed Compound and Products by Prometheus. Prometheus shall manufacture, or have manufactured, and supply, or have supplied, Falk’s requirements for Licensed Compound and Products for the Falk Territory exclusively to Falk or its Affiliates, at Falk’s direction. Such manufacture and supply shall be in accordance with Falk’s needs at a price calculated as the Out-of-Pocket-Costs of Prometheus for the manufacture and supply of Prometheus´ own needs for the Licensed Compound and Products for the Prometheus Territory plus a handling fee of [***] ([***]%) and in accordance with the terms of this Agreement and with the additional terms agreed in a quality agreement according to industry standard which shall be entered into by Prometheus and Falk prior to the supply of any Licensed Compound or Product or when required by law whatever is earlier (hereinafter referred to as “Quality Agreement”). Prometheus shall inform Falk at Falk´s reasonable request of the Out-of-Pocket-Costs of Prometheus for the manufacture and supply of Prometheus´ own needs for the Licensed Compound and Products for the Prometheus Territory.

7.2 Manufacturing Authorizations and Compliance. Prometheus shall at all times during the Term obtain and maintain, or cause the manufacturers to obtain and maintain, regarding the manufacturing facilities for the Licensed Compound and Products all licenses, permits, orders, authorizations and consents (including, without limitation, facility licenses and permits) required for the manufacture (including, without limitation, production, testing, storage, shipment and supply) of the Licensed Compound or Product and shall at all times during the Term be, or cause the manufacturers to be, in compliance with all GCPs, GMPs, GLPs and other Laws applicable for the Falk Territory.

7.3 Change in the Manufacturing. In the event of a change to the manufacturer who manufactures the Licensed Compound or Product, or to the manufacturing facility where the Licensed Compound or Product is manufactured, or to the manufacturing process for the Licensed Compound or Product, Prometheus shall provide to Falk prior written notice of said change, and, if required, any reasonable assistance to allow Falk to update the Regulatory Approval concerned, as well as to ensure that there is no disruption of supply for the Falk Territory. Notwithstanding any provisions contained herein, Prometheus shall not implement any of the foregoing changes which require Regulatory Approval until Falk has obtained such approval and it shall be responsible at its cost for producing any information or data required by the RHA in relation with any of the foregoing changes.

7.4 Specifications and Shelf Life. Licensed Compound and Products to be supplied to Falk shall comply with the specifications provided for by applicable Regulatory Approvals agreed or as otherwise agreed between the Parties. Licensed Compound and Products to be supplied to Falk shall be delivered with a minimum remaining shelf life no less than [***]% of the total shelf life of the Licensed Compound or Product, as applicable, and in compliance with the Quality Agreement.

7.5 Minimum Batch Size and Minimum Order Size. The Parties shall agree upon a minimum batch size and a minimum order size for the manufacture and supply of Licensed Compound or Products according to industry standard and such quantities shall be commercially reasonable vis-à-vis (a) the anticipated Falk needs, (b) transportation and quality control release dates, and (c) the minimum shelf life.


7.6 Forecasts. Falk shall, at least [***] ([***]) months before delivery date designated by Falk in writing (including fax) provide Prometheus with a first forecast of its estimated requirements for the Licensed Compound or Products until the end of the calendar year of such delivery date. Such forecast shall set forth the quantity of Licensed Compound or Products that Falk intends to purchase in the such calendar year. Thereafter, during the Term, Falk shall provide Prometheus with a rolling forecast setting forth the quantity of Licensed Compound or Products that Falk plans intend to purchase in the following calendar years with [***] ([***]) months’ notice prior to the start of such calendar year. Such forecasts shall be binding [***] ([***]) months from each scheduled delivery date, provided that Prometheus will make commercially reasonable efforts to accommodate Falk’s requested changes if made during this [***] ([***]) month window.

7.7 Orders. Orders for Licensed Compound or Products by Falk shall be placed at least [***] ([***]) months before delivery date designated by Falk in writing (including fax) indicating the ordered type and quantities of Licensed Compound or Products, the designated country, the designated place of delivery, and the delivery dates. Any such order of Licensed Compound or Products by Falk shall be binding on both Parties unless Prometheus opposes such order within [***] ([***]) Business Days after receipt of such order by Falk (hereinafter referred to as “Firm Order”). Prometheus may not oppose orders which are consistent with Falk’s forecasts.

7.8 Launch Stocks. In advance of the first marketing authorisation for a Product in the Falk Territory, the Parties shall discuss and agree upon the manufacture and purchase of specific quantities of launch stock; however, for the avoidance of doubt, the Parties hereby confirm that Prometheus’s obligation to manufacture any quantity of a Product for Falk shall only arise on Firm Orders.

7.9 Delivery Period and Notification of Delivery Failures. Prometheus shall deliver the Licensed Compound or Products to Falk within [***] of the Firm Order ([***] days in the case of launch stocks) or within another period as agreed in the respective Firm Order. Notwithstanding any other obligation of Prometheus regarding Firm Orders Prometheus shall promptly notify Falk if it becomes aware or believes that it will not be able to fully satisfy a particular delivery on time, which notice shall include an explanation in reasonable detail of the reasons for such delivery failure, a detailed description of the action to be taken to remedy such failure, including an estimate of the time required to fulfil the obligations that were the subject of the delivery failure.

7.10 Delivery Terms and Documentation. Save as otherwise agreed in writing by the Parties, delivery of shipment of Licensed Compound or Products shall be effected by Prometheus ex-works according to the Incoterms 2020 at the manufacturing facility of designated by Prometheus. Prometheus shall provide all documentation as reasonably required under applicable laws and regulations relating to the manufacture, exportation and importation of the Licensed Compound or Products, as applicable, in the Falk Territory, and shall also provide reasonable assistance to Falk in relation to the acceptance of the Licensed Compound or Products by the customs in the Territory. In particular, without limitation, Prometheus shall deliver a certificate of analysis in the English language regarding each delivered Licensed Compound or Product.


7.11 Claims for Defects. All claims for failure of any Licensed Compound or Products to conform with this Agreement or the Quality Agreement (“Non-Conforming Products”) shall be made by Falk to Prometheus in writing within [***] days following delivery in the case of obvious defects. Claims for latent defects shall be made by Falk to Prometheus in writing within [***] days of discovery. Failure to make timely claims in the manner prescribed shall constitute acceptance of the delivery save in the case Prometheus was aware of the defects.

7.12 Replacement of Non-Conforming Products. Licensed Compound or Products which have been delivered and which have been demonstrated as Non-Conforming Products shall be replaced at Prometheus’s cost as soon as possible but in any event within [***] days of the demonstration of non-conformance of the Non-Conforming Product. All costs associated with the return of such Non-Conforming Product shall be borne by Prometheus.

7.13 Dispute on Non-Conforming Products. In the event of an unresolved dispute as to conformity of the Licensed Compound or Products in accordance with the applicable specifications relating to the substance of the Licensed Compound or Products, the Parties shall within [***] days of Falk’s initial claim of non-conformance, appoint a suitably qualified independent laboratory with experience in complying with the applicable laws and regulations to undertake the relevant testing and its findings shall be conclusive and binding upon the Parties. If the appointed independent laboratory determines that the Licensed Compound or Products is conforming, then Falk shall pay for the Licensed Compound or Product and the cost of replacement. If the appointed independent laboratory determines that the Licensed Compound or Product is a Non-Conforming Product, then Falk shall pay for the Licensed Compound or Product only after replacement of the Licensed Compound or Product with conforming Licensed Compound or Product, as applicable, according to the provisions of this Agreement. If the Parties fail to agree on the appointment of the laboratory within [***] days of Falk’s initial claim of non-conformance (or another period agreed upon by the Parties on a case-by-case basis) Article 12 (Dispute Resolution) shall apply.

ARTICLE 8

REPRESENTATIONS AND WARRANTIES; COVENANTS

8.1 Mutual Representations and Warranties. Each Party hereby represents and warrants to the other Party as follows:

(a) Existence. As of the Effective Date, it is a company or corporation duly organized, validly existing, and in good standing under the Laws of the jurisdiction in which it was incorporated or formed;

(b) Power, Authority and Binding Agreement. As of the Effective Date, (i) it has the power and authority and the legal right to enter into this Agreement and perform its obligations hereunder; (ii) it has taken all necessary action on its part required to authorize the execution and delivery of this Agreement and the performance of its obligations hereunder; and this Agreement has been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, and binding obligation of such Party that is enforceable against it in accordance with


its terms, subject to enforcement of remedies under applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting generally the enforcement of creditors’ rights and subject to a court’s discretionary authority with respect to the granting of a decree ordering specific performance or other equitable remedies;

(c) No Conflict. The execution and delivery of this Agreement, the performance of such Party’s obligations hereunder (i) do not and will not conflict with or violate any requirement of applicable Law existing as of the Effective Date; (ii) do not and will not conflict with or violate the certificate of incorporation, by-laws or other organizational documents of such Party; and (iii) do not and will not conflict with, violate, breach or constitute a default under any contractual obligations of such Party or any of its Affiliates existing as of the Effective Date;

(d) Other Rights. Neither Party nor any of their respective Affiliates is a party to or otherwise bound by any oral or written contract or agreement that will result in any other person obtaining any interest in, or that would give to any other person any right to assert any claim in or with respect to, any of such Party’s rights under this Agreement;

(e) No Violation. Neither Party nor any of their respective Affiliates is under any obligation to any person, contractual or otherwise, that is in violation of the terms of this Agreement or that would impede the fulfillment of such Party’s obligations hereunder; and

(f) No Debarment. As of the Effective Date, none of such Party’s employees, consultants or contractors shall be debarred under the applicable Law in the relevant country in the Territory. The Parties shall ensure that its employees, consultants and contractors are qualified and duly-licensed, as applicable, to perform the duties and obligations set forth in this Agreement pursuant the applicable Laws in the Territory.

8.2 Covenants.

(a) No Debarment. In the course of the Development and Commercialization of Product, neither Party shall use any employee, consultant or contractor who is debarred under the applicable Law in the relevant country in the Territory.

(b) Notification. Each Party shall notify the other Party promptly, but in no event later than [***] ([***]) Business Days, upon becoming aware that any of its employees or consultants has been excluded, debarred, suspended or is otherwise ineligible, or is the subject of exclusion, debarment or suspension proceedings by any Regulatory Authority.

(c) Compliance. Each Party and its Affiliates shall comply with all applicable Laws in the Development, manufacture and Commercialization of Product and the performance of its obligations under this Agreement, including where applicable the statutes, regulations and written directives and guidance of the FDA, the EMA and any Regulatory Authority and shall also comply with international anti-bribery and anti-corruption statutes to the extent applicable including the Foreign Corrupt Practices Act of 1977 (“FCPA”), and the UK Bribery Act of 2010, each as may be amended from time to time and each to the extent applicable.


(d) Certain Payments. Each of the Parties acknowledges that it is aware that the United States and other countries have stringent applicable Laws (e.g., FCPA) which prohibit persons directly or indirectly from making unlawful payments to, and for the benefit of, government officials and related parties to secure approvals or permission for their activities. Each Party agrees that it will make no such prohibited payments, it will not indirectly make or have made such payments and it will make its Affiliates, employees and agents aware of the existence of such applicable Laws and their need to comply with such Applicable Laws.

(e) Resources. Each of the Parties acknowledges that the Development and manufacture of the Licensed Compound and of Products requires considerable resources in personnel and finance and each of the Parties acknowledges as of the Effective Date to dispose of the resources in personnel and finance required for the Development and manufacture of the Licensed Compound and of Products as provided for in this Agreement.

(f) Rights in Technology. As of the Effective Date and during the Term, Falk warrants and represents to Prometheus that the Falk Technology shall be Controlled by Falk and will be free of any lien, charge or encumbrance, and Prometheus warrants and represents to Falk that the Prometheus Technology shall be Controlled by Prometheus and will be free of any lien, charge or encumbrance.

(g) Third Party Rights. As of the Effective Date and to the Knowledge of each Party, no Intellectual Property of a Third Party will prevent the Development, manufacture, or Commercialization of the Licensed Compound or a Product.

(h) Recitals. Each Party acknowledges that the information given under the Recitals and relating to such Party is correct in all material respect.

8.3 Guarantee. Prometheus hereby unconditionally guarantees the prompt and complete payment of any and all license fees, sublicense fees, and milestone payments due to ATX under the terms of the ATX Agreement (“Alloy Payments”) and the following terms and conditions:

(a) Subject to the above restrictions, Prometheus guarantees that it will pay the full amount of any Alloy Payments under the ATX Agreement as and when they become due, either according to the terms and conditions provided by the ATX Agreement or upon acceleration of the relevant payment due date of any Alloy Payment under the ATX Agreement by reason of default;

(b) To the extent permitted by law, Prometheus waives all defenses, counterclaims or offsets that are legally available to Prometheus with respect to the payment of all Alloy Payments;

(c) This guarantee is for the use and benefit of Falk, and will also be for the use and benefit of any subsequent party to whom Falk may assign this guarantee;

(d) The liability of Prometheus will continue until all outstanding Alloy Payments are made, either now due or as incurred over time in connection with this Agreement, and until all such Alloy Payments are made, any loss or damages incurred by Falk with respect to the matter covered by this guarantee, provided such loss or damages will be limited to the amount of Alloy Payments then due and outstanding, can be used by Falk to offset any future payments due to ATX under a subsequent License Agreement between Falk and ATX as set forth in Article 11.3 (c) and Exhibit C; and,


(e) Any of Falk’s rights, powers and remedies available to Falk under this guarantee and under any other agreement in force now or anytime in future between Falk and Prometheus will be cumulative and not alternative, and will be in addition to all rights, powers, and remedies given to Falk in law or equity.

8.4 No Other Representations or Warranties. EXCEPT AS EXPRESSLY STATED IN THIS AGREEMENT, NO REPRESENTATIONS OR WARRANTIES WHATSOEVER, WHETHER EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, OR NON-MISAPPROPRIATION OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS, ARE MADE OR GIVEN BY OR ON BEHALF OF A PARTY, AND ALL REPRESENTATIONS AND WARRANTIES, WHETHER ARISING BY OPERATION OF LAW OR OTHERWISE, ARE HEREBY EXPRESSLY EXCLUDED.

ARTICLE 9

INDEMNIFICATION

9.1 Indemnification by Prometheus. Prometheus shall, at its sole expense, defend, indemnify, and hold Falk and its Affiliates and their respective officers, directors, shareholders or owners, employees, and agents (the “Falk Indemnitees”) harmless from and against any and all Third Party claims, suits, proceedings, damages, losses, liabilities, costs, expenses (including court costs and reasonable attorneys’ fees and expenses) and recoveries (collectively, “Claims”) to the extent that such Claims arise out of, are based on, or result from (a) the breach of any of Prometheus’s obligations under this Agreement, or (b) the willful misconduct or negligent acts of Prometheus, its Affiliates, or the officers, directors, employees, or agents of Prometheus or its Affiliates. The foregoing indemnity obligation will not apply (i) to the extent that (x) the Falk Indemnitees fail to comply with the indemnification procedures set forth in Article 9.3 and Prometheus’s defense of the relevant Claims is prejudiced by such failure or (y) such Claims arise out of or result from the gross negligence or willful misconduct of Falk or its Affiliates, or any related breach by Falk of its representations, warranties or covenants hereunder; or (ii) to Claims for which Falk has an obligation to indemnify Prometheus pursuant to Article 9.2, as to which Claims each Party shall indemnify the other to the extent of its respective liability for such Claims.

9.2 Indemnification by Falk. Falk shall, at its sole expense, defend, indemnify, and hold Prometheus and its Affiliates and their respective officers, directors, shareholders or owners, employees, and agents (the “Prometheus Indemnitees”) harmless from and against any and all Claims to the extent that such Claims arise out of, are based on, or result from (a) the breach of any of Falk’s obligations under this Agreement or (b) the willful misconduct or negligent acts of Falk, its Affiliates, or the officers, directors, employees, or agents of Falk or its Affiliates. The foregoing indemnity obligation will not apply (i) to the extent that (x) the Prometheus Indemnitees fail to comply with the indemnification procedures set forth in Article 9.3 and Falk’s defense of the relevant Claims is prejudiced by such failure or (y) such Claims arise out of or result from the gross negligence or willful misconduct of Prometheus or its Affiliates, or any related breach by Prometheus of its representations, warranties or covenants hereunder; or (ii) to Claims for which Prometheus has an obligation to indemnify Falk pursuant to Article 9.1, as to which Claims each Party shall indemnify the other to the extent of its respective liability for such Claims.


9.3 Indemnification Procedures. The Party claiming indemnity under this Article 9 (the “Indemnified Party”) shall give written notice to the Party from whom indemnity is being sought (the “Indemnifying Party”) promptly after learning of such Claim. The Indemnified Party shall provide the Indemnifying Party with reasonable assistance, at the Indemnifying Party’s expense, in connection with the defense of the Claim for which indemnity is being sought. The Indemnified Party may participate in and monitor such defense with counsel of its own choosing at its sole expense; provided, however, the Indemnifying Party may assume and conduct the defense of the Claim with counsel of its choice. The Indemnifying Party shall not settle any Claim without the prior written consent of the Indemnified Party, not to be unreasonably withheld, unless the settlement involves only the payment of money. So long as the Indemnifying Party is actively defending the Claim in good faith, the Indemnified Party shall not settle or compromise any such Claim without the prior written consent of the Indemnifying Party. If the Indemnifying Party does not assume and conduct the defense of the Claim as provided above, (a) the Indemnified Party may defend against, consent to the entry of any judgment, or enter into any settlement with respect to such Claim in any manner the Indemnified Party may deem reasonably appropriate (and the Indemnified Party need not consult with, or obtain any consent from, the Indemnifying Party in connection therewith), and (b) the Indemnifying Party will remain responsible to indemnify the Indemnified Party as provided in this Article 9.

9.4 Restriction of Liability. NEITHER PARTY IS LIABLE TO THE OTHER FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE, OR INDIRECT DAMAGES FOR ANY CAUSE OF ACTION, WHETHER IN CONTRACT, TORT OR OTHER LEGAL OR EQUITABLE THEORY, INCLUDING, WITHOUT LIMITATION, LOST REVENUES, PROFITS OR BUSINESS OPPORTUNITIES, ARISING FROM OR RELATING TO ANY BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES. NOTWITHSTANDING THE FOREGOING, NOTHING IN THIS SECTION 9.4 IS INTENDED TO LIMIT OR RESTRICT THE INDEMNIFICATION RIGHTS OR OBLIGATIONS OF ANY PARTY UNDER ARTICLE 9.1 OR ARTICLE 9.2, OR DAMAGES AVAILABLE FOR A PARTY’S GROSS NEGLIGENCE, WILLFUL MISCONDUCT, FRAUD, BREACH OF ITS INTELLECTUAL PROPERTY OBLIGATIONS UNDER SECTION 6.1 OR SECTION 6.2 OR CONFIDENTIALITY OBLIGATIONS IN ARTICLE 10.

9.5 Insurance. Each Party shall, during the Term and for a period of [***] ([***]) years after the expiration date of the last unit of a Product sold by Falk, procure and maintain insurance, including product liability insurance for a Product insuring against personal injury, death and damage to property. The said policy shall have a liability limit according to industry standards, and shall be maintained with a financially-sound and reputable insurer. Each Party shall procure insurance or self-insure at its own expense. Each Party shall provide the other Party with written evidence of such insurance or self-insurance upon request. Each Party shall provide the other Party with written notice at least [***] ([***]) days before the cancellation or non-renewal of such insurance.


ARTICLE 10

CONFIDENTIALITY AND PROTECTION OF PERSONAL DATA

10.1 Confidentiality. Each Party agrees that, during the Term and thereafter for so long as they remain confidential, it shall keep, and shall have kept its Affiliates and Licensees, any Confidential Information furnished to it or its Affiliate or its Licensees by the other Party or its Affiliate or Licensee pursuant to this Agreement confidential and shall not use, and shall have not use its Affiliates or Licensees, for any purpose other than as provided for in this Agreement, except to the extent expressly authorized by this Agreement or as otherwise agreed to in writing by the Parties. In the event that Confidential Information is part of Technology which is jointly owned by the Parties then such Confidential Information shall be jointly owned Confidential Information of the Parties and such jointly owned Confidential Information of the Parties shall be deemed for each Party to be furnished to it or its Affiliate or its Licensees by the other Party and shall constitute Prometheus Technology and Falk Technology accordingly. The foregoing confidentiality and non- use obligations do not apply to any portion of the other Party’s Confidential Information that the receiving Party can demonstrate by competent written proof:

(a) was already known to the receiving Party or its Affiliate, other than under an obligation of confidentiality, at the time of disclosure by the other Party or its Affiliate;

(b) was generally available to the public at the time of its disclosure to the receiving Party or its Affiliate;

(c) became generally available to the public after its disclosure and other than through any act or omission of the receiving Party or its Affiliate in breach of this Agreement; or

(d) was disclosed to the receiving Party or its Affiliate by a Third Party who had a legal right to make such disclosure and who did not obtain such information directly or indirectly from the other Party or its Affiliate.

10.2 Authorized Disclosure. Notwithstanding the obligations set forth in Article 10.1, a Party or its Affiliate may disclose the other Party’s Confidential Information and the terms of this Agreement to the extent:

(a) such disclosure is reasonably necessary (i) for the filing or prosecuting of Patent rights as contemplated by this Agreement; (ii) to comply with the requirements of Regulatory Authorities with respect to obtaining and maintaining Regulatory Approval of Product; or (iii) for prosecuting or defending litigation as contemplated by this Agreement;

(b) such disclosure is reasonably necessary to its officers, directors, employees, agents, consultants, contractors, attorneys, or accountants on a need-to-know basis for the sole purpose of performing its obligations or exercising its rights under this Agreement; provided that in each case, the disclosees are bound by obligations of confidentiality and non-use no less stringent than those contained in this Agreement;

(c) such disclosure is reasonably necessary to any bona fide potential or actual investor, acquiror, merger partner, or other financial or commercial partner for the sole purpose of evaluating an actual or potential investment, acquisition or other business relationship; provided that in each case, the disclosees are bound by written obligations of confidentiality and non-use; or


(d) such disclosure is reasonably necessary to comply with applicable Laws, including regulations promulgated by applicable security exchanges, court order, administrative subpoena or other order.

Notwithstanding the foregoing, if a Party or its Affiliate is required to make a disclosure of the other Party’s Confidential Information pursuant to Article 9.2(a) or Article 9.2(d), such Party shall promptly notify the other Party of such required disclosure and, upon the other Party’s request, such Party and its Affiliates shall use reasonable efforts to obtain, or to assist the other Party in obtaining, a protective order preventing or limiting the required disclosure. In addition to the foregoing, whenever a Regulatory Authority requires, due to transparency policies or for other reasons, the public disclosure of Confidential Information of the other Party (including but not limited to jointly owned Confidential Information) the Party concerned shall be responsible for the redaction of such Confidential Information as required to protect personal data and the Confidential Information to the extent permitted by such Regulatory Authority.

10.3 Publication. The Parties shall ensure that all publications, and other forms of public disclosure such as abstracts and presentations, of results of joint development work carried out under this Agreement (each of the foregoing, a “Publication”) comply with the strategy established by the JSC pursuant to Article 3.1(a)(i). A Party that wishes to publish or present the results of the joint development work carried out under this Agreement (“Publishing Party”) must provide the other Party with a reasonable opportunity to review such publication or presentation prior to publication, but in no case less than [***] ([***]) days before its intended submission for publication or presentation. The Publishing Party may not submit for publication, publish or present a Publication without such opportunity for prior review by the other Party, except to the extent required by applicable Laws. The Publishing Party shall consider in good faith any comments thereto provided by the other Party and shall comply with the other Party’s request to remove any and all of the other Party’s Confidential Information from the proposed Publication. In addition, the Publishing Party shall delay the submission for a period of up to [***] ([***]) days if the other Party can demonstrate reasonable need for such delay to prepare and file a patent application for which it has prosecution control pursuant to this Agreement. The Publishing Party shall provide the other Party with a copy of the manuscript, abstract or presentation at the time of the submission or presentation, as applicable. The Publishing Party agrees to acknowledge the contributions of the other Party in all publications, as scientifically appropriate.

10.4 Publicity; Terms of Agreement.

(a) The Parties agree that the financial terms of this Agreement are the Confidential Information of both Parties, subject to the special authorized disclosure provisions set forth in this Article 10.4.

(b) The Parties shall make a joint public announcement of the execution of this Agreement, including a press release in a form mutually agreed by the Parties, which will be issued on or promptly after the Effective Date.


(c) After release of such press release, if either Party or its Affiliate desires to make a public announcement concerning the material terms of this Agreement, or any clinical or regulatory announcements, such Party shall give reasonable prior advance notice of the proposed text of such announcement to the other Party for its prior review and approval (except as otherwise provided), such approval not to be unreasonably withheld. A Party commenting on such a proposed announcement shall provide its comments, if any, within [***] ([***]) Business Days after receiving the announcement for review, or such shorter period as may be reasonably required in order for the proposing Party to comply with any applicable deadline for making such announcement (as such deadline is communicated by the proposing Party to the commenting Party). In addition, where required by applicable Laws, including regulations promulgated by applicable security exchanges, such Party or its Affiliate may make a press release announcing the achievements of Regulatory Approvals in their respective Territory as they occur or any other material event with respect to this Agreement or the Parties’ performance thereof, subject only to the review procedure set forth in the preceding sentence; provided that the review period will be reduced to [***] ([***]) Business Days (or such shorter period as may be reasonably required in order for the proposing Party to comply with any applicable deadline for making such press release, as such deadline is communicated by the proposing Party to the commenting Party) if the deadline for making such disclosure is [***] ([***]) or fewer Business Days after such achievement or event. In relation to the other Party’s review of such an announcement, such other Party may make specific, reasonable comments on such proposed press release within the prescribed time for commentary, but shall not withhold, condition, or delay its consent to disclosure of the information that the relevant Regulatory Approval has been achieved or material event has occurred. Neither Party nor their Affiliates are required to seek the permission of the other Party to repeat any information regarding the terms of this Agreement that has already been publicly disclosed by such Party or its Affiliate, or by the other Party or its Affiliate, in accordance with this Article 9.4, if such information remains accurate as of such time.

10.5 Prior Confidentiality Agreements. Any prior confidentiality agreements between the Parties shall be superseded by this Agreement; provided that all Information disclosed by a Party or its Affiliate to the other Party or its Affiliate pursuant to any prior confidentiality agreements shall be deemed such Party’s Confidential Information disclosed hereunder and the other Party shall and its Affiliates and disclosees will have the confidentiality, non-use and non-disclosure obligations set forth in this Article 10 with respect to such Confidential Information.

10.6 Return of Confidential Information. Except as otherwise set forth in this Agreement, upon termination or expiration of this Agreement, the receiving Party will promptly return all of the disclosing Party’s Confidential Information, including all reproductions and copies thereof in any medium, except that the receiving Party may retain one copy for its legal files. However, any fully paid-up license and right to Information relating thereto remains unaffected.

10.7 Unauthorized Use. If either Party becomes aware or has Knowledge of any unauthorized use or disclosure of the other Party’s Confidential Information, it will promptly notify the other Party of such unauthorized use or disclosure.

10.8 Exclusive Property. All Confidential Information is the sole and exclusive property of the disclosing Party and the permitted use thereof by the receiving Party for purposes


of its performance hereunder will not be deemed a license or other right of the receiving Party to use any such Confidential Information for any other purpose. However, the provisions of this Agreement regarding joint rights in Technology remain unaffected.

The Parties acknowledge and agree that each of Prometheus and Falk, respectively, alone determines the purposes and means of the processing of personal data to be carried out by it, and thus that each Party is the controller in respect of its own processing of personal data and not a processor which process personal data on behalf of the other Party. Consequently, each Party is itself responsible to comply with the obligations as a controller under applicable data protection legislation. Each Party acknowledges that in respect of any Product Data supplied to it by the other Party, it shall comply in all material respects with the applicable requirement of the protection of personal data including pseudonymized raw data. In particular, the EU Standard contractual clauses for the transfer of personal data from the EU member States to third countries (controller to controller transfers) as outlined in Exhibit H shall apply.

ARTICLE 11

TERM AND TERMINATION

11.1 Term.

(a) Commencement of the Term. This Agreement becomes effective on the Effective Date.

(b) Term. Unless sooner terminated as specifically provided in this Agreement, this Agreement continues in effect on a country-by-country basis and Product by Product basis until the later of: (i) the expiration of the last Valid Claim of any patent of the Prometheus Technology or Falk Technology that Covers such Product in such country; (ii) ten (10) years after the First Commercial Sale of such Product in such country; or (iii) expiration of Regulatory Exclusivity, in such country arising from the first Regulatory Approval granted for such Product (the “Term”).

(c) Effect of Expiration of Term. Upon expiration of the Term of this Agreement as set forth in Article 11.1(b), on a country-by-country basis and Product-by-Product basis any licenses granted to the Parties hereunder shall convert to perpetual, irrevocable, fully paid-up, non-exclusive licenses. Each Party shall be entitled on a country-by-country basis and Product-by-Product basis to Develop, or have Developed, manufacture or have manufactured, Commercialize or have Commercialized the Licensed Compound and Products on a non-exclusive basis, either by itself or through its Affiliates or sub-licensees, under the Falk Technology and the Prometheus Technology free of any further payment to the other Party.

11.2 Termination.

(a) Termination by Falk. In addition to the rights of termination provided for elsewhere in this Agreement, Falk shall have the right to terminate this Agreement, unilaterally and without cause, by written notice to Prometheus at any point in time without further compensation or penalty upon [***] months’ prior written notice to Prometheus, provided that where Prometheus incurs costs related specifically and solely to Falk’s Development for or Commercialization in the Falk Territory or costs related specifically and solely to the manufacture


of Licensed Compound or Product specifically and solely for the Falk Territory, Prometheus shall provide Falk with an appropriate invoice for such costs and Falk shall pay Prometheus and Article 4.3 shall apply in this case. During the [***] period set forth in this Article 11.2(a), Falk will work with Prometheus to ensure a smooth transition and winding down of any work or activities under the Development Plan and this Agreement.

(b) Termination due to Regulatory Authority Action or Compelling Reason. In addition to the rights of termination provided for elsewhere in this Agreement, a Party shall be entitled forthwith to unilaterally terminate this Agreement by written notice to the other Party if: (i) Regulatory Approval for a Product is terminated or suspended in a Key Country, (ii) a Regulatory Authority directs or requests discontinuance of Development, manufacturing or Commercialization of the Licensed Compound or a Product in a Key Country for a period in excess of [***] ([***]) months, or (iii) after review and consultation with qualified scientific, technical and clinical experts, the continuing Development, manufacturing, or Commercialization of the Licensed Compound or a Product is no longer scientifically viable or clinically sound. As long as Regulatory Approval for a Product is terminated or suspended in a Key Country or a Regulatory Authority directs or requests discontinuance of Development, manufacturing or Commercialization of the Licensed Compound or a Product in a Key Country, the affected Party’s obligations under this Agreement with respect to Development, manufacturing or Commercialization of the Licensed Compound or a Product are suspended. For clarity, in the event of termination under this Article 11.2(b), Article 8 and Article 9 shall remain unaffected.

(c) Effect of Termination under Article 11.2. In the event of termination of this Agreement by Falk pursuant to Article 11.1(a) or by a Party pursuant to Article 11.2(b), all licenses granted to the terminating Party under this Agreement shall cease and be automatically assigned and transferred for the remainder of the Term and thereafter to the other Party, as applicable, and the other Party shall have access to the terminating Party´s Technology. The terminating Party shall cease to make any use of the other Party’s Technology. To the extent that the other Party elects to Develop, manufacture, or Commercialize the Licensed Compound or a Product in the Field in the terminating Party´s Territory Article 5.4 or 5.5, as applicable, shall apply accordingly, i.e., in the event Prometheus is the terminating Party, then Falk shall continue to pay royalties according to Article 5.4 and in the event Falk is the terminating Party then Prometheus shall continue to pay royalties according to Article 5.5. In the event a Party terminates this Agreement pursuant to 11.2(b), the obligation of that Party to co-funding Development according to Article 5.2 shall also be terminated, provided that any costs incurred at the time of such termination shall be shared. The terminating Party shall, at its own cost and as subject to any requirements of applicable Law, at no additional charge and at the other Party´s request provide the other Party with Regulatory Materials, a full and accurate copy of all study reports, data, including safety data, results, findings and other information generated by or on behalf of, or owned and controlled by the terminating Party (including any patient data) in connection with the Program or otherwise under this Agreement, along with the right to access and use such data without obtaining any additional consents.

(d) Option to Purchase the other Party´s Technology. Upon termination of this Agreement pursuant to Article 11.3(a) or Article 11.3(b), the terminating Party shall have at the option to purchase from the other Party the other Party´s ownership share of any jointly-owned Prometheus Technology or Falk Technology, as applicable, at a fair market value price to be either


(i) negotiated and determined in good faith by the Parties within [***] ([***]) Business Days following the receipt of the other Party´s notice of the exercise of such option by the terminating Party or, after such [***] ([***]) Business Days, (ii) determined by a neutral arbitrator or otherwise independent third party in accordance with Article 12.1. The notice of the exercise of such option must be made in writing. The terminating Party´s ownership share of any jointly-owned Prometheus Technology and Falk Technology shall be assigned and transferred automatically at the receipt of the other Party´s written notice of the exercise of such option by the terminating Party without any further action and the other Party´s obligation to pay royalties shall cease and Article 6.1(c) shall apply accordingly. The terminating Party shall pay the price for the other Party´s ownership share of any jointly-owned Prometheus Technology and Falk Technology as determined by either the Parties or by a neutral arbitrator or otherwise independent third party in accordance with Article 12.1 within [***] ([***]) Business Days following such determination.

11.3 Termination due to Breach or Bankruptcy. In addition to the rights of termination provided for elsewhere in this Agreement, a Party will be entitled forthwith to terminate this Agreement by written notice to the other Party due to breach or bankruptcy subject to the following provisions:

(a) Breach. A Party (the “Non-Breaching Party”) will be entitled forthwith to terminate this Agreement by written notice to the other Party if the other Party commits any material breach of any of the obligations and provisions of this Agreement (the “Breaching Party”), and in the case of a breach capable of cure or remedy, fails to cure or remedy such breach within [***] days after receipt of a written notice sent by the Non-Breaching Party providing details of the breach in reasonable detail and requiring it to be remedied (the “Default Notice”) or within [***] ([***]) days after receipt of such Default Notice if such material breach is solely based on the Breaching Party’s failure to pay any amounts due hereunder. For the purposes of this Article 11.3(a), a breach will be considered capable of cure or remedy if the Party in breach can comply with the provision in question in all respects other than as to the time of performance (provided that time of performance is not of the essence). If a Party provides a Default Notice to the Breaching Party pursuant to this Article 11.3(a) as a result of a material breach (or alleged material breach) by the Breaching Party and, on or before the end of the cure period therefor, either Party has referred the matter to arbitration pursuant to Article 12.1, in either case where the Breaching Party is in good faith disputing such basis for termination pursuant to this Article 11.3(a), then (i) such cure period will be suspended and (ii) this Agreement will not terminate, unless and until such senior executives resolve the dispute or the arbitrator issues a final ruling or award upholding such basis for termination (or unless and until the Breaching Party is no longer disputing such basis in good faith, if earlier). If the arbitrator issues a final ruling or award upholding such basis for termination, then the cure period will resume, and the Breaching Party will have the remainder of the cure period to cure the material breach. If the material breach is so cured within the remainder of the cure period, then this Agreement will remain in full force and effect, otherwise this Agreement will terminate. If the arbitrator issues a final ruling rejecting such basis for termination, then this Agreement will remain in full force and effect.

(b) Bankruptcy of the other Party. A Party will be entitled forthwith to terminate this Agreement by written notice to the other Party if the other Party goes into liquidation (including bankruptcy but except for liquidations outside bankruptcies for the purposes of amalgamation or reconstruction and in such manner that the company resulting therefrom effectively agrees to be bound by or assume the obligations imposed on that other Party under this Agreement, to the extent otherwise permitted hereunder).


(c) Effect of Termination due to Breach or Bankruptcy. In the event of a termination of this Agreement by a Party pursuant to either Article 11.3(a) or Article 11.3(b), all licenses and other rights of the terminating Party granted under this Agreement shall be maintained and automatically extended as may be required to continue to Develop, manufacture and Commercialize Licensed Compound and Products in the Territory for the remainder of the Term and thereafter. Any licenses hereunder granted to the Breaching Party or the Party involved in liquidation or bankruptcy proceedings, as applicable, shall terminate upon the effective date of termination and the Breaching Party or the Party involved in liquidation or bankruptcy proceedings, as applicable, shall cease to make any use of the Prometheus Technology and the Falk Technology as of such date. The obligation of each Party to the co-funding of the Development according to Article 5.2 as well as Article 8 and Article 9 shall remain unaffected. At the request of the terminating Party, the Breaching Party or the Party involved in liquidation or bankruptcy proceedings, as applicable, shall promptly transfer to the terminating Party all Regulatory Materials, study reports, data, including safety data, results, findings and other information generated under the Agreement and transfer all of the rights, title and interest to any Intellectual Property (to the extent not already assigned) that is necessary or desirable to continue Development, manufacturing or Commercialization of the Licensed Compound and of Products. With regard to royalties and milestone payments under Article 5, the obligations of the Party that terminates this Agreement per Article 11.3(a) or Article 11.3(b) shall survive termination and only terminate upon expiration of the Term, however, any such royalties or milestone payments shall be placed in a joint escrow account until damages (if any) which may be payable by the other Party to the terminating Party arising from Article 8 or Article 9 are determined and, if applicable, offset. Any royalties or other payments due and payable to the other Party by the terminating Party may be offset by any such damages, if applicable. Falk shall, in accordance with this Article 11.3(c) and Article 8.3, be permitted to offset any fees and payments paid by Falk to ATX pursuant to the subsequent License Agreement with ATX as contemplated in the side letter agreement between Falk and ATX set forth in Exhibit C and Falk shall be permitted to offset any fees and payments due to CSMC and any consulting fees due to the CSMC Inventors pursuant to the subsequent Exclusive License Agreement with CSMC and the subsequent Consulting Agreements with the CSMC Inventors as contemplated in the side letter agreement set forth in Exhibit E. As far as the terminating Party elects to Develop, manufacture, or Commercialize the Licensed Compound or a Product in the Field in the other Party´s Territory Article 5.4 or 5.5, as applicable, shall apply accordingly, i.e., in the event Falk is the terminating Party then Falk shall pay royalties according to Article 5.4 and in the event Prometheus is the terminating Party then Prometheus shall pay royalties according to Article 5.5.

11.4 Survival. Upon termination or expiration of this Agreement obligations and rights of a Party that expressly or by nature shall survive any termination or expiration of this Agreement will survive any termination or expiration of this Agreement. In particular, termination or expiration of this Agreement will not affect rights or obligations of the Parties under this Agreement that have accrued before the date of termination or expiration. Notwithstanding anything to the contrary, in particular the following provisions will survive any expiration or termination of this Agreement: Article 4.9 (Pharmacovigilance), Article 5 (Compensation), Article 6 (Intellectual Property), Article 9 (Indemnification), Article 10 (Confidentiality), Article 11 (Term and Termination), Article 12 (Dispute Resolution) and Article 13 (Miscellaneous).


ARTICLE 12

DISPUTE RESOLUTION

12.1 Arbitration. In the event of any disputes, controversies or differences between the Parties (except for disputes arising from the JSC, which will be handled pursuant to Article 11.2 and only handled pursuant to this Article 12.1 as provided in Article 12.2), arising out of, in relation to, or in connection with this Agreement, including any alleged failure to perform, or breach, of this Agreement, or any issue relating to the validity, construction, interpretation, enforceability, breach, performance, application, or termination of this Agreement a (“Dispute”), then upon the written request of either Party, the Parties agree to meet and discuss in good faith an amicable resolution thereof, which good faith efforts include at least [***] in-person meeting between the Executive Officers of each Party. If the Dispute is not resolved within [***] ([***]) days following the written request for amicable resolution, then either Party may then initiate arbitration under this Article 11.1. Any Dispute that the Parties do not resolve through amicable resolution will be finally settled by binding arbitration administered by the International Chamber of Commerce (ICC) under the ICC Rules of Arbitration by one or more arbitrators appointed in accordance with the said Rules. The language of the arbitration will be English, and the Parties agree that the place of such arbitration shall be London, England in the United Kingdom of Great Britain and Northern Ireland. Judgment on the award may be entered in any court having jurisdiction. Except as may be required by law, neither Party may disclose the existence, content, or results of any arbitration hereunder without the prior written consent of both parties.

12.2 JSC Disputes. With respect to disputes arising from matters delegated or referred to the JSC pursuant to the terms of this Agreement, each of the Parties shall have the right, at any time after good faith efforts have failed to resolve a deadlock of the JSC, to request review of such matter by an Executive Officer of each of the Parties (“Executive Review”). A Party shall exercise its right to request Executive Review by providing a written notice to the other Party. The Executive Officers of each Party shall meet within [***] ([***]) days of the day such notice is delivered to the Parties, and shall engage in good faith efforts to resolve the deadlock. Within [***] ([***]) days of such meeting, the Executive Officers shall provide notice to the Parties stating whether they have been able to resolve the deadlock, and the nature of their decision if they have resolved the deadlock. Any such decision shall be binding on the Parties and the JSC.

12.3 Equitable Relief. Notwithstanding Articles 11.1 and 11.2, each Party acknowledges that its breach of Article 9 may cause irreparable harm to the other Party, which cannot be reasonably or adequately compensated by damages in an action at law. By reason thereof, each Party agrees that the other Party may, in addition to any other remedies it may have under this Agreement or otherwise, seek preliminary and permanent injunctive and other equitable relief from any court of competent jurisdiction to prevent or curtail any actual or threatened breach of Article 9 that is reasonably likely to cause it irreparable harm. In addition, notwithstanding Articles 11.1 and 11.2, to the fullest extent provided by Law, either Party may bring an action in any court of competent jurisdiction for injunctive relief (or any other provisional remedy) to protect a Party’s rights or enforce a Party’s obligations under this Agreement pending final resolution of any claims related thereto pursuant to the dispute resolution procedure set forth in Article 11.1.


12.4 Governing Law. This Agreement and all disputes arising out of or related to this Agreement or any breach hereof are governed by and construed under the laws of the Federal Republic of Germany without giving effect to any choice of law principles that would require the application of the laws of a different country.

12.5 Patent and Trademark Disputes. Notwithstanding Article 12.1, any dispute, controversy or claim relating to the scope, validity, enforceability or infringement of any Patent or trademark rights covering the manufacture, use, importation, offer for sale or sale of Product will be submitted to a court of competent jurisdiction in the country in which such Patent or trademark rights were granted or arose.

ARTICLE 13

MISCELLANEOUS

13.1 Entire Agreement; Amendment. This Agreement, including any Exhibits hereto, and any other documents delivered pursuant hereto or thereto sets forth the complete, final and exclusive agreement and all the covenants, promises, agreements, warranties, representations, conditions and understandings between the Parties hereto and thereto and their Affiliates with respect to the subject matter hereof and supersedes, as of the Effective Date, all prior and contemporaneous agreements and understandings between the Parties with respect to the subject matter hereof. There are no covenants, promises, agreements, warranties, representations, conditions or understandings, either oral or written, between the Parties with respect to the subject matter of this Agreement other than as are set forth in this Agreement and the Development Plan. No subsequent alteration, amendment, change or addition to this Agreement will be binding upon the Parties unless reduced to writing and signed by an authorized officer of each Party.

13.2 Force Majeure. The performance by either Party of its respective obligations under this Agreement will be excused during the period of time that such performance is delayed or prevented in whole or in part by acts of God, fire, floods, storms, explosions, epidemics, war, act or threat of terrorist activity, emergency, civil disorder, strikes, lockouts or other labor difficulties or shortages, or the like. (each such event, a “Force Majeure Event”). A Party whose performance is affected by a Force Majeure Event shall give the other Party prompt notice of the occurrence of such event, and shall use Commercially Reasonable Efforts to remove the cause of such event and to resume performance hereunder. If a Force Majeure Event prevents a Party from performing hereunder for more than [***] ([***]) calendar days, the other Party shall have the right to terminate this Agreement upon notice to the Party whose performance is affected.

13.3 Notices. Any notice required or permitted to be given under this Agreement will be in writing, will specifically refer to this Agreement, and will be addressed to the appropriate Party at the address specified below or such other address as may be specified by such Party in writing in accordance with this Article 13.3, and will be deemed to have been given for all purposes (a) when received, if hand-delivered, (b) when received if sent by confirmed electronic mail or facsimile (or otherwise on the next succeeding Business Day after being sent if not so confirmed) so long as such notice is followed by a timely confirmation copy mailed by first class certified or


registered airmail, postage prepaid, return receipt requested or sent by a reputable courier service, or (c) on the date of receipt by the recipient thereof if received prior to 5:00 pm in the place of receipt and such day is a Business Day (or otherwise on the next succeeding Business Day), if mailed by first class certified or registered airmail, postage prepaid, return receipt requested or sent by a reputable courier service.

If to Prometheus:

PROMETHEUS BIOSCIENCES, INC.

9410 Carroll Park Dr.

San Diego, CA 92121

USA

  Attn:

Chief Scientific Officer

With copy (which shall not constitute notice) to:    General Counsel

If to Falk:

DR. FALK PHARMA GMBH

Leinenweberstraße 5

79108 Freiburg im Breisgau

Germany

  Attn:

Managing Director, Medicines & Pharmaceutics

13.4 No Strict Construction; Interpretation; Headings. Except where the context otherwise requires, wherever used, the singular includes the plural, the plural the singular, the use of any gender applies to all genders. The word “or” is used in the disjunctive sense and the word and is used in the conjunctive sense. Whenever this Agreement refers to a number of days, unless otherwise specified, such number refers to days. The captions of this Agreement are for convenience of reference only and in no way define, describe, extend, or limit the scope or intent of this Agreement or the intent of any provision contained in this Agreement. The term “including,” “include,” or “includes” means including, without limiting the generality of any description preceding such term. Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document will be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or therein), (ii) any reference to any applicable Laws will be construed as referring to such Laws as from time to time enacted, repealed or amended, (iii) any reference to any person will be construed to include the person’s successors and permitted assigns, (iv) the words “herein”, “hereof” and “hereunder”, and words of similar import, will be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (v) any reference to the words “mutually agree” or “mutual written agreement” will not impose any obligation on either Party to agree to any terms relating thereto or to engage in discussions relating to such terms except as such Party may determine in such Party’s sole discretion, (vi) all references to Articles or Exhibits will be construed to refer to Articles and Exhibits to this Agreement, (vii) the word “days” means calendar days unless otherwise specified, and (viii) the words “copy” and “copies” and words of similar import when used in this Agreement include, to the extent available, electronic copies, files or


databases containing the information, files, items, documents or materials to which such words apply. The headings of each Article and Article in this Agreement have been inserted for convenience of reference only and are not intended to limit or expand on the meaning of the language contained in the particular Article or Article. Each Party represents that it has been represented by legal counsel in connection with this Agreement and acknowledges that it has participated in the drafting hereof. In interpreting and applying the terms and provisions of this Agreement, the Parties agree that no presumption will apply against the Party which drafted such terms and provisions.

13.5 Assignment. Neither Party may assign or transfer this Agreement or any rights or obligations hereunder without the prior written consent of the other Party. For the avoidance of doubt, the foregoing sentence also applies to a Party´s ownership share of any jointly-owned Prometheus Technology and Falk Technology and also applies to an assignment or transfer to an Affiliate of a Party. Any successor or assignee of rights or obligations permitted hereunder will, in writing to the other Party, expressly assume performance of such rights or obligations. Any permitted assignment will be binding on the successors of the assigning Party. Any assignment or attempted assignment by either Party in violation of the terms of this Article 13.5 is null, void and of no legal effect. This Article 13.5 does not apply to share deals regarding the transfer of shares of a Party and this Agreement does not contain a clause regarding a change of control.

13.6 Severability. Each of the provisions contained in this Agreement will be severable, and the unenforceability of one will not affect the enforceability of any others or of the remainder of this Agreement. If any one or more of the provisions of this Agreement, or the application thereof in any circumstances, is held to be invalid, illegal, or unenforceable in any respect for any reason, the Parties shall negotiate in good faith with a view to the substitution therefor of a suitable and equitable solution to carry out, so far as may be valid and enforceable, the intent and purpose of such invalid provision; provided, however, that the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions of this Agreement will not be in any way impaired thereby, it being intended that all of the rights and privileges of the Parties hereto will be enforceable to the fullest extent permitted by Law.

13.7 No Waiver. Any term or condition of this Agreement may be waived at any time by the Party that is entitled to the benefit thereof, but no such waiver will be effective unless set forth in a written instrument duly executed by or on behalf of the Party waiving such term or condition. The waiver, delay or the failure of any Party to enforce or exercise any term, condition or part of this Agreement at any time or in any one or more instances will not be deemed to be or construed as a waiver of the same or any other term, condition or part, nor will it forfeit any rights, power or privilege to future enforcement thereof. No single or partial exercise of any right, power or privilege will preclude any other or further exercise of such right, power or privilege or the exercise of any other right, power or privilege. To the maximum extent permitted by applicable Law, (a) no claim or right arising out of this Agreement or any of the documents referred to in this Agreement can be discharged by one Party, in whole or in part, by a waiver or renunciation of the claim or right unless in writing signed by the other Party; (b) no waiver that may be given by a Party will be applicable except in the specific instance for which it is given; and (c) no notice to or demand on one Party will be deemed to be a waiver of any obligation of that Party or of the right of the Party giving such notice or demand to take further action without notice or demand as provided in this Agreement or the documents referred to in this Agreement. Except as expressly


set forth in this Agreement, all rights and remedies available to a Party, whether under this Agreement or afforded by Law or otherwise, will be cumulative and not in the alternative to any other rights or remedies that may be available to such Party.

13.8 Relationship of the Parties. Neither Party will have any responsibility for the hiring, termination or compensation of the other Party’s employees or for any employee benefits of such employee. No employee or representative of a Party will have any authority to bind or obligate the other Party to this Agreement for any sum or in any manner whatsoever, or to create or impose any contractual or other liability on the other Party without said Party’s approval. For all purposes, and notwithstanding any other provision of this Agreement to the contrary, each Party shall act solely as an independent contractor, and nothing in this Agreement gives either Party the power or authority to act for, bind, or commit the other Party in any way. This Agreement is not a partnership agreement. Nothing in this Agreement will be construed to establish a relationship of partners or joint ventures between the Parties. The relationship between Falk and Prometheus does not constitute a partnership, joint venture, or agency. Neither Falk nor Prometheus shall make any statements, representations, or commitments of any kind, or to take any action that is binding on the other, without the prior consent of the other Party to do so.

13.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which is an original, but all of which together constitute one and the same instrument. Each Party may execute this Agreement by facsimile transmission or in AdobeTM Portable Document Format (“PDF”) sent by electronic mail. In addition, facsimile or PDF signatures of authorized signatories of any Party will be deemed to be original signatures and will be valid and binding, and delivery of a facsimile or PDF signature by any Party will constitute due execution and delivery of this Agreement.

13.10 Expenses. Each of the Parties will bear its own direct and indirect expenses incurred in connection with the negotiation and preparation of this Agreement and, except as set forth in this Agreement, the performance of the obligations contemplated hereby and thereby.

[remainder of this page intentionally left blank]


IN WITNESS WHEREOF, the Parties hereto have caused this License and Development Agreement to be executed by their duly authorized officers as of the Effective Date.

 

PROMETHEUS BIOSCIENCES, INC.   DR. FALK PHARMA GMBH
By:  

/s/ Mark C. McKenna

  By:  

/s/ Philipp Argast

Name:   Mark C. McKenna   Name:   Philipp Argast
Title:   CEO   Title:   CFO
By:  

/s/ Christopher Slavinsky

  By:  

 

Name:   Christopher Slavinsky   Name:  

 

Title:   General Counsel & Secretary   Title:  

 


EXHIBIT A

- [***] -


[***]


EXHIBIT B

- ATX Agreement -


EXHIBIT C

- Side Letter Agreement between Falk and ATX-


- Side letter agreement between ATX and Falk -

Alloy Therapeutics, LLC, a Delaware Limited Liability Corporation with offices located at 44 South Main Street, 2nd Floor, Hanover, NH, 03755 (“ATX”) and a wholly owned subsidiary of the Alloy Therapeutics Inc., a Delaware corporation with offices located at 44 Hartwell Avenue, Lexington, MA 02421, U.S., USA, and

Dr. Falk Pharma GmbH, a German corporation registered with the Commercial Register of the Amtsgericht Freiburg under HRB 3266 and having offices at Leinenweberstraße 5, 79108 Freiburg im Breisgau, Germany (“Falk”);

Hereby enter into this side letter agreement with respect to the License Agreement dated March 18, 2020 and entered into by and between ATX and Prometheus Biosciences, Inc. a Delaware Corporation (file number 6193517) and having a principle place of business at 9410 Carroll Park Dr., San Diego, CA 92121, USA (“License Agreement”):

 

1.

In the event of an early termination of the License Agreement according to Section 10.2, 10.3, 10.4, 10.5 of the License Agreement or in any other case of an early termination of the License Agreement, ATX will timely notify Falk, in writing, of such an early termination and any and all past due financial obligations which are due from Prometheus to ATX LLC as of the effective date of such early termination (“Termination Notice”).

 

2.

Upon receipt of a Termination Notice from ATX, Falk shall have the right, for a period of [***] ([***]) days, to enter into a license agreement with ATX for any Partnered Antibody Programs relating to PR600 and funded by Falk on substantially similar terms as set forth in the License Agreement to enable the transition of the activities of Prometheus to Falk. Falk may accept the offer of ATX only within [***] after the notification of Falk by ATX of an early termination of the License Agreement and of any payments made by Prometheus to ATX under the License Agreement reducing the payment obligations provided for in the License Agreement. ATX agrees that it will not hold Falk liable for any duty of Prometheus under the License Agreement. For the avoidance of doubt, Falk shall be responsible only for any fees and payments as such payments relate to PR600 and upon execution of a license agreement with ATX. Notwithstanding the foregoing, any past due financial obligations due from Prometheus to ATX as stated in the Termination Notice shall be cured before Falk may enter into a license agreement with ATX.

 

3.

All notices, including Termination Notices, and other communications hereunder shall be in writing and shall be deemed to have been duly given or delivered (a) when sent, if sent by electronic mail, provided the electronic mail receipt is promptly confirmed by telephone or electronic mail, (b) when delivered, if delivered personally to the intended recipient and (c) three days following sending by overnight delivery via a reputable international courier service that maintains record of receipt and, in each case, addressed to a Party at the following address for such Party.


If to ATX:

Alloy Therapeutics, LLC c/o Ulysses Diversified Holdings

44 South Main Street, 2nd Floor

Hanover, NH 03755

USA

Attention: [***]

Email: [***]

with copy to (which shall not constitute notice):

Attention: [***]

Email: [***]

If to Falk:

Dr. Falk Pharma GmbH

Leinenweberstraße 5

79108 Freiburg im Breisgau

Germany

Attn: Managing Director, Medicines & Pharmaceutics

 

4.

This Agreement shall be governed by, and construed and enforced in accordance with, the laws and regulations of the State of New York, as well as United States federal law and regulations, without giving effect to any conflicts of laws principles. Any legal suit, action or proceeding arising out of or related to this Agreement or the licenses granted hereunder shall be instituted exclusively in the federal courts of the United States or the courts of the State of New York, in each case located in the State of New York, and each Party irrevocably submits to the exclusive jurisdiction of such courts in any such suit, action or proceeding, and irrevocably waives any objection based on inconvenient forum or lack of personal jurisdiction. Service of process, summons, notice or other document by mail to such Party’s address set forth herein shall be effective service of process for any suit, action or other proceeding brought in any such court.


Alloy Therapeutics, LLC     Dr. Falk Pharma GmbH
Date:  

7/29/2020

    Date:  

30 July 2020

/s/ [Name Illegible]

   

/s/ Philipp Argast

(Name, title)     (Name, title)

CEO

   

Philipp Argast, CFO

(Name, title)     (Name, title)


EXHIBIT D

- CSMC Agreement (Extract) -

EX-23.1 22 d14529dex231.htm EX-23.1 EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

Prometheus Biosciences, Inc.

San Diego, California

We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated February 19, 2021, relating to the consolidated financial statements of Prometheus Biosciences, Inc., which is contained in that Prospectus.

We also consent to the reference to us under the caption “Experts” in the Prospectus.

/s/  BDO USA, LLP

San Diego, California

February 19, 2021

 

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