Conatus Pharmaceuticals
Conatus Pharmaceuticals Inc. (Form: 10-Q, Received: 05/05/2016 16:15:18)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

Commission file number: 001-36003

 

CONATUS PHARMACEUTICALS INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

20-3183915

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16745 W. Bernardo Dr., Suite 200

 

San Diego, CA

92127

(Address of Principal Executive Offices)

(Zip Code)

(858) 376-2600

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

Large accelerated filer

¨

Accelerated filer

x

 

 

 

 

Non-accelerated filer

¨   (Do not check if a smaller reporting company)

Smaller reporting company

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨      No   x

As of May 2, 2016, the registrant had 21,247,158 shares of common stock ($0.0001 par value) outstanding.

 

 

 


CONATUS PHARMACEUTICALS INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

Condensed Balance Sheets

3

 

 

 

 

Condensed Statements of Operations and Comprehensive Loss

4

 

 

 

 

Condensed Statements of Cash Flows

5

 

 

 

 

Notes to Condensed Financial Statements

6

 

 

 

ITEM 2.

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

13

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

19

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

19

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

21

 

 

 

ITEM 1A.

RISK FACTORS

21

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

21

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

21

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

21

 

 

 

ITEM 5.

OTHER INFORMATION

21

 

 

 

ITEM 6.

EXHIBITS

21

 

 

SIGNATURES

22

 

 

EXHIBIT INDEX

23

 

 

 

 

 

2


PART I. FINANCI AL INFORMATION

 

 

ITEM 1.

FINANCIAL STATEMENTS

Conatus Pharmaceuticals Inc.

Condensed Balance Sheets

(Unaudited)

 

 

March 31,

2016

 

 

December 31,

2015

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19,586,035

 

 

$

13,876,090

 

Marketable securities

 

 

12,984,682

 

 

 

22,632,019

 

Prepaid and other current assets

 

 

1,849,782

 

 

 

1,982,031

 

Total current assets

 

 

34,420,499

 

 

 

38,490,140

 

Property and equipment, net

 

 

336,124

 

 

 

344,734

 

Other assets

 

 

876,129

 

 

 

892,394

 

Total assets

 

$

35,632,752

 

 

$

39,727,268

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,192,884

 

 

$

2,545,894

 

Accrued compensation

 

 

891,393

 

 

 

1,436,804

 

Total current liabilities

 

 

3,084,277

 

 

 

3,982,698

 

Note payable

 

 

1,000,000

 

 

 

1,000,000

 

Deferred rent

 

 

197,300

 

 

 

204,224

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.0001 par value; 10,000,000 shares authorized; no shares

   issued and outstanding

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000,000 shares authorized; 21,098,458 shares

   issued and 21,075,405 shares outstanding, excluding 23,053 shares subject to

   repurchase, at March 31, 2016; 19,877,857 shares issued and 19,845,611 shares

   outstanding, excluding 32,246 shares subject to repurchase, at December 31, 2015

 

 

2,108

 

 

 

1,984

 

Additional paid-in capital

 

 

159,514,226

 

 

 

155,441,280

 

Accumulated other comprehensive income (loss)

 

 

5,736

 

 

 

(3,907

)

Accumulated deficit

 

 

(128,170,895

)

 

 

(120,899,011

)

Total stockholders’ equity

 

 

31,351,175

 

 

 

34,540,346

 

Total liabilities and stockholders’ equity

 

$

35,632,752

 

 

$

39,727,268

 

 

See accompanying notes to condensed financial statements.

 

 

3


Conatus Pharmaceuticals Inc.

Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

4,698,462

 

 

$

3,883,613

 

General and administrative

 

 

2,576,127

 

 

 

2,081,309

 

Total operating expenses

 

 

7,274,589

 

 

 

5,964,922

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest income

 

 

26,978

 

 

 

11,419

 

Interest expense

 

 

(17,500

)

 

 

(17,500

)

Other expense

 

 

(6,773

)

 

 

(8,661

)

Total other income (expense)

 

 

2,705

 

 

 

(14,742

)

Net loss

 

 

(7,271,884

)

 

 

(5,979,664

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Net unrealized gains on marketable securities

 

 

9,643

 

 

 

10,758

 

Comprehensive loss

 

$

(7,262,241

)

 

$

(5,968,906

)

Net loss per share, basic and diluted

 

$

(0.35

)

 

$

(0.38

)

Weighted average shares outstanding used in computing

   net loss per share, basic and diluted

 

 

20,626,044

 

 

 

15,581,886

 

 

See accompanying notes to condensed financial statements.

 

 

4


Conatus Pharmaceuticals Inc.

Condensed Statements of Cash Flows

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(7,271,884

)

 

$

(5,979,664

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

26,725

 

 

 

17,096

 

Stock-based compensation expense

 

 

901,924

 

 

 

821,672

 

Amortization of premium on marketable securities

 

 

22,122

 

 

 

102,775

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid and other current assets

 

 

224,354

 

 

 

272,957

 

Accounts payable and accrued expenses

 

 

(252,818

)

 

 

(939,801

)

Accrued compensation

 

 

(544,584

)

 

 

(278,069

)

Deferred rent

 

 

(3,850

)

 

 

35,295

 

Net cash used in operating activities

 

 

(6,898,011

)

 

 

(5,947,739

)

Investing activities

 

 

 

 

 

 

 

 

Maturities of marketable securities

 

 

13,875,000

 

 

 

14,578,000

 

Purchase of marketable securities

 

 

(4,240,142

)

 

 

(10,211,361

)

Capital expenditures

 

 

(105,114

)

 

 

 

Net cash provided by investing activities

 

 

9,529,744

 

 

 

4,366,639

 

Financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net of offering costs

 

 

3,076,709

 

 

 

 

Deferred public offering costs

 

 

 

 

 

(30,965

)

Proceeds from stock issuances under employee stock purchase plan and

   exercise of stock options

 

 

1,503

 

 

 

2,106

 

Net cash provided by (used in) financing activities

 

 

3,078,212

 

 

 

(28,859

)

Net increase (decrease) in cash and cash equivalents

 

 

5,709,945

 

 

 

(1,609,959

)

Cash and cash equivalents at beginning of period

 

 

13,876,090

 

 

 

9,912,674

 

Cash and cash equivalents at end of period

 

$

19,586,035

 

 

$

8,302,715

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

17,500

 

 

$

17,500

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Deferred public offering costs included in accounts payable

 

$

 

 

$

185,688

 

 

See accompanying notes to condensed financial statements.

 

 

5


Conatus Pharmaceuticals Inc.

Notes to Condensed Financial Statements

(Unaudited)

 

 

 

1.

Organization and Basis of Presentation

Conatus Pharmaceuticals Inc. (the Company) was incorporated in the state of Delaware on July 13, 2005. The Company is a biotechnology company focused on the development and commercialization of novel medicines to treat liver disease.

As of March 31, 2016, the Company has devoted substantially all of its efforts to product development and has not realized revenues from its planned principal operations.

The Company has a limited operating history, and the sales and income potential of the Company’s business and market are unproven. The Company has experienced net losses since its inception and, as of March 31, 2016, had an accumulated deficit of $128.2 million. The Company expects to continue to incur net losses for at least the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. If the Company is unable to generate revenues adequate to support its cost structure, the Company may need to raise additional equity or debt financing.

The accompanying unaudited interim condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and the rules and regulations of the Securities and Exchange Commission (SEC) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. The operating results presented in these unaudited interim condensed financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed financial statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2015 included in the Company’s annual report on Form 10-K filed with the SEC on March 11, 2016.

 

 

 

2.

Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable securities. The Company maintains deposits in federally insured financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to significant risk on its cash. Additionally, the Company established guidelines regarding approved investments and maturities of investments, which are designed to maintain safety and liquidity.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include cash in readily available checking and money market accounts.

6


Marketable Securities

The Company classifies its marketable securities as available-for-sale and records such assets at estimated fair value in the condensed balance sheets, with unrealized gains and losses, if any, reported as a component of other comprehensive income (loss) within the condensed statements of operations and comprehensive loss and as a separate component of stockholders’ equity. The Company classifies marketable securities with remaining maturities greater than one year as current assets because such marketable securities are available to fund the Company’s current operations. The Company invests its excess cash balances primarily in corporate debt securities and money market funds with strong credit ratings. Realized gains and losses are calculated on the specific identification method and recorded as interest income. There were no realized gains and losses for the three-month periods ended March 31, 2016 and 2015.

At each balance sheet date, the Company assesses available-for-sale securities in an unrealized loss position to determine whether the unrealized loss is other-than-temporary. The Company considers factors including: the significance of the decline in value compared to the cost basis, underlying factors contributing to a decline in the prices of securities in a single asset class, the length of time the market value of the security has been less than its cost basis, the security’s relative performance versus its peers, sector or asset class, expected market volatility and the market and economy in general. When the Company determines that a decline in the fair value below its cost basis is other-than-temporary, the Company recognizes an impairment loss in the period in which the other-than-temporary decline occurred. There have been no other-than-temporary declines in the value of marketable securities, as it is more likely than not the Company will hold the securities until maturity or a recovery of the cost basis.

Fair Value of Financial Instruments

The carrying amounts of prepaid and other current assets, accounts payable and accrued expenses are reasonable estimates of their fair value because of the short maturity of these items.

Stock-Based Compensation

Stock-based compensation expense for stock option grants under the Company’s stock option plans is recorded at the estimated fair value of the award as of the grant date and is recognized as expense on a straight-line basis over the requisite service period of the stock-based award. Stock-based compensation expense for employee stock purchases under the Company’s 2013 Employee Stock Purchase Plan (the ESPP) is recorded at the estimated fair value of the purchase as of the plan enrollment date and is recognized as expense on a straight-line basis over the applicable six-month ESPP offering period.  The estimation of stock option and ESPP fair value requires management to make estimates and judgments about, among other things, employee exercise behavior, forfeiture rates and volatility of the Company’s common stock. The judgments directly affect the amount of compensation expense that will be recognized.

Property and Equipment

Property and equipment, which consists of furniture and fixtures, computers and office equipment and leasehold improvements, are stated at cost and depreciated over the estimated useful lives of the assets (three to five years) using the straight-line method. Leasehold improvements are amortized over the shorter of their estimated useful lives or the lease term.

Long-Lived Assets

The Company regularly reviews the carrying value and estimated lives of all of its long-lived assets, including property and equipment, to determine whether indicators of impairment may exist which warrant adjustments to carrying values or estimated useful lives. The determinants used for this evaluation include management’s estimate of the asset’s ability to generate positive income from operations and positive cash flow in future periods, as well as the strategic significance of the assets to the Company’s business objective. Should an impairment exist, the impairment loss would be measured based on the excess of the carrying amount of the asset’s fair value. The Company has not recognized any impairment losses through March 31, 2016.

Research and Development Expenses

All research and development costs are expensed as incurred.

7


Income Taxes

The Company’s policy related to accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attribute criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. As of December 31, 2015, there are no unrecognized tax benefits included in the condensed balance sheet that would, if recognized, affect the Company’s effective tax rate, and the Company has noted no material changes through March 31, 2016. The Company has not recognized interest and penalties in the condensed balance sheets or condensed statements of operations and comprehensive loss. The Company is subject to U.S. and California taxation. As of December 31, 2015, the Company’s tax years beginning 2005 to date are subject to examination by taxing authorities.

Comprehensive Loss

The Company is required to report all components of comprehensive loss, including net loss, in the condensed financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources, including unrealized gains and losses on marketable securities. Comprehensive gains (losses) have been reflected in the condensed statements of operations and comprehensive loss for all periods presented.

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is used in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and managed its business as one segment operating primarily in the United States.

Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities, which include warrants to purchase common stock, outstanding stock options under the Company’s stock option plans, common stock subject to repurchase by the Company and potential shares to be purchased under the ESPP, have been excluded from the computation of diluted net loss per share in the periods in which they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position.

The following table sets forth the outstanding potentially dilutive securities that have been excluded in the calculation of diluted net loss per share because to do so would be anti-dilutive.

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Warrants to purchase common stock

 

 

149,704

 

 

 

149,704

 

Common stock options issued and outstanding

 

 

3,309,993

 

 

 

2,370,073

 

Common stock subject to repurchase

 

 

23,053

 

 

 

103,177

 

ESPP shares pending issuance

 

 

15,302

 

 

 

5,154

 

Total

 

 

3,498,052

 

 

 

2,628,108

 

 

Recent Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This guidance requires management to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued. If such conditions or events exist, certain disclosures are required. ASU No. 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU No. 2014-15 on its financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This guidance requires organizations that lease assets with lease terms of more than 12 months to recognize on the balance sheet the assets and liabilities for the rights and obligations

8


created by those leases. The ASU also requires disclosures to give financial statement users information on the amount, timing and uncertainty of cash flows arising from leases, including qualitative and quantitative information. For public companies, ASU No. 2016-0 2 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU No. 2016-02 on its financial state ments and related disclosures .

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718). This guidance changes the accounting for certain aspects of stock-based compensation, including income taxes, forfeitures, tax withholding and classification on the statement of cash flows. For public companies, ASU No. 2016-09 is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU No. 2016-09 on its financial statements and related disclosures.

 

 

 

3.

Fair Value Measurements

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 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:

Includes financial instruments for which quoted market prices for identical instruments are available in active markets.

 

 

Level 2:

Includes financial instruments for which there are inputs other than quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets with insufficient volume or infrequent transaction (less active markets) or model-driven valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

 

Level 3:

Includes financial instruments for which fair value is derived from valuation techniques in which one or more significant inputs are unobservable, including management’s own assumptions.

 

Below is a summary of assets and liabilities measured at fair value as of March 31, 2016 and December 31, 2015.

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

March 31,

2016

 

 

Quoted   Prices in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

13,176,163

 

 

$

13,176,163

 

 

$

 

 

$

 

Corporate debt securities

 

 

18,183,366

 

 

 

 

 

 

18,183,366

 

 

 

 

Total assets

 

$

31,359,529

 

 

$

13,176,163

 

 

$

18,183,366

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

 

 

December 31,

2015

 

 

Quoted   Prices   in

Active Markets

for Identical

Assets (Level 1)

 

 

Significant

Other

Observable

Inputs (Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

10,221,563

 

 

$

10,221,563

 

 

$

 

 

$

 

Corporate debt securities

 

 

24,334,917

 

 

 

 

 

 

24,334,917

 

 

 

 

Total assets

 

$

34,556,480

 

 

$

10,221,563

 

 

$

24,334,917

 

 

$

 

 

9


The Company’s marketable securities, consisting principally of debt securities, are classified as available-for-sale, are stated at fair value, and consist of Level 2 financial instruments in the fair value hierarchy. The Company determines the fair value of its debt security hol dings based on pricing from a service provider. The service provider values the securities based on using market prices from a variety of industry-standard independent data providers. Such market prices may be quoted prices in active markets for identical assets (Level 1 inputs) or pricing determined using inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs), such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market an d contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures.

 

 

 

4.

Marketable Securities

The Company invests its excess cash in money market funds and debt instruments of financial institutions, corporations, government sponsored entities and municipalities. The following tables summarize the Company’s marketable securities:

 

As of March 31, 2016

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Corporate debt securities

 

1 or less

 

$

12,978,946

 

 

$

6,015

 

 

$

(279

)

 

$

12,984,682

 

Total

 

 

 

$

12,978,946

 

 

$

6,015

 

 

$

(279

)

 

$

12,984,682

 

 

As of December 31, 2015

 

Maturity

(in years)

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Estimated

Fair Value

 

Corporate debt securities

 

1 or less

 

$

22,635,926

 

 

$

6,770

 

 

$

(10,677

)

 

$

22,632,019

 

Total

 

 

 

$

22,635,926

 

 

$

6,770

 

 

$

(10,677

)

 

$

22,632,019

 

 

 

 

5.

Property and Equipment

Property and equipment consist of the following:

 

 

 

March 31,

2016

 

 

December 31,

2015

 

Furniture and fixtures

 

$

333,670

 

 

$

326,788

 

Computer equipment and office equipment

 

 

170,006

 

 

 

170,946

 

Leasehold improvements

 

 

152,217

 

 

 

142,032

 

 

 

 

655,893

 

 

 

639,766

 

Less accumulated depreciation and amortization

 

 

(319,769

)

 

 

(295,032

)

Total

 

$

336,124

 

 

$

344,734

 

 

 

 

6.

Note Payable

In July 2010, the Company entered into a $1.0 million promissory note payable to Pfizer Inc. (Pfizer). The note bears interest at 7% per annum, which is paid quarterly, and matures on July 29, 2020. The note payable prohibits the Company from paying cash dividends and is subject to acceleration upon specified events of default as defined in the agreement, including the failure to notify Pfizer of certain material adverse events. In July 2013, the note payable to Pfizer was amended to become convertible into shares of the Company’s common stock following the completion of the Company’s initial public offering (IPO), at the option of the holder, at a price per share equal to the fair market value of the common stock on the date of conversion.

 

 

 

7.

Stockholders’ Equity

Common Stock

In August 2014, the Company entered into an At Market Issuance Sales Agreement (the Sales Agreement) with MLV & Co. LLC (MLV), pursuant to which the Company may sell from time to time, at its option, up to an aggregate of $50.0 million of shares of its common stock through MLV, as sales agent. Sales of the Company’s common stock made pursuant to the Sales Agreement are made on The NASDAQ Global Market (Nasdaq) under the Company’s Registration Statement on Form S-3, filed with the SEC on August 14, 2014 and declared effective by the SEC on August 25, 2014, by means of ordinary brokers’ transactions at market prices. Additionally, under the terms of the Sales Agreement, the Company may also sell shares of its common stock through MLV, on Nasdaq or otherwise, at negotiated prices or at prices related to the prevailing market price. Under the terms of the Sales Agreement, MLV may not engage in any proprietary trading or trading as principal for MLV’s own account. MLV has agreed to use commercially reasonable efforts consistent with its normal trading and sales practices to sell the Company’s common stock from time to time, based upon the Company’s instructions (including any price, time or size limits or other customary parameters or conditions the Company

10


may impose). The Company has agreed to pay a commission rate equal to up to 3% of the gross sales price per share sold. The Company has also agreed to provide MLV with customary indemnifi cation and contribution rights. During the three months ended March 31, 2016, the Company sold 1,219,389 shares of its common stock pursuant to the Sales Agreement at a weighted average price per share of $2.68 and received net proceeds of $3.2 million, after deducting offering-related transaction costs and commissions . Of the net proceeds , $0.1 million was in prepaid and other current assets on the balance sheet at March 31, 2016 , pending receipt of payment for shares settled.

Warrants

In 2013, the Company issued warrants exercisable for 1,124,026 shares of Series B preferred stock, at an exercise price of $0.90 per share, to certain existing investors in conjunction with a private placement (the 2013 Warrants) and warrants exercisable for 111,112 shares of Series B preferred stock, at an exercise price of $0.90 per share, to Oxford Finance LLC and Silicon Valley Bank in conjunction with the Company’s entry into a loan and security agreement (the Lender Warrants). Upon completion of the IPO, the 2013 Warrants and the Lender Warrants became exercisable for 136,236 and 13,468 shares of common stock, respectively, at an exercise price of $7.43 per share. The 2013 Warrants and the Lender Warrants will expire on May 30, 2018 and July 3, 2023, respectively.

Stock Options

The following table summarizes the Company’s stock option activity under all stock option plans for the three months ended March 31, 2016:

 

 

 

Total

Options

 

 

Weighted-

Average

Exercise

Price

 

Balance at December 31, 2015

 

 

2,464,849

 

 

$

6.54

 

Granted

 

 

857,500

 

 

 

1.86

 

Exercised

 

 

(1,212

)

 

 

1.24

 

Cancelled

 

 

(11,144

)

 

 

9.47

 

Balance at March 31, 2016

 

 

3,309,993

 

 

$

5.32

 

 

Stock-Based Compensation

The Company recorded stock-based compensation of $0.9 million and $0.8 million for the three months ended March 31, 2016 and 2015, respectively.

Common Stock Reserved for Future Issuance

The following shares of common stock were reserved for future issuance at March 31, 2016:

 

Warrants to purchase common stock

 

 

149,704

 

Common stock options issued and outstanding

 

 

3,309,993

 

Common stock authorized for future option grants

 

 

741,067

 

Common stock authorized for the ESPP

 

 

582,086

 

Total

 

 

4,782,850

 

 

 

11


 

8.

Commitments

In February 2014, the Company entered into a noncancelable operating lease agreement (the Lease) for certain office space with a lease term from July 2014 through December 2019 and a renewal option for an additional five years. In May 2015, the Company entered into a first amendment to the Lease (the First Lease Amendment) for additional office space starting in September 2015 through September 2020. The First Lease Amendment also extended the term of the Lease to September 2020. The monthly base rent under the Lease and the First Lease Amendment increases approximately 3% annually from $32,784 in 2015 to $39,268 in 2020. Future minimum payments under this noncancelable operating lease total $1.9 million at March 31, 2016.

Rent expense was $94,501 and $71,130 for the three months ended March 31, 2016 and 2015, respectively.

In July 2010, the Company entered into a stock purchase agreement with Pfizer, pursuant to which the Company acquired all of the outstanding stock of Idun Pharmaceuticals, Inc., which was subsequently spun off to the Company’s stockholders in January 2013. Under the stock purchase agreement, the Company may be required to make payments to Pfizer totaling $18.0 million upon the achievement of specified regulatory milestones.

 

 

12


ITEM 2.

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

The following discussion and analysis and the unaudited interim condensed financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2015 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our annual report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 11, 2016.

Forward-Looking Statements

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical facts contained in this quarterly report, including statements regarding our future results of operations and financial position, business strategy, prospective products, product approvals, research and development costs, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products, 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,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this quarterly report 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 quarterly report and are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors.” 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 do not plan 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.

Overview

We are a biotechnology company focused on the development and commercialization of novel medicines to treat liver disease. We are developing emricasan, a first-in-class, orally active pan-caspase protease inhibitor, for the treatment of patients with chronic liver disease. Emricasan is designed to reduce the activities of human caspases, which are enzymes that mediate inflammation and apoptosis. We believe that by reducing the activity of these enzymes, emricasan has the potential to interrupt the progression of liver disease and potentially provide treatment options in multiple areas of liver disease. To date, emricasan has been studied in over 650 subjects in sixteen clinical trials across a broad range of liver disease etiologies and stages of progression. Preclinical studies and clinical trials have yielded compelling results that suggest emricasan may have clinical utility in slowing progression of liver disease regardless of the original cause of the disease.

We plan to focus on advancing toward initial registration of emricasan for patients with cirrhosis due to nonalcoholic steatohepatitis, or NASH, with parallel development toward registration of emricasan for patients with NASH fibrosis. In February 2016, we announced that the U.S. Food and Drug Administration, or the FDA, granted Fast Track designation to the emricasan development program for the treatment of liver cirrhosis caused by NASH. The Fast Track program provides greater access to the FDA in order to expedite review of drugs that have demonstrated the potential to treat serious or life-threatening conditions.

In September 2014, we initiated a six-month two-stage Phase 2 clinical trial in patients with liver cirrhosis due to different etiologies, including NASH, mild to moderate liver impairment and a Model for End-stage Liver Disease, or MELD, score of 11 to 18. In the first stage, which was double-blind and placebo-controlled, 86 patients from 26 U.S. sites were randomized 1:1 to receive either 25 mg of emricasan or placebo orally twice daily for three months. In January 2016, we announced that the results of the first stage of the trial showed a statistically significant reduction in cleaved Cytokeratin 18 vs. placebo in the overall patient population when adjusted for differences between treatment and placebo groups in baseline MELD score and disease etiology as specified in the trial statistical analysis plan. Two key secondary endpoints and clinically relevant measures of liver function and prognosis, MELD score and Child-Pugh-Turcotte score, demonstrated favorable trends vs. placebo in the overall patient population after three months of treatment. The trends in the overall patient population were driven by statistically significant improvements in a subgroup of patients with baseline MELD scores ≥15.

13


In May 2016, we announced top-line results from the three-month, open-label second stage of the Phase 2 trial in patients with liver cirrhosis. In the second stage of the trial, patients on emricasan in the first stage continued treatment for another three months, and patients on placebo in the first stage switched to emricasan for three months. In patients continuing emricasan treatment for an additional three months, MELD score and Child-Pugh-Turcotte score, along with other key liver function parameters, which demonstrated favorable trend s in emricasan treatment effects vs. placebo ( improvement in the emricasan group vs. progression in the placebo group ) in the overall patient population after three months of treatment, showed continued directional improvement after six months of treatment with emricasan.  In a subgroup of patients with baseline MELD scores ≥15, statistically significant emricasan treatment effects vs. placebo ( improvement in the emricasan group vs. progression in the placebo group ) after the first three months showed conti nued directional improvements after the second three months of treatment with emricasan. Emricasan was generally well-tolerated in the clinical trial, and the overall safety profile was similar in the emricasan and placebo groups with regard to both seriou s and other adverse events.

In patients whose liver cirrhosis was caused by NASH, statistically significant emricasan treatment effects vs. placebo (slower progression in the emricasan group than in the placebo group) on measures of liver function after the first three months showed continued directional improvement after the second three months. We believe the statistically significant treatment effects in the NASH patient subgroup, which applied regardless of baseline MELD scores, offer a range of options for future clinical trials in patients with NASH cirrhosis. Furthermore, we believe emricasan is the first drug candidate to demonstrate liver function benefit in patients with NASH cirrhosis. We intend to discuss these results and plans for the ENCORE-LF clinical trial in patients with NASH cirrhosis, discussed below, with regulatory authorities as we advance toward trial initiation in early 2017.

We plan to conduct a set of parallel trials, the ENCORE trials, designed to evaluate multiple doses of emricasan over various treatment durations in chronic liver disease of different etiologies and disease stages. We intend to initiate the following emricasan clinical trials on a staggered basis through early 2017 as resources permit and expect top-line results to be available periodically beginning in 2018, which we believe could position us to advance directly to filing for accelerated approval in NASH cirrhosis:

 

·

ENCORE-PH:  A planned randomized, double-blind, placebo-controlled clinical trial to evaluate the effect of emricasan in reducing hepatic venous pressure gradient in NASH cirrhosis patients with clinically significant portal hypertension and impaired hepatic function.

 

·

ENCORE-LF:  A planned randomized, double-blind, placebo-controlled clinical trial to assess long-term liver function endpoints of MELD score and Child-Pugh-Turcotte status, related serum biomarkers and laboratory parameters associated with liver function, and to collect chronic administration safety information in patients with NASH cirrhosis.  With the continued engagement of the regulatory authorities, we believe the six-month data from the recently completed Phase 2 liver cirrhosis trial may allow redesign of the ENCORE-LF clinical trial, originally planned as a Phase 2 trial, to qualify as a Phase 3 clinical trial.

 

·

ENCORE-XT:  A planned extension clinical trial to continue treatment for at least an additional 18 months, for a total of at least two years, in patients who complete the ENCORE-PH or ENCORE-LF trials, with continued monitoring for efficacy, safety, clinical outcomes and health-related quality of life.

 

·

ENCORE-NF:  We initiated the ENCORE-NF trial, a Phase 2b clinical trial evaluating emricasan’s potential long-term benefits for patients with liver fibrosis resulting from NASH in January 2016. This randomized, double blind, placebo-controlled clinical trial will evaluate the effect of emricasan in reducing fibrosis and steatohepatitis in approximately 330 patients with NASH fibrosis but not cirrhosis. Patients in this trial will be treated for 18 months. The primary endpoint will be a biopsy-based change in fibrosis by at least one stage using the NASH Clinical Research Network Histologic Scoring System, without worsening of steatohepatitis. Top-line results from the ENCORE-NF clinical trial are expected in 2018.

The ENCORE trials are designed to provide further information on doses leading to clinically relevant efficacy, including improvement in biopsy-proven fibrosis and inflammation in patients with NASH fibrosis, and improvement in severe portal hypertension and hepatic function in patients with NASH cirrhosis. The ENCORE trials are also designed to provide safety data to support the initial registration of emricasan for chronic administration in patients with liver cirrhosis. Depending on the strength of the efficacy and safety data, we believe the ENCORE trials could warrant discussions with regulatory agencies regarding potential accelerated approval. However, the decision to pursue such an accelerated approval will depend on multiple factors, including the size of the efficacy and safety database, the strength of the efficacy and safety data, the adequacy of the dose ranging data, and the regulatory agencies’ acceptance of a surrogate endpoint for trials of emricasan in patients with liver cirrhosis.

14


We also have an ongoing double-blind, placebo-controlled Phase 2b clinical trial in approximately 60 post-orthotopic liver transplant recipients with reestablished liver fibrosis as a result of recurrent hepatitis C viru s infection who have successfully achieved a sustained viral response following hepatitis C virus antiviral therapy with residual fibrosis or cirrhosis who will receive 25 mg of emricasan or placebo orally twice daily for two years. This trial was initiate d in May 2014 and the primary endpoint in this exploratory proof-of-concept trial is the change in the Ishak Fibrosis Score compared with placebo. Top-line results are expected in the first half of 2018.

Since our inception, our primary activities have been organizational activities, including recruiting personnel, conducting research and development, including clinical trials, and raising capital. We have funded our operations since inception primarily through sales of equity securities and convertible promissory notes.

We have no products approved for sale. We have not generated any revenues to date, and we have incurred significant operating losses since our inception. We have never been profitable and have incurred net losses of $24.1 million and $22.3 million in the years ended December 31, 2015 and 2014, respectively, and $7.3 million for the three months ended March 31, 2016. As of March 31, 2016, we had an accumulated deficit of $128.2 million.

We expect to continue to incur significant operating losses and negative cash flows from operating activities for the foreseeable future as we continue the clinical development of emricasan and seek regulatory approval for and, if approved, pursue commercialization of emricasan. In August 2014, we entered into an At Market Issuance Sales Agreement, or the Sales Agreement, with MLV & Co. LLC, or MLV, pursuant to which we may sell from time to time, at our option, up to an aggregate of $50.0 million of shares of our common stock in “at-the-market” offerings. As of March 31, 2016, we have sold 1,369,194 shares of our common stock pursuant to the Sales Agreement at a weighted average price per share of $3.05 and received net proceeds of $3.8 million, after deducting offering-related transaction costs and commissions. During the three months ended March 31, 2016, we sold 1,219,389 shares of our common stock pursuant to the Sales Agreement at a weighted average price per share of $2.68 and received net proceeds of $3.2 million, after deducting offering-related transaction costs and commissions.  

As of March 31, 2016, we had cash, cash equivalents and marketable securities of $32.6 million. Although it is difficult to predict future liquidity requirements, we believe that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months.  We will need to raise additional capital to fund further operations, which are expected to include completion of additional clinical trials of emricasan, regulatory filings for emricasan in the United States and the European Union and the potential commercialization of emricasan. We may obtain additional financing in the future through the issuance of our common stock in future public offerings, including under the Sales Agreement, through other equity or debt financings or through collaborations or partnerships with other companies.

Successful transition to profitability is dependent upon achieving a level of revenues adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities and, unless and until we do, we will need to raise substantial additional capital through equity or debt financings or through collaborations or partnerships with other companies. We may not be able to raise additional capital on terms acceptable to us, or at all, and any failure to raise capital as and when needed could have a material adverse effect on our results of operations, financial condition and our ability to execute on our business plan.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or 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,” we are electing not to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision not to take advantage of the extended transition period is irrevocable. In addition, we are in the process of evaluating the benefits of relying on the other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) 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 (auditor discussion and analysis) and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering, or IPO, or until we no longer meet the requirements of being an “emerging growth company,” whichever is earlier.

 

 

15


Financial Overview

Revenues

We currently have no products approved for sale, and we have not generated any revenues to date. We have not submitted any drug candidate for regulatory approval. In the future, we may generate revenues from a combination of milestone payments, reimbursements and royalties in connection with any future collaboration we may enter into with respect to emricasan, as well as product sales from emricasan. However, we do not expect to receive revenues unless and until we receive approval for emricasan or potentially enter into collaboration agreements for emricasan. If we fail to achieve clinical success in the development of emricasan in a timely manner and/or obtain regulatory approval for this drug candidate, our ability to generate future revenues would be materially adversely affected.

Research and Development Expenses

The majority of our operating expenses to date have been incurred in research and development activities. Starting in late 2011, research and development expenses have been focused on the development of emricasan. Since acquiring emricasan in 2010, we have incurred $51.8 million in the development of emricasan through March 31, 2016. Our business model is currently focused on the development of emricasan in various liver diseases and is dependent upon our continuing to conduct research and a significant amount of clinical development. Our research and development expenses consist primarily of:

 

·

expenses incurred under agreements with contract research organizations, or CROs, investigative sites and consultants that conduct our clinical trials and our preclinical studies;

 

·

employee-related expenses, which include salaries and benefits;

 

·

the cost of finalizing our chemistry, manufacturing and controls, or CMC, capabilities and providing clinical trial materials; and

 

·

costs associated with other research activities and regulatory approvals.

Research and development costs are expensed as incurred.

At this time, due to the inherently unpredictable nature of preclinical and clinical development, we are unable to estimate with any certainty the costs we will incur in the continued development of emricasan. Clinical development timelines, the probability of success and development costs can differ materially from expectations.

The costs of clinical trials may vary significantly over the life of a project owing to factors that include but are not limited to the following:

 

·

per patient trial costs;

 

·

the number of patients that participate in the clinical trials;

 

·

the number of sites included in the clinical trials;

 

·

the countries in which the clinical trials are conducted;

 

·

the length of time required to enroll eligible patients;

 

·

the number of doses that patients receive;

 

·

the drop-out or discontinuation rates of patients;

 

·

potential additional safety monitoring or other studies requested by regulatory agencies;

 

·

the duration of patient follow-up; and

 

·

the efficacy and safety profile of the drug candidate.

We are currently focused on advancing emricasan in multiple indications, and our future research and development expenses will depend on its clinical success. In addition, we cannot forecast with any degree of certainty whether emricasan will be the subject of 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.

Research and development expenditures will continue to be significant and will increase as we continue clinical development of emricasan over at least the next several years. We expect to incur significant development costs as we conduct our ongoing and future Phase 2 and Phase 3 clinical trials of emricasan.

16


We do not expect emricasan to be commercially available, if at all, for at least the next several years.

General and Administrative Expenses

General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, business development and administrative functions. Other general and administrative expenses include costs related to being a public company, as well as insurance, facilities, travel, patent filing and maintenance, legal and consulting expenses.

If emricasan receives regulatory approval, we expect to incur increased expenses associated with building a sales and marketing team. Some expenses may be incurred prior to receiving regulatory approval of emricasan. We do not expect to receive any such regulatory approval for at least the next several years.

Interest Income

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

Interest Expense

Interest expense consists of coupon interest on our $1.0 million promissory note payable to Pfizer Inc.

Other Income (Expense)

Other income (expense) includes non-operating transactions such as those caused by currency fluctuations in the conversion of account balances held in foreign currencies to U.S. dollars.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of financial condition and results of operations is based on our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. These items are monitored and analyzed by us for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are 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. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ materially from these estimates under different assumptions or conditions.

There were no significant changes during the three months ended March 31, 2016 to the critical accounting policies described in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Significant Judgments and Estimates” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 11, 2016.

Results of Operations

Comparison of the Three Months Ended March 31, 2016 and 2015

Research and Development Expenses

Research and development expenses were $4.7 million in the three months ended March 31, 2016, as compared to $3.9 million for the same period in 2015. The increase of $0.8 million was primarily due to an increase in external emricasan clinical trial and manufacturing costs.

General and Administrative Expenses

General and administrative expenses were $2.6 million in the three months ended March 31, 2016, as compared to $2.1 million for the same period in 2015. The increase of $0.5 million was primarily due to higher legal, consulting and accounting fees.

17


Changes in components of Other Income (Expense) were as follows:

Interest Income

Interest income was $27,000 for the three months ended March 31, 2016, as compared to $11,000 for the same period in 2015. Interest income consisted of interest earned on our cash, cash equivalents and marketable securities.

Interest Expense

Interest expense was $18,000 for each of the three-month periods ended March 31, 2016 and 2015 and consisted of interest related to the $1.0 million promissory note payable to Pfizer Inc.

Other Expense

Other expense was $7,000 for the three months ended March 31, 2016, as compared to $9,000 for the same period in 2015.  Other expense represents currency fluctuations in the conversion of account balances held in foreign currencies to U.S. dollars.

Liquidity and Capital Resources

We have incurred losses since inception and negative cash flows from operating activities and, as of March 31, 2016, we had an accumulated deficit of $128.2 million. We anticipate that we will continue to incur net losses for the foreseeable future as we continue the development and potential commercialization of emricasan.

Prior to our IPO in July 2013, we funded our operations primarily through private placements of equity and convertible debt securities. In July 2013, we completed our IPO of 6,000,000 shares of common stock at an offering price of $11.00 per share. We received net proceeds of $58.6 million, after deducting underwriting discounts and commissions and offering-related transaction costs.

In August 2014, we entered into the Sales Agreement with MLV, pursuant to which we may sell from time to time, at our option, up to an aggregate of $50.0 million of shares of our common stock through MLV, as sales agent. Sales of our common stock made pursuant to the Sales Agreement are made on The NASDAQ Global Market, or Nasdaq, under our Registration Statement on Form S-3, filed with the SEC on August 14, 2014 and declared effective by the SEC on August 25, 2014, by means of ordinary brokers’ transactions at market prices. Additionally, under the terms of the Sales Agreement, we may also sell shares of our common stock through MLV, on Nasdaq or otherwise, at negotiated prices or at prices related to the prevailing market price. Under the terms of the Sales Agreement, MLV may not engage in any proprietary trading or trading as principal for MLV’s own account. MLV will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell our common stock from time to time, based upon our instructions (including any price, time or size limits or other customary parameters or conditions we may impose). We pay a commission rate equal to up to 3% of the gross sales price per share sold. We have also agreed to provide MLV with customary indemnification and contribution rights. The Sales Agreement may be terminated by us or MLV at any time upon ten days’ notice to the other party, or by MLV at any time in certain circumstances, including the occurrence of an event that would be reasonably likely to have a material adverse effect on our assets, business, operations, earnings, properties, condition (financial or otherwise), prospects, stockholders’ equity or results of operations. As of March 31, 2016, we have sold 1,369,194 shares of our common stock pursuant to the Sales Agreement at a weighted average price per share of $3.05 and received net proceeds of $3.8 million, after deducting offering-related transaction costs and commissions.

Although sales of our common stock have taken place pursuant to the Sales Agreement, there can be no assurance that MLV will be successful in consummating future sales based on prevailing market conditions or in the quantities or at the prices that we deem appropriate .  In addition, under current SEC regulations, at any time during which the aggregate market value of our common stock held by non-affiliates, or public float, is less than $75.0 million, the amount we can raise through primary public offerings of securities in any twelve-month period using shelf registration statements, including sales under the Sales Agreement, is limited to an aggregate of one-third of our public float. As of May 2, 2016, our public float was 16.1 million shares, the value of which was $43.9 million based upon the closing price of our common stock of $2.72 on May 2, 2016. The value of one-third of our public float calculated on the same basis was $14.6 million.

In April 2015, we completed a public offering of 4,025,000 shares of our common stock at a public offering price of $5.75 per share. We received net proceeds of $21.4 million, after deducting underwriting discounts and commissions and offering-related transaction costs.

18


At March 31, 2016, we had cash, cash equivalents and marketable securities of $32.6 million. We believe our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations for at least the next 12 months. To fund further operations, we will need to raise additional capital. We plan to continue to fund losses from operations and capital funding needs through future equity and debt financing, as well as potential collaborations. The sale of additiona l equity or convertible debt could result in additional dilution to our stockholders. The incurrence of indebtedness would result in debt service obligations and could result in operating and financing covenants that would restrict our operations. No assur ances can be provided that financing will be available in the amounts we need or on terms acceptable to us, if at all. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with supp liers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations and future prospects.

The following table sets forth a summary of the net cash flow activity for each of the periods set forth below:

 

 

 

Three Months Ended March 31,

 

 

 

2016

 

 

2015

 

Net cash used in operating activities

 

$

(6,898,011

)

 

$

(5,947,739

)

Net cash provided by investing activities

 

 

9,529,744

 

 

 

4,366,639

 

Net cash provided by (used in) financing activities

 

 

3,078,212

 

 

 

(28,859

)

Net increase (decrease) in cash and cash equivalents

 

$

5,709,945

 

 

$

(1,609,959

)

 

Net cash used in operating activities was $6.9 million and $5.9 million for the three months ended March 31, 2016 and 2015, respectively. The primary use of cash was to fund our operations related to the development of emricasan.

Net cash provided by investing activities was $9.5 million and $4.4 million for the three months ended March 31, 2016 and 2015, respectively, which consisted primarily of proceeds from maturities of marketable securities, partially offset by cash used to purchase marketable securities.  

Net cash provided by financing activities was $3.1 million for the three months ended March 31, 2016, which consisted primarily of net proceeds from sales of common stock pursuant to the Sales Agreement. For the three months ended March 31, 2015, net cash used in financing activities was $29,000, which consisted primarily of deferred public offering costs related to the Sales Agreement and our public offering in April 2015.

Contractual Obligations and Commitments

As of March 31, 2016, there have been no material changes outside the ordinary course of our business to the contractual obligations we reported in “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commitments” in our annual report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 11, 2016.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements (as defined by applicable regulations of the SEC) that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of March 31, 2016, there have been no material changes in our market risk from that described in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our annual report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 11, 2016.

 

 

ITEM 4.

CONTROLS AND PROCEDURES

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this quarterly report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.

19


Inherent Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting

Our management, including our principal executive officer and our principal financial officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

20


PART II. OTHER INFORMATION

 

 

ITEM 1.

LEGAL PROCEEDINGS

We are currently not a party to any material legal proceedings.

 

 

ITEM 1A.

RISK FACTORS

There have been no material changes to the risk factors included in “Item 1A. Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission on March 11, 2016.

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds

On July 24, 2013, our Registration Statement on Form S-1 (File No. 333-189305), which registered an aggregate amount of up to $69.0 million of our common stock, was declared effective by the Securities and Exchange Commission for our initial public offering, or IPO. On July 25, 2013, we filed a Registration Statement pursuant to Rule 462(b) (File No. 333-190115), which registered an additional aggregate amount of up to $6.9 million of our common stock. At the closing of our IPO on July 30, 2013, we sold 6,000,000 shares of common stock at an IPO price of $11.00 per share and received gross proceeds of $66.0 million, which resulted in net proceeds to us of $58.6 million, after deducting underwriting discounts and commissions of $4.6 million and offering-related transaction costs of $2.8 million. None of the expenses associated with our IPO were paid to directors, officers, persons owning ten percent or more of any class of equity securities, or to their associates, or to our affiliates. Stifel, Nicolaus & Company, Incorporated and Piper Jaffray & Co. acted as joint book-running managers, and JMP Securities LLC and SunTrust Robinson Humphrey, Inc. acted as co-managers for our IPO. On August 23, 2013, the underwriters’ 30-day over-allotment option to purchase an additional 900,000 shares of common stock in our IPO expired without being exercised and the IPO terminated.

We intend to use the net offering proceeds to fund the clinical development of emricasan and for working capital and general corporate purposes. Pending use of the net proceeds, we plan to invest the net proceeds from our IPO in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government. Through March 31, 2016, the net proceeds have been applied as follows: $26.1 million towards the clinical development of emricasan and $28.6 million towards working capital and general corporate purposes.

Issuer Purchases of Equity Securities

None.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

ITEM 5.

OTHER INFORMATION

None.

 

 

ITEM 6.

EXHIBITS

A list of exhibits is set forth on the Exhibit Index immediately following the signature page of this quarterly report on Form 10-Q and is incorporated herein by reference.

 

 

21


SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

CONATUS PHARMACEUTICALS INC.

 

 

 

Date: May 5, 2016

 

/s/ Steven J. Mento, Ph.D. 

 

 

Steven J. Mento, Ph.D.

 

 

President and Chief Executive Officer

 

 

(principal executive officer)

 

 

 

Date: May 5, 2016

 

/s/ Charles J. Cashion 

 

 

Charles J. Cashion

 

 

Senior Vice President, Finance,

 

 

Chief Financial Officer and Secretary

 

 

(principal financial and accounting officer)

 

22


EXHIBIT INDEX

 

Exhibit

Number 

 

Description 

 

 

 

   3.1(1)

 

Amended and Restated Certificate of Incorporation

 

 

 

   3.2(1)

 

Amended and Restated Bylaws

 

 

 

   4.1(2)

 

Specimen Common Stock Certificate

 

 

 

   4.2(3)

 

First Amended and Restated Investor Rights Agreement, dated February 9, 2011

 

 

 

   4.3(3)

 

Form of Warrant issued to investors in the Registrant’s 2013 bridge financing

 

 

 

   4.4(2)

 

Form of Warrant issued to lenders under the Loan and Security Agreement, dated July 3, 2013, by and among the Registrant, Oxford Finance LLC, Silicon Valley Bank and the other lenders party thereto

 

 

 

  10.1#

 

Amended and Restated Non-Employee Director Compensation Program, dated March 24, 2016

 

 

 

  10.2#

 

Employment Agreement, dated April 1, 2016, by and between Edward F. Smith III, Ph.D. and the Registrant

 

 

 

  31.1

 

Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended

 

 

 

  31.2

 

Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended

 

 

 

  32.1*

 

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.2*

 

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

 

(1)

Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed with the SEC on August 1, 2013.

(2)

Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-189305), filed with the SEC on July 8, 2013.

(3)

Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (Registration No. 333- 189305), filed with the SEC on June 14, 2013.

#

Indicates management contract or compensatory plan.

*

These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

 

 

23

 

Exhibit 10.1

CONATUS PHARMACEUTICALS Inc.

Non-Employee DIRECTOR COMPENSATION PROGRAM

(As Amended and Restated Effective March 24, 2016)

Non-employee members of the board of directors (the “ Board ”) of Conatus Pharmaceuticals Inc. (the “ Company ”) shall be eligible to receive cash and equity compensation as set forth in this Non-Employee Director Compensation Program (this “ Program ”).  The cash and equity compensation described in this Program shall be paid or be made, as applicable, automatically and without further action of the Board, to each member of the Board who is not an employee of the Company or any parent or subsidiary of the Company (each, a “ Non-Employee Director ”) who may be eligible to receive such cash or equity compensation, unless such Non-Employee Director declines the receipt of such cash or equity compensation by written notice to the Company.  This Program shall remain in effect until it is revised or rescinded by further action of the Board.  This Program may be amended, modified or terminated by the Board at any time in its sole discretion. The terms and conditions of this Program shall supersede any prior cash and/or equity compensation arrangements between the Company and any of its Non-Employee Directors.  No Non-Employee Director shall have any rights hereunder, except with respect to stock options granted pursuant to the Program.

1. Cash Compensation .  

(a) Annual Retainers .  Each Non-Employee Director shall be eligible to receive an annual retainer of $35,000 for service on the Board.  

(b) Additional Annual Retainers .  In addition, a Non-Employee Director shall receive the following additional annual retainers, as applicable:

(i) Chairperson of the Board .  A Non-Employee Director serving as Chairperson of the Board shall receive an additional annual retainer of $45,000 for such service.

(ii) Audit Committee .   A Non-Employee Director serving as Chairperson of the Audit Committee shall receive an additional annual retainer of $15,000 for such service.  A Non-Employee Director serving as a member of the Audit Committee (other than the Chairperson) shall receive an additional annual retainer of $7,500 for such service.

(iii) Compensation Committee .  A Non-Employee Director serving as Chairperson of the Compensation Committee shall receive an additional annual retainer of $10,000 for such service.  A Non-Employee Director serving as a member of the Compensation Committee (other than the Chairperson) shall receive an additional annual retainer of $6,000 for such service.

(iv) Nominating and Corporate Governance Committee .   A Non-Employee Director serving as Chairperson of the Nominating and Corporate Governance Committee shall receive an additional annual retainer of $7,000 for such service.  A Non-Employee Director serving as a member of the Nominating and Corporate Governance Committee (other than the Chairperson) shall receive an additional annual retainer of $3,500 for such service.

 


 

(c) Payment of Retainers .   T he annual retainers described in Sections 1(a) and 1(b) shall be earned on a quarterly basis based on a calendar quarter and shall be paid by the Company in arrears not later than the fifteenth day following the end of each calendar quarter.  In the event a Non-Employee Director does not serve as a Non-Employee Director, or in the applicable positions described in Section 1(b), for an entire calendar quarter, the retainer paid to such Non-Employee Director shall be prorated for the portion of such calendar quarter actually served as a Non-Employee Director, or in such position, as applicable.  

2. Equity Compensation .  Non-Employee Directors shall be granted the equity awards described below.  The awards described below shall be granted under and shall be subject to the terms and provisions of the Company’s 2013 Incentive Award Plan or any other applicable Company equity incentive plan then-maintained by the Company (the “ Equity Plan ”) and shall be granted subject to the execution and delivery of award agreements, including attached exhibits, in substantially the forms previously approved by the Board, setting forth the vesting schedule applicable to such awards and such other terms as may be required by the Equity Plan.  All applicable terms of the Equity Plan apply to this Program as if fully set forth herein, and all grants of stock options hereby are subject in all respects to the terms of the Equity Plan.

(a) IPO Awards .  On the closing date of the Company’s initial public offering, each Non-Employee Director shall be eligible to receive an option to purchase 30,000 shares of the Company’s common stock (subject to adjustment as provided in the Equity Plan), and the Chairperson of the Board shall be eligible to receive an option to purchase an additional 20,000 shares of the Company’s common stock (subject to adjustment as provided in the Equity Plan).  The awards described in this Section 2(a) shall be referred to as “ IPO Awards .”

(b) Initial Awards .  Each Non-Employee Director who is initially elected or appointed to the Board shall be eligible to receive an option to purchase 30,000 shares of the Company’s common stock (subject to adjustment as provided in the Equity Plan) on the date of such initial election or appointment. The awards described in this Section 2(b) shall be referred to as “ Initial Awards .”  No Non-Employee Director shall be granted more than one (1) Initial Award.

(c) Subsequent Awards .  A Non-Employee Director who (i) has been serving on the Board for at least six months as of the date of any annual meeting of the Company’s stockholders and (ii) will continue to serve as a Non-Employee Director immediately following such meeting, shall be automatically granted an option to purchase 20,000 shares of the Company’s common stock (subject to adjustment as provided in the Equity Plan) on the date of such annual meeting, and the Chairperson of the Board shall be eligible to receive an option to purchase an additional 25,000 shares of the Company’s common stock (subject to adjustment as provided in the Equity Plan).  The awards described in this Section 2(c) shall be referred to as “ Subsequent Awards .”  For the avoidance of doubt, a Non-Employee Director elected for the first time to the Board at an annual meeting of the Company’s stockholders shall only receive an Initial Award in connection with such election, and shall not receive any Subsequent Award on the date of such meeting as well.  

(d) Termination of Employment of Employee Directors .  Members of the Board who are employees of the Company or any parent or subsidiary of the Company who subsequently terminate their employment with the Company and any parent or subsidiary of the Company and remain on the Board will not receive an Initial Award pursuant to Section 2(b) above, but to the extent that they are otherwise eligible, will be eligible to receive, after termination from employment with the Company and any parent or subsidiary of the Company, Subsequent Awards as described in Section 2(c) above.  

(e) Terms of Awards Granted to Non-Employee Directors

 


 

(i) Purchase Price .   The per share exercise price of each option granted to a Non-Employee Director shall equal the Fair Market Value (as defined in the Equity Plan) of a share of common stock on the date the option is granted ; provided, however, that the per share exercise price of each IPO Award shall be the greater of (A) the Fair Market Value of a share of common stock on the date the option is granted or (B) the initial price to the public of the Company’s common stock in the initial public offering .  

(ii) Vesting .  Each IPO Award and each Initial Award shall vest and become exercisable in substantially equal installments on each of the first three (3) anniversaries of the date of grant, subject to the Non-Employee Director continuing in service on the Board through each such vesting date.  Each Subsequent Award shall vest and/or become exercisable on the first anniversary of the date of grant, subject to the Non-Employee Director continuing in service on the Board through such vesting date.  No portion of an IPO Award, an Initial Award or Subsequent Award which is unvested and/or exercisable at the time of a Non-Employee Director’s termination of service on the Board shall become vested and/or exercisable thereafter.  All of a Non-Employee Director’s Initial Awards and Subsequent Awards shall vest in full upon the occurrence of a Change in Control (as defined in the Equity Plan).

(iii) Term .  The term of each stock option granted to a Non-Employee Director shall be ten (10) years from the date the option is granted.  Upon a Non-Employee Director’s cessation of service on the Board for any reason, his or her options to purchase shares of the Company’s common stock granted under this Program shall remain exercisable for twelve (12) months following the cessation of his or her service on the Board (or such longer period as the Board may determine in its discretion on or after the date of grant of such stock options).  

* * * * *

 

 

Exhibit 10.2

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “ Agreement ”) is entered into by and between Conatus Pharmaceuticals Inc., a Delaware corporation (the “ Company ”), and Edward F. Smith III, Ph.D., MBA, RAC (“ Employee ”), and shall be effective as of April 1, 2016 1 (the “ Effective Date ”).

WHEREAS, the Company desires to employ Employee, and Employee desires to accept employment with the Company, on the terms and conditions set forth in this Agreement.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties agree as follows:

1. Definitions .  As used in this Agreement, the following terms shall have the following meanings:

 

(a) Board .  “ Board ” means the Board of Directors of the Company.

 

(b) Cause .  “ Cause ” means any of the following:

(i) the commission of an act of fraud, embezzlement or dishonesty by Employee that has a material adverse impact on the Company or any successor or affiliate thereof;

(ii) a conviction of, or plea of “guilty” or “no contest” to, a felony by Employee or any crim e involving fraud, misappropriation, embezzlement or moral turpitude;

(iii) any unauthorized use or disclosure by Employee of confidential information or trade secrets of the Company or any successor or affiliate thereof that has a material adverse impac t on any such entity;

(iv) Employee’s gross negligence, insubordination or material violation of any duty of loyalty to the Company or any other material misconduct on the part of Employee;

(v) Employee’s ongoing and repeated failure or refusal to perfo rm or neglect of Employee’s duties as required by this Agreement, which failure, refusal or neglect continues for fifteen (15) days following Employee’s receipt of written notice from the Board or the Company’s Chief Executive Officer (the “ CEO ”) stating with specificity the nature of such failure, refusal or neglect; or

(vi) Employee’s breach of any material provision of this Agreement;

provided , however , that prior to the determination that “Cause” under this Section 1(b) has occurred, the Company shall (w) provide to Employee in writing, in reasonable detail, the reasons for the determination that such “Cause” exists, (x) other than with respect to clause (v) above which specifies the applicable period of time for Employee to remedy his or her breach, afford Employee a reasonable opportunity to remedy any such breach (if such breach is capable of being remedied), (y) provide Employee an opportunity to be heard prior to the final decision to terminate Employee’s employment hereunder for such “Cause” and (z) make any decision that such “Cause” exists in good faith.

 

1 Effective Date will be date of commencement of employment.

 


 

The foregoing definition shall not in any way preclude or restrict the right of the Company or any successor or affiliate thereof to discharge or dismiss Employee for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of this Agreement, to co nstitute grounds for termination for Cause.

(c) Change of Control .  “ Change of Control ” means and includes each of the following:

(i) a transaction or series of transactions (other than an offering of common stock of the Company to the general public through a registration statement filed with the Securities and Exchange Commission) whereby any “person” or related “group” of “persons” (as such terms are used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), and the rules thereunder) (other than the Company, any of its subsidiaries, an employee benefit plan maintained by the Company or any of its subsidiaries or a “person” that, prior to such transaction, directly or indirectly controls, is controlled by, or is under common control with, the Company) directly or indirectly acquires beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of securities of the Company possessing more than fifty percent (50%) of the total combined voting power of the Company’s securities outstanding immediately after such acquisition; or

(ii) during any period of two consecutive years, individuals who, at the beginning of such period, constitute the Board together with any new director(s) (other than a director designated by a person who shall have entered into an agreement with the Company to effect a transaction described in subsections (i) or (iii) of this Section 1(c)) 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 two year period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(iii) the consummation by the Company (whether directly involving the Company or indirectly involving the C ompany through one or more intermediaries) of a merger, consolidation, reorganization, or business combination, a sale or other disposition of all or substantially all of the Company’s assets, or the acquisition of assets or stock of another entity, in each case, other than a transaction

(A) which results in the Company’s 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 t he person that, as a result of the transaction, controls, directly or indirectly, the Company or owns, directly or indirectly, all or substantially all of the Company’s assets or otherwise succeeds to the business of the Company (the Company or such person, the “ Successor Entity ”)) directly or indirectly, at least fifty percent (50%) of the combined voting power of the Successor Entity’s outstanding voting securities immediately after the transaction, and

(B) after which no person or group beneficially ow ns voting securities representing fifty percent (50%) or more of the combined voting power of the Successor Entity; provided , however , that no person or group shall be treated for purposes of this subsection (iii) as beneficially owning fifty percent (50%) or more of combined voting power of the Successor Entity solely as a result of the voting power held in the Company prior to the consummation of the transaction; or

 

2


 

(iv) the Company’s stockholders approve a liquidation or dissolution of the Company.  

For purposes of subsection (i) above, the calculation of voting power shall be made as if the date of the acquisition were a record date for a vote of the Company’s stockholders, and for purposes of subsection (iii) above, the calculation of voting power shall be made as if the date of the consummation of the transaction were a record date for a vote of the Company’s stockholders.

Notwithstanding the foregoing, a transaction shall not constitute a “ Change of Control ” if: (i) its sole purpose is to change the state of the Company’s incorporation; (ii) its sole purpose is to create a holding company that will be owned in substantially the same proportions by the persons who held the Company’s securities immediately before such transaction; (iii) it constitutes the Company’s initial public offering of its securities; or (iv) it is a transaction effected primarily for the purpose of financing the Company with cash (as determined by the Board in its discretion and without regard to whether such transaction is effectuated by a merger, equity financing or otherwise).

 

(d) Code .  “ Code ” means the Internal Revenue Code of 1986, as amended from time to time, and the Treasury Regulations and other guidance issued thereunder.

(e) Good Reason .  Employee’s resignation for “ Good Reason ” means Employee’s resignation following the occurrence of any of the following events or conditions without Employee’s written consent:

(i) a material diminution in Employee ’s authority, duties or responsibilities;

(ii) a material diminution in Employee ’s base compensation, except in connection with a general reduction in the base compensation of the Company’s or any successor’s or affiliate’s personnel with similar status and responsibilities;

(iii) a material change in the geographic location at which Employee must perform his or her duties (and the Company and Employee agree that any requirement that Employee be based at any place outside a 50-mile radius of his or her place of employment as of the Effective Date, except for reasonably required travel on the Company’s or any successor’s or affiliate’s business that is not materially greater than such travel requirements prior to the Effective Date, shall be considered a material change); or

(iv) any other action or inaction that constitutes a material breach by the Company or any successor or affiliate of its obligations to Employee under this Agreement.

Notwithstanding the foregoing, Good Reason shall only exist if Employee shall have provided the Company with written notice within ninety (90) 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 Employee.  Employee ’s termination by reason of resignation from employment with the Company for Good Reason shall be treated as involuntary.  Employee’s resignation from employment with the Company for “Good Reason” must occur within twelve (12) months following the initial occurrence of one of the foregoing events or conditions.  

 

 

3


 

(f) Permanent Disability .  Employee’s “ Permanent Disability ” shall be deemed to have occurred if Employee shall bec ome physically or mentally incapacitated or disabled or otherwise unable fully to discharge his or her duties hereunder for a period of ninety (90) consecutive calendar days or for one hundred twenty (120) calendar days in any one hundred eighty (180) cale ndar-day period.  The existence of Employee’s Permanent Disability shall be determined by the Company on the advice of a physician chosen by the Company and the Company reserves the right to have the Employee examined by a physician chosen by the Company a t the Company’s expense.  

(g) Stock Awards .  “ Stock Awards ” means all stock options, restricted stock and such other awards granted pursuant to the Company’s stock option and equity incentive award plans or agreements and any shares of stock issued upon exercise thereof.  

2. Employment Period .   During the term of Employee’s employment hereunder (the “ Employment Period ”), Employee shall be considered an employee of the Company.  The Company and Employee acknowledge that Employee’s employment during the Employment Period will be at-will, as defined under applicable law, and that Employee’s employment with the Company during the Employment Period may be terminated by either party at any time for any or no reason, with or without notice.  If Employee’s employment during the Employment Period terminates for any reason, Employee shall not be entitled to any payments, benefits, damages, awards or compensation other than as provided in this Agreement.  

3. Services to Be Rendered .  

(a) Duties and Responsibilities .  Employee shall serve as Senior Vice President of Regulatory and Quality Assurance, of the Company.  In the performance of such duties, Employee shall report directly to the CEO and shall be subject to the direction of the CEO and to such limits upon Employee’s authority as the CEO may from time to time impose.  In the event of the CEO’s incapacity or unavailability, Employee shall be subject to the direction of the Board or its designee.  Employee hereby consents to serve as an officer and/or director of the Company or any subsidiary or affiliate thereof without any additional salary or compensation, if so requested by the Board or the CEO.  Employee’s primary place of work shall be the Company’s facility in San Diego, California, or such other location within San Diego County as may be designated by the Board or the CEO from time to time.  Employee shall also render services at such other places within or outside the United States as the Board or the CEO may direct from time to time.  Employee shall be subject to and comply with the policies and procedures generally applicable to employees of the Company to the extent the same are not inconsistent with any term of this Agreement.

(b) Exclusive Services .  Employee shall be employed by the Company on a full-time basis.  Employee shall at all times faithfully, industriously and to the best of his or her ability, experience and talent perform to the satisfaction of the Board and the CEO all of the duties that may be assigned to Employee hereunder and shall devote substantially all of his or her productive time and efforts to the performance of such duties.  

4. Compensation and Benefits During Employment Period .  During the Employment Period, the Company shall pay or provide, as the case may be, to Employee the compensation and other benefits and rights set forth in this Section 4.

(a) Base Salary .  The Company shall pay to Employee a base salary of $300,000 per year, payable in accordance with the Company’s usual pay practices (and in any event no less frequently than bi-monthly).  Employee’s base salary shall be subject to review annually by and at the sole discretion of the Board or its designee.

 

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(b) Annual Bonus .   Employee shall be eligible to earn, for each fiscal year of the Company ending during th e Employment Period, an annual cash performance bonus (an “ Annual Bonus ”) based on Employee ’s and/or the Company’s attainment of objective financial or other operating criteria established by the Board or its designee .  Upon full attainment of the aforemen tioned criteria, as determined by the Board or its designee, the Annual Bonus will be equal to thirty-five percent (35%) of Employee ’s then-current base salary actually paid for such fiscal year.  The Annual Bonus shall be paid to Employee by the Company b etween January 1 st and March 15 th of the calendar year following the end of the fiscal year to which such Annual Bonus relates.   Employee ’s receipt of an Annual Bonus shall be conditioned on Employee ’s continued employment with the Company on the date such Annual Bonus is paid.  The Annual Bonus shall be pro-rated for any partial fiscal year during the Employment Period.  As of the Effective Date, the Company’s fiscal year ends on December 31.  In the event of any change to the Company’s fiscal year, the af orementioned financial or other operating criteria established by the Board or its designee for purposes of determining Employee’s Annual Bonus shall be adjusted in a manner mutually agreeable to the Company and Employee so as not to disadvantage either pa rty.  

(c) Benefits .  Employee shall be entitled to participate in benefits under the Company’s benefit plans and arrangements, including, without limitation, any employee benefit plan or arrangement made available in the future by the Company to its senior executives, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. The Company shall have the right to amend or delete any such benefit plan or arrangement made available by the Company to its senior executives and not otherwise specifically provided for herein.  The Company’s failure to continue provide Employee with benefits substantially equivalent (in terms of benefit levels and/or reward opportunities) to those provided to Employee under each material employee benefit plan, program and practice of the Company as in effect immediately prior to the Effective Date, except in connection with a general reduction in the benefits of the Company’s or any successor’s or affiliate’s personnel with similar status and responsibilities, shall constitute a material breach of this Agreement by the Company.

(d) Expenses .  The Company shall reimburse Employee for reasonable out-of-pocket business expenses incurred in connection with the performance of his or her duties hereunder, subject to (i) such policies as the Company may from time to time establish, (ii) Employee furnishing the Company with evidence in the form of receipts satisfactory to the Company substantiating the claimed expenditures, (iii) Employee receiving advance approval from the CEO in the case of expenses for travel outside of North America, and (iv) Employee receiving advance approval from the CEO in the case of expenses (or a series of related expenses) in excess of $10,000.   Any amounts payable under this Section 4(d) 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 Employee ’s taxable year following the taxable year in which Employee incurred the expenses.  The amounts provided under this Section 4(d) during any taxable year of Employee ’s will not affect such amounts provided in any other taxable year of Employee ’s, and Employee ’s right to reimbursement for such amounts shall not be subject to liquidation or exchange for any other benefit.

(e) Paid Time Off; Vacation .  Employee shall be entitled to such periods of paid time off (“ PTO ”) each year as provided under the Company’s PTO policy and as otherwise provided for senior executive officers; provided that Employee shall be entitled to at least three (3) weeks paid vacation per year.

 

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(f) Stock Awards .    

(i) As soon as practicable following the Effective Date and subject to approval by the Board or its Compensation Committee, Employee will be granted a stock option under the Company’s 2013 Incentive Award Plan (the “ Plan ”) to purchase 100,000 shares of the Company’s common stock, with an exercise price per share equal to the per share fair market value of the Company’s common stock on the date of grant as determined under the Plan (the “ Initial Option ”).  The Initial Option will vest with respect to twenty-five percent (25%) of the total number of shares of the Company's common stock subject to the Initial Option on the first anniversary of the Effective Date, and with respect to one-forty-eighth (1/48) of the total number of shares of the Company's common stock subject to the Initial Option on the last day of each one-month period of Employee's service to the Company thereafter, subject to accelerated vesting as provided in Section 4(g) below.  The Initial Option will be subject to the terms and conditions of the Plan and the form of stock option agreement thereunder.  

(ii) Employee shall be entitled to participate in any equity or other employee benefit plan that is generally available to senior executive officers, as distinguished from general management, of the Company.  Except as otherwise provided in this Agreement, Employee’s participation in and benefits under any such plan shall be on the terms and subject to the conditions specified in the governing document of the particular plan.

(g) Acceleration of Vesting of Stock Awards .  

(i) The vesting and/or exercisability of fifty percent (50%) of the then-unvested and outstanding portion of each of Employee's Stock Awards shall be automatically accelerated on the date of a Change of Control, and the remaining fifty percent (50%) of the then-unvested and outstanding portion of each of Employee's Stock Awards shall vest and/or become exercisable on the first to occur of (A) the first anniversary of the Change of Control or (B) the date of Employee’s termination of employment by the Company without Cause or by Employee for Good Reason.

(ii) Subject to Section 5(c), if Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason, the vesting and/or exercisability of each of Employee’s outstanding Stock Awards shall be automatically accelerated on the date of termination as to the number of Stock Awards that would vest over the twelve (12) month period following the date of termination had Employee remained continuously employed by the Company during such period.

(iii) The foregoing provisions are hereby deemed to be a part of each Stock Award and to supersede any less favorable provision in any agreement or plan regarding such Stock Award.

 

(h)

Relocation .  

(i) The Company expects Employee to relocate his principal place of residence from Walnut Creek, California to the San Diego, California metropolitan area on or before June 30, 2016.  In furtherance of Employee’s relocation, the Company shall pay for or reimburse Employee in accordance with the Company’s written expense reimbursement policies and procedures for Employee’s reasonable relocation expenses, including the movement of Employee’s reasonable household goods and automobiles (but excluding extraordinary or unusual moving costs such as boat, recreational vehicle, playground equipment), house hunting trips to San Diego for Employee, his spouse and his dependent children, reimbursement for transportation

 

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for Employee, his spouse and his dependent children fr om Walnut Creek, California to San Diego, California, and temporary housing in the San Diego, California area until June 30, 2016 (or, if earlier, Employee’s relocation) (collectively, the “ Relocation Reimbursement ”).  In no event will the Relocation Reimb ursement include realtor costs incurred by Employee in connection with the purchase of Employee’s residence in San Diego California or the sale of Employee’s residence in Walnut Creek, California.  

(ii) In addition, the Company shall pay to Employee a tax gross-up (the “ Tax Gross-Up ”) for any federal and state income and employment taxes Employee is required to pay resulting from the Relocation Reimbursement and from the Tax Gross-Up, which Tax Gross-Up shall be paid in accordance with Treasury Regulation Section 1.409A-3(i)(1)(v).  The Relocation Reimbursement and any Tax Gross-Up shall be subject to an aggregate cap of $20,000.  All amounts eligible for the Relocation Reimbursement must be incurred by and paid to Employee during the term of his employment with the Company.  The Relocation Reimbursement and the Tax Gross-Up shall be paid to Employee within thirty (30) days following the Company’s receipt of a written request for such reimbursement, but subject to receipt by the Company of supporting receipts and/or documentation and/or receipts in form and substance reasonably acceptable to the Company.  If Employee voluntarily terminates his employment without Good Reason or his employment is terminated for Cause prior to the first anniversary of the Effective Date, Employee shall repay to the Company a pro rata portion of the Relocation Reimbursement and any Tax Gross-Up based on the number of days elapsed in the one-year period ending on the first anniversary of the Effective Date.  The Company will have the right to offset such amounts against any compensation otherwise payable to Employee on the date of Employee’s termination of employment.

5. Termination of Employment Period and Severance .  Employee shall be entitled to receive benefits upon termination of the Employment Period only as set forth in this Section 5.

(a) Termination Without Cause or For Good Reason .  If Employee’s employment is terminated by the Company without Cause or by Employee for Good Reason, Employee shall be entitled to receive, in lieu of any severance benefits to which Employee may otherwise be entitled under any severance plan or program of the Company, the benefits provided below:

(i) the Company shall pay to Employee his or her fully earned but unpaid base salary, when due, through th e date of termination at the rate then in effect, accrued but unused PTO, plus all other amounts or benefits to which Employee is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices;

(ii) subject to Sections 5(c), 5(g) and 5(h) and Employee’s continuing compliance with Section 6, Employee shall be entitled to receive Employee’s monthly base salary as in effect immediately prior to the date of termination for the twelve (12) month period following the date of termination, payable in a lump sum no later than sixty (60) days following the date of Employee’s termination of employment; and

 

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(iii) subject to Sections 5(c), 5(g) and 5(h) and Employee’s continuing compliance with Section 6, for the period beginning on the date of termination and ending on the date which is twelve (12) full months following the date of termination (or, if earlier, the date on which the applicable continuation p eriod under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“ COBRA ”) expires) (the “ COBRA Coverage Period ”), the Company shall pay for and provide to Employee and his or her eligible dependents who were covered under the Company’s h ealth insurance plans immediately prior to the date of termination with healthcare insurance benefits substantially similar to those provided to Employee and his or her eligible dependents immediately prior to the date of termination.  If any of the Compan y’s health benefits are self-funded as of the date of termination, or if the Company cannot provide the foregoing benefits in a manner that is exempt from or otherwise compliant with applicable law (including, without limitation, Section 409A of the Code a nd Section 2716 of the Public Health Service Act), instead of providing continued health insurance benefits as set forth above, the Company shall instead pay to Employee an amount equal to the monthly plan premium payment for Employee and his or her eligib le dependents who were covered under the Company’s health plans as of the date of termination (calculated by reference to Employee’s premiums as of the date of termination) as currently taxable compensation in substantially equal monthly installments over the COBRA Coverage Period (or the remaining portion thereof).    

(b) Termination for Cause, Voluntary Resignation Without Good Reason, Death or Permanent Disability .  If Employee’s employment is terminated by the Company for Cause, by Employee without Good Reason or as a result of Employee’s death or Permanent Disability, the Company shall not have any other or further obligations to Employee (or his or her estate) under this Agreement (including any financial obligations) except that Employee (or his or her estate) shall be entitled to receive (i) Employee’s fully earned but unpaid base salary, through the date of termination at the rate then in effect, (ii) all accrued but unused PTO, and (iii) all other amounts or benefits to which Employee is entitled under any compensation, retirement or benefit plan or practice of the Company at the time of termination in accordance with the terms of such plans or practices, including, without limitation, any continuation of benefits required by COBRA or applicable law.  In addition, if Employee’s employment is terminated by the Company for Cause, by Employee without Good Reason or as a result of Employee’s death or Permanent Disability, all vesting of Employee’s unvested Stock Awards previously granted to him or her by the Company shall cease and none of such unvested Stock Awards shall be exercisable following the date of such termination.  The foregoing shall be in addition to, and not in lieu of, any and all other rights and remedies which may be available to the Company under the circumstances, whether at law or in equity.

(c) Release .  As a condition to Employee’s receipt of any post-termination benefits pursuant to Sections 4(g)(i), 4(g)(ii) or 5(a) above, on or prior to the sixtieth (60 th ) day following the date of Employee ’s termination of employment, Employee shall have executed and delivered a Release (the “ Release ”) in a form reasonably acceptable to the Company and any applicable revocation period applicable to such Release shall have expired.  Such Release shall specifically relate to all of Employee’s rights and claims in existence at the time of such execution, including any claims related to Employee’s employment by the Company and his or her termination of employment, and shall exclude any continuing obligations the Company may have to Employee following the date of termination under this Agreement or any other agreement providing for obligations to survive Employee’s termination of employment.  In the event the Release does not become effective within the sixty (60) day period following the date of Employee's termination of employment, Employee shall not be entitled to any of the aforesaid post-termination benefits.

 

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(d) Exclusive Remedy .  Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein, all of Employee’s rights to salary, severance, benefits, bonuses and other amounts hereunder (if any) accruing after the termination of Employee’s employment shall cease upon such termination.  In the event of a termination o f Employee’s employment with the Company, Employee’s sole remedy shall be to receive the payments and benefits described in this Section 5.  In addition, Employee acknowledges and agrees that he or she is not entitled to any reimbursement by the Company fo r any taxes payable by Employee as a result of the payments and benefits received by Employee pursuant to this Section 5, including, without limitation, any excise tax imposed by Section 4999 of the Code.  Any payments made to Employee under this Section 5 shall be inclusive of any amounts or benefits to which Employee may be entitled pursuant to the Worker Adjustment and Retraining Notification Act, 29 U.S.C. Sections 2101 et seq., and the Department of Labor regulations thereunder, or any similar state st atute.  

(e) No Mitigation .  Employee shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 5 be reduced by any compensation earned by Employee as the result of employment by another employer or self-employment or by retirement benefits; provided , however , that loans, advances or other amounts owed by Employee to the Company may be offset by the Company against amounts payable to Employee under this Section 5; provided , further , that, as provided in Section 5(a), Employee’s right to continued healthcare and life insurance benefits following his or her termination of employment will terminate on the date on which the applicable continuation period under COBRA expires.    

(f) Return of the Company’s Property .  If Employee’s employment is terminated for any reason, the Company shall have the right, at its option, to require Employee to vacate his or her offices prior to or on the effective date of termination and to cease all activities on the Company’s behalf.  Upon the termination of his or her employment in any manner, as a condition to the Employee’s receipt of any post-termination benefits described in this Agreement, Employee shall immediately surrender to the Company all lists, books and records of, or in connection with, the Company’s business, and all other property belonging to the Company, it being distinctly understood that all such lists, books and records, and other documents, are the property of the Company.  Employee shall deliver to the Company a signed statement certifying compliance with this Section 5(f) prior to the receipt of any post-termination benefits described in this Agreement.

(g) Short-Term Deferral .  This Agreement is not intended to provide for any deferral of compensation subject to Section 409A of the Code, and, accordingly, the severance payment payable under Section 5(a)(ii) shall be paid no later than the later of:  (i) the fifteenth (15 th ) day of the third month following Employee's first taxable year in which such severance benefit is no longer subject to a substantial risk of forfeiture, and (ii) the fifteenth (15 th ) day of the third month following the first taxable year of the Company in which such severance benefit is no longer subject to a substantial risk of forfeiture, as determined in accordance with Section 409A of the Code and any Treasury Regulations and other guidance issued thereunder.  To the extent applicable, this Agreement shall be interpreted in accordance with the applicable exemptions from Section 409A of the Code.

(h) Payment Delay .  Notwithstanding anything herein to the contrary, to the extent any payments to Employee pursuant to Section 5(a)(ii) are treated as non-qualified deferred compensation subject to Section 409A of the Code, then (i) no amount shall be payable pursuant to such section unless Employee’s termination of employment constitutes a “separation from service” with the Company (as such term is defined in Treasury Regulation Section 1.409A-1(h) and any successor provision thereto) (a “ Separation from Service ”), and (ii) if Employee , at the time of his or her Separation from Service, is determined by the Company to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code and the Company determines that delayed commencement of any portion of the termination benefits

 

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payable to Employee pursuant to this Agreement is required in order to avoid a prohibited distribution unde r Section 409A(a)(2)(B)(i) of the Code (any such delayed commencement, a “ Payment Delay ”), then such portion of Employee’s termination benefits described in Section 5(a)(ii) shall not be provided to Employee prior to the earlier of (A) the expiration of th e six-month period measured from the date of Employee’s Separation from Service, (B) the date of Employee’s death or (C) such earlier date as is permitted under Section 409A.  Upon the expiration of the applicable Code Section 409A(a)(2)(B)(i) deferral per iod, all payments deferred pursuant to a Payment Delay shall be paid in a lump sum to Employee within thirty (30) days following such expiration, and any remaining payments due under the Agreement shall be paid as otherwise provided herein.  The determinat ion of whether Employee is a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code as of the time of his or her Separation from Service shall made by the Company in accordance with the terms of Section 409A of the Code and applicable gu idance thereunder (including without limitation Treasury Regulation Section 1.409A-1(i) and any successor provision thereto).  

(i) Interpretation .  To the extent the payments and benefits under this Agreement are subject to Section 409A of the Code, this Agreement shall be interpreted, construed and administered in a manner that satisfies the requirements of Sections 409A(a)(2), (3) and (4) of the Code and the Treasury Regulations thereunder (and any applicable transition relief under Section 409A of the Code).  To the extent that any provision of this Agreement is ambiguous as to its compliance with 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.  Each series of installment payments made under this Agreement is hereby designated as a series of "separate payments" within the meaning of Section 409A of the Code.  

6. Certain Covenants .

 

(a) Noncompetition .  Except as may otherwise be approved by the Board, during the Employment Period, Employee shall not have any ownership interest (of record or beneficial) in, or perform services as an employee, salesman, consultant, officer or director of, or otherwise aid or assist in any manner, any firm, corporation, partnership, proprietorship or other business that engages in any county, city or part thereof in the United States and/or any foreign country in a business which competes directly or indirectly (as determined by the Board) with the Company’s business in such county, city or part thereof, so long as the Company, or any successor in interest of the Company to the business and goodwill of the Company, remains engaged in such business in such county, city or part thereof or continues to solicit customers or potential customers therein; provided , however , that Employee may own, directly or indirectly, solely as an investment, securities of any entity if Employee (x) is not a controlling person of, or a member of a group which controls, such entity; or (y) does not, directly or indirectly, own ten percent (10%) or more of any class of securities of any such entity.  Subject to the terms of the Proprietary Information and Inventions Agreement referred to in Section 6(b), nothing in this Agreement shall preclude Employee from devoting time to personal and family investments or serving on community and civic boards, or participating in industry associations, provided such activities do not interfere with his or her duties to the Company, as determined in good faith by the CEO.  Employee agrees that he or she will not join any boards, other than community and civic boards (which do not interfere with his or her duties to the Company), without the prior approval of the CEO.

(b) Confidential Information .  Employee and the Company have entered into the Company’s standard proprietary information and inventions agreement (the “ Proprietary Information and Inventions Agreement ”).  Employee agrees to perform each and every obligation of Employee therein contained.

 

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(c) Solicitation of Employees .  Employee shall not during the Employment Period and for the applicable severance period for which Employee receives severance benefits following any termination hereof pursuant to Section 5(a) above (the “ Restricted Period ”), directly or indirectly, solicit or encourage to leave the employment of the Company or any of its affiliates, any employee of the Company or any of its affiliates.  

(d) Solicitation of Consultants .  Employee shall not during the Employment Period and for the Restricted Period, directly or indirectly, hire, solicit or encourage to cease work with the Company or any of its affiliates any consultant then under contract with the Company or any of its affiliates within one year of the termination of such consultant’s engagement by the Company or any of its affiliates.

(e) Rights and Remedies Upon Breach .  If Employee breaches or threatens to commit a breach of any of the provisions of this Section 6 (the “ Restrictive Covenants ”), the Company shall have the following rights and remedies, each of which rights and remedies shall be independent of the other and severally enforceable, and all of which rights and remedies shall be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity:

(i) Specific Performance .  The right and remedy to have the Restrictive Covenants specifically enforced by any court having equity jurisdiction, all without the need to post a bond or any other security or to prove any amount of actual damage or that money damages would not provide an adequate remedy, it being acknowledged and agreed that any such breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide adequate remedy to the Company;

(ii) Accounting and Indemnification .  The right and remedy to require Employee (i) to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Employee or any associated party deriving such benefits as a result of any such breach of the Restrictive Covenants; and (ii) to indemnify the Company against any other losses, damages (including special and consequential damages), costs and expenses, including actual attorneys’ fees and court costs, which may be incurred by them and which result from or arise out of any such breach or threatened breach of the Restrictive Covenants; and

(iii) Termination of Severance Payments .   In the event Employee breaches any of the provisions of this Section 6, the Company shall be entitled to immediately cease all payments under Section 5(a) above.

(f) Severability of Covenants/Blue Pencilling .  If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions.  If any court determines that any of the Restrictive Covenants, or any part thereof, are unenforceable because of the duration of such provision or the area covered thereby, such court shall have the power to reduce the duration or area of such provision and, in its reduced form, such provision shall then be enforceable and shall be enforced.  Employee hereby waives any and all right to attack the validity of the Restrictive Covenants on the grounds of the breadth of their geographic scope or the length of their term.

 

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(g) Enforceability in Jurisdictions .  The Company and Employee intend to and do hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographical scope of such covenants.  If the courts of any one or more of such jurisdictions hold the Restrictive Covenants wholly unenforceable by reason of the breadth of such scope or otherwise, it is the intention of the Company and Employee that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such covenants, as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants.  

(h) Whistleblower Provision .  Nothing herein shall be construed to prohibit Employee from communicating directly with, cooperating with, or providing information to, any government regulator, including, but not limited to, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, or the U.S. Department of Justice.

(i) Definitions .  For purposes of this Section 6, the term “ Company ” means not only Conatus Pharmaceuticals Inc., but also any company, partnership or entity which, directly or indirectly, controls, is controlled by or is under common control with Conatus Pharmaceuticals Inc.

7. Insurance; Indemnification .  The Company shall have the right to take out life, health, accident, “key-man” or other insurance covering Employee, in the name of the Company and at the Company’s expense in any amount deemed appropriate by the Company.  Employee shall assist the Company in obtaining such insurance, including, without limitation, submitting to any required examinations and providing information and data required by insurance companies.  Employee will be provided with indemnification against third party claims related to his or her work for the Company as required by Delaware law.  The Company shall provide Employee with directors and officers liability insurance coverage at least as favorable as that which the Company may maintain from time to time for other executive officers.

8. Arbitration .  Any dispute, claim or controversy based on, arising out of or relating to this Agreement, or the breach thereof, including questions regarding the arbitrability of a particular dispute, shall be settled by final and binding arbitration in San Diego, California, before a single neutral arbitrator in accordance with the National Rules for the Resolution of Employment Disputes (the “ Rules ”) of the American Arbitration Association, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction.  The Rules may be found online at www.adr.org.  Arbitration may be compelled pursuant to the California Arbitration Act (Code of Civil Procedure §§ 1280 et seq .).  If the parties are unable to agree upon an arbitrator, one shall be appointed by the AAA in accordance with its Rules.   Each party shall pay the fees of its own attorneys, the expenses of its witnesses and all other expenses connected with presenting its case; however , Employee and the Company agree that, to the extent permitted by law, the arbitrator may, in his or her discretion, award reasonable attorneys’ fees to the prevailing party ; provided , further , that the prevailing party shall be reimbursed for such fees, costs and expenses within forty-five (45) days following any such award; provided , further , that the parties’ obligations pursuant to the provisos set forth above shall terminate on the tenth (10th) anniversary of the date of Employee’s termination of employment .  Other costs of the arbitration, including the cost of any record or transcripts of the arbitration, AAA’s administrative fees, the fee of the arbitrator, and all other fees and costs, shall be borne by the Company.  This Section 8 is intended to be the exclusive method for resolving any and all claims by the parties against each other for payment of damages under this Agreement, or relating to Employee's employment; provided , however , that Employee shall retain the right to file administrative charges with or seek relief through any government agency of competent jurisdiction, and to participate in any government investigation, including but not limited to (i) claims for workers’ compensation, state disability insurance or unemployment insurance; (ii) claims for unpaid

 

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wages or waiting time penalties brought be fore the California Division of Labor Standards Enforcement; provided , however , that any appeal from an award or from denial of an award of wages and/or waiting time penalties shall be arbitrated pursuant to the terms of this Agreement; and (iii) claims fo r administrative relief from the United States Equal Employment Opportunity Commission and/or the California Department of Fair Employment and Housing (or any similar agency in any applicable jurisdiction other than California); provided , further , that Emp loyee shall not be entitled to obtain any monetary relief through such agencies other than workers’ compensation benefits or unemployment insurance benefits.  This Agreement shall not limit either party’s right to obtain any provisional remedy, including, without limitation, injunctive or similar relief, from any court of competent jurisdiction as may be necessary to protect their rights and interests pending the outcome of arbitration, including without limitation injunctive relief, in any court of compete nt jurisdiction pursuant to California Code of Civil Procedure § 1281.8 or any similar statute of an applicable jurisdiction.  Seeking any such relief shall not be deemed to be a waiver of such party’s right to compel arbitration.  Both Employee and the Co mpany expressly waive their right to a jury trial to the extent permitted by applicable law.  

9. Miscellaneous .

(a) Modification; Prior Claims .  This Agreement and the Employee Proprietary Information and Inventions Agreement set s forth the entire understanding of the parties with respect to the subject matter hereof, supersede s all existing agreements between them concerning such subject matter , including without limitation, any offer letter between Employee and the Company, and may be modified only by a written instrument duly executed by each party.  No oral waiver, amendment or modification will be effective under any circumstances whatsoever.

 

(b) Assignment; Assumption by Successor .  The rights of the Company under this Agreement may, without the consent of Employee, be assigned by the Company, in its sole and unfettered discretion, to any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly, acquires all or substantially all of the assets or business of the Company.  The Company will require any successor (whether direct or indirect, by purchase, merger or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place; provided , however , that no such assumption shall relieve the Company of its obligations hereunder.  As used in this Agreement, the “ Company ” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise.

(c) Survival .  The covenants, agreements, representations and warranties contained in or made in Sections 4, 5, 6, 8 and 9 of this Agreement shall survive any termination of this Agreement.

(d) Third‑Party Beneficiaries .  This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement.

(e) Waiver .  The failure of either party hereto at any time to enforce performance by the other party of any provision of this Agreement shall in no way affect such party’s rights thereafter to enforce the same, nor shall the waiver by either party of any breach of any provision hereof be deemed to be a waiver by such party of any other breach of the same or any other provision hereof.

(f) Section Headings .  The headings of the several sections in this Agreement are inserted solely for the convenience of the parties and are not a part of and are not intended to govern, limit or aid in the construction of any term or provision hereof.

 

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(g) Notices .  All notices, requests and other communications hereunder shall be in writing and shall be delivered by courier or other means of personal service (including by means of a nationally recognized courier service or prof essional messenger service), or sent by telex or telecopy or mailed first class, postage prepaid, by certified mail, return receipt requested, in all cases, addressed to:  

If to the Company or the Board:

Conatus Pharmaceuticals Inc.

16745 West Bernardo Drive, Suite 200

San Diego, California 92127

Attention:  Secretary

If to Employee:

Edward F. Smith III, Ph.D., MBA, RAC

All notices, requests and other communications shall be deemed given on the date of actual receipt or delivery as evidenced by written receipt, acknowledgement or other evidence of actual receipt or delivery to the address.  In case of service by telecopy, a copy of such notice shall be personally delivered or sent by registered or certified mail, in the manner set forth above, within three business days thereafter.  Any party hereto may from time to time by notice in writing served as set forth above designate a different address or a different or additional person to which all such notices or communications thereafter are to be given.

(h) Severability .  All Sections, clauses and covenants contained in this Agreement are severable, and in the event any of them shall be held to be invalid by any court, this Agreement shall be interpreted as if such invalid Sections, clauses or covenants were not contained herein.

(i) Governing Law and Venue .  This Agreement is to be governed by and construed in accordance with the laws of the State of California applicable to contracts made and to be performed wholly within such State, and without regard to the conflicts of laws principles thereof.  Except as provided in Sections 6 and 8, any suit brought hereon shall be brought in the state or federal courts sitting in San Diego, California, the parties hereto hereby waiving any claim or defense that such forum is not convenient or proper.  Each party hereby agrees that any such court shall have in personam jurisdiction over it and consents to service of process in any manner authorized by California law.

(j) Non-transferability of Interest .  None of the rights of Employee to receive any form of compensation payable pursuant to this Agreement shall be assignable or transferable except through a testamentary disposition or by the laws of descent and distribution upon the death of Employee.  Any attempted assignment, transfer, conveyance, or other disposition (other than as aforesaid) of any interest in the rights of Employee to receive any form of compensation to be made by the Company pursuant to this Agreement shall be void.

(k) Gender .  Where the context so requires, the use of the masculine gender shall include the feminine and/or neuter genders and the singular shall include the plural, and vice versa, and the word “person” shall include any corporation, firm, partnership or other form of association.

(l) Counterparts .  This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement.

 

14


 

(m) Construction .  The language in all parts of this Agre ement shall in all cases be construed simply, according to its fair meaning, and not strictly for or against any of the parties hereto.  Without limitation, there shall be no presumption against any party on the ground that such party was responsible for d rafting this Agreement or any part thereof.  

(n) Withholding and other Deductions .  All compensation payable to Employee hereunder shall be subject to such deductions as the Company is from time to time required to make pursuant to law, governmental regulation or order.

 

15


 

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above.  

 

CONATUS PHARMACEUTICALS INC.

 

 

 

By:

 

/s/ Steven J. Mento, Ph.D.

Name:

 

Steven J. Mento, Ph.D.

Title:

 

President and CEO

 

 

 

 

 

/s/ Edward F. Smith III, Ph.D., MBA, RAC

 

 

Edward F. Smith III, Ph.D., MBA, RAC

 

 

16

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven J. Mento, Ph.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Conatus Pharmaceuticals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 5, 2016

 

/s/ Steven J. Mento, Ph.D. 

 

 

Steven J. Mento, Ph.D.

 

 

President and Chief Executive Officer

 

 

(principal executive officer)

 

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Charles J. Cashion, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Conatus Pharmaceuticals Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 5, 2016

 

/s/ Charles J. Cashion 

 

 

Charles J. Cashion

 

 

Senior Vice President, Finance,

 

 

Chief Financial Officer and Secretary

 

 

(principal financial and accounting officer)

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Conatus Pharmaceuticals Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven J. Mento, Ph.D., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2016

 

/s/ Steven J. Mento, Ph.D. 

 

 

Steven J. Mento, Ph.D.

 

 

President and Chief Executive Officer

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.

 

Exhibit 32.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Conatus Pharmaceuticals Inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Charles J. Cashion, Senior Vice President, Finance, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2016

 

/s/ Charles J. Cashion 

 

 

Charles J. Cashion

 

 

Senior Vice President, Finance,

 

 

Chief Financial Officer and Secretary

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.