DCOY 8-K
Decoy Therapeutics Inc. (DCOY)
8-K
2025-01-13
For: 2025-01-10
View Original
Added on
April 11, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 10, 2025
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer Identification Number) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(713 ) 913-5608
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Nasdaq Capital Market | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐
1
EXPLANATORY NOTE
This Current Report on Form 8-K (the “Report”) is being filed in connection with the execution of the Merger Agreement (as defined below) between Salarius Pharmaceuticals, Inc. (“Salarius” or the “Company”) and Decoy Therapeutics Inc. (“Decoy”) pursuant to which Decoy’s business will combine with the business of the Company. A description of the material terms of the Merger Agreement is set forth in Item 1.01 of this Current Report.
The purpose of this Report, in addition to disclosures with respect to Merger Agreement (as defined below) is to provide stockholders with specified additional information about Decoy and its business.
FORWARD-LOOKING STATEMENTS
This Current Report on Form 8-K contains forward-looking statements regarding Salarius, Decoy, the proposed Merger (as defined below), pre-merger financing and other matters, including without limitation, statements relating to the satisfaction of the conditions to and consummation of the Merger, the expected timing of the closing (the “Closing”), the expected ownership percentages of the combined company and Salarius’ estimates of its expected net cash at Closing. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of Salarius, as well as assumptions made by, and information currently available to, management. Forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “may,” “will,” “should,” “would,” “expect,” “anticipate,” “plan,” “likely,” “believe,” “estimate,” “project,” “intend,” and other similar expressions. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties and are not guarantees of future performance. Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation: the risk that the conditions to the Closing are not satisfied, including uncertainties as to the timing of the consummation of the proposed Merger and the ability of each of Salarius and Decoy to consummate the Merger, including completing a Qualified Financing (as defined below); and risks related to Salarius’ ability to correctly estimate its expected net cash at Closing and estimate and manage its operating expenses and its expenses associated with the proposed Merger pending Closing. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the SEC which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
In this Report, unless otherwise specified, all dollar amounts are expressed in United States dollars. Except as otherwise indicated herein, references in this report to “Company”, “Salarius”, “we”, “us” and “our” are references to Salarius Pharmaceuticals, Inc.
Item 1.01. Entry into a Material Definitive Agreement
Merger Agreement
2
58582473.18
On January 10, 2025, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“First Merger Sub”), Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and wholly owned subsidiary of the Company (“Second Merger Sub”), and Decoy. Pursuant to the Merger Agreement, the Company will combine with Decoy (the “Merger”) by causing First Merger Sub to be merged with and into Decoy, with Decoy surviving the merger as a wholly owned subsidiary of the Company (the “First Merger”). Immediately following the First Merger, Decoy will merge with and into Second Merger Sub, with Second Merger Sub being the surviving entity and continuing under the name “Decoy Therapeutics, LLC” as a wholly-owned subsidiary of the Company.
The Merger is structured as a stock-for-stock transaction pursuant to which all of Decoy’s outstanding equity interests will be exchanged based on an exchange ratio for consideration of a combination of (a) shares of the Company’s common stock par value $0.0001 (the “Common Stock”) in an amount up to (i) 19.9% of the Company’s total shares outstanding as of January 10, 2025 minus (ii) any shares of Salarius' Common Stock issued in any private placement between January 10, 2025 and the effective time of the First Merger (the "First Effective Time"), and (b) shares of Series A Preferred Stock, which is a newly designated series of preferred stock (“Preferred Stock”) that is intended to have economic rights equivalent to the Common Stock, but with only limited voting rights, in addition to the assumption of outstanding and unexercised stock options to purchase shares of Common Stock from the Decoy Therapeutics Inc. 2020 Equity Incentive Plan. The number of shares of common stock to be issued at the Closing and the number of shares of common stock underlying the Series A Preferred Stock to be issued at Closing is based on an exchange ratio which assumes a base value of $28.0 million for Decoy and $4.6 million for Salarius, subject in each case to adjustment based on the balance sheet cash available to each Salarius and Decoy at Closing (excluding any proceeds raised in in the Qualified Financing, as defined below). Based on these relative values, before taking into account the dilutive effects of the Qualified Financing, Salarius’ legacy stockholders would retain approximately 14.1% of Salarius on an as-converted-to-common basis and, after giving effect to the exchange ratio and the conversion of the Series A Preferred Stock, Decoy stockholders would own approximately 85.9% of Salarius.
The rights of the Series A Preferred Stock will be set forth in a Certificate of Designation of Preferences, Rights and Limitations that we will file with the Secretary of State of the State of Delaware (the “Certificate of Designation”). The Certificate of Designation provides that the preferred stock will be convertible into shares of Common stock on a 1-for-1000 basis, subject to stockholder approval. Please see “Description of Series A Preferred Stock” for a complete description of the Certificate of Designation and the rights of the Series A Preferred Stock. The Merger was approved by our Board of Directors and the board of directors of Decoy. In addition, following the consummation of the Merger, the Company has agreed to call a special stockholder meeting to approve (i) the conversion of the preferred stock to be issued at the Closing into shares of Common Stock (the “Conversion Proposal”), (ii) a new equity incentive plan in form reasonably agreed to by the parties (the “Equity Plan Proposal”), and (iii) if necessary and advisable, a reverse stock split in a ratio to be approved by our Board of Directors (the “Reverse Stock Split Proposal” and together with the Conversion Proposal and the Equity Plan Proposal, the “Company Stockholder Matters”).
The Merger Agreement contains customary representations and warranties by each of the Company and Decoy, as well as covenants relating to operating each respective business in the ordinary course prior to closing. The closing is conditioned upon, among other things, minimum proceeds from future offerings of at least $6.0 million (collectively, the “Qualified Financing”) and the continued listing of our Common Stock on Nasdaq.
3
58582473.18
In connection with the execution of the Merger Agreement, the Company entered into stockholder support agreements (the “Salarius Support Agreements”) with certain of our officers and directors, who collectively own an aggregate of approximately 1.38% of the outstanding shares of the Common Stock. The Salarius Support Agreements provide that, among other things, each of the parties thereto has agreed to vote or cause to be voted all of the shares of Common Stock owned by such stockholder in favor of the Company Stockholder Matters at a special or annual meeting of our stockholders to be held in connection therewith. The form of Salarius Support Agreement is attached hereto as Exhibit 10.1 and incorporated herein by reference. In addition, Decoy officers and directors, in their capacities as stockholders of Decoy, entered into stockholder support agreements (the “Decoy Support Agreements”) with Decoy. The Decoy Support Agreements provide that, among other things, each of the parties thereto has agreed to vote or cause to be voted all of the shares of Common Stock owned by such stockholder in favor of the proposed Merger. A Form of Decoy Support Agreement is attached hereto as Exhibit 10.2 and incorporated herein by reference.
Concurrently and in connection with the execution of the Merger Agreement, certain Decoy officers and directors, and certain of our directors and officers entered into lock-up agreements with us and Decoy, pursuant to which each such stockholder will be subject to a 180-day lockup on the sale or transfer of shares of Common Stock held by each such stockholder at the closing of the Merger, including those shares received by Decoy stockholders in the Merger. The form of lock-up agreement is attached hereto as Exhibit 10.3 and incorporated by reference.
As disclosed elsewhere in this Report, subject to the conditions set forth in the Merger Agreement, the businesses of Salarius and Decoy will combine upon the consummation of the Merger. Given the significance of Decoy’s operations to the future of the combined company, Salarius is providing certain information regarding Decoy and its business.
Unless the context otherwise requires, the information provided below relates to the combined company after the acquisition of Decoy.
Warrant Cancellation Agreement
On January 10, 2025, Salarius Pharmaceuticals, Inc. (the “Company”) entered into a Warrant Cancellation Agreement (the “Agreement”) with an accredited investor (“Investor”). The Company previously issued to the Investor a Series A-1 Common Stock Purchase Warrant to purchase 454,546 shares (on a post-reverse stock split basis) of its common stock, par value $0.0001 per share (the “Common Stock”) pursuant to the offering described in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on May 16, 2023 (the “Warrant”). Pursuant to the Agreement, on January 10, 2025, the Company paid the Investor an aggregate amount in cash of $350,000 in exchange for the surrender and cancellation of the Warrant.
The above summary of the Agreement does not purport to be complete and is qualified in its entirety to the full text of the Agreement, which is filed as Exhibit 10.4 to this Current Report on Form 8-K and is qualified herein by this reference.
Item 3.02. Unregistered Sales of Equity Securities
4
58582473.18
To the extent required by Item 3.02 of Form 8-K, the information contained in Item 1.01 of this Report is incorporated herein by reference. The Common Stock and Preferred Stock to be issued at the Closing are intended to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Regulation D promulgated thereunder.
Item 7.01. Regulation FD Disclosure
In connection with the execution of the Merger Agreement, the Company and Decoy issued the press release attached as Exhibit 99.4 hereto and incorporated by reference herein.
The information set forth in this Item 7.01 and in the press release attached hereto as Exhibit 99.4, is deemed to be “furnished” and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that Section. The information set forth in this Item 7.01, including Exhibit 99.4, shall not be deemed incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933, as amended, except to the extent that the Company specifically incorporates it by reference.
Item 8.01. Other Events
DESCRIPTION OF BUSINESS OF DECOY THERAPEUTICS INC.
Overview of Decoy’s and the Combined Company’s Proposed Business
Decoy’s proprietary IMP3ACTTM platform (Immediate Peptide/PPMO/P-PROTAC Alpha-helical Conjugate Technology) represents a paradigm shift in peptide conjugate drug discovery and manufacturing, leveraging machine learning (ML) and artificial intelligence (AI) tools alongside high- speed synthesis techniques to rapidly engineer, optimize and manufacture peptide conjugates that target serious unmet medical needs. Peptide conjugates are emerging as a major therapeutic drug modality, with the potential to transform multiple therapeutic areas. This innovative class of drugs, exemplified by successful diabetes and weight loss treatments like Ozempic, Wegovy, Mounjaro and ZepBound, combines small a-helical peptides with functional moieties to enhance solubility and extend the duration of action. By decreasing the complexity of peptide conjugate development, Decoy aims to establish itself as a leader in this advancing drug class. Decoy’s goal is to build a robust portfolio of novel peptide conjugate therapeutics, initially focusing on infectious diseases and oncology. Through this approach, Decoy intends to revolutionize the design, development, and commercialization of peptide conjugate therapeutics, becoming a fully integrated biopharmaceutical company at the forefront of this exciting field.
The peptide conjugate drug class is extremely modular and flexible, making it applicable to a wide range of human disease states and medical indications. Decoy expects that its drug candidates may be used both chronically, like current diabetes or weight loss drugs, or acutely, as is typical of antiviral treatments. Decoy is planning to engineer its peptide conjugates to be delivered via a variety of routes that can be optimally matched to the targeted disease state, including intranasal and pulmonary inhalation, extended-release dermal patches, oral, subcutaneous (SC) injection, and IV. Peptide drug conjugates (PDCs) can also be designed to deliver payloads, including radionucleotides or approved small molecule or biological drugs, to a specific target or tissue of interest, such as cancerous tumors, to achieve highly precise delivery with increased tissue penetration and lower cost compared to antibody-drug conjugates (ADCs). As with ADCs, the goal of this strategy is to widen the “therapeutic window” by
5
58582473.18
increasing efficacy while reducing the overall dose and consequent side-effects of the payload. Decoy believes the peptide conjugate modality is ideally suited to this strategy. Finally, Decoy believes its integration with Salarius expands the combined company’s opportunities to create an additional novel class of peptide conjugates, specifically, peptide-based proteolysis targeting chimeras, or P-PROTACs, utilizing the Salarius compound SP-3164 as an important building block in these peptide conjugate drugs.
New Program Development in the Merged Company
The combined company intends to leverage Salarius’ proprietary compound SP-3164, which specifically binds to the E3 ligase complex CRLCBRN, together with Decoy’s peptide engineering platform to engineer peptides to target a variety of disease relevant intracellular proteins, creating ‘peptide based-Proteolysis Targeting Chimeras,’ or PROTACs (P-PROTACS).
PROTACs are typically a bifunctional molecule; one side of the molecule binds to a targeted protein, while the other side of the molecule binds to an E3 ligase, with a linker between the two. When both the targeted protein and the E3 ligase are brought together the targeted protein is ubiquitinated, or “tagged” by the E3 ligase, and is marked for destruction via proteasomal protein degradation. SP-3164, a novel and proprietary immunomodulatory drug molecule, has many advantageous properties including potent cereblon binding, low molecular weight, high oral bioavailability, and clear and well characterized binding mechanisms. Using the IMP3ACT platform engineered peptides instead of small molecules to target disease causing proteins has many advantages: peptides can be precisely engineered to bind specifically to one protein, or to a pre-determined set of proteins (for example, across mutated ras proteins). In contrast, small molecules typically bind to many “off-target” proteins, decreasing selectivity and increasing toxicity. Peptides can bind to the active enzymatic site of a protein but can also be engineered to bind to other sites on the protein which may be under much lower selective mutational pressure, lowering the likelihood of resistance mechanisms and avoiding competition with the natural ligand. Finally, Decoy believes using peptides instead of existing small molecules vastly expands the protein targeting opportunities, and dramatically shortens the timelines to engineering P-PROTAC candidates.
The PROTAC mechanism of action can be described as “event-driven” in which one PROTAC molecule can induce the degradation of multiple copies of the protein target. Even small concentrations of the PROTAC can be highly advantageous, such that toxicity due to high drug concentrations may be avoided. Additionally, by degrading rather than inhibiting the protein target, both enzymatic and any other functions of the protein are disrupted, and these effects will last for as long as it takes the cell to synthesize new proteins, which can dramatically expand the duration of action of even a small concentration of a PROTAC. Thus, the combined company’s P-PROTACs may be ideal peptide drug conjugate payloads, targeting a potentially wide range of intracellular biologically relevant targets, including those thought to be “undruggable”, and representing a major addition to Decoy’s IMP3ACT platform. Upon consummation of the Merger, this is expected to become a major focus of exploratory research at the combined company, with an initial focus on creating P-PROTACs for metastatic colorectal cancer to complement Decoy’s colorectal cancer GPCR-based peptide conjugate program.
Decoy’s Drug Development Programs
Decoy is developing peptide conjugates, PDCs, and peptide-PROTACs with an initial focus on the treatment of viral infections and colorectal cancer. Decoy has demonstrated multi-virus in vitro activity with direct acting peptide conjugate antivirals by targeting the highly conserved fusion mechanism found across enveloped virus families. Next, Decoy intends to apply the same peptide design Machine Learning/Artificial Intelligence
6
58582473.18
(ML/AI) tools to create peptide binders to select overexpressed G protein-coupled receptor (GPCR) colorectal cancer targets for novel precision medicine peptide drug conjugates. Decoy intends to explore the use of the Salarius compound SP-3164, a molecular glue degrader that binds to cereblon, as a building block in a P-PROTAC in which the combined company plans to engineer a peptide targeting a protein of interest in colorectal cancer. This P-PROTAC may be suitable as a novel and proprietary payload for Decoy’s colorectal targeting peptide conjugate.
Through Decoy’s IMP3ACT Platform the combined company would aim to create a diverse and growing development portfolio of peptide conjugate, PDC and P-PROTAC programs as summarized in the figure below.
•COV: Pan-Coronavirus Prophylactic for Immunocompromised Patients. Decoy’s lead program, a nasally inhaled pan-Coronavirus prophylactic, has demonstrated activity in vitro against all human infecting Coronaviruses tested, including representatives of all variant strains of concern of COVID-19 that have emerged as of the date of this Report. This program has primarily been funded by grants from the Bill & Melinda Gates Foundation, BARDA’s Blue Knight Program, and with additional support from the IMI Care Consortium, Google and NVIDIA computing programs. Decoy plans to file an IND for this program in the first half of 2026. Decoy intends to continue to pursue non-dilutive funding and a development partner for this program’s clinical development.
•TRI: Broad Respiratory Antiviral (Flu/COVID/Respiratory syncytial virus). Decoy’s goal is to exploit structural similarities across these viruses and their viral families to create a peptide conjugate antiviral that will be broadly applicable to most Influenza-like-illnesses (ILI), which drive an estimated 15 to 20 million medical visits every year in the United States alone. Building on work that Decoy has already done to create peptide conjugate antivirals with very broad activity in the Coronavirus and Paramyxovirus (RSV) viral families, Decoy believes this program could represent a fundamental shift in the treatment of respiratory viruses.
7
58582473.18
•cGPCR: GPCR-Targeted Conjugate for Colorectal (CRC) and other GI Tumors. There is an urgent need for the identification of new cell membrane targets to create multiple precision treatment options for many colon cancer patients, including those with late stage metastatic and drug resistant tumors. Decoy aims to investigate an under-utilized cell membrane molecule class, the G-protein coupled receptors (GPCRs) as new precision medicine targets for Decoy’s peptide engineering platform, ultimately creating novel peptide drug conjugates as new biomarker driven CRC therapeutics.
The Combined Company’s Exploratory Stage Program
•P-TAC: Exploratory P-PROTAC Conjugates: The combined company would aim to explore the use of SP-3164 as the E3 ligase binding component in peptide based PROTACs, using engineered peptides to target intracellular proteins involved in colorectal cancer cell function and dysregulation.
Legacy Small Molecule Program resulting from the Merger
•SP-2577: SP-2577 is a legacy small molecule LSD-1 inhibitor program from Salarius not using Decoy technology. The combined company would intend to continue supporting MD Anderson Cancer Center (MDACC) in MDACC’s sponsored investigator-initiated clinical trial evaluating seclidemstat (SP-2577) in combination with azacytidine in adult patients with myelodysplastic syndromes and chronic myelomonocytic leukemia. The trial remains on partial clinical hold following a serious and unexpected grade 4 adverse event while MDACC works with the FDA to resolve the partial clinical hold. The combined company would intend to conduct a thorough review of this small molecule program in early 2025.
Strategy
Decoy’s strategy is to leverage its IMP3ACT platform to rapidly design, develop and commercialize novel and transformative peptide conjugate therapeutics that improve the lives of patients with serious diseases. Decoy’s initial focus is on 3 types of peptide conjugates: fusion inhibitor peptide conjugates for viral diseases, GPCR-based peptide drug conjugates, and peptide-PROTACs. These areas were chosen as Decoy’s starting points for the following reasons:
•The fusion inhibition machinery is highly conserved across all enveloped viruses, and peptide conjugate inhibitors offer a new antiviral modality in a therapeutic area with high medical need and low competition.
•G-Protein Coupled Receptors (GPCRs) are a very rich target space that are simultaneously implicated in multiple serious disease states and have been underexploited in cancer. Peptide drug conjugates offer the potential for significant benefits including high tumor penetration, tissue selectivity with an improved toxicity profile, and are highly amenable to manufacturing modularity in payload type.
•PROTACs are an emerging drug class that suffers from two things: limitations due to what small molecules are available to target proteins of interest, and toxicity due to lack of selective tissue targeting. Peptide conjugate peptide-PROTACs can address both issues, dramatically expanding the range of the proteins of interest targeted for degradation and selectively targeting tissues for improved safety and efficacy.
Decoy selects peptide conjugate targets based on the following criteria:
8
58582473.18
•Potential for a therapeutic that can address multiple disease indications with one drug.
•The presence of a natural “starting peptide” that Decoy’s platform can rapidly optimize into a promising therapeutic.
•Potential to create a peptide conjugate therapeutic with a novel and differentiated value proposition that meets a significant unmet medical need.
Decoy believes that this target selection strategy will maximize the return on investment from the IMP3ACT platform by allowing Decoy to efficiently advance paradigm creating therapeutics across its peptide conjugate, peptide drug conjugate and peptide-PROTAC molecules.
Decoy’s goal is to become a fully integrated biopharmaceutical company with a pipeline of novel therapeutics with targets selected as outlined above. Decoy intends to achieve this goal by pursuing the following strategic objectives:
•Achieve clinical proof-of-concept for Decoy’s platform by bringing its lead pan-Coronavirus antiviral forward through a Phase 2 human challenge clinical trial. Even though COVID-19 has largely moved into an endemic phase, Decoy believes there is still a significant global unmet medical need among immune-suppressed people that this program can fill, giving it meaningful economic value. To date, this program has been largely supported by non-dilutive funds and this funding source continues to be the mechanism through which Decoy is validating many of the technologies in its platform. Decoy believes it will continue to attract such funds to advance this program in the clinic.
•Bring forward 1 additional transformative program to IND-enabling status within two years. Decoy aims to leverage the speed and efficiency of its peptide conjugate design and development platform to bring forward additional potentially transformative peptide conjugate therapeutics that meet the target selection criteria outlined above to the IND-enabling stage of development with 24 months. Decoy expects that this program could have the potential to deliver a novel value proposition that is not currently available to patients and healthcare providers.
•Thorough review of SP-2577 to drive a decision on whether to continue development internally or position this asset for out-licensing.
•Build a platform manufacturing capability: Decoy intends to pursue platform manufacturing designation from the FDA, allowing it to rapidly scale-up the manufacturing of novel peptide-conjugate drug candidates for pre-clinical and clinical studies in a repeatable and cost-effective manner. Decoy believes this would significantly enhance its ability to quickly advance novel and economically valuable therapeutic programs.
•Continue to access non-dilutive funding. To date, Decoy has been able to attract significant non-dilutive funding to support its programs and platform from organizations such as The Bill & Melinda Gates Foundation (BMGF), BARDA, Google, and the IMI-Care Consortium. Decoy expects to continue seeking such funds in the future.
9
58582473.18
•Pursue value-enhancing partnerships. Decoy believes it can rapidly create and validate novel therapeutic assets. Consequently, Decoy aims to attract capital and relevant capabilities in later-stage development and commercialization to these programs by selectively seeking partnerships for these assets that Decoy believes will be value enhancing to its company.
•Maintain Pandemic Readiness: Preserve the Pandemic “Call-Option” Embedded with the IMP3ACT Platform. Based on our goals, Decoy’s platform is well-positioned to rapidly advance antiviral therapeutics in response to the emergence of novel and dangerous viral pathogens, especially in several of the viral families that are often considered to be the most likely sources of such a pathogen, for example, avian influenza. Decoy will continue to actively work with governmental agencies and NGOs globally to provide funding to further develop peptide drug conjugates against developing global threats. Given the financial returns to their sponsors from therapeutic assets such as the mRNA vaccines and Paxlovid during the COVID-19 pandemic, Decoy considers this capability to be a valuable ‘call option’ on the next epidemic or pandemic.
Decoy’s Management and Management of the Proposed Combined Company
Decoy’s management, co-founders and scientific advisor board include highly experienced senior scientists, clinicians, biotechnology and pharmaceutical executives, and a renowned professor of peptide chemistry from the Massachusetts Institute of Technology:
•Rick Pierce, Chief Executive Officer and Director, a serial biotech entrepreneur who has helped build a number of biotech companies over the last 25 years, including Javelin Pharmaceuticals, which was sold to Pfizer, which now markets its lead drug, Dyloject.
•Barbara Hibner Ph.D., Chief Scientific Officer and Director, 25+ years of experience in pharmacology and drug discovery and development in pharma and biotech companies resulting in contributions to 2 oncology drugs sorafenib and ixazomib.
•Peter Marschel, MS MBA, Chief Business Officer & Director with over fifteen years of experience in business development, financial and commercial roles at large pharma and biotech, including leading market analytics for the cystic fibrosis franchise at Vertex Pharmaceuticals.
•Michael Lipp, Ph.D. Chief Technology Officer with over two decades of experience in pharmaceutical development and drug delivery technologies ranging from the preclinical stage through commercial approval.
•Bradley L. Pentelute, Ph.D., Professor of Chemistry at MIT and co-founder, whose lab invented the world’s fastest peptide synthesizer and has advised large pharmaceutical and biotech companies on advancing their peptide drug discovery and manufacturing efforts.
•Shahin Gharakhanian, MD, SAB chair and acting-Chief Medical Officer, is a Physician-Executive with expertise in pharmaceutical medicine, leadership and management, and an international track record and former VP within the Medicines Development Group, Global R&D at Vertex Pharmaceuticals with 2 antiviral drugs taken successfully to commercialization.
10
58582473.18
In addition, Mark Rosenblum, Chief Financial Officer of Salarius, is expected to serve as Chief Financial Officer of the combined company.
Decoy currently has 10 full time employees and 7 dedicated consultants, responsible for preclinical, toxicology, clinical development, prescriber, payor, market access and pricing strategy, CMC, quality, and regulatory strategy and execution, finance strategy and business development.
Decoy’s Scientific Advisory Board
Decoy also has 4 members of its Scientific Advisory Board chaired by Dr. Shahin Gharakhanian:
•Dr. Shahin Gharakhanian, SAB chair.
•Dr. Mark Garnick is an internationally renowned expert in medical oncology and urologic cancer and has served as an FDA ODAC panel member for 15 years. A clinical professor of medicine at Harvard Medical School, he also maintains an active clinical practice at Beth Israel Deaconess Medical Center.
•Dr. Daniel Kuritzkes, Chief of Infectious Disease at Brigham and Women’s Hospital and Professor of Medicine at Harvard Medical School.
•Yonatan Grad, Epidemiologist and Professor of Immunology and Infectious Disease at Harvard T.H. Chan School of Public Health.
Decoy’s employees and advisors have significant industry experience and have been involved in the discovery, development, regulatory approvals, and commercial launches of several successful drugs.
Financing Model
Decoy’s financing model has historically consisted of partnerships with industry entities, domestic and foreign government agencies, and non-governmental organization funding. This approach has been highly efficient and allowed Decoy to operate with relatively low annual cash burn rate and dilution compared to many of its peers.
Decoy has garnered substantial non-dilutive funding, support, and ML/AI computation credits equal to or greater than what Decoy has raised from institutional investors. Decoy has received significant grants from The Bill and Melinda Gates Foundation and the U.S. government’s Blue Knight Program, and support from the European Union’s IMI-CARE Consortium, the Canadian government’s National Research Council, GOOGLE’s AI Startup Program, and NVIDIA’s Inception Program.
Market Opportunity for Decoy’s Current Drug Development Programs
Decoy sees opportunities in each of the four main areas of its drug discovery program efforts:
COV: Pan-Coronavirus Inhibitor for Immunocompromised Patients
According to the most recent December 2024 WHO publication on COVID-19, while there are periodic waves of COVID-19 in some countries, SARS-CoV-2, the virus that causes COVID-19, largely circulates without
11
58582473.18
clear seasonality, and continues to infect, cause severe acute disease and post COVID-19 condition (long COVID).1 Currently, the primary tools to combat the virus involve mRNA vaccines and medications like Paxlovid, which are effective at avoiding severe outcomes in patients at high risk for progression to severe COVID-19. However, Paxlovid cannot be used prophylactically, either before or after exposure and has a significant Drug-Drug Interaction2 (DDI) profile, leaving a large treatment gap and negative outcomes for patients who are immune-suppressed or who have high-risk comorbidities and do not respond significantly to vaccines. Early in the pandemic, long-acting antibody-based prophylactics like Evusheld were prescribed for immune-suppressed patients. These antibody therapeutics quickly became obsolete due to the rapid and continued evolution of the SARS-CoV-2 virus. More recently the antibody Pemgarda was approved under an Emergency Use Authorization (EUA) for pre-exposure prophylaxis of COVID-19 in certain high-risk individuals. As with other antibodies, Pemgarda is at risk of losing efficacy as the virus continues to mutate; the most recent SARS-CoV-2 viral variants have ~ 150 mutations compared to the original viral sample, with no indication that viral evolution is slowing.
Decoy commissioned market research in 20223 that indicated important medical unmet needs in the treatment and prevention of COVID-19, including:
•Prophylaxis for current and future variants in high-risk patients: Health care providers, or HCPs, are concerned about preventing and minimizing severe cases in patients at risk. This is considered particularly critical if or when new variants arise.
•Easy-to-use route of administration: Key opinion leaders noted the need for non-injectable preventative products to enable broad availability by reducing infrastructure requirements. This type of treatment also avoids the need for high-risk patients to visit healthcare facilities for administration.
•Effective treatments with better Drug-Drug Interaction, or DDI, profile: DDIs, such as those seen with Paxlovid, are a concern for HCPs, especially when considering that high risk patients tend to have other comorbidities and are most probably already on other treatments.
This market research, which included both health care provider and payer studies across the United States and the European Union, indicated that there are 20 million or more patients in the US and Europe that many health care providers consider to be at ‘highest risk’ from COVID and other respiratory viral infections, and a favorable outlook for reimbursement for therapeutics that can fill treatment gaps for these patients.
Decoy’s lead program is a broad-acting antiviral nasal spray to prevent or mitigate COVID-19 infections in high-risk, immunocompromised populations for whom there are limited treatment options. This agent has been shown to be active in vitro against all human infecting Coronaviruses, including all COVID-19 variants that have emerged to date, would be conveniently self-administered, and is expected to provide 8-24 hours of antiviral activity. Decoy also believes that it will be able to manufacture this nasal spray with a low cost of goods..
Decoy expects multiple potential attractive development and commercialization options for an inhaled pan-Coronavirus fusion inhibitor, including:
1 https://www.who.int/publications/m/item/covid-19-epidemiological-update---24-december-2024
2 https://paxlovid.pfizerpro.com/drug-interactions
3 Primary market research performed by Bionest Partners in Oct/Nov 2022: 13 HCPs, 13 Payers in US, DE, FR, IT, UK
12
58582473.18
•Pre- and Post-Exposure Prophylaxis (PrEP/PEP) for highly immunocompromised populations that face elevated risks due to severe immune deficiencies associated with conditions such as hematological malignancies and immunosuppressive medical treatments in the context of Hematopoietic stem cell transplantation and solid organ transplants, with the potential for label expansion to other immunocompromised and at high-risk populations. The market research mentioned above suggests there may be 5M+ such patients in the US and EU, and that an estimated net price of up to $500 per 30-day supply in the US is feasible.
•Post-infection treatment as an alternative to Paxlovid, with a superior DDI profile. Morningstar research projects full year 2024 revenues exceeding $5 B4 for Pfizer’s Paxlovid, despite Paxlovid’s notable DDIs with widely prescribed drugs such as statins (prescribed to over 90 million Americans) and calcium channel blockers (prescribed to more than 20 million Americans), which underscore the critical need for a safer alternative. Many of these patients have serious pre-existing conditions that put them at significant risk from COVID infection, but there have been emerging concerns that Paxlovid is under-prescribed to high-risk patients because of DDI concerns. As of October 18, 2023, Paxlovid’s list price in the US was $1,390 for a 5-day course5.
Decoy also believes there may be additional opportunities for a pan-Coronavirus fusion inhibitor to generate revenue from public health authority stockpiling of drug for pandemic preparedness and military readiness purposes.
Decoy’s plan is to initially develop this agent as a Pre- and Post-Exposure Prophylactic for a targeted subset of the immunocompromised, such as patients with hematological malignancies and post-transplant patients, that have both a very high unmet medical need and can be accessed in the US by a small, specialized sales force focusing on a small number of cancer treatment and transplant centers. Decoy then plans to expand from there to additional indications, including potentially novel dose regimens and inhalation routes optimized to new indications.
Decoy recognizes the rapid evolution of the COVID landscape and will continue to strive to conduct key opinion leader, health care provider, payer, and patient market research and potentially adjust its plans based on those findings.
TRI: Broad Respiratory Antiviral (Flu/COVID/RSV)
Decoy is engineering a groundbreaking approach to combat Flu/COVID/respiratory syncytial virus (RSV) infections with a single peptide conjugate antiviral that is potentially effective against all three major respiratory viruses, including activity against pandemic flu strains if possible.
By addressing the tripledemic with a single therapy, Decoy aims to revolutionize the management and treatment of respiratory illnesses caused by these viruses. Respiratory tract infections represent an important unmet medical need, exerting a significant toll on patients and public health systems worldwide. The seasonal convergence of influenza, RSV, and COVID-19, often referred to as the “tripledemic,” has intensified the burden of these infections, which are often vectors to dangerous and expensive lower respiratory infections. Despite the availability of vaccines targeting these viruses, and with decreasing vaccine uptake, hospitalizations, ICU admissions, and fatalities attributed to respiratory viruses continue to strain healthcare resources underscoring the need for effective therapeutic interventions.
Decoy’s single therapy approach potentially offers several key advantages:
4 https://www.morningstar.com/news/business-wire/20241029363831/pfizer-reports-strong-third-quarter-2024-results-and-raises-2024-guidance
5 https://www.reuters.com/business/healthcare-pharmaceuticals/pfizer-price-covid-19-drug-paxlovid-1400-five-day-course-wsj-2023-10-18/
13
58582473.18
•A single therapy with proven efficacy against all three viruses could potentially eliminate the need for multiple treatments, streamlining patient care and reducing complexity for healthcare providers.
•Decoy’s therapy is expected to be self-administered, offering convenience and autonomy to patients.
•Peptide conjugates to date have a favorable safety and tolerability profile.
Given the ease of use and safety of the envisioned product profile, Decoy intends to work towards a commercialization approach that will make this product, if approved, broadly accessible to symptomatic patients, leveraging emerging channels such as telehealth, digital patient engagement and at-home delivery.
In the United States, the combined impact of influenza, RSV, and COVID-19 results in an estimated 15 to 20 million medical visits annually among patients aged 18 and older. This significant healthcare utilization underscores the burden of respiratory tract infections on the healthcare system.
Expanding the market to include individuals with symptomatic illness who may not physically visit a doctor's office approximately doubles the number of eligible adult patients. With the increasing adoption of telehealth services and the advancement of wearables signaling very early respiratory infections, there is a tangible opportunity to expand the market for respiratory tract infection, or RTI, treatments beyond patients who traditionally seek in-person medical care.
Given these factors, Decoy believes its ‘tripledemic’ antiviral program could represent the cornerstone of a significant global franchise.
cGPCR: GPCR-Targeted Conjugate for CRC/GI Tumors
Decoy aims to investigate an under-utilized cell membrane molecule class, G-protein coupled receptors (GPCRs), as oncology precision medicine targets.
Decoy's IMP3ACT peptide discovery platform optimizes natural GPCR a-helical peptide ligands for improved drug properties. Decoy’s Design-Build-Test-Learn (DBT-L) Cycle integrates AI-driven and physics-based design, rapid peptide synthesis, and experimental testing. This iterative process builds a proprietary database, potentially enhancing Decoy’s AI's predictive capabilities for GPCR peptide ligands.
The identification of one or more novel colon tumor overexpressed GPCR biomarkers and the subsequent design and synthesis of an engineered peptide ligand has the potential to create a new paradigm for personalized medicine for colon cancer. GPCR-based novel peptide drug conjugates or radionuclide therapies can transform cancer treatment with high therapeutic window medicines so desperately needed for drug resistant and metastatic colon cancer patients.
Colon cancer therapies have changed little over the last decades, with mainstay therapies continuing to revolve around Fluorouracil (5-FU), platinum, and irinotecan combinations, typically with the addition of an anti-VEGF treatment. Only a small percentage of colon cancer patients have a biomarker that allows the incorporation of a ‘precision medicine’ where characteristics of the patient tumor drive selection of a specific therapy (for example, the 3-5% of CRC patients with amplified HER2 become eligible for the ADC trastuzumab deruxtecan). There is a high need for the identification of new cell membrane and internal protein targets to create multiple options for
14
58582473.18
precision treatments for the majority of colon cancer patients, including late stage metastatic and drug resistant tumors.
According to the most recent American Cancer Society (ACS) report released in January 2024, is the ACS estimated 152,810 new cases of colorectal cancer diagnosed in the US in 2024, with approximately 20% of these diagnosed at a late stage. The incidence rate of colorectal cancer continues to rise between 1% and 2% each year in people under the age of 55, an alarming trend since the mid-1990s.6 The mortality rate in young people is also increasing about 1% each year since the mid-2000s. Colorectal cancer has now become the leading cause of cancer death in men under 50 and the second leading cause in women of the same age group. Young people are often diagnosed with more advanced cancers due to delays in detection. Overall, CRC is the second leading cause of all cancer-related deaths in the U.S., with an estimated 53,010 deaths in 2024.
GPCRs have a high potential to target peptide drug conjugates or peptide receptor radionuclide therapy (PRRT), as exemplified by multiple approvals of somatostatin theranostics to diagnose and treat GI neuroendocrine tumors (NETs).7 The structure of GPCRs is well conserved, with a defined architecture, and the ligand binding sites are on the outer cell membrane. Over 100 GPCRs have endogenous peptide ligands, and many GPCR peptides display a regular a-helical structure in solution8, a structure that provides an excellent natural starting point for Decoy’s innovative IMP3ACT design platform. While not classic driver mutations, several GPCRs with natural a-helical peptide ligands have been reported to be overexpressed in colon tumors compared to normal tissue, in some cases in resistant and metastatic tumors.9 Typically, antagonists of GPCRs will lead to internalization, necessary for PDCs to deliver a payload inside the cell. Decoy hypothesizes that by using state of the art AI tool- boosted immunohistochemistry (IHC) to quantify GPCR cell membrane expression at the protein level, Decoy may identify one or more new colon tumor biomarkers suitable for further exploration in PDC or PRRT therapies.
Decoy’s IMP3ACT Platform
Overview of Peptides and Peptide Conjugate Therapeutics
A key proposed advantage of the peptide-conjugate modality as exemplified by product candidates engineered and synthesized by Decoy’s IMP3ACT Platform is the opportunity for ‘polypharmacology’, in which a single molecule can activate or inhibit multiple targets/receptors in an additive or synergistic manner to achieve superior or multi-indication efficacy.
The success of multi-targeting peptide conjugates is due to careful peptide design based on the structural similarity between the two GPCRs or viruses and is an exciting advantage of peptide-conjugates that is difficult to match with other therapeutic modalities, and contrasts with the often unpredictable off-target effects of small molecules.
An FDA approved example of polypharmacology is the newest obesity drug, Eli Lilly’s blockbuster ZepBoundTM, in which a single peptide conjugate demonstrates agonism of two different GPCRs: glucagon-like peptide 1 receptor (GLP-1R), and gastric inhibitory peptide receptor (GIPR). A second example is Decoy’s lead
6 https://colorectalcancer.org/article/acs-releases-colorectal-cancer-estimates-2024
7 Susini, C. & Buscail, L. Rationale for the use of somatostatin analogs as antitumor agents. Ann. Oncol. 17: 1733–1742 (2006).
8 Kaiser, A and Irene Coin. Capturing Peptide-GPCR Interactions and Their Dynamics. Molecules 25, 4724 (2020).
9 Insel, PA et. al. GPCRomics: GPCR Expression in Cancer Cells and Tumors Identifies New, Potential Biomarkers and Therapeutic Targets. Front Pharmacol. 9:431 (2018).
15
58582473.18
program, a peptide-conjugate antiviral therapeutic, that has demonstrated activity against multiple related viral pathogens.
Peptides are short chains of amino acids linked together by peptide (amide) bonds, typically less than 50 amino acids long, which play a vital role in a wide range of biological processes. Secondary atomic interactions between amino acids cause peptides to fold into complex 3-dimensional structures, one of the most common of which is an -helical coil. -helical peptides and proteins are ubiquitous in human biology, and -helices often interact chemically with other -helices driving protein-protein and protein-nucleic acid interactions, so peptides with -helical structures can often be the basis for effective therapeutics.
Peptides have important innate advantages when compared to small molecules and antibody-based therapeutics10:
•High potency and specificity: Peptides bind a larger surface area of the target than small molecules, and therefore are highly selective with very tight binding.
•Excellent safety profile with predictable metabolism: Because they easily diffuse across cell membranes small molecules often have off target toxicities that can limit or nullify their therapeutic potential. Peptides typically do not passively diffuse, and they are usually readily metabolized into non-toxic compounds.
•High tissue penetration vs. antibodies: Antibody-based therapeutics are very large molecules (~30x the size of peptides) and thus have difficulty diffusing deep into tissues from blood vessels.
•Simpler manufacturing, lower cost of goods: Peptides are manufactured using synthetic chemistry, whereas antibody-based therapeutics require complex and intensively regulated biological processes.
Small peptides as drugs, however, have an intrinsic limitation; they are subject to rapid enzymatic digestion and clearance from the GI tract or in the bloodstream, limiting their half-life and oral bioavailability.
Peptide conjugates solve this problem by chemically linking a peptide, typically via a polyethylene glycol (PEG) structure, to one or more additional molecules, often another biological molecule such as another peptide, nucleic acid, or a fatty acid, which enhance the drug-like properties of the conjugate by improving enzymatic stability, half-life in the bloodstream or at the target, and bioavailability, while also maintaining low immunogenicity.
The IMP3ACT Platform
The Immediate Peptide/PPMO/P-PROTAC Alpha-helical Conjugate Technology (IMP3ACT) platform leverages peptide ‘coiled-coils’ chemistry and physics to design -helical peptides through computational and machine learning tools. Starting from naturally existing peptide ligands, Decoy optimizes their structure and transform them into multimeric conjugates by chemically linking multiple copies to lipids and other suitable anchor moieties, enhancing their drug-like properties and dosing flexibility with extended pharmacokinetics. Notably, Decoy’s technology has produced single peptide conjugates that are active against multiple human coronaviruses, including all the SARS-CoV-2 major variants of concern to date, and a second conjugate that is active against RSV A, RSV B, and hPIV3. By integrating machine learning algorithms in peptide design and synthesis, Decoy’s
10 PLoS ONE 17(3): e0255753. https://doi.org/10.1371/journal. pone.0255753
16
58582473.18
platform accelerates the creation of lead molecules for preclinical evaluations, simultaneously optimizing peptide conjugates for enhanced affinity, binding specificity, resistance to proteases, pharmacokinetic properties, and manufacturability at early commercial scale.
The efficiency of Decoy’s IMP3ACT platform may enable Decoy to achieve peptide conjugate manufacturing readiness faster than conventional drug development processes, leading to reduced manufacturing costs and accelerated delivery of broad-spectrum drug candidates to IND. The modular nature of these drugs and processes also means that each new drug candidate improves the overall platform, and the likelihood of success should grow as the experience base teaches the ML/AI models. By employing solid phase peptide synthesis (SPPS) in an “All-in-One” manufacturing approach, Decoy optimizes the assembly of complex peptide-linker-functionalized compounds, enhancing the speed, efficiency, and predictive value of the IMP3ACT platform.
The Design-Build-Test-Learn Engine
Decoy has integrated advancements in data science, peptide conjugate chemistry, and manufacturing processes, underpinned by strong foundational research, to create its IMP3ACT platform. The core of this innovation is the Design-Build-Test-Learn Cycle: the Design component utilizes artificial intelligence (AI) in silico approaches to analyze existing protein and genomics datasets and make structure-function predictions, the Build cycle component implements fast flow synthesizers that can generate peptide candidates faster than industry standard synthetic practices, and the Test cycle incorporates experimental testing of peptide physiochemical properties and activity via reliable assays to characterize peptide-candidates. The Learn cycle capitalizes on the experimental data to redesign new and improved in silico candidates.
This integrated, multiparameter approach is designed to streamline the drug discovery process, making it faster, more efficient and with greater attention to drug-like and commercialization properties. Additionally, Decoy believes that continuing to iterate on its Design-Build-Test-Learn loop will generate valuable proprietary data that can drive its in-silico models to generate design solutions that would otherwise not be available from computational approaches. Decoy’s hypothesis is that the key to value-creation in ML/AI driven drug design is well-structured, useful, and proprietary data and the knowledge on which tools to use when, not on the computational models themselves. Decoy’s platform strategy will help Decoy become the leaders in designing and developing -helical peptide-conjugate therapeutics in its chosen target areas.
Figure 1: The major components of Decoy’s Design-Build-Test-Learn iterative loop.
17
58582473.18
Figure 1. Flow schematic of Decoy’s engine for rapid drug discovery. (A) The design stage capitalizes on metagenomics data to create structure-function predictions and further optimize peptide ligand sequences based on in silico readouts. (B) Decoy’s build stage uses fast flow synthesis to create select candidates that pass in silico criteria. (C) At the test stage, biophysical assays check peptide candidates for a variety of readouts. (D) Through the learn stage, experimental data is used to guide new and improved in silico designs.
Starting from Existing Peptide Ligands
A key element of Decoy’s platform strategy is to start from naturally existing peptides, leveraging ‘Nature’s starting points’ to improve drug development program timelines and risk. Typically, Decoy can rapidly synthesize a peptide conjugate that incorporates a naturally existing peptide sequence, and which is immediately active against the target in question. Decoy believes this is an excellent starting point for the Design-Build-Test-Learn loop because it significantly decreases the size of the peptide conjugate design space, making it computationally tractable to immediately begin optimizing for drug-like properties.
Additionally, Decoy’s in-silico engine uses machine learning, AI, and physics-based computational tools to identify helical motifs within metagenomics data that are shared across targets. This enables Decoy, especially when starting from existing peptide ligands, to rapidly design polypharmacologic peptide conjugates in which one drug can potentially interact with multiple targets, unlocking the potential for very broad activity across several indications from a single peptide conjugate. For example, these ML-driven a-helical drug candidates have the potential to inhibit a wide range of viruses by targeting the viral fusion machinery, a critical component utilized by enveloped viruses for viral entry and subsequent replication in the host cells. Similarly, Decoy will leverage the virally trained a-helical database to train the engine to target one or more GPCRs with innovatively designed a-helical ligand agonists or antagonists.
18
58582473.18
Multiparameter Optimization of Drug Properties
The IMP3ACT Platform acts as an iterative feedback loop and incorporates data from multiple in vitro experiments to improve the design parameters of the candidate peptides. The real power of this approach lies in optimizing against multiple parameters at the same time. In the past, the drug-development industry has typically relied on ‘one step at a time’ optimization that often leads to a highly restricted chemical design space in which important downstream attributes, like pharmacokinetic behavior, cannot easily be enhanced. By using all the experimental data relevant to making a drug to train the ML engine as computational guides, more drug-like peptide conjugates with optimized functionality against one or more targets and with optimized commercialization potential (pharmacology, formulation, manufacturability) may be designed. This multiparameter optimization approach not only reduces the costs associated with combinatorial research investigations but will also significantly decrease the probability of pre-clinical or clinical failures by avoiding ‘dead end’ development paths.
Rapid synthesis
Decoy is using a fast-flow automated process coupled with a proprietary “All-in-One” method (patent pending) to synthesize multiple peptide-conjugates on lab-based machines. The yield (5-100 mg depending on desired scale) and purity is sufficient for conducting multiple in vitro tests including physicochemical properties and biological function. This innovation dramatically decreases the cycle time to learn the structure-activity relationships for different peptide designs and enables Decoy’s construction of a multiparameter structure-activity-drug-like proprietary database on a-helical peptides.
Compared to standard industrial solid phase synthesis, fast flow synthesis leverages the use of a heated reactor to accelerate synthetic speed, allowing amide bond formation creation in just 7 seconds per amino acid, compared to around 1 hour per cycle in traditional methods. In addition, fast flow synthesis can be automated to eliminate human intervention and errors, and work in a high throughput fashion. Mijalis et al tested the speed of synthesis of a GHRH peptide hormone, showing that the fast flow machines can generate the peptide 45x faster than standard batch synthesis, in 40 minutes versus 30 hours11. The crude peptide output and yields are better than standard batch synthesis. This automated approach enables rapid peptide conjugate production while maintaining high quality, making it suitable for applications like drug discovery that require synthesizing multiple peptide conjugates rapidly, thus shortening the overall time to optimize a clinical drug candidate.
By innovative design, Decoy has invented a multi-arm linker which is compatible with solid phase peptide synthesis (SPPS) methods and can be used to build complex biomacromolecules containing branched peptides and other functionalities in one synthetic run. These complex molecules can be differentially functionalized in such a way so that non-peptide functionality can be attached to them while the whole molecule is still attached to the solid phase resin; Decoy’s proprietary “All-In-One” manufacturing. When the desired molecule has been built, the intact, desired compound can be cleaved from the resin, purified by suitable means, and isolated for formulation and administration.
Using fast-flow synthesis technology coupled with the above process, the research scale synthesis of a peptide conjugate is reduced from several months, typical at a standard CDMO, to days or even hours. Decoy’s IMP3ACT platform is a unique lead optimization engine that can rapidly design from natural peptide ligands and
11 Mijalis AJ, et. al. A fully automated flow-based approach for accelerated peptide synthesis. Nat Chem Biol. 13(5):464-466 (2017).
19
58582473.18
identify optimized drug-like lead molecules. Additionally, Decoy is currently evaluating the use of its All-In-One process at commercial scale, which would enable further time savings in the transition from preclinical to GLP and cGMP scale up.
Testing
Decoy is focused on using in silico and empirical assays that have predictive value. In the Design Engine the in-silico tools have been validated against the actual data (e.g., binding affinity, solubility, protease resistance, manufacturability etc.) to ensure reliability of the computational predictions. The screening cascade for each program will rely on predictive assays to streamline the work and decision making. Where possible, human organoid and epithelial tissue models are incorporated to improve predictive power, as rodent efficacy models have moderate predictive value and it can be difficult to translate the pharmacokinetics to human tissues, especially for local peptide conjugate exposure in the nose or lungs as needed for an intranasal or inhaled program. Rodent noses are substantially different to human, and it is difficult to control compound delivery and tissue analysis in intranasal and inhaled studies. Organoid models are also significantly less expensive, and easier to scale-up, than animal models.
The human airway epithelial (HAE) model is a cell culture system that is grown at an air-liquid interface (ALI). This in vitro culture system is designed to mimic the conditions of the human airway epithelium more closely than traditional submerged cell cultures. In the ALI setup, the basal surface of the human airway (nasal, bronchial, or alveolar) cells is in contact with a liquid culture medium, while the apical surface is exposed to air. This configuration promotes the differentiation of the cells into a mucociliary phenotype, which is characteristic of the pseudostratified epithelium found in the human respiratory tract, including the presence of ciliated and mucus-secreting cells. The ALI culture system is physiologically relevant and is used for various research applications, including studying the cell biology of the respiratory epithelium, modeling respiratory diseases, studying respiratory epithelium infections and effects of drugs on the respiratory epithelium.
SARS-CoV-2 HAE-ALI experiments have demonstrated that this model recapitulates human data: SARS-CoV-2 infection kinetics have been studied, and the peak of viremia occurs between days 4 and 8 in HAE-ALI culture. Human SARS-CoV-2 viral kinetics peak in the nasal epithelium between days 4 and 8 as delineated in a human challenge trial.12 Additionally, multiple coronaviruses have been tested in the HAE-ALI culture and their growth kinetics and cellular effects correlate to human experience across the seasonal (‘cold-causing’) vs. pandemic viruses. Both Influenza and RSV have been modeled in HAE and used to test the infectivity of new strains as well as therapeutic efficacy.
Beyond use in respiratory viruses, human organoid models are gaining widespread acceptance as a predictive tool for cancer drug development. Recently, an analysis of drug responses in patients and in their matched cancer organoids led to the conclusion that responses to the drugs are highly similar in the two settings. A drug with no antitumor activity in the tumor organoids did not demonstrate efficacy in the matched patient, and drugs that showed an effect in the organoid cultures were matched by a patient response in close to 90% of cases. This study has been corroborated by several studies with larger cohorts. Human organoids may be highly predictive in vitro models for candidate drug screening that could improve the clinical success rate for a variety of therapeutics.
12 Lindeboom, R.G.H., Worlock, K.B., Dratva, L.M. et al. Human SARS-CoV-2 challenge uncovers local and systemic response dynamics. Nature 631, 189–198 (2024). https://doi.org/10.1038/s41586-024-07575-x
20
58582473.18
Additional pre-clinical work will include quantitative pharmacology and model- based approaches in conjunction with toxicology information in both human model systems and animal studies to project the human starting dose for phase 1 studies with appropriate modeling consideration for any delivery device.
Scale-Up Manufacturing
Decoy is working internally as well as in collaboration with multiple Contract Manufacturing Organizations (CMOs) to develop and scale-up proprietary and GMP-compatible manufacturing processes to produce peptide conjugates generated from its IMP3ACT platform. As described earlier above, the efficiency of Decoy’s IMP3ACT platform enables Decoy to achieve peptide conjugate manufacturing readiness faster than conventional drug development processes, leading to reduced manufacturing costs and accelerated delivery of broad-spectrum drug candidates.
By employing solid phase peptide synthesis (SPPS) in an “All-in-One” manufacturing approach, Decoy optimizes the assembly of complex peptide-linker-functionalized compounds, enhancing the speed, efficiency, and predictive value of the IMP3ACT platform. Decoy is currently working with a major peptide manufacturer to scale the “All-in-One” manufacturing process to quantities useful for pre-clinical development potentially through early-stage clinical trials at minimum; Decoy anticipates new intellectual property will be an outcome of this collaboration. Decoy’s goal is pre-clinical manufacturing readiness within significantly shorter timelines compared to traditional drug development processes, aiming to eventually meet or exceed the100-day goal for vaccine manufacturing; in other words, moving from an initial natural peptide ligand to drug lead in a single quarter.
Formulation Flexibility
Traditionally peptides as drugs have suffered from very low bioavailability, limiting their delivery to intravenous (IV) or subcutaneous (SC) routes. Decoy is exploring multiple routes of administration, with an emphasis on self-administered methods including:
•Intranasal, including nose-to-brain delivery.
•Inhaled/pulmonary delivery (local and systemic applications)
•Subcutaneous patches for extended systemic release.
•Oral
Decoy is engineering its peptide conjugates to possess the required physicochemical and pharmaceutical properties to enable each of these routes of delivery, including solubility, chemical stability, resistance to proteolytic degradation and compatibility with a range of pharmaceutically acceptable excipients. Results to date indicate that Decoy’s peptide conjugates can be formulated into both liquid and dry powder-based dosage forms that are room temperature stable and suitable for administration via a range of delivery devices such as liquid and dry powder-based nasal and pulmonary inhalation devices and syringes.
Competitive Strengths of the IMP3ACT Platform
Decoy believes the IMP3ACT platform has several key advantages compared to other drug-discovery approaches:
21
58582473.18
•Proprietary Data: Continuing to run Decoy’s Design-Build-Test-Learn loop results in an expanding proprietary data set that should give the IMP3ACT platform a differentiated and difficult to duplicate capability to design novel and promising therapeutic candidates against -helical targets, for example as found in viruses and GPCRs.
•Faster & Lower Cost Discovery: Decoy’s ML/AI engine is applying computational tools to model structures, energy costs, binding affinities and specificity, protease resistance and manufacturability to design lead quality molecules in a fraction of the time, and by making significantly fewer candidate molecules, than required in traditional drug discovery methods.
•Streamlined & Repeatable Manufacturing: Decoy is currently working to scale-up the “All-in-one” manufacturing process such that it will repeatably utilize the same chemistry, manufacturing, and controls (CMC) processes for each new drug candidate Decoy brings forward. Given this, Decoy has applied for the FDA Emerging Technology program based on the Food and Drug Omnibus Reform Act of 2022 (“FDORA”). Decoy’s goal to be able to manufacture 30g of active pharmaceutical ingredient (API) of a new therapeutic candidate, typically enough material to take a new therapeutic candidate at least through pre-clinical activities, in 30 days (“30 in 30”).
•Low Commercial Cost of Goods: Decoy’s manufacturing process is fully chemically synthetic and can be run on standard peptide synthesis machinery, thus avoiding the bioprocess and regulatory complexities of recombinant biological processes. Given this and based on examples from currently marketed peptide conjugate therapeutics, Decoy expects to have very low cost-of-goods-sold (COGS) at commercial scale. For example, Decoy is aiming for total COGS of less than $1/dose in its lead pan-coronavirus inhibitor program.
•Flexible Formulation: Decoy intends to formulate its peptide-conjugate therapeutic candidates in a variety of formats for self-administered routes of administration, including nasal and oral inhalation and extended-release dermal patches. This will allow Decoy to optimize the route of delivery for the indication and market in question.
•Increased Probability of Success: Multi-parameter optimization of drug properties from the beginning of the design and discovery process should help Decoy avoid “dead-ends” which can result in expensive and time-consuming drug development failures.
Drug Development Programs
Through Decoy’s IMP3ACT platform Decoy aims to create a diverse and expanding development portfolio of antiviral and GPCR-targeted peptide conjugates. Decoy’s initial programs are outlined below.
Pan-Coronavirus Prophylactic for Immunocompromised Patients
Decoy is developing this program for the prophylactic prevention of SARS-CoV-2 infection in immunocompromised patients. Decoy has evaluated multiple peptide-conjugate molecules and are currently in late lead optimization stage. This program is supported to IND by grants from the Bill & Melinda Gates Foundation and the Blue Knight Program totaling $6.5M. It is Decoy’s intention to seek additional non-dilutive funding through Phase 2a proof-of-concept (antiviral challenge) studies and a development partner for this program.
22
58582473.18
The SARS-CoV-2 pandemic demonstrated that vaccines and antiviral therapeutics are complementary tools in the response to viruses. The rapid development of the COVID-19 vaccines saved millions of lives. However, the continued evolution of SARS-CoV-2 immune escape variants, growing ‘vaccine hesitancy’ among the population at large, and the presence of immune-suppressed sub-groups that are at risk regardless of vaccination status are treatment gaps that can only be filled by antiviral therapeutics.
Decoy’s Target Product Profile (TPP) for this program, developed in conjunction with the Bill & Melinda Gates Foundation, is:
•Prevention of infection by all SARS-CoV-2 variants and other human infecting coronaviruses including MERS-CoV
•Convenient self-administration via intranasal spray
•8+ hours of protection from a single dose
•Cost of goods of less than $1 per dose
Decoy has demonstrated through in vitro pseudotype, live virus, human airway epithelium (HAE) assays and in vivo Syrian hamster models that multiple Decoy peptide conjugates inhibit viral infection and demonstrate a multifold decrease in viral infectious particles when delivered either before (pre-exposure prophylaxis, or PrEP) or after (post-exposure prophylaxis but before symptoms, PEP) viral challenge. DCOY101 and its analogs have also demonstrated infection inhibition in cell based assays against all major SARS-CoV-2 variants of concern and other human infecting coronaviruses, including SARS-CoV-1, Middle Eastern Respiratory Syndrome (MERS), and the “cold-causing” coronaviruses OC43 and NL63, as expected due to the strong similarity of the fusion region structure across coronaviruses.
The initial indication for the pan-Coronavirus inhibitor will be pre- and post-exposure prevention of COVID-19 in immunocompromised patients. Decoy intends to submit an IND to the FDA within the first half of 2026, and subsequently, if approved, to initiate a Phase I clinical trial in adult healthy volunteers to be followed quickly by a proof-of-concept Phase 2a human “challenge” study in which healthy volunteers are infected with SARS-Cov-2 under controlled conditions13. Decoy expects to partner this program after demonstration of human proof-of-concept in the challenge study.
Immunocompromised Populations
The SARS-CoV-2 virus initially infects ciliated cells in the nasopharynx; most people have a mild to moderate illness with viral replication restricted to the upper airways, resolving over 1-2 weeks. In some cases, however, Covid-19 can progress to life-threatening pneumonia with further complications. People that get severe infections often have predispositions, or co-morbidities, including hypertension, heart failure, cardiac arrhythmia, diabetes, kidney failure, chronic pulmonary disease, old age, and/or a compromised immune system. In such cases, infection in the lower respiratory tract can reach the alveoli causing inflammation and limiting gas exchange. Severe illness typically begins 1 week after symptoms start, with shortness of breath and decreased blood oxygen levels, with pneumonia evident as opaque regions on lung X-rays. Patients may meet the definition of ARDS, a form of
13 Nature Medicine (2022) 28:1031-1041
23
58582473.18
lung injury with inflammation, pulmonary vascular leakage, and hypoxic respiratory failure. Severe Covid-19 may also lead to disease beyond the respiratory tract, including gastrointestinal, acute cardiac, kidney and liver injury, cardiac arrhythmias, rhabdomyolysis, coagulopathy, and shock. COVID-19 infection can also lead to Long COVID, also known as Post COVID Condition, (PCC), a multisystemic condition that can persist for weeks, months or even years after an infection and vary widely in severity, from mild to debilitating. The risk of contracting Long COVID increases with each time an individual is infected; available data from multiple countries suggests that approximately 6% of symptomatic SARS-CoV-2 infections resulted in PCC despite vaccination14.
Immunocompromised patients face several distinct challenges:
•Patients post- hematopoietic stem cell transplants or CAR-T therapy are at higher risk of severe Covid-19 within 100 days of treatment, even with rigorous infection control and social avoidance practices.
•Patients with cancer have an impaired immune response to COVID-19 vaccination and are thus at significant risk from SARS-CoV-2 infection.
•Prolonged SARS-CoV-2 infection has been observed in patients with lymphoid or hematological malignancies.
•COVID-19 infections may lead to disruptions of care, for example an interruption in cancer treatment or a delay in a transplant procedure, that can have significant life-altering consequences for patients.
Chronic, persistent SARS-CoV-2 infections in immunocompromised patients are also of public health concern, as the continued evolution of the virus within these patients may be a key source of novel SARS-CoV-2 variants of concern, highlighting an important societal need to prevent infections in this population.
SARS-CoV-2 Burden of Disease Post-Pandemic
SARS-CoV-2 continues to cause significant morbidity and mortality. Between September 2023 and March 2024, approximately 561,000 people were hospitalized in the United States from Covid-19, resulting in approximately 42,000 deaths.15 By comparison, during the 2023-2024 Flu season, a similar timeframe, there were 470,000influenza-associated hospitalizations and 28,000 deaths. Decoy believes this data strongly suggests that COVID-19 prevalence may be equal to or higher than that of Influenza for the foreseeable future.
Current Treatment Landscape and Opportunity
Decoy is not aware of any antiviral that can be used to prevent SARS-CoV-2 infection. There was a recent approval under an emergency use authorization (EUA) of the prophylactic monoclonal antibody Pemivibart for use in immunocompromised patients, however given the continued evolution of the SARS-CoV-2 virus it is not clear how long this antibody will remain effective.
Therefore, immunocompromised patients, including those facing transplants or cancer treatments, are at particularly high risk of significant morbidity and mortality upon infection with few options. There is a clear unmet medical need for additional safe, novel prophylactic treatments that can act across multiple SARS-CoV-2 variants.
14 Wulf Hanson, S. et al. JAMA. (2022) 328(16):1604-1615
15 https://covid.cdc.gov/covid-data-tracker/#trends_weeklydeaths_weeklyhospitaladmissions100k_00
24
58582473.18
Decoy’s Solution – a pan-Coronavirus peptide conjugate fusion inhibitor
Decoy is designing and synthesizing an -helical peptide simultaneously optimized for multiple features including binding affinity, broad activity against human coronaviruses, potency in cell-based antiviral assays, physicochemical features that Decoy understands to be important for pharmacokinetic durability, formulation, and manufacturability. These peptides are linked via a PEG-based linker to a cholesterol molecule. Cholesterol has been demonstrated in scientific literature to significantly improve the pharmacokinetic properties of peptide conjugates.
Mechanism of Action
Viral fusion is required for enveloped viruses to enter human host cells and initiate viral replication. Without fusion, infection will not occur. Treatment with a fusion inhibitor interrupts the infectious cycle of the virus, thus decreasing viral replication. Decoy’s pan-coronavirus peptide conjugates recognize the HRN helical region of the coronavirus spike protein and bind to it (Figure 2). This binding precludes the natural binding of spike HRC to HRN and prevents fusion and viral entry, and thereby decreases viral replication.
Figure 2: Schematic representation of the viral fusion inhibition by a peptide conjugate
25
58582473.18
Summary of Proof-of-Concept Preclinical Data
In vitro cell based assays:
Decoy has demonstrated that a single Decoy peptide conjugate targeting the fusion machinery can inhibit viral infection for multiple SARS-CoV-2 variants in a pseudotype assay (Wuhan, alpha, beta, gamma, delta, omega BA.1, BA.2,) and in a live virus infection assay (Wuhan, delta, P-1, BA.1, BA.2). Decoy has also shown activity with the same peptide conjugate against 5/6 other human infecting coronaviruses: SARS-CoV-1, MERS, OC43, NL63, and 229E (Fig. 3). The final human infecting coronavirus, HKU1, is difficult to culture in vitro and therefore difficult to test against.
Figure 3: In Vitro Antiviral Activity of pan-Coronavirus Peptide Conjugates
Human Airway Epithelial (HAE) Model:
The HAE-ALI system refers to a human airway epithelial (HAE) cell culture that is grown at an air-liquid interface (ALI). This in vitro culture system is designed to mimic the conditions of the human airway epithelium more closely than traditional submerged cell cultures. In the ALI setup, the basal surface of the human airway (nasal, bronchial, or alveolar) cells is in contact with a liquid culture medium, while the apical surface is exposed to air (Fig. 4) This configuration supports the differentiation of the cells into a mucociliary phenotype, which is characteristic of the pseudostratified epithelium found in the human respiratory tract, including the presence of ciliated and mucus-secreting cells. The ALI culture system is physiologically relevant and is used for various research applications, including studying the cell biology of the respiratory epithelium, modeling respiratory diseases, studying respiratory epithelium infections and drug efficacy.
Figure 4: Diagram of the Production and Physiological Relevant Features of HAE-ALI
26
58582473.18
DCOY101 Inhibits Infection in a Human SARS-CoV-2 HAE-ALI Infection Model:
The pan-coronavirus peptide conjugate DCOY101 prevented infection in the human airway epithelial model (HAE) from Epithelix with dose response from 25 nM, 125 nM to 625 nM. Compound was delivered apically (on the air side) at the same time as the viral challenge (prophylactic treatment). Doses selected covered previous in vitro efficacious concentration range and hamster PK nasal levels. DCOY101 demonstrated a dose dependent decrease in viral load measured at 48- and 72-hours post-infection, as seen in figure 5 below. Viral load was reduced by ~4 logs compared to vehicle treatment. Remdesivir was used as a positive control for this experiment, as it is approved for use in hospitalized Covid-19 patients. Remdesivir gave significant viral inhibition as expected based on previous prophylactic HAE-ALI results.16 Remdesivir works by a different mechanism of action, was delivered basolaterally (in the media to simulate IV injection) in this assay and is dosed 8x higher than DCOY101.
Figure 5: Activity of DCOY101 in the Human Airway Epithelial Model
16 Antiviral Research (2021) 192:105122
27
58582473.18
The dose responsive antiviral efficacy shown in the above graph is due to DCOY101’s anti-fusion mechanism, rather than toxicity in the HAE system. Toxic effects on the cells were measured with five different endpoint assays. To summarize four of the toxicity assessments: there was no impact on the cellular junctions and integrity of the epithelial cell layer as measured by trans-epithelial electrical resistance (TEER), no increase of lactate dehydrogenase as a measure of ruptured plasma membranes, no induction of inflammatory response as measured by
Figure 6: Maintenance of Cellular Function as a Toxicity Measure in HAE
IL-8 secretion, and no impact on the mucociliary clearance after treatment with DCOY101. In addition, Figure 6 shows that DCOY101 had no impact on the function and frequency of the cilia as measured by calculating the frequency of cilia beating in untreated cells compared to cells treated with 3 dose levels of DCOY101. Ciliated cells in the nasopharynx are the primary targets for SARS-CoV-2 fusion and entry.
In vivo Efficacy Evaluations:
28
58582473.18
Administration of DCOY101+ demonstrated decreased pathological body weight loss and viral infectious genomes and live virus particles in vivo in an intranasal prophylactic (dosing begins before viral exposure) and post-exposure prophylactic (dosing begins after exposure but before symptoms) Syrian hamster model of SARS-CoV-2 delta variant infection.
Syrian Golden hamsters are susceptible to SARS-CoV-2 infection, and will become sick, although they typically clear the infection by 7 days and infection is not fatal. SARS-CoV-2 will infect the hamster nose, and cause lesions in the lungs by day 4. Hamsters will lose weight, which is thought to be equivalent to a human showing symptoms.
Two studies were conducted with DCOY101. In the first study (Pre-Exposure Prophylaxis or PrEP) hamsters were dosed intranasally with peptide conjugate at different dose levels in a liquid formulation once a day, starting two days before they were given a dose of the delta SARS-CoV-2 virus and continuing until day 7 (Fig. 7). The administered viral inoculum gives a high level of viral replication and pneumonia in hamsters, with body weight loss evident between 24 and 48 hours as a pathology symptom. By day 7 animals treated with vehicle alone had lost 5-10% of their body weight. Animals treated with DCOY101 were able to maintain body weight, or even gained weight at the highest dose level tested, indicating protection from viral effects. The experiment was terminated on day 7 for assessment of viral levels in nose and lungs. Measurements of viral genomes (which represents live and dead virus) and live virus particles were measured in both studies on days 2 and 7. Viral load showed significant reduction in all dose levels tested, measured by RT-qPCR on a log scale as noted in figure 7.
Figure 7: DCOY101 Prevents SARS-CoV-2 Infection in the PrEP Syrian Hamster Model
In the second study (Post-Exposure Prophylaxis or PEP) hamsters were dosed intranasally with DCOY101 beginning at various timepoints after the virus was given to the animals intranasally (2 hours, 12, 24 and 36 hours post challenge – Figure 8). As seen previously, control animals treated with vehicle alone began to lose weight
29
58582473.18
between 24 and 48 hours after viral administration. Animals treated with DCOY101 maintained their weight throughout the study across all the timepoints tested, even when dosing did not start until 36 hours after the virus, which is within the timeframe when the hamsters are showing the body weight loss symptom. Based on this data, it is possible that Decoy’s Pan-Coronavirus intranasal peptide conjugate could also have activity as a therapeutic in addition to a prophylactic treatment.
Figure 8: DCOY101 Prevents SARS-CoV-2 Infection up to 36 hours Post Exposure
Preclinical Research Plans
Decoy has demonstrated in vitro activity across all the human infecting coronaviruses it can test and has observed significant antiviral activity across this viral family. SARS-CoV-2 infection can be significantly inhibited with prophylactic treatment of DCOY101 in the human organoid HAE-ALI model, and in vivo in the pre-exposure and post-exposure prophylactic hamster models.
Lead Optimization:
The IMP3ACT Platform acts as an iterative feedback loop and incorporates data from in vitro experiments to improve the design parameters of the candidate peptides. Typical data that may be used to guide the AI and ML systems consists of SPR binding potency, cell-based activity via pseudotype or live virus assays, and assessment of molecular parameters of the peptide. By using the experimental data to train the ML engine, more potent and drug-like peptide binders can be designed over time, with multiple parameter optimization simultaneously. This ML/AI-enhanced approach not only reduces the costs associated with combinatorial research investigations but also allows for the manufacturing of the lead drug candidate at a lower cost due to the improvements in speed and scale for peptide synthesis. Moreover, the platform achieves peptide conjugate manufacturing readiness within significantly shorter timelines compared to traditional drug development processes, aiming to eventually meet or exceed a 100-day goal for vaccine manufacture.
30
58582473.18
Use of Physiologically Relevant Human Tissue Models:
The human airway epithelial model uses primary differentiated human biopsy tissue with appropriate architecture and cellular complexity, and allows infections from standard respiratory viruses including RSV, SARS-CoV-2 and influenza.17 The kinetics of SARS-CoV-2 replication in these HAE-ALI cultures is very similar to that observed in humans, as the viral load peaks between days 4 and 8,18 which is consistent with the viral peaks observed in the human challenge study. Decoy believes that this human-based model system will be useful to optimize the pharmacokinetic properties of its peptide conjugates, with the expectation that human nasal tissue will provide the most predictive tool versus rodent animal models. This medium-throughput system will allow careful evaluation of tissue residence time and the effect of formulation excipients.
CMC
Drug Substance: Continuous Manufacturing – IMP3ACT Platform:
Decoy utilizes a continuous manufacturing technology which, by thoughtful design and differentiation of chemically active sites on the target molecule, allows for complete manufacture of the full target compound from beginning to end without the need for any intermediate isolation or purification. This synthesis is a continuous flow chemical process in which both the peptide component and the final cholesterol linker/anchor are assembled in one continuous operation. The desired compound is isolated only after the target is fully assembled.
The advantages of the continuous manufacturing process are several:
1.A single continuous operation to produce a very complex molecule.
2.Overall improvement of speed of the synthesis
•Continuous manufacturing process time to final product is approximately 5-6 days. This is in contrast with similar compounds requiring numerous isolations and purifications taking approximately 8 weeks to manufacture and isolate.
3.In-process analytical and quality checks can be performed to check on progress of the assembly of the target molecule.
•High quality of the process output is assured by continuous monitoring of the outcome of combined unit operations.
4.Simplicity of overall process.
•Instead of as many as roughly 70-unit operations and numerous purifications, this continuous process requires only material inputs and a single isolation and purification.
Drug Substance: Distributed Manufacturing - IMP3ACT platform
17 Antiviral Research (2018) 156:72-79
18 Antiviral Research (2021) 192:105122
31
58582473.18
Decoy is aware of FDA’s Framework for Regulatory Advanced Manufacturing Evaluation (FRAME) program to support ongoing initiatives for prioritized advanced manufacturing technologies. Specific steps include:
•Continuing to develop guidance, as appropriate, to clarify areas of regulatory uncertainty, including the following proposed draft guidance: Considerations for Complying with 21 CFR 211.110, Approaches to Meeting CGMP Requirements for Distributed Manufacturing, in early 2025; and
•Engage participants in the CDER ETP and the CBER CATT who are developing DM technologies and visit development sites.
Decoy projects that the continuous manufacturing platform (IMP3ACT) described above can become a modular, distributed manufacturing platform if the following process development criteria are met:
1. Experience with multiple product manufactures enables continuous processing from start to finish to be optimized to maximize yield and purity of the final product.
2. This experience leads to an understanding of the critical process parameters, variables and attributes affecting product quality which can be applied to efficient continuous processing.
3. Robust and predictive in-process controls are developed.
4. Process concentrations are high.
5. Final purification and isolation of the agent produced can be made efficient and robust.
6. The above criteria having been met, modular, portable standalone manufacturing skids with modest utility requirements are assembled and shown to be viable for the process.
It is Decoy’s understanding that this type of modular, distributed manufacturing capability has been demonstrated previously for vaccine production “in-country” where the vaccines are urgently required. Decoy proposes developing a similar, modular, portable continuous manufacturing platform which can be used “in-country” where viral outbreaks occur, and patients are needing treatment. For the purposes of this modular, distributed system, it is Decoy’s intent that the process can be made relatively straightforward so that deep knowledge of chemical processing is not required to successfully produce needed medicines.
Drug Product
With respect to drug product development activities, Decoy is developing and optimizing multiple nasal candidate formulations containing its peptide conjugates, including both liquid and dry powder-based formulations. Decoy has conducted multiple studies both internally and in collaboration with Contract Manufacturing Organizations (CMOs) demonstrating the suitability for inclusion of its peptide conjugates in shelf-stable aqueous-based nasal formulations containing typical pharmaceutical excipients (osmotic agents, pH modifiers, preservatives, mucolytic agents, etc.) and has identified multiple lead formulation candidates. Decoy has also demonstrated the suitability for delivery of its nasal solution formulation candidates at therapeutic doses via conventional nasal spray devices, such as the VP7 Spray Pump and Unidose Liquid Nasal Spray devices available from Aptar Pharma Inc.
32
58582473.18
(Aptar). Additionally, Decoy is developing dry powder-based formulations containing its peptide conjugates for nasal delivery via nasal dry powder devices such as the Unidose Powder Nasal Spray device available from Aptar.
Clinical Development Plan
Decoy expects to file an IND for its optimized pan-Coronavirus peptide conjugate within the first half of 2026 and subsequently, if approved, initiate a Phase 1 trial shortly thereafter. Decoy’s planned Phase 1 trial is expected to be a randomized, placebo- controlled trial with a part A consisting of single ascending daily intranasal dose and multiple ascending daily dose in up to 40 healthy volunteers, followed by part B in which a 12- healthy volunteer cohort will be given an intranasal daily dose for 28 days.
The primary trial endpoints is expected to be to determine the safety and local and generalized tolerability of the optimized clinical candidate administered daily as an intranasal spray. Secondary endpoints are expected to include evaluation of the pharmacokinetic profiles in the nose and oropharyngeal cavity over a 12-hour period. Decoy plans to also characterize the device delivery, mucociliary clearance and nasal residence time.
Decoy anticipates taking 2 dose levels into a Phase 2 proof of concept human challenge trial with up to 250 healthy volunteers. In this trial healthy volunteers are administered SARS-CoV-2 under carefully controlled and monitored conditions. Preventative and therapeutic compounds are tested to establish the relationship between pharmacokinetics and activity.
Other Indications for Decoy’s Pan-Coronavirus Antiviral
Decoy believes there may be opportunities to develop DCOY101+ in additional indications, including:
•Inhaled COVID-19 Therapeutic: As shown in Figure 8, DCOY101 has demonstrated activity in hamsters against SARS-CoV-2 infection even when administered up to 36 hours after viral challenge, when significant symptoms have emerged (body weight loss). Decoy believes DCOY101+ may have utility as a COVID-19 treatment alternative to Paxlovid with a significantly superior drug-drug interaction profile. This could be of benefit to immunocompromised, high-risk, and elderly patients that are often already taking drugs that are contraindicated to Paxlovid.
•Middle Eastern Respiratory Syndrome (MERS) Therapeutic: DCOY101+ has been shown to be active against the MERS-CoV coronavirus in live virus cell based assays, the virus that causes MERS. The symptoms of MERS range from mild respiratory illness to severe disease with shortness of breath and pneumonia, and respiratory failure. Approximately 35% of reported cases have resulted in death, a rate much higher fatality rate than SARS-CoV-2.
•Broad Respiratory Antiviral (Flu/COVID-19/RSV): Infectious respiratory diseases, particularly influenza, respiratory syncytial virus (RSV), and SARS-CoV-2, continue to pose significant threats to global public health, leading to substantial morbidity and mortality worldwide. Despite advancements in antiviral therapies, the emergence of viral variants and the lack of broad-spectrum treatments remain major challenges in combating these respiratory pathogens effectively. Therefore, there is an urgent need for innovative strategies to develop potent and versatile antiviral agents capable of targeting multiple viral strains and providing broad protection against respiratory infections. A single peptide-conjugate therapeutic
33
58582473.18
active against the major respiratory viruses from these 3 viral families with an excellent safety profile could fill a significant unmet medical need, particularly in immunocompromised patients and children.
Clinical Rationale and Disease Description
Globally, acute lower respiratory tract infections (LRTI) have been among the top three causes of death and disability among both children and adults.19 It is estimated that lower respiratory tract infections cause nearly 4 million deaths annually and are a leading cause of death in children under 5 years old.20 Viruses are estimated to be causative in up to 50% of these respiratory infections, with influenza A and B, RSV A and B, and coronaviruses being identified often. The syndromes of LRTI in children include bronchiolitis, exacerbations of asthma or wheezing, croup, and pneumonia, and viruses overlap in terms of which syndromes they cause, making it hard to identify a causative virus based on symptoms alone.
A recent study looked at the burden of community-onset LRTI in hospitalized adults over 18 in NYC prior to the Covid-19 pandemic. Out of a total of 4232 patients, 51% were > 65 years old. The virus percentage was as follows:
•Influenza (any) 20.2%
•RSV 9.8%
•RSV+ Human parainfluenza viruses + Human Metapneumovirus 26.5%
•Coronaviruses (all) 12.8% (not including SARS-CoV-2; study was Oct 2017-Sept 2019)
This dataset identifies that non-influenza viruses including the paramyxoviruses and non-SARS-CoV-2 coronaviruses are a significant cause of LRTI severe enough to lead to hospitalization, with a higher population-based incidence, significantly more ICU admissions, and higher in-house mortality.21 Compared to the other viruses, the coronavirus 229E had the highest mortality rate at 12.3%. Among all the viruses studied, the combined coronaviruses had the highest rates of ICU admission and the highest mortality rates, including in the 18-49 and 50-64 age ranges.
A study from 2015-2018 in Canada on adult patients with influenza-like-illness who were hospitalized the viral cause was determined to be:22
•Influenza 45.4%, 6.5% mortality by day 30
•RSV 12.9%, 9.5% mortality by day 30
•Coronavirus 8.2%, 9.2% mortality by day 30
19 Forum of International Respiratory Societies. 3rd Edition. European Respiratory Society; 2021. The Global Impact of Respiratory Disease. Accessed February 27th, 2024.
20 Lancet Infect Dis 2018; 18:1191-1210.
21 Influenza Other Respi Viruses. 2021;15:670–677.
22 CMAJ. 2021; 193:E439-46. Doi: 10.1503/cmaj.201748
34
58582473.18
Patients with non-influenza viruses were younger (mean 66.4 years old) and were more likely to be immunocompromised (30.3%). Additionally, 14.6% of non-influenza viruses were acquired in the hospital (nosocomial infections) rather than in the community. This was particularly true for coronaviruses, where 20% were hospital acquired, a higher rate than any other virus. Protection against institutional (hospital and long-term care facility) transmitted respiratory viruses is an unmet medical need.
Before the SARS-CoV-2 pandemic as shown by the two studies above, coronaviruses were a lower percentage of the overall total of LRTI hospitalizations compared to RSV and influenza. Now, with Covid-19, hospitalizations due to COVID eclipse those from the other viruses as shown in Fig 9.
Figure 9: CDC hospitalization burden of Influenza, RSV and Covid-19
It is evident that pneumonia prevention and treatment would have a significant impact on LRTI morbidity and mortality, in the US and globally, in adults and children.
Current Treatment Landscape and Opportunity
Current medical approaches to alleviate disease burden from common viral LRIs include vaccination and antiviral treatment, where applicable. Vaccination, which can provide a cornerstone of antiviral protection, seems to be decreasing globally. Influenza vaccination among healthcare professionals increased during the COVID-19 pandemic up to ~90% coverage, but since then has decreased to 81% in the 2022-23 influenza season (foot). Reports indicate that by late 2023, only 14% of American adults elected to get the latest SARS-CoV-2 vaccine, even though research indicated that vaccinated individuals were 54% less likely to get COVID-19. The recently approved RSV vaccine is only approved for certain populations, so widespread vaccine uptake is difficult to measure, but appears to be substantially less that the rate for flu.
Antiviral medications for influenza such as Tamiflu, Relenza, and Repivab can be used for treatment of influenza, and Paxlovid for the treatment of SARS-CoV-2. However, the influenza drugs are subject to drug resistance, and Paxlovid is underutilized because of the possibilities of drug-drug interactions. The reluctance of
35
58582473.18
society to maintain up-to-date vaccinations can have significant repercussions on public health and the management of infectious diseases, among these increased disease burden, risks of outbreaks and epidemics, and increased transmission of resistant strains.
Decoy’s peptide-conjugate therapeutic that treats LRIs from three major respiratory endemic and epidemic viruses would be unprecedented and could fill a significant medical need given the morbidity and mortality associated with LRIs globally.
Decoy’s Solution
Decoy intends to explore the possibility of combining fusion inhibitory peptides for SARS-CoV-2 (coronaviruses), RSV (paramyxoviruses) and Flu (orthomyxoviruses) in a single molecule. Decoy plans to investigate several approaches to optimize breadth of activity.
Mechanism of Action
Figure 10: Conservation of the 6-helix bundle across class I fusion proteins from 3 viral families
Figure 10 adapted from Igoneta, S. et. al., Proc Natl Acad Sci U S A. 2011 Dec 13;108(50):19967-72. doi: 10.1073/pnas.1108910108.
Decoy is targeting the conserved fusion machinery common to influenza A&B, paramyxoviruses (RSV A & B, hMPV, hPIV) and coronaviruses (SARS-CoV-2, OC43, NL63). Decoy believes a single molecule that targets all three major respiratory viral families is possible, given the highly conserved protein structure of the 6-helix post-fusion bundle common to these viruses as shown in Figure 10. Figure 10 illustrates the targeted viral fusion machinery across these viruses, emphasizing the conserved coiled-coil regions critical to Decoy’s inhibitor design. By focusing on this shared mechanism, Decoy’s project aims to pioneer a versatile antiviral agent, significantly impacting global health by mitigating the LRTI threat posed by these viruses.
Summary of Proof-of-Concept Preclinical Data
36
58582473.18
Significant progress has been made with Decoy’s leading antiviral peptide conjugate series, DCOY101+, which has shown strong in vitro effectiveness against all tested SARS-CoV-2 variants and other human coronaviruses like MERS, SARS-CoV-1, OC43, and NL63 (see Fig. 3,5). In vivo, DCOY101+ has demonstrated antiviral effects and maintained therapeutic levels for over 8 hours when administered intranasally in Syrian Golden Hamsters (Figures 7, 8).
Recently, Decoy’s rapid discovery engine has produced broad-spectrum inhibitors against paramyxoviruses, with promising proof of concept in vitro results against RSV-A, RSV-B, and HPIV3 (Fig. 11). Synthesis of these novel peptide conjugates was completed in just four days with the “all-in-one” synthesis process.
Figure 11: Activity of Decoy’s Peptide Conjugate Antivirals Against 3 viruses from the Paramyxovirus Family
Therefore, Decoy has demonstrated peptide conjugate molecules with broad-based antiviral POC against two of the three respiratory viral families Decoy is targeting in this program. Based on Decoy’s in-silico tools, Decoy believes it will be possible to design a single molecule that also targets influenza in addition to coronaviruses and paramyxoviruses.
Clinical Development Plan
Decoy intends to follow a similar structure for this clinical program as for its pan-Coronavirus prophylactic peptide-conjugate. A Phase 1 trial would focus on the safety, local and general tolerability of an inhaled formulation of the multi-viral family peptide conjugate. Phase 2 would include a healthy volunteer human challenge trial using multiple arms to interrogate all three viral families, Flu A, RSV and SARS-CoV-2 to determine the PK/efficacy relationship and establish proof of concept. Each of these viruses has been previously studied in human challenge trials.
Potential Future Indications
37
58582473.18
Upon establishing proof of concept as outlined above, Decoy believes there would be several attractive commercial indications for this candidate, including:
•Therapeutic treatment of early Lower Respiratory Tract Infections (LRTIs) in immunocompromised patients via inhaled administration. Mortality rates in some severely immunocompromised patient populations, such as patients undergoing cancer treatment or post-transplant patients, can be as high as 50%23
•Prophylactic use in highly immunocompromised patient populations, including immunocompromised pediatric populations.
•Therapeutic use in large populations that are susceptible to LRTIs, including people who are 65+ or who are suffering from high-risk conditions such as Type II Diabetes, Chronic Kidney Disease (CKD), Congestive Heart Failure, and Chronic Obstructive Pulmonary Disease (COPD)
•Broad use among otherwise healthy populations during seasonal surges in ‘influenza-like illness’
GPCR-Targeted Peptide Conjugate for CRC and other GI Tumors
G protein-coupled receptors are anchored in the cell membrane and are triggered by extracellular chemicals (ligands) that activate internal signal transduction to drive cellular responses through a set of ‘G-proteins’ and/or arrestins inside the cell. Their endogenous ligands include odors, hormones, neurotransmitters, and chemokines, with structures ranging from photons, amines, carbohydrates, lipids, proteins, and peptides. GPCRs have been implicated in many diseases, such as type 2 diabetes mellitus (T2DM), obesity, depression, cancer, Alzheimer’s disease, and many others.24
While not classic driver mutations, several GPCRs with natural α-helical peptide ligands have been reported to be overexpressed in colon tumors compared to normal tissue25. Recent large-scale expression GPCR profiling (‘GPCRomics’) has shown signatures of large numbers of GPCRs across different tumor types upregulated when compared to normal tissue. The findings suggest that GPCRs over expressed in cancer are often critical contributors to their malignancy and that this may be an underexplored area for targeting cancer.
The structure of GPCRs is well conserved, with a defined architecture, and the ligand binding sites are on the outer cell membrane. Over 100 GPCRs have endogenous peptide ligands, providing an excellent natural starting point for Decoy’s innovative IMP3ACT design platform.
While at the exploratory stage, Decoy has identified an initial GPCR target of interest that is reportedly expressed in intestinal polyps and in 100% of all stages of colon tumors, including metastases and 5-FU resistant tumors. This target has two identified naturally occurring -helical peptide ligands, and treatment of colon tumor cell lines and xenografts with this peptide alone has demonstrated anti-cancer activity. Decoy believes that a peptide-conjugate based on this ligand, with improved pharmacokinetic and drug-like properties, may have potential as a
23 Viral Infections of Humans DOI 10.1007/978-1-4899-7448-8_26
24 Sriram K. and P.A. Insel (2018) Mol Pharmacol 93:251–258
25 Insel PA, et. al., (2018) Front. Pharmacol. 9:431.doi: 10.3389/fphar.2018.00431
38
58582473.18
candidate for conjugation to a cytotoxic payload or a radionucleotide for diagnostic imaging and therapeutics (“theranostics”), like somatostatin.
Initial Indication
Colorectal cancer (CRC) therapies have changed little over the last decades, with mainstay therapies continuing to revolve around 5-FU, platinum, and irinotecan combinations, typically with the addition of an anti-VEGF treatment. Only a small fraction of patients benefits from ‘precision medicine’ approaches based on specific biomarkers (for example, only 3-5% of CRC patients have an amplified HER2 are therefore eligible for the ADC, trastuzumab deruxtecan).
There is an urgent need for the identification of new cell membrane targets to create multiple precision treatments options for many colon cancer patients, including late stage metastatic and drug resistant tumors.
Decoy’s Solution
A peptide conjugate that targets a GPCR expressed universally in CRC tumors, including metastatic and SOC resistant tumors and delivers into the cell a radionuclide, a cytotoxic drug or a PROTAC payload would be a substantial addition to CRC precision medicines. The peptide conjugate may be administered through a SC injection with a depot formulation, as has been done for the somatostatin drugs, or may also be formulated as a pill for GI tract use. Oral bioavailability of peptide conjugates, while low, has been demonstrated with the GLP-1 inhibitors.
Biology and Mechanism of Action
This initial GPCR target has been reported to be expressed selectively in polyps and tumors of the colon, prostate, and pancreas. It has a typical structure with -helical peptide ligands as shown in Figure 12.
Figure 12: Representative structure for GI targeting GPCR
39
58582473.18
The peptide ligands for this GPCR are reported to normally play a role in the CNS, with extremely low levels in systemic circulation. This may explain why colon tumors are not normally inhibited by these ligands. The natural half-life of these peptides is minutes, which may also explain the lack of activity. Therefore, these peptides are excellent candidates as starting points for Decoy’s drug design engine.
Potential Future Indications
Decoy believes there are multiple potential additional indications for this type of therapeutic, including:
•Treatment for familial adenomatous polyposis (FAP).
•Diagnostic for FAP and colorectal cancer: Conjugated to an appropriate imaging radionucleotide in a manner like that done for somatostatin.
•Additional therapeutic peptide-conjugate indications: Intestinal Bowel Disease and late stage/metastatic colon cancer.
•Use in additional cancers: depending on levels of GPCR expression, Androgen Insensitive Prostate Cancer and Glioblastoma multiforme.
Competitors and Competitive Advantage
The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis on proprietary products. While Decoy believes that its technologies, knowledge, experience, and scientific resources provide it with competitive advantages, Decoy faces potential competition from many different sources, including major pharmaceutical, specialty pharmaceutical and
40
58582473.18
biotechnology companies, academic institutions and governmental agencies and public and private research institutions. Any product candidates that Decoy successfully develops and commercializes will compete with existing therapies and new therapies that may become available in the future.
Decoy’s potential competitors include large pharmaceutical and biotechnology companies, as well as specialty pharmaceutical and generic or biosimilar drug companies. Many of Decoy’s competitors have significantly greater financial and human resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals, and marketing approved products than Decoy does. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors compete with Decoy in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient enrollment for clinical trials, as well as in acquiring products, product candidates or other technologies complementary to Decoy’s programs.
Each of Decoy’s pipeline candidates faces a unique but, in Decoy’s view, favorable competitive landscape because of Decoy’s emphasis on unique value propositions. Specifically:
•Covid-19 Prevention & Treatment for Immune-Suppressed Patients: Despite being four years from the beginning of the COVID-19 pandemic, there are still limited prophylactic options for people with highly suppressed immune function. The mRNA vaccines have been shown to be less effective for immune-suppressed patients26, and Decoy believes this will also be true for the nasally delivered vaccines currently under development. Also, vaccine efficacy has been and will likely continue to be at risk from the evolution of the SARS-CoV-2 virus, and COVID vaccine uptake has continued to decline significantly in the US27. Long-lasting antibody prophylactics such as Evusheld were initially effective but rapidly became obsolete due to viral evolution,28 and this is likely for the new EUA approval, pemivibart. Decoy’s therapeutic candidate is effective against all SARS-CoV-2 variants, and Decoy expects it to continue to be based on the limited evolution that has occurred to date in the portion of the SARS-CoV-2 genome Decoy is targeting. Given this, along with convenient administration and the fact that Decoy’s strategy does not require a functional immune system, Decoy believes this therapeutic will deliver a unique solution for highly immune-suppressed patients in both the developed and developing worlds.
•Broad Respiratory Antiviral (COVID/Flu/RSV): There is significant competition in each of the areas of COVID, Flu, and RSV antiviral therapeutics, both from currently commercialized drugs and pipeline candidates. Also, while there are vaccines against these pathogens, their usage continues to be low. Decoy believes its strategy of being able to treat all three viruses, and potentially additional human Coronaviruses and Paramyxoviruses that cause Influenza-like symptoms, with a single therapeutic will deliver a unique value proposition during seasonal surges of ‘influenza-like illness’ (ILI). These illnesses can be personally disruptive to patients, and often lead to dangerous lower respiratory tract infections29, especially in immune-compromised individuals. It is often challenging to identify respiratory viruses, so it is Decoy’s belief that a therapeutic that can safely treat a large percentage of ILI-causing viruses would be a uniquely useful tool for healthcare providers.
26 https://www.thelancet.com/journals/eclinm/article/PIIS2589-5370(23)00142-6/fulltext
27 https://www.cdc.gov/respiratory-viruses/data-research/dashboard/vaccination-trends-adults.html
28 https://www.cnbc.com/2023/01/27/covid-fda-pulls-evusheld-because-its-not-effective-against-subvariants.html
29 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3106235/
41
58582473.18
•GPCR-Targeted Conjugate for GI Tumors: Several promising new treatments for metastatic colorectal cancer are emerging from recent clinical trials that may impact the competitive landscape. Immunotherapy combinations like botensilimab (anti-CTLA-4) and balstilimab (anti-PD1) have shown significant activity in microsatellite stable mCRC, a historically challenging “immunologically cold” subtype found in most patients. Newer anti-VEGFR treatments like fruquintinib have demonstrated modest improved overall and progression-free survival compared to placebo in refractory mCRC patients. Personalized medicine approaches, including biomarker-guided targeted therapies like ADCs are gaining traction. The Antibody-drug conjugate (ADC) like trastuzumab deruxtecan is FDA approved for HER2-positive mCRC, while others such as telisotuzumab adizutecan (a c-MET targeting ADC) are showing promise in clinical trials. Recently two GPCR-targeting ADCs have shown activity in preclinical work: LGR5-MMAE and GPR56-duocarmycin. Decoy expects that there will be continued growth in this area due to the strong unmet medical need in this indication.
Intellectual Property
Decoy strives to protect its proprietary technology, inventions, improvements, platforms, program candidates, therapeutic candidates and components thereof, its methods of use and processes for their manufacture that Decoy believes are important to its business, including by obtaining, maintaining, defending and enforcing patent and other intellectual property rights for the foregoing in the United States and in foreign jurisdictions. Decoy also relies on trade secrets and confidentiality agreements to protect its confidential information and know-how and other aspects of its business that are not amenable to, or that Decoy does not consider appropriate for, patent protection.
Decoy’s future commercial success depends in part on its ability to:
•obtain, maintain, enforce and defend patent and other intellectual property rights for its important technology, inventions and know-how; preserve the confidentiality of its trade secrets and other confidential information;
•obtain and maintain licenses to use and exploit intellectual property owned or controlled by third parties
•operate without infringing, misappropriating or otherwise violating any valid and enforceable patents and other intellectual property rights of third parties; and defend against challenges and assertions by third parties challenging the validity or enforceability of Decoy’s intellectual property rights, or Decoy’s rights in Decoy’s intellectual property, or asserting that the operation of Decoy’s business infringes, misappropriates or otherwise violates their intellectual property rights.
Decoy’s portfolio currently consists of solely owned patents and applications. As of December 31, 2024, there are 6 distinct patent families covering compositions of matter, manufacturing and uses related to its business. Currently, Decoy has 11 pending applications (including PCT, provisional and non-provisional applications).
Patent Prosecution
A PCT patent application is not eligible to become an issued patent until, among other things, Decoy files one or more national stage patent applications in the jurisdictions in which it seeks patent protection and do so within prescribed timelines of the PCT patent application’s priority date. These prescribed timelines are generally 30
42
58582473.18
months, 31 months or 32 months, depending on the jurisdiction. To date, Decoy has filed national stage applications in Australia, Canada, Europe and New Zealand. If Decoy does not timely file any national stage patent applications, it may lose its priority date and any potential patent protection on the inventions disclosed in such PCT patent application.
Moreover, a provisional patent application is not eligible to become an issued patent. A provisional patent application may serve as a priority filing for a non-provisional and/or PCT patent application Decoy files within 12 months of such provisional patent application. If Decoy does not timely file non-provisional or PCT patent applications, it may lose its priority date with respect to its existing provisional patent applications and any potential patent protection on the inventions disclosed in its provisional patent applications.
While Decoy intends to timely file additional provisional patent applications and PCT applications, as well as national stage and non-provisional patent applications relating to its provisional applications or PCT patent applications, Decoy cannot predict whether any of its patent applications will result in the issuance of patents. If Decoy does not successfully obtain patent protection, or if the scope of the patent protection Decoy or its licensors obtain with respect to Decoy’s therapeutic candidates or technology is insufficient, Decoy will be unable to use patent protection to prevent others from using Decoy’s technology or from developing or commercializing technology and products similar or identical to Decoy or other similar competing products and technologies. Decoy’s ability to stop third parties from making, using, selling, offering to sell, importing or otherwise commercializing any of its technology, inventions and improvements, either directly or indirectly, will depend in part on Decoy’s success in obtaining, maintaining, defending and enforcing patent claims that cover its technology, inventions and improvements.
The patent positions of companies like Decoy are generally uncertain and involve complex legal and factual questions. The protection afforded by a patent varies on a product-by-product basis, from jurisdiction-to-jurisdiction, and depends upon many factors, including the type of patent, the scope of its coverage, the availability of patent term adjustments and regulatory-related patent term extensions, the availability of legal remedies in a particular jurisdiction, and the validity and enforceability of the patent. Patent laws and related enforcement in various jurisdictions outside of the United States are uncertain and may not protect Decoy’s rights to the same extent as the laws of the United States. Changes in the patent laws and rules, whether by legislation, judicial decisions or regulatory interpretation, in the United States and other jurisdictions may have uncertain affects that could improve or diminish its ability to protect its inventions and obtain, maintain, defend and enforce its patent rights, and could therefore affect the value of its business in uncertain ways.
The area of patent and other intellectual property rights in biotechnology is evolving and has many risks and uncertainties, and third parties may have blocking patents and other intellectual property that could be used to prevent Decoy from commercializing its platform and therapeutic candidates and practicing its proprietary technology. Decoy’s patent rights may be challenged, narrowed, circumvented, invalidated or ruled unenforceable, which could limit its ability to stop third parties from marketing and commercializing related platforms or therapeutic candidates or limit the term of patents that cover its platform and any therapeutic candidates. In addition, the rights granted under any issued patents may not provide Decoy with protection or competitive advantages against third parties with similar technology, and third parties may independently develop similar technologies.
Moreover, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that before any of Decoy’s therapeutic candidates can be commercialized, any related patent
43
58582473.18
may expire or remain in force for only a short period following commercialization, thereby reducing any competitive advantage provided by the patent. For this and other risks related to Decoy’s proprietary technology, inventions, improvements, platforms and therapeutic candidates and intellectual property rights related to the foregoing, please see the section entitled “Risk Factors— Risks Related to the Discovery, Development and Commercialization of Product Candidates by Decoy.”
Patent Term
The term of individual patents depends upon the laws of the jurisdictions in which they are obtained. In most jurisdictions in which Decoy files, the patent term is 20 years from the filing date of a PCT patent application or, if a PCT application is not filed, the earliest date of filing of the first non-provisional patent application to which the patent claims priority. However, the term of U.S. patents may be extended or adjusted for delays incurred due to compliance with FDA requirements or by delays encountered during prosecution that are caused by the United States Patent and Trademark Office (“USPTO”). For example, in the United States, a patent claiming a new chemical entity (“NCE”) or biologic product, its method of use or its method of manufacture may be eligible for a limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (the “Hatch-Waxman Act”) for up to five years beyond the normal expiration date of the patent. Patent term extension cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date in the United States. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent for which extension is sought and within 60 days of FDA approval of the product. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. During the period of extension, if granted, the scope of exclusivity is limited to the approved product for approved uses. Some foreign jurisdictions, including Europe and Japan, have analogous patent term extension provisions, which allow for extension of the term of a patent that covers a drug approved by the applicable foreign regulatory agency. For more information on patent term extensions, see “Business—Government Regulation— Patent Term Restoration and Extension and Marketing Exclusivity.” In the future, if and when any therapeutic candidates Decoy may develop receive FDA approval, Decoy expects to apply for patent term extensions on issued patents covering those therapeutic candidates. Moreover, Decoy intends to seek patent term adjustments and extensions for any of its issued patents in any jurisdiction where such adjustments and extensions are available. However, there is no guarantee that the applicable authorities, including the USPTO and the FDA, will agree with Decoy’s assessment of whether such adjustments and extensions should be granted, and even if granted, the length of such adjustments and extensions.
Trade Secrets
In addition to patent protection, Decoy also relies on trade secrets, know-how, unpatented technology and other proprietary information to strengthen its competitive position. Decoy currently, and may continue in the future continue to, rely on third parties for assistance in developing and manufacturing its products. Accordingly, Decoy must, at times, share trade secrets, know-how, unpatented technology and other proprietary information, including those related to its platform, with them. Decoy may in the future also enter into research and development collaborations with third parties that may require Decoy to share trade secrets, know-how, unpatented technology and other proprietary information under the terms of research and development partnerships or similar agreements. Nonetheless, Decoy takes steps to protect and preserve Decoy’s trade secrets and other confidential and proprietary information and prevent the unauthorized disclosure of the foregoing, including by entering into non-disclosure and invention assignment agreements with parties who have access to Decoy’s trade secrets or other confidential and proprietary information, such as employees, consultants, outside scientific collaborators, contract research and
44
58582473.18
manufacturing organizations, sponsored researchers and other advisors, at the commencement of their employment, consulting or other relationships with us. In addition, Decoy takes other appropriate precautions, such as maintaining physical security of its premises and physical and electronic security of its information technology systems, to guard against any misappropriation or unauthorized disclosure of its trade secrets and other confidential and proprietary information by third parties.
Despite these efforts, third parties may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to Decoy’s trade secrets or other confidential or proprietary information. In addition, Decoy cannot provide any assurances that all of the foregoing non-disclosure and invention assignment agreements have been duly executed, and any of the counterparties to such agreements may breach them and disclose Decoy’s trade secrets and other confidential and proprietary information. Although Decoy has confidence in the measures it takes to protect and preserve its trade secrets and other confidential and proprietary information, they may be inadequate, Decoy’s agreements or security measures may be breached, and Decoy may not have adequate remedies for such breaches. Moreover, to the extent that Decoy’s employees, contractors, consultants, collaborators and advisors use intellectual property owned by others in their work for Decoy, disputes may arise as to Decoy’s rights in any know-how or inventions arising out of such work. For more information, please see the section entitled “Risk Factors— Risks Related to the Discovery, Development and Commercialization of Product Candidates by Decoy.”
U.S. Patent Term Restoration and Extension and Marketing Exclusivity
In the United States, a patent claiming a new biologic or pharmaceutical product, its method of use or its method of manufacture may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent extension of up to five years for patent term lost during product development and FDA regulatory review. Assuming grant of the patent for which the extension is sought, the restoration period for a patent covering a product is typically one-half the time between the effective date of the IND and the submission date of the New Drug Application (“NDA”) or Biologics License Application (“BLA”), plus the time between the submission date of the NDA or BLA and the ultimate approval date, except that the review period is reduced by any time during which the applicant failed to exercise due diligence. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date in the United States. Only one patent applicable to an approved product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent for which extension is sought. A patent that covers multiple products for which approval is sought can only be extended in connection with one of the approvals. The USPTO reviews and approves the application for any patent term extension in consultation with the FDA.
Marketing exclusivity provisions under the FDCA also can delay the submission or the approval of certain applications. The FDCA provides a five-year period of non-patent marketing exclusivity within the United States to the first applicant to gain approval of an NDA for an NCE. A drug is an NCE if the FDA has not previously approved any other new drug containing the same active moiety, which is the molecule or ion responsible for the action of the drug substance. During the exclusivity period, the FDA may not accept for review an abbreviated new drug application (“ANDA”), or a 505(b)(2) NDA submitted by another company for another version of such drug where the applicant does not own or have a legal right of reference to all the data required for approval. However, an application may be submitted after four years if it contains a certification of patent invalidity or non-infringement. The FDCA also provides three years of marketing exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability studies, that were conducted or sponsored by
45
58582473.18
the applicant are deemed by the FDA to be essential to the approval of the application, for example, new indications, dosages, or strengths of an existing drug. This three-year exclusivity covers only the conditions of use associated with the new clinical investigations and does not prohibit the FDA from approving ANDAs for drugs containing the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However, an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.
Patent Term Extensions in the European Union and Other Jurisdictions
The European Union also provides for patent term extension through Supplementary Protection Certificates (“SPCs”). The rules and requirements for obtaining a SPC are similar to those in the United States. An SPC may extend the term of a patent for up to five years after its originally scheduled expiration date and can provide up to a maximum of fifteen years of marketing exclusivity for a drug. In certain circumstances, these periods may be extended for six additional months if pediatric exclusivity is obtained; and in the case of orphan medicinal products, a two-year extension of the orphan market exclusivity may be available. Although SPCs are available throughout the European Union, sponsors must apply on a country-by-country basis. Similar patent term extension rights exist in certain other foreign jurisdictions outside the European Union.
Key Relationships & Licenses
In June of 2020 Decoy entered a broad one-year, non-exclusive licensing agreement with the Massachusetts Institute of Technology (MIT) related to developing potential treatments for Covid-19, using a variety available resources, services and technologies from the Institute. Additionally, in July of 2020, Decoy entered into a Sponsored Research Agreement and option agreement with Columbia University to evaluate a molecule to block the transmission of Covid-19, neither collaboration resulted in a licensing agreement for Decoy.
Decoy has attracted non-dilutive investments from the Bill & Melinda Gates Foundation, the Center for the Biologic Advanced Research and Development Authority (BARDA) and Johnson & Johnson through the US Government’s Blue Knight Program, with some additional support from the European Union’s IMI-CARE Consortium and the Massachusetts Life Sciences Seed Fund.
Machine Learning and Artificial Intelligence computing support: Google AI Startup Program and the NVIDIA Inception Program including computing credits as well as hardware and software discounts.
Sales and Marketing
While Decoy is not a commercial-stage biotech company at this time, Decoy believes that the structure of its drug development pipeline and emerging trends in pharmaceutical marketing could allow Decoy to efficiently implement a commercial model capable of addressing high-revenue markets without building a traditional 'big pharma' sales organization.
Small, Specialized Sales Force
46
58582473.18
Many of the immune-suppressed, high-risk, or orphan cancer patient groups that would be key early commercial targets for Decoy’s drug development candidates are typically served by specialist HCPs working in easy to identify and access medical settings. For example, in the United States:
•The great majority of solid organ transplants are performed at one of approximately 250 transplant centers30
•Leukemia/Lymphoma patients are typically associated with one of 76 NCI-designated cancer centers31
Should one or more of Decoy’s pipeline candidates reach commercialization, Decoy believes it will be feasible to build a small and specialized sales force that can work across its sales portfolio to target and access these patient settings in a financially efficient manner. This would enable Decoy to drive revenue growth while maintaining a cost-effective commercial and medical affairs footprint to effectively engage with key opinion leaders and specialists, particularly at cancer and transplant centers.
Emerging “Telehealth” Commercial Model
In addition, Decoy believes it will be well-positioned to implement an innovative commercialization strategy which leverages various emerging technological elements aimed at efficiently optimizing patient engagement, facilitating access to HCPs, and streamlining product delivery. Key components of such a commercial model could include:
•Digital Patient Engagement: Leveraging digital channels such as social media and paid search to efficiently educate patients about Decoy’s products, ensuring broad reach and accessibility.
•Telehealth Partnerships: Collaborating with telehealth providers to enable convenient and immediate access to HCPs, complementing direct-to-consumer campaigns and facilitating seamless patient engagement.
•At-Home Delivery: Implementing a streamlined process for at-home delivery of Decoy’s products following prescription, potentially facilitated through telehealth visits, enhancing patient convenience and adherence.
•Streamlined Distribution: Aligning with industry trends to establish a streamlined distribution strategy aimed at enhancing efficiency and optimizing Gross to Net (GTN).
Such an innovative commercial model would not only align with Decoy’s status as an emerging biotech organization but also reflect broader industry trends. By integrating these various channels, Decoy would aim to orchestrate a streamlined patient journey, reducing the time and in-person contact requires for patients to access its therapies. This approach would not only mitigate the risks associated with transmission of infectious diseases for patients, but also enhance operational efficiency, resource utilization, and return on investment from cost of sales.
Manufacturing
30 https://optn.transplant.hrsa.gov/about/search-membership/
31 https://www.cancer.gov/research/infrastructure/cancer-centers
47
58582473.18
Decoy does not currently own or operate manufacturing facilities to produce clinical or commercial quantities of its product candidates. Decoy relies, and expect to continue to rely, on third parties to conduct some or all aspects of its product manufacturing, research, preclinical and clinical testing, and these third parties may not perform satisfactorily or dedicate adequate resources to meet Decoy’s needs.
Government Regulation and Product Approvals
Government authorities in the United States, at the federal, state, and local level, and in other countries and jurisdictions, including the European Union, extensively regulate, among other things, the research, development, testing, manufacture, quality control, approval, packaging, storage, recordkeeping, labeling, advertising, promotion, distribution, marketing, post-approval monitoring and reporting, and import and export of pharmaceutical products. The processes for obtaining regulatory approvals in the United States and in foreign countries and jurisdictions, along with subsequent compliance with applicable statutes and regulations and other regulatory authorities, require the expenditure of substantial time and financial resources.
Review and Approval of Drugs in the United States
In the United States, the FDA regulates, among other things, the research, development, testing, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring and reporting and import and export of drugs in the U.S. to assure the safety and effectiveness of medical products for their intended use under the Federal Food, Drug, and Cosmetic Act (“FDCA”), and implementing regulations. The failure to comply with applicable U.S. requirements at any time during the product development process, approval process or after approval may subject an applicant and/or sponsor to a variety of administrative or judicial sanctions, including refusal by the FDA to approve pending applications, withdrawal of an approval, imposition of a clinical hold, issuance of warning letters and other types of letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts, denial of the ability to import and export certain products, restitution, disgorgement of profits, or civil or criminal investigations and penalties brought by the FDA and the Department of Justice or other governmental entities.
An applicant seeking approval to market and distribute a new drug product in the United States must typically undertake the following:
•completion of preclinical laboratory tests, animal studies and formulation studies in compliance with the FDA’s good laboratory practice regulations;
•submission to the FDA of an IND, which must take effect before human clinical trials may begin;
•approval by an independent institutional review board representing each clinical site before each clinical trial may be initiated;
•performance of adequate and well-controlled human clinical trials in accordance with good clinical practices to establish the safety and efficacy of the proposed drug product for each indication;
•preparation and submission to the FDA of a new drug application;
48
58582473.18
•review of the product by an FDA advisory committee, where appropriate or if applicable;
•satisfactory completion of one or more FDA inspections of the manufacturing facility or facilities at which the product, or components thereof, are produced to assess compliance with cGMP, requirements and to assure that the facilities, methods and controls are adequate to preserve the product’s identity, strength, quality and purity;
•satisfactory completion of FDA audits of clinical trial sites to assure compliance with GCPs and the integrity of the clinical data;
•payment of user fees and securing FDA approval of the NDA; and
•compliance with any post-approval requirements, including Risk Evaluation and Mitigation Strategies and post-approval studies required by the FDA.
Preclinical Studies
Preclinical studies include laboratory evaluation of the purity and stability of the manufactured drug substance or API and the formulated drug or drug product, as well as in vitro and animal studies to assess the safety and activity of the drug for initial testing in humans and to establish a rationale for therapeutic use. The conduct of preclinical studies is subject to federal regulations and requirements, including GLP regulations. The results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. Some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, may continue after the IND is submitted.
Companies usually must complete some long-term preclinical testing, such as animal tests of reproductive adverse events and carcinogenicity, and must also develop additional information about the chemistry and physical characteristics of the investigational product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable deterioration over its shelf life.
The IND and IRB Processes
An IND is an exemption from the FDCA that allows an unapproved drug to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA authorization to administer an investigational drug to humans. Such authorization must be secured prior to interstate shipment and administration of any new drug that is not the subject of an approved NDA. In support of a request for an IND, applicants must submit a protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, are submitted to the FDA as part of an IND. The FDA requires a 30-day waiting period after the filing of each IND before clinical trials may begin. This waiting period is designed to allow the FDA to review the IND to determine whether human
49
58582473.18
research subjects will be exposed to unreasonable health risks. At any time during this 30-day period, the FDA may raise concerns or questions about the conduct of the trials as outlined in the IND and impose a clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin.
Following commencement of a clinical trial under an IND, the FDA may also place a clinical hold or partial clinical hold on that trial. A clinical hold is an order issued by the FDA to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. A partial clinical hold is a delay or suspension of only part of the clinical work requested under the IND. For example, a specific protocol or part of a protocol is not allowed to proceed, while other protocols may do so. No more than 30 days after imposition of a clinical hold or partial clinical hold, the FDA will provide the sponsor a written explanation of the basis for the hold.
Following issuance of a clinical hold or partial clinical hold, an investigation may only resume after the FDA has notified the sponsor that the investigation may proceed. The FDA will base that determination on information provided by the sponsor correcting the deficiencies previously cited or otherwise satisfying the FDA that the investigation can proceed.
A sponsor may choose, but is not required, to conduct a foreign clinical study under an IND. When a foreign clinical study is conducted under an IND, all FDA IND requirements must be met unless waived. When the foreign clinical study is not conducted under an IND, the sponsor must ensure that the study complies with certain FDA requirements in order to use the study as support for an IND or application for marketing approval.
In addition to the IND requirements, an IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.
Additionally, some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring board or committee. This group provides authorization for whether or not a trial may move forward at designated check points based on access that only the group maintains to available data from the study. Suspension or termination of development during any phase of clinical trials can occur if it is determined that the participants or patients are being exposed to an unacceptable health risk. Other reasons for suspension or termination may be made by Decoy based on evolving business objectives and/or competitive climate.
Information about certain clinical trials must be submitted within specific timeframes to the National Institutes of Health, for public dissemination on its ClinicalTrials.gov website.
Human Clinical Studies in Support of an NDA
Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators in accordance with GCP requirements, which include, among other things, the requirement that all research subjects provide their informed consent in writing before their participation in any clinical trial. Clinical trials are conducted under written study protocols detailing, among other things, the inclusion
50
58582473.18
and exclusion criteria, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated.
Human clinical trials are typically conducted in the following sequential phases, which may overlap or be combined:
•Phase 1: The drug is initially introduced into healthy human subjects or, in certain indications such as cancer, patients with the target disease or condition and tested for safety, dosage tolerance, absorption, metabolism, distribution, excretion and, if possible, to gain an early indication of its effectiveness and to determine optimal dosage.
•Phase 2: The drug is administered to a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance and optimal dosage.
•Phase 3: The drug is administered to an expanded patient population, generally at geographically dispersed clinical trial sites, in well-controlled clinical trials to generate enough data to statistically evaluate the efficacy and safety of the product for approval, to establish the overall risk- benefit profile of the product, and to provide adequate information for the labeling of the product.
•Phase 4: Post-approval studies, which are conducted following initial approval, are typically conducted to gain additional experience and data from treatment of patients in the intended therapeutic indication.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and more frequently if serious adverse events occur. In addition, IND safety reports must be submitted to the FDA for any of the following: serious and unexpected suspected adverse reactions; findings from other studies or animal or in vitro testing that suggest a significant risk in humans exposed to the drug; and any clinically important increase in the case of a serious suspected adverse reaction over that listed in the protocol or investigator brochure. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, or at all. Furthermore, the FDA or the sponsor may suspend or terminate a clinical trial at any time on various grounds, including a finding that the research subjects are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the drug has been associated with unexpected serious harm to patients. The FDA will typically inspect one or more clinical sites to assure compliance with GCP and the integrity of the clinical data submitted.
Concurrent with clinical trials, companies often complete additional animal studies and must also develop additional information about the chemistry and physical characteristics of the drug as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable of consistently producing quality batches of the drug candidate and, among other things, must develop methods for testing the identity, strength, quality, purity, and potency of the final drug. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration over its shelf life.
Submission of an NDA to the FDA
51
58582473.18
Assuming successful completion of required clinical testing and other requirements, the results of the preclinical studies and clinical trials, together with detailed information relating to the product’s chemistry, manufacture, controls and proposed labeling, among other things, are submitted to the FDA as part of an NDA requesting approval to market the drug product for one or more indications. Under federal law, the submission of most NDAs is additionally subject to an application user fee and the sponsor of an approved NDA is also subject to annual product and establishment user fees. These fees are typically increased annually. Certain exceptions and waivers are available for some of these fees, such as an exception from the application fee for products with orphan designation and a waiver for certain small businesses, an exception from the establishment fee when the establishment does not engage in manufacturing the product during a particular fiscal year, and an exception from the product fee for a product that is the same as another product approved under an abbreviated pathway.
The FDA conducts a preliminary review of an NDA within 60 days of its receipt and strives to inform the sponsor by the 74th day after the FDA’s receipt of the submission to determine whether the application is sufficiently complete to permit substantive review. The FDA may request additional information rather than accept an NDA for filing. In this event, the application must be resubmitted with additional information. The resubmitted application is also subject to review before the FDA accepts it for filing. Once the submission is accepted for filing, the FDA begins an in-depth substantive review. The FDA has agreed to certain performance goals in the review process of NDAs. Most such applications are meant to be reviewed within ten months from the date of filing, and most applications for “priority review” products are meant to be reviewed within six months of filing. The review process may be extended by the FDA for three additional months to consider new information or clarification provided by the applicant to address an outstanding deficiency identified by the FDA following the original submission.
Before approving an NDA, the FDA typically will inspect the facility or facilities where the product is or will be manufactured. These pre-approval inspections may cover all facilities associated with an NDA submission, including drug component manufacturing (such as APIs), finished drug product manufacturing, and control testing laboratories. The FDA will not approve an application unless it determines that the manufacturing processes and facilities comply with cGMP requirements and adequate to assure consistent production of the product within required specifications. Additionally, before approving an NDA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. Under the FDA Reauthorization Act of 2017 (“FDARA”), the FDA must implement a protocol to expedite review of responses to inspection reports pertaining to certain drug applications, including applications for drugs in a shortage or drugs for which approval is dependent on remediation of conditions identified in the inspection report.
In addition, as a condition of approval, the FDA may require an applicant to develop a Risk Evaluation and Mitigation Assessment (“REMS”). REMS use risk minimization strategies beyond professional labeling to ensure that the benefits of the product outweigh the potential risks. To determine whether a REMS is needed, the FDA will consider the size of the population likely to use the product, seriousness of the disease, expected benefit of the product, expected duration of treatment, seriousness of known or potential adverse events, and whether the product is a new molecular entity. REMS can include medication guides, physician communication plans for healthcare professionals, and elements to assure safe use (“ETASU”). ETASU may include, but is not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The FDA may require a REMS before approval or post-approval if it becomes aware of a serious risk associated with use of the product. The requirement for a REMS can materially affect the potential market and profitability of a product.
52
58582473.18
The FDA may refer an application for a novel drug to an advisory committee or explain why such referral was not made. Typically, an advisory committee is a panel of independent experts, including clinicians and other scientific experts, that reviews, evaluates and provides a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Fast-Track, Breakthrough Therapy and Priority Review Designations
The FDA is authorized to designate certain products for expedited review if they are intended to address an unmet medical need in the treatment of a serious or life-threatening disease or condition. These programs are referred to as fast-track designation, breakthrough therapy designation and priority review designation.
Specifically, the FDA may designate a product for fast-track review if it is intended, whether alone or in combination with one or more other products, for the treatment of a serious or life-threatening disease or condition, and it demonstrates the potential to address unmet medical needs for such a disease or condition. For fast-track products, sponsors may have greater interactions with the FDA and the FDA may initiate review of sections of a fast-track product’s application before the application is complete. This rolling review may be available if the FDA determines, after preliminary evaluation of clinical data submitted by the sponsor, that a fast-track product may be effective. The sponsor must also provide, and the FDA must approve, a schedule for the submission of the remaining information and the sponsor must pay applicable user fees. However, the FDA’s time period goal for reviewing a fast-track application does not begin until the last section of the application is submitted. In addition, the fast track designation may be withdrawn by the FDA if the FDA believes that the designation is no longer supported by data emerging in the clinical trial process.
Second, a product may be designated as a breakthrough therapy if it is intended, either alone or in combination with one or more other products, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the product may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints, such as substantial treatment effects observed early in clinical development. The FDA may take certain actions with respect to breakthrough therapies, including holding meetings with the sponsor throughout the development process; providing timely advice to the product sponsor regarding development and approval; involving more senior staff in the review process; assigning a cross- disciplinary project lead for the review team; and taking other steps to design the clinical trials in an efficient manner.
Third, the FDA may designate a product for priority review if it is a product that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. The FDA determines, on a case-by-case basis, whether the proposed product represents a significant improvement when compared with other available therapies. Significant improvement may be illustrated by evidence of increased effectiveness in the treatment of a condition, elimination or substantial reduction of a treatment-limiting product reaction, documented enhancement of patient compliance that may lead to improvement in serious outcomes, and evidence of safety and effectiveness in a new subpopulation. A priority designation is intended to direct overall attention and resources to the evaluation of such applications, and to shorten the FDA’s goal for taking action on a marketing application from ten months to six months.
Accelerated Approval Pathway
53
58582473.18
The FDA may grant accelerated approval to a drug for a serious or life-threatening condition that provides meaningful therapeutic advantage to patients over existing treatments based upon a determination that the drug has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit. The FDA may also grant accelerated approval for such a condition when the product has an effect on an intermediate clinical endpoint that can be measured earlier than an effect on irreversible morbidity or mortality (“IMM”), and that is reasonably likely to predict an effect on IMM or other clinical benefit, taking into account the severity, rarity or prevalence of the condition and the availability or lack of alternative treatments. Drugs granted accelerated approval must meet the same statutory standards for safety and effectiveness as those granted traditional approval.
For the purposes of accelerated approval, a surrogate endpoint is a marker, such as a laboratory measurement, radiographic image, physical sign or other measure that is thought to predict clinical benefit, but is not itself a measure of clinical benefit. Surrogate endpoints can often be measured more easily or more rapidly than clinical endpoints. An intermediate clinical endpoint is a measurement of a therapeutic effect that is considered reasonably likely to predict the clinical benefit of a drug, such as an effect on IMM. There is limited experience with accelerated approvals by the FDA based on intermediate clinical endpoints. However, the FDA has indicated that such endpoints generally may support accelerated approval where the therapeutic effect measured by the endpoint is not itself a clinical benefit and basis for traditional approval, if there is a basis for concluding that the therapeutic effect is reasonably likely to predict the ultimate clinical benefit of a drug.
The accelerated approval pathway is most often used in settings in which the course of a disease is long, and an extended period of time is required to measure the intended clinical benefit of a drug, even if the effect on the surrogate or intermediate clinical endpoint occurs rapidly. Thus, accelerated approval has been used extensively in the development and approval of drugs for treatment of a variety of cancers in which the goal of therapy is generally to improve survival or decrease morbidity and the duration of the typical disease course requires lengthy and sometimes large trials to demonstrate a clinical or survival benefit.
The accelerated approval pathway is usually contingent on a sponsor’s agreement to conduct, in a diligent manner, additional post-approval confirmatory studies to verify and describe the drug’s clinical benefit. As a result, a drug candidate approved on this basis is subject to rigorous post-marketing compliance requirements, including the completion of Phase 4 or post-approval clinical trials to confirm the effect on the clinical endpoint. Failure to conduct required post-approval studies, or confirm a clinical benefit during post-marketing studies, would allow the FDA to withdraw the drug from the market on an expedited basis. All promotional materials for drug candidates approved under accelerated regulations are subject to prior review by the FDA.
The FDA’s Decision on an NDA
On the basis of the FDA’s evaluation of the NDA and accompanying information, including the results of the inspection of the manufacturing facilities, the FDA may issue an approval letter or a complete response letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If and when those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Even with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
54
58582473.18
If the FDA approves a product, it may limit the approved indications for use for the product, require that contraindications, warnings or precautions be included in the product labeling, require that post-approval studies, including Phase 4 clinical trials, be conducted to further assess the drug’s safety after approval, require testing and surveillance programs to monitor the product after commercialization, or impose other conditions, including distribution restrictions or other risk management mechanisms, including REMS, which can materially affect the potential market and profitability of the product. The FDA may prevent or limit further marketing of a product based on the results of post-market studies or surveillance programs. After approval, many types of changes to the approved product, such as adding new indications, manufacturing changes and additional labeling claims, are subject to further testing requirements and FDA review and approval.
Post-Approval Requirements
Drugs manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to recordkeeping, periodic reporting, product sampling and distribution, advertising and promotion and reporting of adverse experiences with the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual user fee requirements for any marketed products and the establishments at which such products are manufactured, as well as new application fees for supplemental applications with clinical data.
In addition, drug manufacturers and other entities involved in the manufacture and distribution of approved drugs are required to register their establishments with the FDA and state agencies, and are subject to periodic unannounced inspections by the FDA and these state agencies for compliance with cGMP requirements. Changes to the manufacturing process are strictly regulated and often require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting and documentation requirements upon the sponsor and any third-party manufacturers that the sponsor may decide to use. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance.
Once an approval is granted, the FDA may withdraw the approval if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information; imposition of post-market studies or clinical trials to assess new safety risks; or imposition of distribution or other restrictions under a REMS program. Other potential consequences include, among other things:
•restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market or product recalls;
•fines, warning letters or holds on post-approval clinical trials;
•refusal of the FDA to approve pending NDAs or supplements to approved NDAs, or suspension or revocation of product license approvals;
•product seizure or detention, or refusal to permit the import or export of products; or
55
58582473.18
•injunctions or the imposition of civil or criminal penalties.
The FDA strictly regulates the marketing, labeling, advertising and promotion of prescription drug products placed on the market. This regulation includes, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet and social media. Promotional claims about a drug’s safety or effectiveness are prohibited before the drug is approved. After approval, a drug product generally may not be promoted for uses that are not approved by the FDA, as reflected in the product’s prescribing information. In the United States, healthcare professionals are generally permitted to prescribe drugs for such uses not described in the drug’s labeling, known as off-label uses, because the FDA does not regulate the practice of medicine. However, the FDA’s regulations impose rigorous restrictions on manufacturers’ communications, prohibiting the promotion of off-label uses. It may be permissible, under very specific, narrow conditions, for a manufacturer to engage in nonpromotional, non-misleading communication regarding off-label information, such as distributing scientific or medical journal information. If a company is found to have promoted off-label uses, it may become subject to adverse public relations and administrative and judicial enforcement by the FDA, the Department of Justice, or the Office of the Inspector General of the Department of Health and Human Services, as well as state authorities. This could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal fines and agreements that materially restrict the manner in which a company promotes or distributes drug products. The federal government has levied large civil and criminal fines against companies for alleged improper promotion, and has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
In addition, the distribution of prescription pharmaceutical products is subject to the Prescription Drug Marketing Act (“PDMA”), and its implementation regulations, as well as the Drug Supply Chain Security Act (“DSCSA”), which regulates the distribution of and tracing of prescription drugs and prescription drug samples at the federal level, and sets minimum standards for the regulation of drug distributors by the states. The PDMA, its implementing regulations and state laws limit the distribution of prescription pharmaceutical product samples, and the DSCSA imposes requirements to ensure accountability in distribution and to identify and remove counterfeit and other illegitimate products from the market.
Abbreviated New Drug Applications for Generic Drugs
In 1984, with passage of the Hatch-Waxman Amendments to the FDCA, Congress authorized the FDA to approve generic drugs that are the same as drugs previously approved by the FDA under the NDA provisions of the statute. To obtain approval of a generic drug, an applicant must submit an ANDA to the agency. In support of such applications, a generic manufacturer may rely on the preclinical and clinical testing previously conducted for a drug product previously approved under an NDA, known as the reference-listed drug (“RLD”).
Specifically, in order for an ANDA to be approved, the FDA must find that the generic version is identical to the RLD with respect to the active ingredients, the route of administration, the dosage form, and the strength of the drug. At the same time, the FDA must also determine that the generic drug is “bioequivalent” to the innovator drug. Under the statute, a generic drug is bioequivalent to a RLD if “the rate and extent of absorption of the drug do not show a significant difference from the rate and extent of absorption of the listed drug...”
Upon approval of an ANDA, the FDA indicates whether the generic product is “therapeutically equivalent” to the RLD in its publication “Approved Drug Products with Therapeutic Equivalence Evaluations,” also referred to
56
58582473.18
as the “Orange Book.” Physicians and pharmacists consider a therapeutic equivalent generic drug to be fully substitutable for the RLD. In addition, by operation of certain state laws and numerous health insurance programs, the FDA’s designation of therapeutic equivalence often results in substitution of the generic drug without the knowledge or consent of either the prescribing physician or patient.
Under the Hatch-Waxman Amendments, the FDA may not approve an ANDA until any applicable period of non-patent exclusivity for the RLD has expired. The FDCA provides a period of five years of non-patent data exclusivity for a new drug containing an NCE. For the purposes of this provision, an NCE, is a drug that contains no active moiety that has previously been approved by the FDA in any other NDA. An active moiety is the molecule or ion responsible for the physiological or pharmacological action of the drug substance. In cases where such NCE exclusivity has been granted, an ANDA may not be filed with the FDA until the expiration of five years unless the submission is accompanied by a Paragraph IV certification, in which case the applicant may submit its application four years following the original product approval.
The FDCA also provides for a period of three years of exclusivity if the NDA includes reports of one or more new clinical investigations, other than bioavailability or bioequivalence studies, that were conducted by or for the applicant and are essential to the approval of the application. This three-year exclusivity period often protects changes to a previously approved drug product, such as a new dosage form, route of administration, combination or indication. Three-year exclusivity would be available for a drug product that contains a previously approved active moiety, provided the statutory requirement for a new clinical investigation is satisfied. Unlike five-year NCE exclusivity, an award of three-year exclusivity does not block the FDA from accepting ANDAs seeking approval for generic versions of the drug as of the date of approval of the original drug product. The FDA typically makes decisions about awards of data exclusivity shortly before a product is approved.
Under FDARA, a priority review track will be established for certain generic drugs, requiring the FDA to review a drug application within eight months for a drug that has three or fewer approved drugs listed in the Orange Book and is no longer protected by any patent or regulatory exclusivities, or is on the FDA’s drug shortage list. The new legislation also authorizes the FDA to expedite review of “competitor generic therapies” or drugs with inadequate generic competition, including holding meetings with or providing advice to the drug sponsor prior to submission of the application.
Hatch-Waxman Patent Certification and the 30-Month Stay
Upon approval of an NDA or a supplement thereto, NDA sponsors are required to list with the FDA each patent with claims that cover the applicant’s product or an approved method of using the product. Each of the patents listed by the NDA sponsor is published in the Orange Book. When an ANDA applicant files its application with the FDA, the applicant is required to certify to the FDA concerning any patents listed for the reference product in the Orange Book, except for patents covering methods of use for which the ANDA applicant is not seeking approval. To the extent that the Section 505(b)(2) applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the Orange Book to the same extent that an ANDA applicant would.
Specifically, the applicant must certify with respect to each patent that:
•the required patent information has not been filed;
57
58582473.18
•the listed patent has expired;
•the listed patent has not expired, but will expire on a particular date and approval is sought after patent expiration; or
•the listed patent is invalid, unenforceable or will not be infringed by the new product.
A certification that the new product will not infringe the already approved product’s listed patents or that such patents are invalid or unenforceable is called a Paragraph IV certification. If the applicant does not challenge the listed patents or indicates that it is not seeking approval of a patented method of use, the ANDA application will not be approved until all the listed patents claiming the referenced product have expired (other than method of use patents involving indications for which the ANDA applicant is not seeking approval).
If the ANDA applicant has provided a Paragraph IV certification to the FDA, the applicant must also send notice of the Paragraph IV certification to the NDA and patent holders once the ANDA has been accepted for filing by the FDA. The NDA and patent holders may then initiate a patent infringement lawsuit in response to the notice of the Paragraph IV certification. The filing of a patent infringement lawsuit within 45 days after the receipt of a Paragraph IV certification automatically prevents the FDA from approving the ANDA until the earlier of 30 months after the receipt of the Paragraph IV notice, expiration of the patent, or a decision in the infringement case that is favorable to the ANDA applicant.
Pediatric Studies and Exclusivity
Under the Pediatric Research Equity Act of 2003, an NDA or supplement thereto must contain data that are adequate to assess the safety and effectiveness of the drug product for the claimed indications in all relevant pediatric subpopulations, and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. With enactment of the Food and Drug Safety and Innovation Act (“FDASIA”), in 2012, sponsors must also submit pediatric study plans prior to the assessment data. Those plans must contain an outline of the proposed pediatric study or studies the applicant plans to conduct, including study objectives and design, any deferral or waiver requests, and other information required by regulation. The applicant, the FDA, and the FDA’s internal review committee must then review the information submitted, consult with each other, and agree upon a final plan. The FDA or the applicant may request an amendment to the plan at any time. For drugs intended to treat a serious or life-threatening disease or condition, the FDA must, upon the request of an applicant, meet to discuss preparation of the initial pediatric study plan or to discuss deferral or waiver of pediatric assessments.
In addition, FDARA requires the FDA to meet early in the development process to discuss pediatric study plans with drug sponsors. The legislation requires the FDA to meet with drug sponsors no later than the end-of-phase 1 meeting for serious or life-threatening diseases and by no later than 90 days after the FDA’s receipt of the study plan.
The FDA may, on its own initiative or at the request of the applicant, grant deferrals for submission of some or all pediatric data until after approval of the product for use in adults, or full or partial waivers from the pediatric data requirements. Additional requirements and procedures relating to deferral requests and requests for extension of deferrals are contained in FDASIA. Unless otherwise required by regulation, the pediatric data requirements do not apply to products with orphan designation.
58
58582473.18
Pediatric exclusivity is another type of non-patent marketing exclusivity in the United States and, if granted, provides for the attachment of an additional six months of marketing protection to the term of any existing regulatory exclusivity, including the non-patent and orphan exclusivity. This six-month exclusivity may be granted if an NDA sponsor submits pediatric data that fairly responds to a written request from the FDA for such data. The data do not need to show the product to be effective in the pediatric population studied; rather, if the clinical trial is deemed to fairly respond to the FDA’s request, additional protection is granted. If reports of requested pediatric studies are submitted to and accepted by the FDA within the statutory time limits, whatever statutory or regulatory periods of exclusivity or patent protection cover the product are extended by six months. This is not a patent term extension, but it effectively extends the regulatory period during which the FDA cannot approve another application. With regard to patents, the six-month pediatric exclusivity period will not attach to any patents for which a generic (ANDA or 505(b)(2) NDA) applicant submitted a paragraph IV patent certification, unless the NDA sponsor or patent owner first obtains a court determination that the patent is valid and infringed by a proposed generic product.
Orphan Drug Designation and Exclusivity
Under the Orphan Drug Act, the FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally meaning that it affects fewer than 200,000 individuals in the United States, or more in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United States for treatment of the disease or condition will be recovered from sales of the product). A company must request orphan product designation before submitting an NDA. If the request is granted, the FDA will disclose the identity of the therapeutic agent and its potential use. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.
If a product with orphan status receives the first FDA approval for the disease or condition for which it has such designation or for a select indication or use within the rare disease or condition for which it was designated, the product generally will be receiving orphan product exclusivity. Orphan product exclusivity means that the FDA may not approve any other applications for the same product for the same indication for seven years, except in certain limited circumstances. Those circumstances include instances in which another sponsor’s application for the same drug product and indication is shown to be “clinically superior” to the previously approved drug. In this context, clinically superior means that the drug provides a significant therapeutic advantage over and above the already approved drug in terms of greater efficacy, greater safety or by providing a major contribution to patient care. Competitors may receive approval of different products for the indication for which the orphan product has exclusivity and may obtain approval for the same product but for a different indication. If a drug or drug product designated as an orphan product ultimately receives marketing approval for an indication broader than what was designated in its orphan product application, it may not be entitled to exclusivity.
Under FDARA, orphan exclusivity will not bar approval of another orphan drug under certain circumstances, including if a subsequent product with the same drug for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand. The new legislation reverses prior precedent holding that the Orphan Drug Act unambiguously required the FDA to recognize orphan exclusivity regardless of a showing of clinical superiority.
Patent Term Restoration and Extension
59
58582473.18
A patent claiming a new drug product may be eligible for a limited patent term extension under the Hatch-Waxman Act, which permits a patent restoration of up to five years for patent term lost during product development and the FDA regulatory review. The restoration period granted is typically one-half the time between the effective date of an IND and the submission date of an NDA, plus the time between the submission date of an NDA and the ultimate approval date. Patent term restoration cannot be used to extend the remaining term of a patent past a total of 14 years from the product’s approval date. Only one patent applicable to an approved drug product is eligible for the extension, and the application for the extension must be submitted prior to the expiration of the patent in question. A patent that covers multiple drugs for which approval is sought can only be extended in connection with one of the approvals. The U.S. Patent and Trademark Office reviews and approves the application for any patent term extension or restoration in consultation with the FDA.
Review and Approval of Medical Devices in the United States
Medical devices in the United States are strictly regulated by the FDA. Under the FDCA, a medical device is defined as an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is, among other things: intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals; or intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes. This definition provides a clear distinction between a medical device and other FDA regulated products such as drugs. If the primary intended use of the product is achieved through chemical action or by being metabolized by the body, the product is usually a drug. If not, it is generally a medical device.
Medical devices are classified into one of three classes on the basis of the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices have the lowest level or risk associated with them, and are subject to general controls, including labeling, premarket notification and adherence to the Quality System Regulation (“QSR”). Class II devices are subject to general controls and special controls, including performance standards. Class III devices, which have the highest level of risk associated with them, such as life sustaining, life supporting or some implantable devices, or devices that have a new intended use, or use advanced technology that is not substantially equivalent to that of a legally marketed device, are subject to most of the aforementioned requirements as well as to premarket approval.
A 510(k) must demonstrate that the proposed device is substantially equivalent to another legally marketed device, or predicate device, which did not require premarket approval. In evaluating a 510(k), the FDA will determine whether the device has the same intended use as the predicate device, and (a) has the same technological characteristics as the predicate device, or (b) has different technological characteristics, and (i) the data supporting substantial equivalence contains information, including appropriate clinical or scientific data, if deemed necessary by the FDA, that demonstrates that the device is as safe and as effective as a legally marketed device, and (ii) does not raise different questions of safety and effectiveness than the predicate device. Most 510(k)s do not require clinical data for clearance, but the FDA may request such data. The FDA seeks to review and act on a 510(k) within 90 days of submission, but it may take longer if the agency finds that it requires more information to review the 510(k). If the FDA concludes that a new device is not substantially equivalent to a predicate device, the new device will be classified in Class III and the manufacturer will be most likely required to submit a PMA to market the product.
60
58582473.18
Under the PMA application process, the applicant must demonstrate that the device is safe and effective for its intended use. This PMA approval process applies to most Class III devices, and generally requires clinical data to support the safety and effectiveness of the device, obtained in conformance with Investigational Device Exemption regulations. The FDA will approve a PMA application if it finds that there is a reasonable assurance that the device is safe and effective for its intended purpose, and that the proposed manufacturing is in compliance with the QSRs. For novel technologies, the FDA will seek input from an advisory panel of medical experts regarding the safety and effectiveness of, and their benefit-risk analysis for the device. The PMA process is generally more detailed, lengthier and more expensive than the 510(k) process, though both processes can be expensive and lengthy, and require payment of significant user fees, unless an exemption is available.
Modifications to a 510(k)-cleared medical device may require the submission of another 510(k) or a PMA if the changes could significantly affect safety or effectiveness or constitute a major change in the intended use of the device. Modifications to a 510(k)-cleared device frequently require the submission of a traditional 510(k), but modifications meeting certain conditions may be candidates for FDA review under a Special 510(k). If a device modification requires the submission of a 510(k), but the modification does not affect the intended use of the device or alter the fundamental technology of the device, then summary information that results from the design control process associated with the cleared device can serve as the basis for clearing the application. A Special 510(k) allows a manufacturer to declare conformance to design controls without providing new data. When the modification involves a change in material, the nature of the “new” material will determine whether a traditional or Special 510(k) is necessary.
Review and Approval of Drug Products in the European Union
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of products. Whether or not it obtains FDA approval for a product, Decoy would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies between countries and jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Procedures Governing Approval of Drug Products in the European Union
Pursuant to the European Clinical Trials Directive, a system for the approval of clinical trials in the European Union has been implemented through national legislation of the member states. Under this system, an applicant must obtain approval from the competent national authority of an E.U. member state in which the clinical trial is to be conducted. Furthermore, the applicant may only start a clinical trial after a competent Ethics Committee has issued a favorable opinion. Clinical trial application must be accompanied by an investigational medicinal product dossier with supporting information prescribed by the European Clinical Trials Directive and corresponding national laws of the member states and further detailed in applicable guidance documents.
61
58582473.18
To obtain marketing approval of a product under European Union regulatory systems, an applicant must submit a marketing authorization application (“MAA”), either under a centralized or decentralized procedure. The centralized procedure provides for the grant of a single marketing authorization by the European Commission that is valid for all E.U. member states. The centralized procedure is compulsory for specific products, including for medicines produced by certain biotechnological processes, products designated as orphan medicinal products, advanced therapy products and products with a new active substance indicated for the treatment of certain diseases. For products with a new active substance indicated for the treatment of other diseases and products that are highly innovative or for which a centralized process is in the interest of patients, the centralized procedure may be optional.
Under the centralized procedure, the Committee for Medicinal Products for Human Use (the “CHMP”), established at the European Medicines Agency (“EMA”), is responsible for conducting the initial assessment of a product. The CHMP is also responsible for several post-authorization and maintenance activities, such as the assessment of modifications or extensions to an existing marketing authorization. Under the centralized procedure in the European Union, the maximum timeframe for the evaluation of an MAA is 210 days, excluding clock stops, when additional information or written or oral explanation is to be provided by the applicant in response to questions of the CHMP. Accelerated evaluation might be granted by the CHMP in exceptional cases, when a medicinal product is of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation. In this circumstance, the EMA ensures that the opinion of the CHMP is given within 150 days.
The decentralized procedure is available to applicants who wish to market a product in various E.U. member states where such a product has not previously received marketing approval in any E.U. member states. The decentralized procedure provides for approval by one or more other, or concerned, member states of an assessment of an application performed by one member state designated by the applicant, known as the reference member state. Under this procedure, an applicant submits an application based on identical dossiers and related materials, including a draft summary of product characteristics, and draft labeling and package leaflet, to the reference member state and concerned member states. The reference member state prepares a draft assessment report and drafts of the related materials within 210 days after receipt of a valid application. Within 90 days of receiving the reference member state’s assessment report and related materials, each concerned member state must decide whether to approve the assessment report and related materials.
If a member state cannot approve the assessment report and related materials on the grounds of potential serious risk to public health, the disputed points are subject to a dispute resolution mechanism and may eventually be referred to the European Commission, whose decision is binding on all member states.
Clinical Trial Approval
Requirements for the conduct of clinical trials in the European Union including Good Clinical Practice, are set forth in the Clinical Trials Directive 2001/20/EC and the GCP Directive 2005/28/EC. Pursuant to Directive 2001/20/EC and Directive 2005/28/EC, as amended, a system for the approval of clinical trials in the European Union has been implemented through national legislation of the E.U. member states. Under this system, approval must be obtained from the competent national authority of each E.U. member state in which a study is planned to be conducted. To this end, a clinical trial application is submitted, which must be supported by an investigational medicinal product dossier (“IMPD”), and further supporting information prescribed by Directive 2001/20/EC and
62
58582473.18
Directive 2005/28/EC and other applicable guidance documents. Furthermore, a clinical trial may only be started after a competent Ethics Committee has issued a favorable opinion on the clinical trial application in that country.
In April 2014, the European Union passed the new Clinical Trials Regulation, (EU) No 536/2014, which will replace the current Clinical Trials Directive 2001/20/EC. To ensure that the rules for clinical trials are identical throughout the European Union, the new E.U. clinical trials legislation was passed as a regulation that is directly applicable in all E.U. member states. All clinical trials performed in the European Union are required to be conducted in accordance with the Clinical Trials Directive 2001/20/EC until the new Clinical Trials Regulation (EU) No 536/2014 becomes applicable. According to the current plans of EMA, the new Clinical Trials Regulation will become applicable in 2019. The Clinical Trials Directive 2001/20/EC will, however, still apply three years from the date of entry into application of the Clinical Trials Regulation to (i) clinical trials applications submitted before the entry into application and (ii) clinical trials applications submitted within one year after the entry into application if the sponsor opts for old system.
The new Clinical Trials Regulation aims to simplify and streamline the approval of clinical trials in the European Union. The main characteristics of the regulation include: a streamlined application procedure via a single entry point, the E.U. portal; a single set of documents to be prepared and submitted for the application as well as simplified reporting procedures that will spare sponsors from submitting broadly identical information separately to various bodies and different member states; a harmonized procedure for the assessment of applications for clinical trials, which is divided in two parts—Part I is assessed jointly by all member states concerned. Part II is assessed separately by each member state concerned; strictly defined deadlines for the assessment of clinical trial applications; and the involvement of the Ethics Committees in the assessment procedure in accordance with the national law of the member state concerned but within the overall timelines defined by the Clinical Trials Regulation.
Data and Market Exclusivity in the European Union
In the European Union, NCEs qualify for eight years of data exclusivity upon marketing authorization and an additional two years of market exclusivity. This data exclusivity, if granted, prevents regulatory authorities in the European Union from referencing the innovator’s data to assess a generic (abbreviated) application for eight years, after which generic marketing authorization can be submitted, and the innovator’s data may be referenced, but not approved for two years. The overall ten-year period will be extended to a maximum of eleven years if, during the first eight years of those ten years, the marketing authorization holder obtains an authorization for one or more new therapeutic indications which, during the scientific evaluation prior to their authorization, are held to bring a significant clinical benefit in comparison with existing therapies. Even if a compound is considered to be an NCE and the sponsor is able to gain the prescribed period of data exclusivity, another company nevertheless could also market another version of the product if such company can complete a full MAA with a complete database of pharmaceutical tests, preclinical tests and clinical trials and obtain marketing approval of its product.
In order to market any product outside of the United States, a company must also comply with numerous and varying regulatory requirements of other countries and jurisdictions regarding quality, safety and efficacy and governing, among other things, clinical trials, marketing authorization, commercial sales and distribution of drug products. Whether or not it obtains FDA approval for a product, the company would need to obtain the necessary approvals by the comparable foreign regulatory authorities before it can commence clinical trials or marketing of the product in those countries or jurisdictions. The approval process ultimately varies between countries and
63
58582473.18
jurisdictions and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries and jurisdictions might differ from and be longer than that required to obtain FDA approval. Regulatory approval in one country or jurisdiction does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country or jurisdiction may negatively impact the regulatory process in others.
Periods of Authorization and Renewals
Marketing authorization is valid for five years in principle and the marketing authorization may be renewed after five years on the basis of a re-evaluation of the risk-benefit balance by the EMA or by the competent authority of the authorizing member state. To this end, the marketing authorization holder must provide the EMA or the competent authority with a consolidated version of the file in respect of quality, safety and efficacy, including all variations introduced since the marketing authorization was granted, at least six months before the marketing authorization ceases to be valid. Once renewed, the marketing authorization is valid for an unlimited period, unless the European Commission or the competent authority decides, on justified grounds relating to pharmacovigilance, to proceed with one additional five-year renewal. Any authorization which is not followed by the actual placing of the drug on the European Union market (in case of centralized procedure) or on the market of the authorizing member state within three years after authorization ceases to be valid (the so-called sunset clause).
Orphan Drug Designation and Exclusivity
Regulation 141/2000 provides that a drug shall be designated as an orphan drug if its sponsor can establish: that the product is intended for the diagnosis, prevention or treatment of a life-threatening or chronically debilitating condition affecting not more than five in ten thousand persons in the European Community when the application is made, or that the product is intended for the diagnosis, prevention or treatment of a life-threatening, seriously debilitating or serious and chronic condition in the European Community and that without incentives it is unlikely that the marketing of the drug in the European Community would generate sufficient return to justify the necessary investment. For either of these conditions, the applicant must demonstrate that there exists no satisfactory method of diagnosis, prevention or treatment of the condition in question that has been authorized in the European Community or, if such method exists, the drug will be of significant benefit to those affected by that condition.
Regulation 847/2000 sets out criteria and procedures governing designation of orphan drugs in the European Union. Specifically, an application for designation as an orphan product can be made any time prior to the filing of an application for approval to market the product. Marketing authorization for an orphan drug leads to a ten-year period of market exclusivity. This period may, however, be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan drug designation, for example because the product is sufficiently profitable not to justify market exclusivity. Market exclusivity can be revoked only in very selected cases, such as consent from the marketing authorization holder, inability to supply sufficient quantities of the product, demonstration of “clinically relevant superiority” by a similar medicinal product, or, after a review by the Committee for Orphan Medicinal Products, requested by a member state in the fifth year of the marketing exclusivity period (if the designation criteria are believed to no longer apply). Medicinal products designated as orphan drugs pursuant to Regulation 141/2000 shall be eligible for incentives made available by the European Community and by the member states to support research into, and the development and availability of, orphan drugs.
Brexit and the Regulatory Framework in the United Kingdom
64
58582473.18
On June 23, 2016, the electorate in the United Kingdom (U.K.) voted in favor of leaving the European Union (commonly referred to as “Brexit”). Thereafter, on March 29, 2017, the country formally notified the European Union of its intention to withdraw pursuant to Article 50 of the Lisbon Treaty. The withdrawal of the U.K. from the European Union will take effect either on the effective date of the withdrawal agreement or, in the absence of agreement, two years after the U.K. provides a notice of withdrawal pursuant to the E.U. Treaty. Since the regulatory framework for pharmaceutical products in the U.K. covering quality, safety and efficacy of pharmaceutical products, clinical trials, marketing authorization, commercial sales and distribution of pharmaceutical products is derived from European Union directives and regulations, Brexit could materially impact the future regulatory regime which applies to products and the approval of product candidates in the U.K. It remains to be seen how, if at all, Brexit will impact regulatory requirements for product candidates and products in the U.K.
Pharmaceutical Coverage, Pricing and Reimbursement
Significant uncertainty exists as to the coverage and reimbursement status of products approved by the FDA and other government authorities. Sales of products will depend, in part, on the extent to which third-party payors, including government health programs in the United States such as Medicare and Medicaid, commercial health insurers and managed care organizations, provide coverage, and establish adequate reimbursement levels for, such products. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the price or reimbursement rate that the payor will pay for the product once coverage is approved. Third-party payors are increasingly challenging the prices charged, examining the medical necessity, and reviewing the cost-effectiveness of medical products and services and imposing controls to manage costs. Third-party payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the approved products for a particular indication.
In order to secure coverage and reimbursement for any product that might be approved for sale, a company may need to conduct expensive pharmacoeconomic studies in order to demonstrate the medical necessity and cost-effectiveness of the product, in addition to the costs required to obtain FDA or other comparable regulatory approvals. Nonetheless, product candidates may not be considered medically necessary or cost effective. Additionally, a payor’s decision to provide coverage for a drug product does not imply that an adequate reimbursement rate will be approved. Further, one payor’s determination to provide coverage for a drug product does not assure that other payors will also provide coverage for the drug product. Third-party reimbursement may not be sufficient to maintain price levels high enough to realize an appropriate return on investment in product development.
The containment of healthcare costs also has become a priority of federal, state and foreign governments and the prices of drugs have been a focus in this effort. Governments have shown significant interest in implementing cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Adoption of price controls and cost-containment measures, and adoption of more restrictive policies in jurisdictions with existing controls and measures, could further limit Decoy’s net revenue and results. Coverage policies and third-party reimbursement rates may change at any time. Even if favorable coverage and reimbursement status is attained for one or more products for which a company or its collaborators receive regulatory approval, less favorable coverage policies and reimbursement rates may be implemented in the future.
65
58582473.18
Outside the United States, ensuring adequate coverage and payment for Decoy’s product candidates will face challenges. Pricing of prescription pharmaceuticals is subject to governmental control in many countries. Pricing negotiations with governmental authorities can extend well beyond the receipt of regulatory marketing approval for a product and may require Decoy to conduct a clinical trial that compares the cost effectiveness of its product candidates or products to other available therapies. The conduct of such a clinical trial could be expensive and result in delays in Decoy’s commercialization efforts.
In the European Union, pricing and reimbursement schemes vary widely from country to country. Some countries provide that drug products may be marketed only after a reimbursement price has been agreed. Some countries may require the completion of additional studies that compare the cost- effectiveness of a particular drug candidate to currently available therapies. For example, the European Union provides options for its member states to restrict the range of drug products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. European Union member states may approve a specific price for a drug product or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the drug product on the market. Other member states allow companies to fix their own prices for drug products, but monitor and control company profits. The downward pressure on health care costs in general, particularly prescription drugs, has become intense. As a result, increasingly high barriers are being erected to the entry of new products. In addition, in some countries, cross-border imports from low- priced markets exert competitive pressure that may reduce pricing within a country. Any country that has price controls or reimbursement limitations for drug products may not allow favorable reimbursement and pricing arrangements.
Healthcare Law and Regulation
Healthcare providers and third-party payors play a primary role in the recommendation and prescription of drug products that are granted regulatory approval. Arrangements with providers, consultants, third-party payors and customers are subject to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain Decoy’s business and/or financial arrangements. Such restrictions under applicable federal and state healthcare laws and regulations, include the following:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving or providing remuneration (including any kickback, bribe or rebate), directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, lease or order of, any good or service, for which payment may be made, in whole or in part, under a federal healthcare program such as Medicare and Medicaid;
•the federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalties laws, which prohibit individuals or entities from, among other things, knowingly presenting, or causing to be presented, to the federal government, claims for payment that are false or fraudulent or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
•the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA”), which created additional federal criminal laws that prohibit, among other things, knowingly and willingly executing, or attempting to execute, a scheme or making false statements in connection with the delivery of or payment for health care benefits, items, or services;
66
58582473.18
•HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”)and its implementing regulations, which also imposes obligations, including mandatory contractual terms, with respect to safeguarding the privacy, security and transmission of individually identifiable health information on covered entities and their business associates that associates that perform certain functions or activities that involve the use or disclosure of protected health information on their behalf;
•the federal transparency requirements known as the federal Physician Payments Sunshine Act, under the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act (collectively the “ACA”), which requires certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the Centers for Medicare & Medicaid Services (“CMS”), within the U.S. Department of Health and Human Services, information related to payments and other transfers of value to physicians and teaching hospitals and information regarding ownership and investment interests held by physicians and their immediate family members; and
•analogous state and foreign laws and regulations, such as state anti-kickback and false claims laws, which may apply to healthcare items or services that are reimbursed by non-governmental third-party payors, including private insurers.
Some state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government in addition to requiring drug manufacturers to report information related to payments to physicians and other HCPs or marketing expenditures. State and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not pre-empted by HIPAA, thus complicating compliance efforts.
Healthcare Reform
A primary trend in the United States healthcare industry and elsewhere is cost containment. There have been a number of federal and state proposals during the last few years regarding the pricing of pharmaceutical and biopharmaceutical products, limiting coverage and reimbursement for drugs and other medical products, government control and other changes to the healthcare system in the United States.
In March 2010, the United States Congress enacted the Affordable Care Act, which, among other things, includes changes to the coverage and payment for drug products under government health care programs. Among the provisions of the ACA of importance to Decoy’s potential product candidates are:
•an annual, non-deductible fee on any entity that manufactures or imports specified branded prescription drugs and biologic agents, apportioned among these entities according to their market share in certain government healthcare programs;
•expansion of eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to certain individuals with income at or below 133% of the federal poverty level, thereby potentially increasing a manufacturer’s Medicaid rebate liability;
67
58582473.18
•expanded manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate for both branded and generic drugs and revising the definition of average manufacturer price (“AMP”), for calculating and reporting Medicaid drug rebates on outpatient prescription drug prices;
•addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected;
•expanded the types of entities eligible for the 340B drug discount program;
•established the Medicare Part D coverage gap discount program by requiring manufacturers to provide a 50% point-of-sale-discount off the negotiated price of applicable brand drugs to eligible beneficiaries during their coverage gap period as a condition for the manufacturers’ outpatient drugs to be covered under Medicare Part D; and
•a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research.
Other legislative changes have been proposed and adopted in the United States since the ACA was enacted. In August 2011, the Budget Control Act of 2011, among other things, created measures for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments to providers of up to 2% per fiscal year, which went into effect in April 2013 and will remain in effect through 2024 unless additional Congressional action is taken. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among other things, further reduced Medicare payments to several providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Since enactment of the ACA, there have been numerous legal challenges and Congressional actions to repeal and replace provisions of the law. In May 2017, the U.S. House of Representatives passed legislation known as the American Health Care Act of 2017. Thereafter, the Senate Republicans introduced and then updated a bill to replace the ACA known as the Better Care Reconciliation Act of 2017. The Senate Republicans also introduced legislation to repeal the ACA without companion legislation to replace it, and a “skinny” version of the Better Care Reconciliation Act of 2017. In addition, the Senate considered proposed healthcare reform legislation known as the Graham-Cassidy bill. None of these measures were passed by the U.S. Senate.
In January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In October 2017, the President signed a second Executive Order allowing for the use of association health plans and short-term health insurance, which may provide fewer health benefits than the plans sold through the ACA exchanges. At the same time, the Administration announced that it will discontinue the payment of cost-sharing reduction (“CSR”), payments to insurance companies until Congress approves the appropriation of funds for such CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the ACA.
68
58582473.18
A bipartisan bill to appropriate funds for CSR payments was introduced in the Senate, but the future of that bill is uncertain. Further, each chamber of Congress has put forth multiple bills designed to repeal or repeal and replace portions of the ACA. Although none of these measures have been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the ACA. Congress will likely consider other legislation to replace elements of the ACA, during the next Congressional session. Decoy will continue to evaluate the effect that the ACA and its possible repeal and replacement could have on its business.
In August 2022, the Inflation Reduction Act of 2022 was signed into law and requires the federal government to negotiate prices for some high-cost drugs covered under Medicare, requires drug manufacturers to pay rebates to Medicare if they increase prices faster than inflation for drugs used by Medicare beneficiaries, and caps Medicare beneficiaries’ out-of-pocket spending under the Medicare Part D benefit. Decoy will monitor this issue to determine the effects of this legislation on its business.
Human Capital Resources
As of December 31, 2024, Decoy had a total of eight full time employees. Decoy also utilizes the services of similarly sized team of contractors with whom it has on-going multi-year relationships, and a three-person scientific advisory board consisting of academic clinicians that can be considered key opinion leaders in the therapeutic areas in which Decoy plans to operate.
Decoy’s human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating its existing and new employees, advisors and consultants. The principal purposes of Decoy’s equity and cash incentive plans are to attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards, to increase stockholder value and the success of Decoy by motivating such individuals to perform to the best of their abilities and achieve Decoy’s objectives.
Properties
Decoy’s corporate headquarters are located at One Broadway, 14th Floor, Cambridge MA 02142. Decoy leases laboratory space at the JLABs NYC, 101 6th Ave 3rd floor, New York, NY 10013. Decoy does not own any physical property, plant or labs. The combined company intends to maintain Salarius’ headquarters in Houston, Texas.
Legal Proceedings
Decoy is not currently a party to any legal proceedings that, in the opinion of its management, are likely to have a material adverse effect on its business. Regardless of the outcome, litigation can have an adverse impact on Decoy because of defense and settlement costs, diversion of management resources and other factors.
History
Decoy was incorporated in the State of Delaware on April 17, 2020. Decoy is also registered to conduct business in Massachusetts and New York.
In addition, Decoy has a wholly-owned Canadian subsidiary, Decoy Drug Discovery Canada, Inc. which was incorporated on July 8, 2021. Decoy Drug Discovery Canada’s primary activities have been related to
69
58582473.18
sponsored research activities at the University of Toronto and The University of Waterloo. Decoy may conduct additional Canadian sponsored research and business activities in the future.
RISK FACTORS
In addition to the risk factors and uncertainties relating to Salarius that are included herein and incorporated by reference herein, in connection with Salarius’ proposed merger with Decoy you should consider the following additional risks and uncertainties that could affect the post-merger combined company and materially affect the combined company’s business, results of operations or financial condition and cause the value of Salarius’ securities to decline. If any of these risks occur, Salarius’ business, financial condition, results of operations, and future prospects would likely be materially and adversely affected. In these circumstances, the market price of Salarius’ common stock and value of Salarius’ other securities would likely decline and you may lose all or part of your investment. Share information set forth in these risk factors is as of the dates set forth herein or therein and unless otherwise indicated, does not give effect to the issuance of the securities in connection with this offering.
Risks Related to the Merger
The Merger may be completed even though certain events occur prior to the Closing that materially and adversely affect Salarius or Decoy.
The Merger Agreement provides that either Salarius or Decoy can refuse to complete the merger if there is a material adverse change affecting the other party between January 10, 2025, the date of the Merger Agreement, and the Closing. However, certain types of changes do not permit either party to refuse to complete the Merger, even if such change could be said to have a material adverse effect on Salarius or Decoy, including:
•general business or economic conditions affecting the industry in which Salarius or Decoy or their subsidiaries, as applicable, operate,
•acts of war, armed hostilities or terrorism, acts of God or comparable events, epidemic, pandemic or disease outbreak (including the COVID-19 virus) or any worsening of the foregoing, or any declaration of martial law, quarantine or similar directive, policy or guidance or law or other action by any governmental body in response thereto,
•changes in financial, banking or securities markets,
•any change in, or any compliance with or action taken for the purpose of complying with, any law or GAAP (or interpretations of any law or GAAP),
•changes resulting from the announcement of the Merger Agreement or the pendency of the transactions contemplated by the Merger Agreement; or
•changes resulting from the taking of any action required to be taken under the Merger Agreement.
If adverse changes occur and Salarius and Decoy still complete the Merger, the market price of the combined company’s common stock may suffer. This in turn may reduce the value of the Merger to the stockholders of Salarius or Decoy.
The Qualified Financing may not be satisfied.
70
58582473.18
One of the conditions to the obligations of the Company under the Merger Agreement is that on or immediately prior to the Closing, the Company consummate the Qualified Financing whereby the Company receives gross proceeds of no less than $6,000,000. No assurance can be given that all of the conditions to the consummation of the Qualified Financing condition will be satisfied, or that we will be able to satisfy the Qualified Financing condition. If the Qualified Financing is not consummated, and if we are not otherwise willing to waive the Qualified Financing condition, the parties will not be able to consummate the Merger. Failure to satisfy the Qualified Financing condition would leave the Company with minimal balance sheet cash and there would continue to be substantial doubt regarding our ability to continue as a going concern.
The Exchange Ratio set forth in the Merger Agreement is adjustable based on the Parent Cash Amount and the Company Cash Amount, each of which will be impacted by, among other things, unexpected expenses that could be experienced by Salarius or Decoy during the pre-closing period, which could result in Salarius Stockholders owning significantly less of the combined company than currently estimated.
The Exchange Ratio formula in the Merger Agreement is subject to adjustment based on the Parent Cash Amount and Company Cash Amount (each as defined in the Merger Agreement) on the anticipated Closing Date. For example, if the Parent Cash Amount is $0 and the Company Cash Amount is $2.0 million, stockholders of Salarius would own approximately 14.1% of the fully diluted common stock, and stockholders of Decoy would own, or hold rights to acquire, approximately 85.9% of Salarius common stock, in each case calculated on a fully-diluted basis for in-the-money options and warrants (and in each case, prior to taking into account any dilution from the Qualified Financing). The calculation of the Exchange Ratio under the Merger Agreement and post-closing ownership of Salarius Stockholders are subject to adjustment based on an assumed value of Salarius at Closing based on the Parent Cash Amount and Company Cash Amount as of the anticipated Closing Date. To the extent the Parent Cash Amount falls below $0, Salarius’ assumed value would be reduced or increased by $100,000 for every $100,000 below the threshold. To the extent the Company Cash Amount falls below $2.0 million, Decoy’s assumed value would be reduced by $100,000 for every $100,00 below the threshold.
Based on Salarius’ current estimates, Salarius anticipates delivering a Parent Cash Amount of approximately $0; however, the final Parent Cash Amount will not be calculated until the anticipated Closing Date, and may vary significantly depending on, among other things, Salarius’ ability to control and correctly estimate its operating expenses, and if the amount is significantly less, Salarius stockholders would experience additional dilution, subject to a floor of 10% of the combined company, regardless of the Parent Cash Amount on the anticipated Closing Date. Further, these ownership percentages do not give effect to the shares of Salarius common stock that will be issued to investors in the Qualified Financing prior to the Closing, and do not account for any additional shares of Salarius common stock that may be issued to investors following the Effective Time. As a result, stockholders of Salarius and/or Decoy could own less of the combined company than currently contemplated.
Stockholders of the combined company may not realize a benefit from the Merger commensurate with the ownership dilution they will experience in connection with the Merger and the Qualified Financing.
If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Merger, Salarius Stockholders and Decoy Stockholders will have experienced substantial dilution of their ownership interests in their respective companies. The Qualified Financing may cause substantial dilution to Salarius and Decoy stockholders which may result in such stockholders not receiving any commensurate benefit, or only
71
58582473.18
receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Qualified Financing.
The historical unaudited pro forma condensed combined financial information may not be representative of the combined company’s results after the Merger.
The historical unaudited pro forma condensed combined financial information included elsewhere in this Report has been presented for informational purposes only and is not necessarily indicative of the financial position or results of operations that actually would have occurred had the Merger been completed as of the date indicated, nor is it indicative of future operating results or financial position.
During the pendency of the Merger, Salarius and Decoy may not be able to enter into a business combination with another party at a favorable price because of restrictions in the Merger Agreement, which could adversely affect their respective businesses.
Covenants in the Merger Agreement impede the ability of Salarius and Decoy to make acquisitions, subject to certain exceptions relating to fiduciary duties, as set forth below, or to complete other transactions that are not in the ordinary course of business pending completion of the Merger. As a result, if the Merger is not completed, the parties may be at a disadvantage to their competitors during such period. In addition, while the Merger Agreement is in effect, each party is generally prohibited from soliciting, initiating, encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets, or other business combination outside the ordinary course of business with any third party, subject to certain exceptions relating to fiduciary duties. Any such transactions could be favorable to such party’s stockholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Merger Agreement.
The terms of the Merger Agreement prohibit each of Salarius and Decoy from soliciting alternative takeover proposals or cooperating with persons making unsolicited takeover proposals, except in limited circumstances when such party’s board of directors determines in good faith that an unsolicited alternative takeover proposal is or is reasonably likely to lead to a superior takeover proposal and that failure to cooperate with the proponent of the proposal would be reasonably likely to be inconsistent with the applicable board’s fiduciary duties. Any such transactions could be favorable to such party’s stockholders. In addition, if Salarius terminates the Merger Agreement under certain circumstances, including terminating because of a decision of Salarius to enter into definitive agreement with respect to a superior offer, Salarius would be required to pay a termination fee of $300,000 to Decoy. This termination fee described above may discourage third parties from submitting alternative takeover proposals to Salarius Stockholders.
Pursuant to the terms of the Merger Agreement, we are required to recommend that our stockholders approve the conversion of all outstanding shares of our Series A Preferred Stock into shares of our Common Stock. We cannot guarantee that our stockholders will approve this matter, and if they fail to do so our operations may be materially harmed.
Under the terms of the Merger Agreement, we agreed following the consummation of the Merger to use reasonable best efforts to call and hold a meeting of Salarius stockholders to obtain the requisite approval for the conversion of all outstanding shares of Series A Preferred Stock issued in the Merger into shares of Salarius Common Stock, as
72
58582473.18
required by the Nasdaq listing rules, as soon as practicable after the Closing of the Merger and, if such approval is not obtained at that meeting, to seek to obtain such approval at an annual or special stockholders meeting to be held at least every four months thereafter until such approval is obtained, which would be time-consuming and costly and could significantly negatively affect our projected cash position.
Because the lack of a public market for Decoy’s capital stock makes it difficult to evaluate the value of Decoy’s capital stock, the stockholders of Decoy may receive shares of Salarius common stock in the Merger that have a value that greater than the fair market value of Decoy’s capital stock.
The outstanding capital stock of Decoy is privately held and is not traded in any public market. The lack of a public market makes it extremely difficult to determine the fair market value of Decoy. Because the percentage of Salarius common stock to be issued to Decoy’s stockholders was determined based on negotiations between the parties, it is possible that Salarius may pay more than the aggregate fair market value for Decoy.
The combined company may become involved in securities class action litigation that could divert management’s attention and harm the combined company’s business and insurance coverage may not be sufficient to cover all costs and damages.
In the past, securities class action or shareholder derivative litigation often follows certain significant business transactions, such as the sale of a business division or announcement of a merger. The combined company may become involved in this type of litigation in the future. Litigation is often expensive and diverts management’s attention and resources, which could adversely affect the combined organization’s business.
The Merger Agreement between us and Decoy may be terminated in accordance with its terms and the Merger may not be completed.
The Merger Agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include, among other things: (i) the lack of a Material Adverse Effect on the respective businesses of Salarius and Decoy; (ii) the continued listing of our Common Stock on Nasdaq through the closing; (iii) the absence of any order, injunction, decree or other legal restraint preventing the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement or making the completion of the Merger or any of the other transactions contemplated by the Merger Agreement illegal; and (iv) the accuracy of the respective parties’ representations and warranties contained in the Merger Agreement (subject to certain customary qualifications) and compliance by Salarius and Decoy with its respective agreements and covenants contained in the Merger Agreement.
These conditions to the closing may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may not be completed. In addition, the parties can mutually decide to terminate the Merger Agreement at any time, or we or Decoy may elect to terminate the Merger Agreement in certain other circumstances.
We may not be able to effect the Merger pursuant to the Merger Agreement, and failure to complete the Merger could negatively impact our stock price and the future business and financial results of the Company.
In connection with the Merger Agreement, we have incurred substantial costs planning and negotiating the transaction. These costs include, but are not limited to, costs associated with employing and retaining third-party advisors who performed the financial, auditing, and legal services required before we were able to enter into the
73
58582473.18
Merger Agreement and which will continue as we seek to complete the transaction. If, for whatever reason, including those set forth above, the transactions contemplated by the Merger Agreement fail to close, we will be responsible for these costs, which could adversely affect our liquidity and financial results. In addition, our stock price may decline significantly if the Merger is not completed.
The market price of Salarius’ common stock following the merger may decline as a result of the Merger.
The market price of Salarius’ common stock may decline as a result of the Merger for a number of reasons, including if:
• | investors react negatively to the prospects of the combined company’s product candidates, business and financial condition following the Merger; | ||||
• | the effect of the Merger on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or | ||||
• | the combined company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial or industry analysts. | ||||
Salarius and Decoy securityholders will have a reduced ownership and voting interest in, and will exercise less influence over the management of, the combined company following the Closing as compared to their current ownership and voting interest in the respective companies.
If the proposed merger is completed, the current securityholders of Salarius and Decoy will own a smaller percentage of the combined company than their ownership in their respective companies prior to the merger. Accordingly, the issuance of shares of Salarius common stock to Decoy’s stockholders in the merger will reduce significantly the relative voting power of each share of Salarius common stock held by its current stockholders and will reduce the relative voting power of each share of Decoy common stock held by its current stockholders. Consequently, Salarius’ stockholders as a group and Decoy’s stockholders as a group will have less influence over the management and policies of the combined company after the merger than prior to the merger.
Consequently, securityholders of both Salarius and Decoy will be able to exercise less influence over the management and policies of the combined company following the Closing than they currently exercise over the management and policies of their respective companies.
The combined company will need to raise additional capital by issuing securities or debt or through licensing or other strategic arrangements, which may cause dilution to the combined company’s stockholders or restrict the combined company's operations or impact its proprietary rights.
The combined company may be required to raise additional funds sooner than currently planned. If either or both of Salarius or Decoy hold less cash at the time of the Closing than the parties currently expect, the combined company will need to raise additional capital sooner than expected. Additional financing may not be available to the combined company when it needs it or may not be available on favorable terms. To the extent that the combined company raises additional capital by issuing equity securities, such an issuance may cause significant dilution to the combined company’s stockholders’ ownership and the terms of any new equity securities may have preferences over the combined company’s common stock. Any debt financing the combined company enters into may involve covenants that restrict its operations. These restrictive covenants may include limitations on additional borrowing and specific
74
58582473.18
restrictions on the use of the combined company’s assets, as well as prohibitions on its ability to create liens, pay dividends, redeem its stock or make investments. In addition, if the combined company raises additional funds through licensing, partnering or other strategic arrangements, it may be necessary to relinquish rights to some of the combined company’s technologies or product candidates and proprietary rights, or grant licenses on terms that are not favorable to the combined company.
Furthermore, provisions in the agreements for the Qualified Financing may deter or prevent the combined company from raising additional capital to fund the company as and when needed. Restrictive covenants and other provisions in the Qualified Financing documents could deter or prevent the combined company from raising additional capital as and when needed. The combined company’s failure to raise capital as and when needed would have a negative effect on its financial condition and its ability to develop and commercialize its pipeline and otherwise pursue the combined company’s business strategy and the combined company may be unable to continue as a going concern.
Risks Related to Salarius
Risks Related to Salarius’ Financial Position and Capital Needs
If the merger is not completed, Salarius may not be able to otherwise source adequate liquidity to fund its operations, meet its obligations, and continue as a going concern. Salarius’ board of directors may decide to pursue a dissolution and liquidation of Salarius. In such an event, there can be no assurances as to the amount or timing of available cash left, if any, to distribute to its stockholders after paying its debts and other obligations and setting aside funds for reserves.
While Salarius has entered into the Merger Agreement with Decoy, the Closing may be delayed or may not occur at all and there can be no assurance that the Merger will deliver the anticipated benefits Salarius expects or enhance stockholder value. If the merger is not completed and the Merger Agreement is terminated under certain circumstances, Salarius may be required to pay Decoy a termination fee of $300,000. Even if a termination fee is not payable in connection with a termination of the Merger Agreement, Salarius will have incurred significant fees and expenses, which must be paid whether or not the Merger is completed.
Salarius does not currently have adequate financial resources to fund its forecasted operating costs for at least twelve months from the filing of this report. As of September 30, 2024, Salarius’ cash and cash equivalents totaled $3.3 million, which were held in bank deposit accounts and a money market account. As of September 30, 2024, Salarius has incurred an accumulated deficit of $80.5 million. For the nine months ended September 30, 2024, Salarius reported net losses of $4.1 million. As a result, Salarius believes its existing cash resources are sufficient to meet its anticipated needs into the first half of 2025. If for any reason the Merger does not close, Salarius would need to raise additional capital to continue to fund the further development of its product candidates and its operations thereafter. Salarius has based its cash sufficiency estimates on its current business plan and its assumptions may prove to be wrong. Salarius could utilize its available capital resources sooner than it currently expects, and it could need additional funding sooner than currently anticipated. Additionally, the process of advancing early stage product candidates and testing product candidates in clinical trials is costly, and the timing of progress in these clinical trials is uncertain. Even if Salarius raises sufficient funds and decides to continue the development of its product candidates, its ability to successfully transition to profitability will be dependent upon achieving a level of product sales adequate to support its cost structure. Salarius cannot assure you that it will ever be profitable or generate positive cash flow from operating activities.
Failure to secure any necessary financing in a timely manner and on favorable terms or the failure of the proposed Merger to be consummated in a timely manner would require Salarius to further delay or abandon clinical development plans. If, for any reason, the Merger does not close, the Salarius board of directors may elect to, among other things, attempt to complete another strategic transaction like the Merger, attempt to sell or otherwise dispose of the various assets of Salarius, resume its research and development activities and continue to operate the business of Salarius. Any of these alternatives would be costly and time-consuming and would require that Salarius obtain
75
58582473.18
additional funding. Salarius expects that it would be difficult to secure financing in a timely manner, on favorable terms or at all. Salarius can make no assurances that it would be able to obtain additional financing or find a partner and close an alternative transaction on terms that are as favorable or more favorable than the terms set forth in the Merger Agreement or that any such alternatives are possible or would be successful, if pursued. To the extent that Salarius seeks and is able to raise additional capital through the sale of equity or convertible debt securities, Salarius’ stockholders’ ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect their rights as a common stockholder. Debt financing or preferred equity financing, if available, may involve agreements that include covenants limiting or restricting Salarius’ ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If Salarius raises funds through strategic transactions or marketing, distribution, or licensing arrangements with third parties, Salarius may have to relinquish valuable rights to its technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to it. Even if Salarius is able to pursue such alternatives, the failure to complete the Merger may result in negative publicity and/or a negative impression of Salarius in the investment community, could significantly harm the market price of Salarius common stock and may affect Salarius’ relationship with employees and other partners in the business community.
If the Salarius board of directors were to decide to dissolve and liquidate Salarius’ assets, Salarius would be required to pay all of its debts and contractual obligations, and to set aside certain reserves for potential future claims, and there can be no assurances as to the amount or timing of available cash left, if any, to distribute to stockholders after paying its debts and other obligations and setting aside funds for reserves. In addition, Salarius may be subject to litigation or other claims related to a dissolution and liquidation. If a dissolution and liquidation were pursued, the Salarius board of directors, in consultation with its advisors, would need to evaluate these matters and make a determination about a reasonable amount to reserve. Accordingly, Salarius’ stockholders would likely lose all or a significant portion of their investment in the event of a liquidation, dissolution or winding up of Salarius.
Salarius does not believe that its current expenses are indicative of the costs it may incur in the future in connection with the development and commercialization of any product candidate if it consummates the Merger or raises additional capital to continue its operations. Salarius’ future funding requirements will depend on many factors, including:
•its ability to consummate the Merger with Decoy;
•the scope, rate of progress and cost of its preclinical and clinical trials for any product candidate in its future pipeline and results of future clinical trials;
•the cost and timing of regulatory filings and approvals for any product candidates that successfully complete clinical trials;
•the timing and nature of any strategic transactions that Salarius undertakes, including potential partnerships;
•the effect of competing technological and market developments;
•the cost incurred in responding to actions by activist stockholders; and
•the cost of filing, prosecuting, defending and enforcing its intellectual property rights.
In addition, the amounts available under Salarius’ shelf registration statement on Form S-3 will be significantly limited as long as Salarius’ public float remains below $75 million, which, given its currently depressed stock price, limits its ability to obtain meaningful funding through a shelf registration statement at this time, although Salarius could still raise funds through a registration statement on Form S-1 or through private placements.
As such, there is uncertainty regarding Salarius’ ability to maintain liquidity sufficient to operate its business effectively, which raises substantial doubt about its ability to continue as a going concern.
Salarius’ common stock may be subject to delisting from Nasdaq.
Salarius’ common stock is currently listed on the Nasdaq Capital Market, or Nasdaq. To maintain its listing on Nasdaq, Salarius is required to maintain: (i) a minimum bid price of $1.00 per share; (ii) a market value of publicly
76
58582473.18
held securities of $1 million; (iii) a certain number of round lot stockholders; and (iv) one of the following: a net income from continuing operations (in the latest fiscal year or two of the three last fiscal years) of at least $500,000, a market value of listed securities of at least $35 million or a stockholders’ equity of at least $2.5 million (the “Stockholders’ Equity Requirement”). Nasdaq has the authority to delist Salarius’ common stock if Salarius fails to maintain these minimum requirements. In addition, Nasdaq may delist Salarius if, based on Nasdaq’s review of Salarius’ operations and pursuant to Nasdaq Listing Rule 5101, Nasdaq believes that Salarius is a “public shell” and that the continued listing of its securities is no longer warranted. Salarius has no current plans to delist its shares of common stock from Nasdaq. However, following the decision to close the clinical development of seclidemstat for Ewing sarcoma, Salarius may be treated as a public shell under Nasdaq rules. Although Nasdaq evaluates whether a listed company is a public shell company based on a facts and circumstances determination, a Nasdaq-listed company with no or nominal operations and either no or nominal assets, assets consisting solely of cash and cash equivalents, or assets consisting of any amount of cash and cash equivalents and nominal other assets is generally considered to be a public shell company. Listed companies determined to be public shell companies by Nasdaq may be subject to delisting proceedings or additional and more stringent listing criteria.
On August 9, 2024, Salarius reported in its Quarterly Report on Form 10-Q that for the three months ended June 30, 2024, its stockholders’ equity was approximately $2.3 million. As further disclosed in that Quarterly Report on Form 10-Q, subsequent to June 30, 2024, Salarius sold 564,730 shares of its common stock for gross proceeds of approximately $1.5 million pursuant to that certain At the Market Offering Agreement, dated as of February 5, 2021, with Ladenburg Thalmann & Co. Inc. (the “ATM Financing Transaction”). On August 13, 2024, Salarius reported via Current Report on Form 8-K that Salarius regained compliance with the Stockholders’ Equity Requirement after giving effect to the ATM Financing Transaction. Notwithstanding the foregoing, Nasdaq will continue to monitor Salarius’ ongoing compliance with the Stockholders’ Equity Requirement and, if at the time of the next periodic report Salarius does not evidence compliance, Salarius’ common stock may be subject to delisting.
Salarius is actively monitoring the market value of its publicly held securities and its stockholders’ equity and will consider any and all options available to it to maintain compliance. There can be no assurance, however, that Salarius will be able to maintain compliance and meet Nasdaq’s continued listing requirements.
If Salarius’ common stock is delisted from Nasdaq, whether because Nasdaq determines Salarius is a “public shell” or Salarius fails to maintain compliance with the continued listed requirements, or otherwise, Salarius’ securities may qualify for trading over-the-counter (“OTC”), in the United States on a market colloquially referred to as the “Pink Sheets.” Securities quoted on OTC are generally subject to lesser requirements than securities listed for trading on a U.S. national stock exchange, such as Nasdaq, including reduced corporate governance and public reporting standards. If Nasdaq should delist Salarius’ common stock from trading, a reduction in some or all of the following may occur, each of which could have a material adverse effect on holders of Salarius’ common stock: the liquidity of the common stock; the market price of the common stock; the number of institutional and general investors that will consider investing in the common stock; the number of investors in general that will consider investing in the common stock; the number of market makers in the common stock; the availability of information concerning the trading prices and volume of the common stock; and the number of broker-dealers willing to execute trades in the common stock. In addition to the foregoing, there are certain consequences under the Securities Act of being a public shell company, including the unavailability of Rule 144 thereunder for the resale of restricted securities and the inability to utilize Form S-8 for the registration of employee benefit plan securities.
Salarius is substantially dependent on its remaining employees and consultants to facilitate the consummation of the merger.
As of January 10, 2025, Salarius had only two full-time employees and one consultant acting as Salarius’ Chief Executive Officer. Salarius’ ability to successfully complete the Merger depends in large part on its ability to retain certain remaining personnel. Despite Salarius’ efforts to retain these employees, one or more may terminate their employment or consulting arrangement with Salarius on short notice. The loss of the services of certain employees could potentially harm Salarius’ ability to consummate the Merger, to run its day-to-day business operations, as well as to fulfill its reporting obligations as a public company.
77
58582473.18
The pendency of the Merger could have an adverse effect on the trading price of Salarius’ common stock and its business, financial condition and prospects.
The pendency of the Merger could disrupt Salarius’ business in many ways, including:
•the attention of its remaining management and employees may be directed toward the completion of the Merger and related matters and may be diverted from Salarius’ day-to-day business operations; and
•third parties may seek to terminate or renegotiate their relationships with Salarius as a result of the Merger, whether pursuant to the terms of their existing agreements with Salarius or otherwise.
Should they occur, any of these matters could adversely affect the trading price of Salarius’ common stock or harm its business, financial condition and prospects.
Risks Related to Decoy’s Business
Decoy’s financial condition raises substantial doubt regarding its ability to continue as a going concern.
Decoy’s consolidated financial statements have been prepared assuming that Decoy will continue to operate as a going concern, which contemplates the realization of assets, and the satisfaction of liabilities and commitments in the ordinary course of business. Based on Decoy’s current operations and operating plans, however, Decoy believes that its existing cash and cash equivalents will not be sufficient to fund Decoy’s operating expenses and capital expenditure requirements for the next 12 months. Included in Decoy’s anticipated future capital needs will be capital for advancing Decoy’s research and development activities including Decoy’s goal to begin a Phase 1 clinical trial for DCOY-101 potentially in the first half of 2026. As a result, Decoy has determined that there is substantial doubt regarding Decoy’s ability to continue as a going concern, and Decoy’s independent registered public accounting firm has included in its audit opinion for the year ended December 31, 2023, an explanatory paragraph about such substantial doubt regarding Decoy’s ability to continue as a going concern.
The substantial doubt regarding Decoy’s ability to continue as a going concern may adversely affect Decoy’s stock price and its ability to raise capital necessary to execute Decoy’s current operating plans. If Decoy is unable to obtain additional capital, it may not be able to continue its operations on the scope or scale as currently conducted, and Decoy could be forced to cease operations, in which case stockholders of the combined company could lose all or most of their investment.
Decoy has never generated revenue from product sales and all of Decoy’s product candidates are currently in the preclinical stage, and Decoy may continue to incur significant losses for the foreseeable future and never generate revenue from product sales.
Decoy is a preclinical biopharmaceutical discovery and development company. Decoy plans to bring certain product candidates into the early stages of clinical development beginning in the first half of 2026, however its ability to do so will depend on factors beyond Decoy’s control, including its ability to raise capital and to effectively navigate the regulatory requirements, particularly those imposed by the United States Food and Drug Administration (the “FDA”) which are described elsewhere in these Risk Factors and in this Report. Because of the need to proceed to and complete clinical trials, establish safety and efficacy and obtain regulatory approval, which is an expensive and time-consuming process, Decoy does not anticipate generating revenue from product sales for at least several years and will continue to sustain considerable losses during that time. Decoy may develop a partnership that could generate income sooner, but there is no guarantee that will be achievable.
Because Decoy has yet to generate revenue from product sales on which to evaluate its potential for future success and to determine if Decoy will be able to execute its business plan, it is difficult to evaluate Decoys’ prospects and the likelihood of success or failure of its business.
78
58582473.18
Decoy’s ability to generate revenue from product sales and achieve profitability depends on its ability, alone or with partners, to successfully complete the development of, obtain the regulatory approvals for and commercialize pharmaceutical product candidates. Decoy has no pharmaceutical product candidates that have proceed to clinical trials or generated any commercial revenue, does not expect to generate revenues from the commercial sale of pharmaceutical products for foreseeable future, and may never generate revenues from the sale of pharmaceutical products. Decoy’s ability to generate revenue and achieve profitability will depend on, among other things, the following:
•identifying and validating new therapeutic strategies;
•entering into and maintaining collaborations and relationships with large pharmaceutical or biotechnology companies;
•completing its research and preclinical development of pharmaceutical product candidates;
•initiating and completing clinical trials for pharmaceutical product candidates;
•seeking and obtaining regulatory marketing approvals for pharmaceutical product candidates that successfully complete clinical trials;
•establishing and maintaining supply and manufacturing relationships with third parties;
•launching and commercializing pharmaceutical product candidates for which Decoy obtains regulatory marketing approval with a partner or, if launched independently, successfully establishing a sales force, marketing and distribution infrastructure;
•maintaining, protecting, enforcing, defending and expanding its intellectual property portfolio; and
•attracting, hiring and retaining qualified personnel.
Because of the numerous risks and uncertainties associated with pharmaceutical product development, Decoy cannot predict the timing or amount of increased expenses and when it will be able to achieve or maintain profitability, if ever. Decoy’s expenses could increase beyond expectations if it is required by regulatory agencies to perform additional unanticipated studies and trials.
Even if one or more pharmaceutical product candidates Decoy independently develops is approved for commercial sale, Decoy anticipates incurring significant costs associated with commercializing any approved pharmaceutical product candidate. Moreover, even if Decoy can generate revenues from the sale of any approved pharmaceutical products, Decoy may not become profitable and may need to obtain additional funding to continue operations.
Because early-stage drug development requires major capital investment, as Decoy continues to incur operating losses, it will need to raise additional capital or form strategic partnerships to support its research and development activities in the future.
Decoy is still in the early stages of development of its product candidates, and has no products approved for commercial sale or presently in clinical trials. Decoy’s ability to proceed to and conduct clinical trials in a cost-effective manner and within the desired timeframes remains subject to uncertainties including the potential for supply chain shortages and difficulties in obtaining adequate participant enrollments which are common challenges faced in conducting clinical trials. Further, developing pharmaceutical products, including conducting preclinical studies and clinical trials, is capital-intensive. As a rule, research and development expenses increase substantially as product candidates are advanced toward clinical programs. If Decoy is able to advance its products to and through clinical trials, it may need to raise additional capital to support its operations and/or form partnerships, in addition to its existing collaborative alliances, which may give substantial rights to a partner. Such funding or partnerships may not be available to Decoy on acceptable terms, or at all. Moreover, any future financing may be very dilutive to Decoy’s existing stockholders.
As Decoy moves lead compounds through toxicology and other preclinical studies, also referred to as nonclinical studies, it has and will be required to file an investigational new drug (“IND”) or its equivalent in foreign countries, and as it conducts clinical development of product candidates, it may have adverse results that may cause Decoy to
79
58582473.18
consume additional capital. Decoy’s partners may not elect to pursue the development and commercialization of Decoy’s product candidates subject to Decoy’s respective agreements with them. These events may increase Decoy’s development costs more than it expects. Decoy may need to raise additional capital or otherwise obtain funding through strategic alliances if it initiates clinical trials for new product candidates other than programs currently partnered. Decoy will require additional capital to obtain regulatory approval for, and to commercialize, product candidates.
In securing additional financing, such additional fundraising efforts may divert Decoy’s management’s attention from its day-to-day activities, which may adversely affect its ability to develop and commercialize product candidates. Decoy cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to Decoy, if at all. If Decoy cannot raise additional capital when required or on acceptable terms, it may be required to:
•accept terms that restrict its ability to issue securities, incur indebtedness, or otherwise raise capital in the future, or restrict its ability to pay dividends or engage in acquisitions;
•significantly delay, scale back or discontinue the development or commercialization of any product candidates;
•seek strategic alliances for research and development programs at an earlier stage than otherwise would be desirable or on terms less favorable than might otherwise be available; or
•relinquish or license on unfavorable terms, its rights to technologies or any product candidates Decoy otherwise would seek to develop or commercialize itself.
If Decoy is unable to raise additional capital in sufficient amounts or on terms acceptable to Decoy, it will be prevented from pursuing development and commercialization efforts, which will have a material adverse effect on its business, operating results and prospects or may render Decoy unable to continue operations.
Risks Related to the Discovery, Development and Commercialization of Product Candidates by Decoy
If any strategic alliances on which Decoy depends are unsuccessful or are terminated, Decoy may be unable to develop or commercialize certain product candidates and it may be unable to generate revenues from its development programs.
Decoy will likely need to use third-party alliance partners for financial, scientific, manufacturing, marketing and sales resources for the development and commercialization of its product candidates. Decoy also presently relies on a number of third party vendors for a variety of operational functions, including the provision of its technology infrastructure and other elements of its product candidate development programs as well as critical data storage and processing functions. These strategic alliances, if Decoy is able to enter into, foster and maintain them, will likely constrain its control over development and commercialization of its product candidates, especially once a candidate has reached the stage of clinical development. Decoy’s ability to recognize revenues from successful strategic alliances may be impaired by several factors including a partner shifting its priorities and resources away from Decoy, failing to perform under required standards or contractual terms, terminating the relationship with Decoy, entering into a dispute or litigation with Decoy or third parties or ceasing operations.
For example, Decoy relies and expects to continue to rely on third parties to conduct some aspects of its preclinical testing and on third-party contract research organizations (“CROs”) to conduct clinical trials. This reliance can materially delay Decoy’s research and developments efforts, and increase the costs of undertaking them. Further, any disputes that may arise from Decoy’s arrangements with CROs or contract manufacturing organizations (“CMOs”) may result in additional unexpected expenses and force Decoy’s management to allocate their limited time to seeking a resolution to the problem, which could materially adversely affect Decoy’s operations.
Additionally, Decoy’s reliance on third-party manufacturers to develop products and its anticipated reliance on third-party manufacturers to produce products it may develop in the future entail risks to which Decoy would not be
80
58582473.18
subject if it supplied the materials needed to develop and manufacture its product candidates itself, including supply chain shortages, the inability to meet any product specifications and quality requirements consistently, a delay or inability to procure or expand sufficient manufacturing capacity, and a failure to comply with current Good Manufacturing Practices (“cGMP”) and similar foreign standards. These events could lead to clinical study delays or failure to obtain regulatory approval or impact Decoy’s ability to successfully commercialize future products. Some of these events could be the basis for regulatory actions, including injunction, recall, seizure or total or partial suspension of production.
Termination of or other adverse development with respect to a strategic alliance may require Decoy to seek out and establish alternative strategic alliances with third-party partners. This may not be possible, including due to restrictions under the terms of Decoy’s collaborations, or Decoy may not be able to do so on terms acceptable to Decoy. If Decoy fails to establish alternative strategic alliances with third-party partners on terms acceptable to Decoy, or at all, it may be required to limit the size or scope of one or more of its programs or decrease its expenditures and seek additional funding by other means. Such events would likely have a material adverse effect on Decoy’s results of operations and financial condition.
Since Decoy expects to rely on third parties to conduct, supervise and monitor any future clinical trials, if those third parties fail to perform in a satisfactory manner and one that meets applicable regulatory, scientific and safety requirements, it may materially harm Decoy’s business.
If and when Decoy is able to proceed to clinical trial for a product candidate, it will rely on CROs and clinical trial sites to ensure the proper and timely conduct of its clinical trials. Decoy anticipates that Decoy or its partners will have limited influence over their actual performance. Nevertheless, Decoy or its partners will be responsible for ensuring that each of its clinical trials is conducted in accordance with its protocol, and that all legal, regulatory and scientific standards are met. Decoy’s reliance on the CROs does not relieve Decoy of its regulatory responsibilities.
Decoy, its partners and its CROs must comply with current Good Clinical Practices (“cGCPs”), as defined by the FDA and the International Conference on Harmonization, for conducting, recording and reporting the results of IND-enabling preclinical studies and clinical trials, to ensure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of clinical trial participants are protected. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal investigators, and clinical trial sites. If Decoy or its CROs fail to comply with cGCPs, the clinical data generated in Decoy’s clinical trials may be deemed unreliable and the FDA or other regulators may require Decoy to perform additional clinical trials before approving any marketing applications. Decoy’s clinical trials will require a sufficiently large number of test subjects to evaluate the safety and effectiveness of a product candidate. If Decoy’s CROs fail to comply with these regulations or fail to recruit a sufficient number of patients, fail to recruit properly qualified patients or fail to properly record or maintain patient data, Decoy may be required to repeat such clinical trials, which would delay the regulatory approval process.
Decoy’s contracted CROs will not be Decoy’s employees, and Decoy cannot control whether they devote sufficient time and resources to Decoy’s clinical and nonclinical programs. These CROs may also have relationships with other commercial entities, including Decoy’s competitors, for whom they may also be conducting clinical trials, or other drug development activities that could harm Decoy’s competitive position. If Decoy’s CROs do not successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is compromised due to failing to adhere to Decoy’s clinical protocols or regulatory requirements, or for any other reasons, Decoy’s clinical trials may be extended, delayed or terminated, and Decoy may not obtain regulatory approval for, or successfully commercialize its product candidates. Decoy’s financial results and the commercial prospects for such products and any product candidates it develops would be harmed, its costs could increase, and its ability to generate revenues could be delayed.
Decoy also expects to rely on other third parties to store and distribute drug products for any clinical trials it may conduct. Any performance failure by Decoy’s distributors could delay clinical development or marketing approval of its product candidates or commercialization of its products, if approved, producing additional losses and depriving Decoy of potential product revenue.
81
58582473.18
Because the approach Decoy is taking to discover and develop drugs is novel, it may never lead to marketable products.
Decoy is concentrating its therapeutic product research and development efforts on using its proprietary technology, and Decoy’s future success depends on the continued successful development of this technology and the products derived from it. Decoy has never commercialized any products. The scientific discoveries that form the basis for Decoy’s efforts to discover and develop drug product candidates are relatively new and unproven. The scientific evidence to support the feasibility of developing product candidates based on Decoy’s approach is limited. If Decoy does not successfully develop and commercialize drug product candidates based upon its technological approach, it may not become profitable and the value of its stock may decline.
Further, Decoy’s approach to drug development involves the use of artificial intelligence (“AI”) and computing software to identify potential molecules for further research and development processes. The use of AI is relatively novel, and the underlying technology continues to experience substantial changes with the passage of time and as considerable resources continue to be deployed in the market. Decoy is therefore subject to unique risks and uncertainties based on its reliance on and involvement in AI for its operations, including the risk of regulatory developments that may adversely affect or hinder its ability to use this technology or expose Decoy to potential liability arising from such use, the risk that competitors develop or deploy similar or superior systems in their operations that give them an advantage over Decoy, and the risk that the third parties on which Decoy relies for its technology and infrastructure fail to perform as needed or fail to protect its rights, technology, data and interests. Further, Decoy relies on a relatively small number of third parties for services and infrastructure related to its technology, and any loss or diminishment of any of those relationships could significantly harm its business, and Decoy may be unable to find a suitable replacement for those functions in a reasonable amount of time, on favorable terms or at all.
If Decoy does not succeed in its efforts to identify or discover additional potential product candidates, investments in Decoy or the combined company may be lost.
The success of Decoy’s business depends primarily upon its ability to identify, develop and commercialize drug products, an extremely risky business. Decoy’s research programs may initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for several reasons, including:
•Decoy’s research methodology or that of its partners may be unsuccessful in identifying potential product candidates;
•potential product candidates may have harmful side effects or may have other characteristics that make the products unmarketable or unlikely to receive marketing approval; and
•Decoy or its partners may change their development profiles for potential product candidates or abandon a therapeutic area.
Such events may force Decoy to abandon its development efforts for a program or programs, which would have a material adverse effect on its business and could cause Decoy to cease operations. Research programs to identify new product candidates require substantial technical, financial, and human resources. Decoy may focus its efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful.
Because Decoy’s future commercial success depends on gaining regulatory approval for its products, Decoy cannot generate revenue without obtaining approvals.
Decoy’s long-term success and generation of revenue will depend upon the successful development of new products from its research and development activities, including those licensed or acquired from third parties. Product development is very expensive and involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. For example, the FDA indicates that
82
58582473.18
approximately 70% of drugs proceed past Phase 1 studies, 33% proceed past Phase 2, and just 25%-30% proceed past Phase 3 to Phase 4 which is the final phase in the FDA review and approval process for marketing therapeutic product candidates. The process for obtaining regulatory approval to market product candidates is expensive, usually takes many years, and can vary substantially based on the type, complexity, and novelty of the product candidates involved. Decoy’s ability to generate revenue would be adversely affected if Decoy is delayed or unable to successfully develop its products.
Decoy may also pursue and deploy substantial resources and time towards seeking accelerated or limited approval processes that it may be deemed to not qualify for or may otherwise not be granted, in which case those efforts and resources will have been lost, and a delay or inability to obtain the approval for the applicable product candidate may result.
Decoy cannot guarantee that any marketing application for its product candidates will be approved. If Decoy does not obtain regulatory approval of its products or Decoy is significantly delayed or limited in doing so, Decoy cannot generate revenue, and it may need to significantly curtail operations.
If Decoy is unable to successfully complete preclinical testing and clinical trials of its product candidates or experience significant delays in doing so, its business will be materially harmed.
Decoy has invested and intends to continue to invest a significant portion of its efforts and financial resources in the identification and preclinical development of product candidates that target select diseases, including viral diseases and colon cancer. Decoy’s ability to generate product revenues, which it does not expect will occur for many years, if ever, will depend heavily on the successful development and eventual commercialization of its product candidates.
The commercial success of Decoy’s product candidates will depend on several factors, including:
•successful completion of preclinical studies and clinical trials;
•receipt of marketing and pricing approvals from regulatory authorities;
•obtaining and maintaining patent and trade secret protection for product candidates;
•establishing and maintaining manufacturing relationships with third parties or establishing Decoy’s own manufacturing capability; and
•commercializing Decoy’s products, if and when approved, whether alone or in collaboration with others.
If Decoy does not achieve one or more of these factors in a timely manner or at all, it could experience significant delays or an inability to successfully complete development of, or to successfully commercialize, its product candidates, which would materially harm its business. Pharmaceutical products that do overcome the low probability of success of drug development and achieve commercialization often do not recoup their cost of capital. If Decoy is unable to design and develop each drug to meet a commercial need far in the future, the approved drug may become a commercial failure and Decoy’s investment in those development and commercialization efforts will have been commercially unsuccessful.
Decoy may be unable to demonstrate safety and efficacy of its product candidates to the satisfaction of regulatory authorities or it may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of its product candidates.
Before obtaining marketing approval from regulatory authorities for the sale of product candidates, Decoy or its partners must conduct extensive preclinical studies and clinical trials to demonstrate the safety and efficacy of the product candidates in humans. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not predict final results. Moreover, preclinical, and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates
83
58582473.18
performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval for their products.
Events that may cause a delay or unsuccessful completion of clinical development include, among other things:
•delays in agreeing with the FDA or other regulatory authorities on final clinical trial design;
•imposition of a clinical hold following an inspection of a clinical trial operations or trial sites by the FDA or other regulatory authorities;
•delays in agreeing on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
•delays in obtaining required institutional review board approval at each clinical trial site;
•delays in recruiting suitable patients to participate in a trial;
•delays in the testing, validation, manufacturing and delivery of the product candidates to the clinical sites;
•delays in having patients complete participation in a trial or return for post-treatment follow-up;
•delays caused by patients dropping out of a trial due to product side effects or disease progression;
•clinical sites dropping out of a trial to the detriment of enrollment;
•negative or inconclusive results of clinical trials of product candidates;
•time and expenses required to add new clinical sites; or
•delays by contract manufacturers in producing and delivering sufficient supply of clinical trial materials.
If Decoy or its partners must conduct additional clinical trials or other testing of any product candidates beyond those that are contemplated, or are unable to successfully complete clinical trials or other testing of any of its product candidates, or if the results of these trials or tests are not positive or are only modestly positive or if there are safety concerns, Decoy or its partners may be subject to delays in or restriction from obtaining marketing approval for its product candidates, negative labeling and marketing requirements, additional post-marketing testing requirements, or actions by regulatory agencies to remove the product from a target market after obtaining marketing approval.
Decoy’s product development costs will also increase if Decoy experiences delays in testing or in obtaining marketing approvals. Decoy does not know whether any clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Significant clinical trial delays also could shorten any periods during which Decoy may have the exclusive right to commercialize its product candidates or allow its competitors to bring products to market before Decoy does, which would impair its ability to successfully commercialize its product candidates and may harm its business and results of operations. Any inability to successfully complete preclinical and clinical development, whether independently or with Decoy’s partners, could cause additional costs to Decoy or impair its ability to generate revenues from its product candidates, including product sales, milestone payments, profit sharing or royalties.
Decoy’s product candidates may cause adverse effects or have other properties that could delay or prevent their regulatory approval or limit the scope of any approved label or market acceptance.
Adverse events (“AEs”) or serious adverse events (“SAEs”), that may be observed during clinical trials of Decoy’s product candidates could cause Decoy, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt such trials and could cause denial of regulatory approval. If AEs or SAEs are observed in any clinical trials of Decoy’s product candidates, including those Decoy’s partners may develop under alliance agreements, Decoy or its partners’ ability to obtain regulatory approval for product candidates may be negatively impacted.
Serious or unexpected side effects caused by an approved product could result in significant negative consequences, including the following:
84
58582473.18
•regulatory authorities may withdraw prior approval of the product or impose restrictions on its distribution in the form of a modified risk evaluation and mitigation strategy (“REMS”) which may restrict the manner in which the product can be distributed or administered;
•Decoy may be required to add labeling statements, such as warnings or contraindications;
•Decoy may be required to change the way the product is administered or conduct additional clinical trials;
•Decoy may decide or be forced to temporarily or permanently remove the affected product from one or more target markets or from the marketplace in general;
•Decoy could be sued and held liable for harm caused to patients; and
•Decoy’s reputation may suffer.
These events could prevent Decoy or its partners from achieving or maintaining market acceptance of the affected product and could substantially increase the costs of commercializing Decoy’s products and impair its ability to generate revenues from the commercialization of these products either by Decoy or by its partners.
Following regulatory approval for a product candidate, Decoy will still face extensive regulatory requirements and the approved product may face future development and regulatory difficulties.
Even if Decoy obtains regulatory approval in the United States or elsewhere, the applicable regulators may still impose significant restrictions on the indicated uses or marketing of its product candidates or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance. The following discussion is based on United States law. Similar types of regulatory provision apply outside of the United States.
The holder of an approved new drug application (“NDA”) must monitor and report AEs and SAEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process. Advertising and promotional materials must comply with FDA rules and other applicable federal and state laws and are subject to FDA review.
Drug product manufacturers and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMPs, and adherence to commitments made in the NDA. If Decoy or a regulatory agency discovers previously unknown problems with a product such as AEs or SAEs of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product or the manufacturing facility, including requiring recall or withdrawal of the product from the market or suspension of manufacturing.
If Decoy or its partners fail to comply with regulatory requirements following approval of Decoy’s product candidates, a regulatory agency may:
•issue a warning letter asserting Decoy is in violation of the law;
•impose a REMS, or other restrictions on the manufacturing, marketing or use of the product;
•seek an injunction or impose civil or criminal penalties or monetary fines;
•suspend or withdraw regulatory approval;
•suspend any clinical trials Decoy may commence in the future;
•refuse to approve a pending NDA or supplements to an NDA submitted by Decoy;
•seize product; or
•refuse to allow Decoy to enter into supply contracts, including government contracts.
Decoy’s defense of any government investigation of alleged violations of law, or any lawsuit alleging such violations, could require decoy to expend significant time and resources and could generate negative publicity.
85
58582473.18
Further, the FDA’s and other regulatory authorities’ policies may change, and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of Decoy’s product candidates or increase the cost of compliance. The occurrence of any event or penalty described above may prevent or inhibit Decoy’s ability to commercialize its products and generate revenues.
Decoy may not succeed in obtaining or maintaining necessary rights to drug compounds and processes for its development pipeline through acquisitions and in-licenses.
Decoy may be unable to acquire or in-license any compositions, methods of use, processes, or other third-party intellectual property rights from third parties it identifies. The licensing and acquisition of third-party intellectual property rights is a competitive area, and more established companies are also pursuing strategies to license or acquire third-party intellectual property rights Decoy may consider attractive. These established companies may have a competitive advantage over Decoy due to their size, cash resources and greater clinical development and commercialization capabilities.
Companies that perceive Decoy to be a competitor may be unwilling to assign or license rights to Decoy. Decoy also may be unable to license or acquire third-party intellectual property rights on terms that would allow Decoy to make an appropriate return on its investment. If Decoy is unable to successfully obtain rights to required third-party intellectual property rights, its business, financial condition, and prospects for growth could suffer.
Decoy’s product development programs are in the preclinical stage and Decoy faces significant competition from major companies who have developed or are developing vaccines or treatments for the diseases Decoy is targeting, and if Decoy fails to gain market share because its competitors develop and successfully commercialize vaccines or treatments, its business and future prospects could be materially and adversely affected.
Decoy may be unable to develop or proceed with the onerous regulatory requirements for clinical programs necessary to produce an effective therapy in a timely manner or at all. Additionally, Decoy is committing substantial financial and other resources to its drug development programs, which may occur at the expense of other potential drug candidate programs Decoy could have otherwise and thereby negatively impact such other programs. Even if Decoy does obtain FDA authorization for a therapeutic product, the FDA may subsequently rescind or limit such authorization as more information about the product, including its efficacy and side effects, becomes available. Further, a virus Decoy targets, such as COVID-19 which is highly mutative and a number of variants have already arisen, will render any product candidates it develops subject to the risk that a mutation will occur that produces a strain or strains of the virus to which such treatment has a diminished effect or is ineffective. If Decoy does develop a treatment that is effective against a current version of a disease, a later variant may arise that reduces or eliminates the product’s efficacy before Decoy is able to commercialize it. Further, if this occurs, one or more competitors’ products may be more effective against new variants than Decoy’s, resulting in a diminished market for Decoy’s products. If Decoy is unable to timely advance its programs, or if Decoy fails to gain or maintain a market share as a result of its competitors developing and successfully commercializing effective vaccines and therapies more quickly than Decoy does, its business and future prospects could be materially and adversely affected.
Further, because third parties may be developing competitive products without Decoy’s knowledge, Decoy may later learn that competitive products are superior to its product candidates which may force Decoy to terminate its research efforts of one or more product candidates. If in the future, Decoy learns of the existence of one or more competitive products, Decoy may be required to cease its development efforts for a product candidate. Any of these events may occur after Decoy has spent substantial sums in connection with the clinical research of one or more product candidates.
Decoy has limited experience in conducting and managing the preclinical development activities and clinical trials necessary to obtain approvals for marketing its product candidates, including approval by the FDA.
Decoy’s efforts to develop its product candidates are limited to a small number of product candidates aimed at treating a small number of viral diseases and colon cancer. To date, Decoy has not advanced any product candidates to clinical trials, and it may be unable to progress its product candidates through the preclinical stage and into
86
58582473.18
clinical trials. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will succeed, and favorable initial results from a clinical trial do not determine outcomes in subsequent clinical trials. The indications of use for which Decoy is pursuing development may have clinical effectiveness endpoints not previously reviewed or validated by the FDA or foreign regulatory authorities, which may complicate or delay its effort to obtain marketing approval. Decoy cannot guarantee that it will be able to proceed to clinical trials or that any future clinical trials will succeed. In fact, most compounds fail in clinical trials, even at companies far larger and more experienced than Decoy. If any preclinical or clinical trials yield adverse results, it could delay the development of the product candidate, force Decoy to cease pursuing the product candidate, or render it impossible or impracticable to proceed towards commercialization.
Decoy has not obtained marketing approval or commercialized any of its product candidates. Decoy may not successfully design or implement clinical trials required for marketing approval to market its product candidates. If Decoy is unsuccessful in conducting and managing its preclinical development activities or clinical trials or obtaining marketing approvals, it might not be able to commercialize its product candidates, or might be significantly delayed in doing so, which will materially harm its business.
Risks Related to Decoy’s Operations and Industry
If Decoy cannot obtain or protect intellectual property rights related to its future products and product candidates, it may not be able to compete effectively in its markets.
Decoy relies upon a combination of patents, trade secret protection and confidentiality agreements to protect the intellectual property related to its future products and product candidates. The strength of patents in the biotechnology and pharmaceutical field involves complex legal and scientific questions and can be uncertain. The patent applications Decoy owns or in-license may fail to result in patents with claims that cover the products in the United States or in other countries. There is no assurance that all potentially relevant prior art relating to Decoy’s patents and patent applications has been found; such prior art can invalidate a patent or prevent issuance of a patent based on a pending patent application. Even if patents do successfully issue, third parties may challenge their validity, enforceability or scope, which may cause such patents to be narrowed or invalidated. Even if unchallenged, Decoy’s patents and patent applications may not adequately protect Decoy’s intellectual property or prevent others from designing around Decoy’s claims.
If the patent applications Decoy holds or has in-licensed regarding its programs or product candidates fail to issue or if their breadth or strength of protection is threatened, it could dissuade companies from collaborating with Decoy to develop product candidates, and threaten its ability to commercialize products. Patents may not issue and issued patents may be found invalid and unenforceable or challenged by third parties. Since patent applications in the United States and most other countries are confidential for a period after filing, and some remain so until issued, Decoy cannot be certain that it was the first to invent a patent application related to a product candidate. In certain situations, if Decoy and one or more third parties have filed patent applications in the United States and claiming the same subject matter, an administrative proceeding can be initiated to determine which applicant is entitled to the patent on that subject matter. Patents have a limited lifespan. In the United States, the natural expiration of a patent is 20 years after it is filed, although various extensions may be available. The life of a patent, and the protection it affords, is limited. When the patent life has expired for a product, Decoy will become vulnerable to competition from generic medications attempting to replicate that product. Further, if Decoy encounters delays in regulatory approvals, the time during which decoy will be able to market and commercialize a product candidate under patent protection could be reduced.
In addition to patent protection, Decoy relies on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable, processes for which patents are difficult to enforce and any other elements of its drug discovery and development processes that involve proprietary know-how, information or technology not covered by patents. Each of Decoy’s employees agrees to assign their inventions to Decoy through an employee inventions agreement. In addition, as a general practice, Decoy’s employees, consultants, advisors and any third parties who have access to Decoy’s proprietary know-how, information or technology enter into
87
58582473.18
confidentiality agreements. Nonetheless, Decoy’s trade secrets and other confidential proprietary information may be disclosed and competitors may otherwise gain access to Decoy’s trade secrets or independently develop substantially equivalent information and techniques.
The laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. Decoy may encounter significant problems in protecting and defending its intellectual property both in the United States and abroad. Further, governments may in the future alter intellectual property rights in a manner adverse to Decoy or to its third-party collaborators, including actions taken at the international level.
If Decoy is unable to prevent material disclosure of the non-patented intellectual property related to its technologies to third parties, and there is no guarantee Decoy will have any such enforceable trade secret protection, Decoy may not be able to establish or maintain a competitive advantage in its market, which could materially adversely affect its business, results of operations and financial condition.
If third-party intellectual property infringement claims are asserted against Decoy, it may prevent or delay Decoy’s development and commercialization efforts and have a material adverse effect on its business and future prospects.
Decoy’s commercial success depends in part on Decoy avoiding infringement on the patents and proprietary rights of third parties. There is substantial litigation, both within and outside the United States, involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interferences, oppositions, and reexaminations and other post-grant proceedings before the U.S. Patent and Trademark Office, and corresponding foreign patent offices. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist in the fields in which Decoy and its partners are pursuing product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that Decoy’s product candidates may be subject to claims of infringement of the patent rights of third parties.
Third parties may assert that Decoy is employing their proprietary technology or rights without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacture of Decoy’s product candidates. Because patent applications can take many years to issue, there may be patent applications currently pending that may later result in patents that Decoy’s product candidates may infringe upon. Third parties may obtain patents in the future and claim that use of Decoy’s technologies infringes on these patents. If any third-party patents were to be held by a court of competent jurisdiction to cover the manufacturing process of any of Decoy’s product candidates, any molecules formed during the manufacturing process or any final product itself, the holders of any such patents may be able to block Decoy’s ability to commercialize such product candidate unless Decoy obtained a license under the applicable patents, or until such patents expire. Similarly, if any third-party patents were to be held by a court of competent jurisdiction to cover aspects of Decoy’s formulations, processes for manufacture or methods of use, including combination therapy, the holders of any such patents may be able to block Decoy’s ability to develop and commercialize the applicable product candidate unless Decoy obtained a license or until such patent expires. In either case, such a license may not be available on commercially reasonable terms or at all.
Parties making intellectual property claims against Decoy may obtain injunctive or other equitable relief, which could block its ability to further develop and commercialize one or more of its product candidates. Defense of these claims, regardless of their merit, involves substantial litigation expense and diversion of Decoy’s management’s attention from its business. If a claim of infringement against Decoy succeeds, Decoy may have to pay substantial damages, possibly including treble damages and attorneys’ fees for willful infringement, pay royalties, redesign its infringing products or obtain one or more licenses from third parties, which may be impossible or require substantial time and monetary expenditure.
Because of the costs involved in defending patent litigation, Decoy may in the future lack the capital to defend its intellectual property rights.
88
58582473.18
Decoy may in the future be involved in lawsuits to protect or enforce its patents or the patents of its licensors, which could be expensive, time-consuming and unsuccessful.
Competitors may infringe on Decoy’s patents or the patents of its licensors. To counter such infringement or unauthorized use, Decoy may be required to file infringement claims, or it may be required to defend the validity or enforceability of such patents, which can be expensive and time-consuming. In an infringement proceeding, a court may decide that either one or more of Decoy’s patents or its licensors’ patents is not valid or is unenforceable or may refuse to stop the other party from using the technology at issue because Decoy’s patents do not cover that technology. An adverse result in any litigation or defense proceedings could put one or more of Decoy’s patents at risk of being invalidated or interpreted narrowly and could put its patent applications at risk of not being issued.
Interference proceedings provoked by third parties or brought by Decoy may be necessary to determine the priority of inventions regarding Decoy’s patents or patent applications or those of Decoy’s partners or licensors. An unfavorable outcome could require Decoy to cease using the related technology or to license rights to it from the prevailing party. Decoy’s business could be harmed if the prevailing party does not offer Decoy a license on commercially reasonable terms. Decoy’s defense or pursuit of litigation or interference proceedings may fail and, even if successful, may cause Decoy to incur substantial costs and distract the attention of its management and other employees. Decoy may not be able to prevent, alone or with its licensors, misappropriation of its intellectual property rights, particularly in countries where the laws may not protect those rights as fully as in the United States.
Because of the substantial amount of discovery required in intellectual property litigation, there is a risk that some of Decoy’s confidential information could be compromised by disclosure during this type of litigation. There could also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a material adverse effect on the price of Decoy’s common stock.
Decoy may need to obtain additional licenses to intellectual property rights from third parties.
Decoy may need to obtain additional licenses from third parties to advance its research or allow commercialization of its product candidates. Decoy may fail to obtain these licenses at a reasonable cost or on reasonable terms, if at all. In that event, Decoy would be unable to further develop and commercialize one or more of its product candidates, which could harm its business significantly. Decoy cannot provide any assurances that third-party patents do not exist that might be enforced against its products, resulting in either an injunction prohibiting its sales, or, with respect to its sales and other activities, an obligation on its part to pay royalties and/or other forms of compensation to third parties
The licensing and acquisition of third-party intellectual property rights is a competitive practice, and companies that may be more established, or have greater resources than Decoy does, may also be pursuing strategies to license or acquire third-party intellectual property rights that Decoy may consider necessary or attractive in order to develop and commercialize its product candidates. More established companies may have a competitive advantage over Decoy due to their larger size and cash resources or greater clinical development and commercialization capabilities. Decoy may not be able to successfully complete such negotiations and ultimately acquire the rights to the intellectual property surrounding product candidates that it may seek to acquire, in which case its business could be harmed.
Decoy may be subject to claims that its employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties.
Decoy employs individuals previously employed at other biotechnology or pharmaceutical companies. Decoy may be subject to claims asserting that Decoy or its employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of Decoy’s employees’ former employers or other third parties. Decoy may also be subject to claims that former employers or other third parties have an ownership interest in Decoy’s patents. Litigation may be necessary to defend against these claims. There is no guarantee of success in
89
58582473.18
defending these claims, and if Decoy succeeds, litigation could cause substantial cost and be a distraction to its management and other employees.
Because Decoy faces significant competition from other biotechnology and pharmaceutical companies, its operating results will suffer if it fails to compete effectively.
The biotechnology and pharmaceutical industries are intensely competitive. Decoy has competitors both in the United States and internationally, including major multinational pharmaceutical companies, biotechnology companies and universities and other research institutions. Decoy’s competitors have substantially greater financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations. This enables them, among other things, to make greater research and development investments and efficiently utilize their research and development costs. Additional mergers and acquisitions in the biotechnology and pharmaceutical industries may cause even more resources being concentrated in Decoy’s competitors. Additionally, smaller or early-stage companies of which Decoy may not be aware could also prove to be material competitors, particularly through collaborative arrangements with larger, more well-established companies or by competing with Decoy for limited resources and strategic alliances with Decoy’s current or prospective partners. Competition may increase further because of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Decoy’s competitors may develop, acquire or license drug products that are more effective or less costly than any product candidate Decoy may develop.
The programs Decoy is focusing on are in a preclinical stage and are targeted toward indications for which there are approved products on the market or product candidates in clinical development. Decoy will face competition from other drugs that are or will be approved for the same therapeutic indications. Decoy’s ability to compete successfully will depend largely on its ability to leverage its experience in drug discovery and development to discover and develop therapeutics superior to other products in the market, attract and retain qualified scientific, product development and commercial personnel, obtain and maintain patent and/or other proprietary protection for its technology platform and product candidates, obtain required regulatory approvals faster than competitors, and successfully collaborate with third parties with respect to these endeavors.
The availability of Decoy’s competitors’ products could limit the demand, and the price Decoy can charge, for any products it may develop and commercialize. Decoy will not achieve its business plan if the acceptance of its products is inhibited by price competition or the reluctance of physicians to switch from existing drug products to its products, or if physicians switch to other new drug products or reserve Decoy’s products for use in limited circumstances. Additionally, the biopharmaceutical industry is characterized by rapid technological and scientific change, and Decoy may not be able to adapt to these rapid changes to the extent necessary to keep up with competitors or at all. The inability to compete with existing or subsequently introduced drug products would have a material adverse impact on Decoy’s business, financial condition and prospects.
Established pharmaceutical companies may invest heavily to accelerate discovery and development of novel compounds or to in-license novel compounds that could make Decoy’s product candidates less competitive. Any new product that competes with an approved product must typically demonstrate advantages, such as in efficacy, convenience, tolerability or safety, to overcome price competition and to succeed. Decoy’s competitors may obtain patent protection, receive approval by FDA and/or foreign regulatory authorities or discover, develop and commercialize product candidates before Decoy does, which would have a material adverse impact on its business.
Decoy’s business could be negatively impacted by cybersecurity threats and other security threats and disruptions.
Because Decoy’s business relies on proprietary data and related technology and computer systems, it faces certain security threats, including threats to its information technology infrastructure, attempts to gain access to its proprietary or confidential information, threats to physical security, and domestic terrorism events. Decoy’s information technology networks and related systems are critical to the operation of its business and its research and development efforts. Decoy is also reliant on information technology systems operated by certain third parties, which generally face similar security threats and which third parties and their activities are beyond Decoy’s control.
90
58582473.18
Cybersecurity threats in particular, are persistent, evolve quickly and include, but are not limited to, computer viruses, attempts to access information, denial of service and other electronic security breaches. Decoy believes that it has implemented appropriate measures and controls and invested in skilled information technology resources to appropriately identify threats and mitigate potential risks, but there can be no assurance that such actions will be sufficient to prevent disruptions to critical systems, the unauthorized release of confidential information or corruption of data. A security breach or other significant disruption involving these types of information and information technology networks and related systems could:
•disrupt the proper functioning of these networks and systems and therefore its operations and/or those of third parties on which Decoy relies;
•result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of, Decoy’s proprietary, confidential, sensitive or otherwise valuable information, or that of third parties with which it collaborates or otherwise depends, which others could use to compete against Decoy or for disruptive, destructive or otherwise harmful purposes and outcomes;
•delay or compromise preclinical or clinical studies or the analysis and use of data collected in Decoy’s efforts to develop product candidates;
•require significant attention and resources of management and key personnel to remedy any damages or other adverse consequences that result;
•subject Decoy to claims for breach of contract, damages, credits, penalties or termination with respect to its relationships with third parties, or regulatory actions by governmental agencies; and
•damage Decoy’s reputation with industry participants, existing or prospective strategic alliances, and the public generally.
Certain of Decoy’s operations may have bearing on pandemic preparedness, national security and homeland defense, which increases the threat of cybersecurity attacks or incidents and the potential for losses, liability and other adverse consequences Decoy could incur or experience as a result. Companies are increasingly suffering damage from attacks by hackers and there is a general risk that adversaries in geopolitical conflicts such as those taking place in Ukraine and in the Middle East adopt widespread Internet hacking as a weapon, which hacking may ultimately affect Decoy. In the ordinary course of business, Decoy stores sensitive information, such as its intellectual property, including trade secrets and results of its research, and that of its suppliers and business partners, using online systems, and such information is sometimes transmitted via email correspondence. The secure maintenance and processing of this information is critical to Decoy’s research and development activities and future operations. Despite Decoy’s security measures, its information technology and infrastructure may be vulnerable to attacks by hackers or breaches due to employee error, malfeasance or other disruptions. Any such unauthorized access, disclosure, misappropriation or other loss of information could result in disruption of Decoy’s operations, including its existing and future research collaborations, and damage its reputation, which in its turn could harm its business and future results of operations. The data and software on which Decoy’s technology depends, as well as other information used in its operations, are trade secrets which are critical to its business, and any loss or unauthorized access or use thereof could materially harm its business.
Further, Decoy is or may become subject to data privacy laws and regulations that could be implicated in its operations, including due to the issues described above. The interpretation and application of consumer and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. Among other things, federal, state and foreign privacy laws impose significant obligations on U.S. companies to protect the personal information of foreign and domestic citizens. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with Decoy’s data practices, which could have a material adverse effect on its business. Complying with these various laws could cause Decoy to incur substantial costs or require Decoy to change its business practices in a manner adverse to its business.
Any of the foregoing events could have a material negative impact on Decoy’s business, financial condition and prospects.
91
58582473.18
Failure of Decoy’s information technology infrastructure to operate effectively could adversely affect its business.
Decoy depends on information technology infrastructure to pursue its business objectives and development efforts with respect to its product candidates. If a problem occurs that impairs this infrastructure, including as a result of an outage or malfunctioning of the hardware and software comprising or contributing to the information technology, the resulting disruption could impede Decoy’s ability to proceed with research objectives in a timely manner, or otherwise carry on business in the normal course. Any such events could cause Decoy to lose opportunities or progress with respect to product candidates or strategic alliances, and could require Decoy to incur significant expense to remediate.
The commercial success of Decoy’s product candidates will depend upon the acceptance of these product candidates by the medical community, including physicians, patients and healthcare payors.
Assuming one or more product candidates achieve regulatory approval and Decoy commences marketing such products, the market acceptance of any product candidates will depend on several factors, including:
•demonstration of clinical safety and efficacy compared to other products;
•the relative convenience, ease of administration and acceptance by physicians, patients and healthcare payors;
•the prevalence and severity of any adverse effects or serious adverse effects;
•limitations on marketing or warnings in the label approved by FDA and/or foreign regulatory authorities for such products;
•the timing of market introduction of Decoy’s products relative to competitive products and the availability of alternative treatments;
•pricing and cost-effectiveness;
•the execution and effectiveness of Decoy’s or any partners’ sales and marketing strategies;
•Decoy’s ability to obtain hospital formulary approval; and
•Decoy’s ability to obtain and maintain sufficient third-party payor coverage or reimbursement.
In addition, healthcare reform measures such as the Affordable Care Act and future government initiatives could have the effect of reducing prices for products Decoy seeks to commercialize in the future, thereby reducing its prospects for revenue and profitability with respect to any such products.
If Decoy obtains regulatory approval for one product candidate, it expects sales to generate substantially all of its product revenues, and as such, the failure of such product to find market acceptance would adversely affect Decoy’s results of operations.
Due to the change in the United States presidency, Decoy and its industry face uncertainty including the potential for adverse regulatory developments, which may adversely affect Decoy’s business.
Decoy and its industry face uncertainty in regard to the regulatory environment Decoy will face as it proceeds with research and development, and possibly in the future commercialization, efforts following the election of the Republican presidential administration in November 2024. While much of the Trump Administration’s proposed policies appear to be focused on deregulation, the new administration and federal government could adopt or further regulation or legislation that adversely affects Decoy or creates a more challenging or costly environment to pursue the development and sale of new therapeutic products. For example, because one major goal of the new administration will be to cut spending in the federal government, the FDA could as a result face staff reductions, which could result in delays or limitations on Decoy’s ability to proceed with clinical programs and obtaining the requisite regulatory approvals in the future. Decoy also relies on federal grants for a portion of the funding for its research and development programs, which may be reduced or more difficult to access. Alternatively, state
92
58582473.18
governments may attempt to address or react to changes at the federal level with changes to their own regulatory frameworks in a manner that is adverse to Decoy’s operations. Further, to the extent the federal government’s policies and regulatory framework operates to favor Decoy’s competitors, including larger pharmaceutical companies, more than Decoy in the future, it could limit Decoy’s ability to obtain approval for or obtain or maintain a market presence and commercialize products in the future. If Decoy or its partners become negatively impacted by future government laws or regulations due to the changes in the federal government as a result of the election, it could have a material adverse effect on Decoy and its operating results, in which case you could lose all or most of your investment.
If Decoy is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell its product candidates, Decoy may be unable to generate any revenues from product sales.
Decoy does not have a team with experience in the sales, marketing and distribution of pharmaceutical products and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. To market any products that may be approved, Decoy must build its sales, marketing, managerial and other non-technical capabilities or arrange with third parties to provide these services.
Decoy’s current and future partners may not dedicate sufficient resources to the commercialization of Decoy’s product candidates or may otherwise fail in their commercialization efforts due to factors beyond Decoy’s control. If Decoy is unable to establish effective alliances to enable the sale of its product candidates to healthcare professionals and in geographical regions, including the United States, that will not be covered by Decoy’s own marketing and sales force, or if Decoy’s potential future strategic partners do not successfully commercialize the product candidates, Decoy’s ability to generate revenues from product sales will be adversely affected.
If Decoy is unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, it may not be able to generate sufficient product revenue and may not become profitable. Decoy will be competing with many companies that have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third-party to perform marketing and sales functions, Decoy may be unable to compete successfully against these more established companies.
If Decoy obtains approval to commercialize any approved products outside of the United States, a variety of risks associated with international operations could materially adversely affect its business.
If any of Decoy’s product candidates are approved for commercialization, Decoy may enter into agreements with third parties to market them on a worldwide basis or in more limited geographical regions. Decoy expects its will be subject to additional risks related to entering into international business relationships, including:
•different regulatory requirements for drug approvals in foreign countries;
•reduced protection for intellectual property rights;
•unexpected changes in tariffs, trade barriers and regulatory requirements;
•economic weakness, including inflation, or political instability in foreign economies and markets;
•compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
•foreign taxes, including withholding of payroll taxes;
•foreign currency fluctuations, which could cause increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
•workforce uncertainty in countries where labor unrest is endemic;
•the impact of any war or hostilities such as those occurring in Ukraine and the Middle East;
•production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
•business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters including earthquakes, typhoons, floods and fires.
93
58582473.18
If Decoy loses key management or scientific personnel, cannot recruit qualified employees, directors, officers, or other personnel or experience increases in its compensation costs, its business may materially suffer.
Decoy depends on principal members of its executive and research teams; the loss of whose services may adversely impact the achievement of its objectives. Decoy is highly dependent on certain key personnel, particularly Frederick Pierce, its Chief Executive Officer, Peter Marschel, its Chief Business Officer, Barbara Hibner, its Chief Scientific Officer, and Michael Lipp, its Chief Technology Officer. If Decoy loses the services of any of these individuals, it may be unable to locate replacements capable of performing these roles effectively, and any such individual will require high compensation in a competitive market for experienced and qualified personnel within Decoy’s industry. Decoy does not carry “key-man” life insurance on any of its employees or advisors. Furthermore, Decoy’s future success will also depend in part on the continued service of its key scientific and management personnel and its ability to identify, hire, and retain additional personnel. Decoy may not be able to attract and retain personnel on acceptable terms, as there is significant competition among numerous pharmaceutical companies for individuals with similar skill sets. Because of this competition, Decoy’s compensation costs may increase significantly. If Decoy loses key employees, its business may suffer.
Any relationships with customers and third-party payors may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws and health information privacy and security laws. If Decoy is unable to comply, or have not fully complied, with such laws, it could face criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.
If Decoy obtains FDA approval for any of its product candidates and commercialize those products in the United States, its operations may be directly, or indirectly through its customers, subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute and the federal False Claims Act. These laws may impact, among other things, Decoy’s proposed sales, marketing and education programs. Decoy may be subject to patient privacy regulation by the federal government and by the U.S. states and foreign jurisdictions in which Decoy conducts its business. The laws that may affect Decoy’s ability to operate include:
•the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, either the referral of an individual, or the purchase or recommendation of an item or service for which payment may be made under a federal healthcare program, such as the Medicare and Medicaid programs;
•federal civil and criminal false claims laws and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent;
•the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
•HIPAA, as amended by the Health Information Technology and Clinical Health Act of 2009 (“HITECH”), and its implementing regulations, which imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information; and
•state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payer, including commercial insurers, and state and foreign laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
If Decoy’s operations are found to violate any of the laws described above or any other governmental regulations that apply to Decoy, Decoy may be subject to penalties, including, without limitation, civil and criminal penalties,
94
58582473.18
damages, fines, possible exclusion from Medicare, Medicaid and other government healthcare programs, and curtailment or restructuring of its operations, which could adversely affect its ability to operate its business and its results of operations.
Because Decoy will face potential product liability as it further develops product candidates and more so if it can commercialize any product candidate, if claims are brought against Decoy, it may incur substantial liability and costs.
Using Decoy’s product candidates in clinical trials and the sale of any products for which it obtains marketing approval will expose Decoy to the risk of product liability claims. Product liability claims might be brought against Decoy by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with Decoy’s products. These claims may allege that Decoy’s products caused harm to them and/or that any adverse side effects or outcomes were not adequately disclosed or labelled. If Decoy cannot successfully defend against product liability claims, it could incur substantial liability and costs. Regardless of merit or eventual outcome, product liability claims may cause:
•impairment of Decoy’s business reputation;
•withdrawal of clinical trial participants;
•costs due to related litigation;
•distraction of management’s attention from Decoy’s primary business;
•substantial monetary awards to patients or other claimants;
•regulatory scrutiny and product recalls, withdrawals or labeling, marketing or promotional restrictions;
•the inability to commercialize Decoy’s product candidates; and
•decreased demand for Decoy’s product candidates, if approved for commercial sale.
Insurance coverage is becoming increasingly expensive and Decoy may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect Decoy against losses due to liability. If and when Decoy obtains marketing approval for product candidates, Decoy intends to expand its insurance coverage to include the sale of commercial products; however, Decoy may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. Occasionally, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against Decoy could cause its stock price to decline and, if judgments exceed Decoy’s insurance coverage, could adversely affect its results of operations and business.
If Decoy fails to comply with applicable laws and regulations, including environmental, health and safety laws and regulations, it could become subject to fines or penalties or incur costs that could have a material adverse effect on its business.
Decoy is subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes, and the treatment of animals used in research. Decoy’s operations involve using hazardous and flammable materials, including chemicals and biological materials. Decoy’s operations also produce hazardous waste products. Decoy generally contracts with third parties for the disposal of these materials and wastes. Decoy cannot eliminate the risk of contamination or injury from these materials. If contamination occurs or injury results from Decoy’s use of hazardous materials, Decoy could be held liable for any resulting damages, and any liability could exceed its resources. Decoy also could incur significant costs associated with civil or criminal fines and penalties.
The Federal Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories, whose workers may be exposed to pathogens such as those Decoy aims to treat. These requirements, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens. In addition, the Needlestick Safety and
95
58582473.18
Prevention Act requires, among other things, that Decoy includes in its safety programs the evaluation and use of engineering controls such as safety needles if found to be effective at reducing the risk of needlestick injuries in the workplace.
Although Decoy’s workers’ compensation insurance may cover Decoy for costs and expenses, Decoy may incur additional costs due to injuries to its employees resulting from the use of hazardous materials or other work-related injuries, and this insurance may not provide adequate coverage against other potential liabilities. Decoy may incur substantial costs to comply with current or future environmental, health and safety laws and regulations. These current or future laws and regulations may impair Decoy’s research, development or production efforts. Failure to comply with these laws and regulations also may cause substantial fines, penalties or other sanctions.
Business interruptions resulting from pandemics, natural disasters and adverse weather events could cause delays in research and development of Decoy’s product candidates.
Decoy and third parties on which Decoy relies upon are vulnerable to natural disasters such as earthquakes, tornados, severe storms, hurricanes, tsunamis, and fires, as well as other events that could disrupt Decoy’s operations and cause delays in research and development of its product candidates. Decoy does not carry insurance for natural disasters or similar events, and it may not carry sufficient business interruption insurance to compensate for losses that may occur. Any losses or damages Decoy incurs could have a material adverse effect on its operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF DECOY
You should read the following discussion and analysis of financial condition and results of operations of Decoy Therapeutics, Inc. together with our financial statements and the related notes included elsewhere in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
In this sub-section titled “Management Discussion and Analysis of Financial Condition and Results of Operations of Decoy”, unless otherwise specified, references to “company”, “we”, “us” and “our” are references to Decoy only.
96
58582473.18
The following table sets forth our results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022:
General and Administrative Expenses
General and administrative expenses were approximately $1,065,000 and $1,025,000, in the year ended December 31, 2023 and 2022, respectively, representing an increase of $40,000, or 3.9%. The increase was primarily due to increases in employee compensation of $75,000, travel expenses of $31,000, office supplies of $17,000 and an increase of $45,000 in non-cash stock-based compensation expense, offset by a decrease in legal fees and professional services of $131,000.
Research and Development Expenses
Our research and development expenses during the year ended December 31, 2023 and 2022 were approximately $2,385,000 and $2,266,000, respectively, representing an increase of $119,000, or approximately 5.3%. The increase was primarily due to an increase in employee compensation of $626,000, offset by a decrease of $535,000 worth of expenditures on our development programs. The increase also included approximately $25,000 in non-cash stock-based compensation expense.
Other Expenses:
Grant Income
Our grant income during the year ended December 31, 2023 and 2022 were approximately $666,000 and $739,000, respectively, representing a decrease of $73,000, or approximately 9.9%. The decrease corresponds with the decrease in our research and development expenditures in the year ended December 31, 2023.
Fair Value adjustment to convertible notes payable
We determined our convertible notes issued to investors required liability treatment at fair value, which was remeasured at each reporting period. In the year ended December 31, 2023, we incurred a fair value gain of ($5.6) million related to the convertible notes. In the year ended December 31, 2022, we incurred a fair value gain of ($703,000) related to the convertible notes.
Warrant liability (income) expense
97
58582473.18
We determined our warrants issued to investors in our senior secured convertible promissory notes required liability treatment at fair value, which was remeasured at each reporting period. In the year ended December 31, 2023, we incurred a fair value income of $251,000 related to these warrants. In the year ended December 31, 2022, we incurred a fair value expense of ($108,000) related to these warrants.
Interest expense
We had interest expense of approximately $1.1 million and $331,000, in the year ended December 31, 2023 and December 31 2022, respectively, from our financings with convertible debt. The increase in interest expense in the year ending December 31, 2023 is the result of increased debt balances.
Summary Statement of Cash Flows – Year ended December 31, 2023 compared to Year ended December 31, 2022
As of December 31, 2023, we had approximately $4,156,000 in cash and cash equivalents. The table below presents our cash flows for the year ended December 31, 2023 and 2022:
Operating Activities
Net cash provided by (used in) operating activities was approximately $1,260,000 and ($2,708,000) for the year ended December 31, 2023 and 2022, respectively. The increase in net cash provided by operating activities in 2023 was primarily due to non-cash increase in fair value and interest expense related to our convertible notes, offset by an increase of deferred revenue from grants for the year ended December 31, 2023.
Investing Activities
Net cash used in investing activities in the year ended December 31, 2023 was approximately $9,000 and net cash used in investing activities in the year ended December 31, 2022 was approximately $158,000. The decrease in net cash used is due to a reduction of purchases in property, plant and equipment in 2023.
Financing Activities
Net cash provided by financing activities was approximately $1,281,000 for the year ended December 31, 2023. The net cash provided decreased due to the receipt of approximately $1,281,000 in net proceeds from the notes issued in 2023. Net cash provided by financing activities in the year ended December 31, 2022 was approximately $2,000,000, representing net proceeds of $2,250,000 from notes issued in 2022, offset by repayments of $250,000 in notes during the year ended December 31,2022.
Results of Operations – Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023
The following table sets forth our results of operations for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023:
98
58582473.18
General and Administrative Expenses
General and administrative expenses were approximately $872,000 and $711,000, in the nine months ended September 30, 2024 and 2023, respectively, representing an increase of $161,000, or approximately 22.6%. The increase was primarily due to increases in employee compensation of $10,000, bank and payroll fees of $28,000, office supplies of $26,000 and an increase of $88,000 in non-cash stock-based compensation expense.
Research and Development Expenses
Research and development expenses were approximately $1,925,000 and $1,662,000, in the nine months ended September 30, 2024 and 2023, respectively, representing an increase of $263,000, or approximately 15.8%. The increase was primarily due to an increase in employee compensation of $138,000, and approximately $130,000 in non-cash stock-based compensation expense.
Other (Income) and Expenses:
Grant Income
Our grant income during the nine months ended September 30, 2024 and 2023 were approximately $1,135,000 and $308,000, respectively, representing an increase of $827,000, or approximately 268.5%. The increase is a result of increased activity around the work being done on grant based projects during the nine months ending September 30, 2024.
Fair Value adjustment to convertible notes payable
We determined our convertible notes issued to investors required liability treatment at fair value, which was remeasured at each reporting period. In the nine months ended September 30, 2024, we incurred a fair value expense of $406,000 related to the convertible notes. nine months ended September 30, 2023, we incurred a fair value expense of $2.6 million related to the convertible notes.
99
58582473.18
Warrant liability (income) expense
We determined our warrants issued to investors in our senior secured convertible promissory notes required liability treatment at fair value, which was remeasured at each reporting period. In the nine months ended September 30, 2024, we incurred a fair value expense of $175,000 related to these warrants. There were no warrants issued in the nine months ended September 30, 2023.
Interest expense
We had interest expense of approximately $913,000 and $1.2 million, in the nine months ended September 30, 2024 and 2023, respectively, from our financings with convertible debt.
Liquidity and Capital Resources
We have incurred net losses every year since inception and had an accumulated deficit of approximately $18.3 million at September 30, 2024. We have a limited operating history and have historically funded our operations through debt and equity financings. We incurred net losses of approximately $3.3 million and negative cash flows from operations of $1.6 million for the nine months ended September 30, 2024. At September 30, 2024, we had cash and cash equivalent balances totaling $3.2 million. We have determined that we do not have sufficient resources to effect our business plan for at least one year from the issuance of the unaudited consolidated financial statements included in this Report. We are subject to risks common to development stage biopharmaceutical companies including, but not limited to, unanticipated development costs and the ability to estimate such occurrences, if any, on our cash, liquidity, additional financing requirements, and availability. Accordingly, we need to raise additional funds. We do not expect to generate revenue from product sales unless and until we successfully complete development and obtain marketing approval for one or more of our product candidates, which we expect will take a number of years and is subject to significant uncertainty. Additional financing will be required to complete the research and development of our therapeutic targets and our other operating requirements, which may not be available at acceptable terms, if at all. If we are unable to obtain additional funding when it becomes necessary, the development of our product candidates will be impacted and we would likely be forced to delay, reduce, or terminate some or all of our development programs, all of which could have a material adverse effect on our business, results of operations and financial condition.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of planned clinical trials and our expenditures on other research and development activities.
Future Funding Requirements
We will need to obtain further funding through public or private offerings of our capital stock, debt financing, collaboration and licensing arrangements or other sources, the requirements for which will depend on many factors, including:
•the scope, timing, rate of progress and costs of our drug development efforts, preclinical development activities, the timing of laboratory testing and clinical trials for our product candidates;
•the number and scope of clinical programs we decide to pursue;
•the cost, timing and outcome of preparing for and undergoing regulatory review of our product candidates;
•the scope and costs of development and commercial manufacturing activities;
•the cost and timing associated with commercializing our product candidates, if they receive marketing approval;
•the extent to which we acquire or in-license other product candidates and technologies;
100
58582473.18
•the costs of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending intellectual property-related claims;
•our ability to establish and maintain collaborations on favorable terms, if at all;
•our efforts to enhance operational systems and our ability to attract, hire and retain qualified personnel, including personnel to support the development of our product candidates and, ultimately, the sale of our products, following FDA approval;
•our implementation of operational, financial and management systems; and
Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of any future product candidate, or potentially discontinue operations.
To the extent that we raise additional capital through the sale of our equity or convertible debt securities, and pursuant to the exercise of the warrants issued to investors, the ownership interest of our equity holders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our equity holders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or proposed products, or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our drug development or future commercialization efforts or grant rights to develop and market any future product that we would otherwise prefer to develop and market ourselves.
Summary Statement of Cash Flows
As of September 30, 2024, we had approximately $3.2 million in cash and cash equivalents. The table below presents our cash flows for the nine month periods ended September 30, 2024 and 2023:
Operating Activities
Net cash (used in) provided by operating activities was approximately ($1,613,000) and $1,725,000 in the nine months ended September 30, 2024 and 2023, respectively. The decrease in the nine months ended September 30, 2024 was mostly due to decreases in decrease in deferred revenue and decreases in non-cash expense adjustments to fair value and interest expense related to our convertible notes.
101
58582473.18
Investing Activities
Net cash used in investing activities was approximately $0 and ($5,000) in the nine months ended September 30, 2024 and 2023, respectively, consisting of purchases in property, plant and equipment in the nine month period ended September 30, 2023.
Financing Activities
Net cash provided by financing activities was approximately $656,000 for the nine months ended September 30, 2024, consisting of the receipt of approximately $538,000 in net proceeds from notes and $118,000 in due to proceeds from officers on the Company. Net cash provided by financing activities was approximately $666,000 for the nine months ended September 30, 2023, consisting of the receipt of $666,000 in net proceeds from the issuance of notes.
DIRECTORS AND EXECUTIVE OFFICERS
Current Directors, Executives and Employees of Decoy
Currently Decoy’s executives include its co-founders, who are highly experienced senior scientists, clinicians, biotechnology and pharmaceutical executives, and a renowned professor of peptide chemistry from the Massachusetts Institute of Technology:
•Rick Pierce, Chief Executive Officer and Director, a serial biotech entrepreneur who has helped build a number of biotech companies over the last 25 years, including Javelin Pharmaceuticals, which was sold to Pfizer, which now markets its lead drug, Dyloject.
•Barbara Hibner Ph.D., Chief Scientific Officer and Director, 25+ years of experience in pharmacology and drug discovery and development in pharma and biotech companies resulting in contributions to 2 oncology drugs sorafenib and ixazomib.
•Peter Marschel, MS MBA, Chief Business Officer & Director with over fifteen years of experience in business development, financial and commercial roles and large pharma and biotech, including leading market analytics for the cystic fibrosis franchise at Vertex Pharmaceuticals.
•Michael Lipp, Ph.D. Chief Technology Officer with over two decades of experience in pharmaceutical development and drug delivery technologies ranging from the preclinical stage through commercial approval.
•Bradley L. Pentelute, Ph.D., Professor of Chemistry at MIT and co-founder, whose lab invented the world’s fastest peptide synthesizer and has advised large pharmaceutical and biotech companies on advancing their peptide drug discovery and manufacturing efforts.
•Shahin Gharakhanian, MD, SAB chair and acting-Chief Medical Officer, is a Physician-Executive with expertise in pharmaceutical medicine, leadership and management, and an international track record and former VP within the Medicines Development Group, Global R&D at Vertex Pharmaceuticals with 2 antiviral drugs taken successfully to commercialization.
Decoy currently has eight full time employees and seven dedicated consultants, responsible for preclinical, toxicology, clinical development, prescriber, payor, market access and pricing strategy, CMC, quality, and regulatory strategy and execution, finance strategy and business development. Decoy also has three highly engaged members of our Scientific Advisory Board: Dr. Mark Garnick has served as an FDA ODAC panel member for 15 years and is an expert in oncology, Dr. Daniel Kuritkes, Chief of Infectious Disease at Brigham and Women’s
102
58582473.18
Hospital, and Yonatan Grad, Epidemiologist and Professor of Immunology and Infectious Disease at Harvard T.H. Chan School of Public Health.
Decoy’s employees and advisors have significant industry experience and have been involved in the discovery, development, regulatory approvals and commercial launches of several successful drugs.
MANAGEMENT FOLLOWING THE MERGER
Management Following the Merger
The following table lists names, ages and positions of the individuals who are expected to serve as executive officers and directors of the combined company following completion of the merger. In addition to Mr. Pierce and Ms. Hibner, following stockholder approval of conversion of the preferred stock to be issued upon completion of the merger, additional non-employee directors will be designated by Decoy.
Name | Age | Position | ||||||||||||||||||
Executive Officers | ||||||||||||||||||||
Frederick E. Pierce | 63 | Chief Executive Officer and Director | ||||||||||||||||||
Mark Rosenblum | 71 | Chief Financial Officer | ||||||||||||||||||
Peter Marschel | 50 | Chief Business Officer | ||||||||||||||||||
Barbara Hibner | 63 | Chief Scientific Officer and Director | ||||||||||||||||||
The following presents biographical information for each of our executive officers in the table above.
Frederick E. Pierce. Mr. Pierce Frederick E. Pierce has been Decoy’s Chief Executive Officer and director since he co-founded it in 2020. From September 2022 until November 2024, Mr. Pierce served as an executive officer of Innovation1 Biotech, Inc., a drug discovery company. Mr. Pierce is also an Advisor to the Canadian Consulate of Boston/Cambridge’s Healthcare and Technology Accelerator and a Board member of the Canadian Entrepreneurs of New England, where he is Chairman of the Life Sciences Leadership Council. From 2017 through 2020, Mr. Pierce served as a Senior Advisor for Bionest Partners, a life sciences consulting company. Mr. Pierce is a serial biotech entrepreneur with over 20 years of increasing senior leadership and operating experience building successful biotech companies.
Mark J. Rosenblum. Mr. Rosenblum has served as Salarius’ Executive Vice President Finance and Chief Financial Officer since September 2019. Prior to September 2019, Mr. Rosenblum served as a financial consultant to Salarius since February 2019. Prior to joining Salarius, Mr. Rosenblum served as chairman, chief executive officer and a director of ActiveCare, Inc. (Nasdaq: ACAR), a healthcare company, from December 2017 to March 2019, which was sold to Biotelemetry, Inc. (now Royal Philips (NYSE: PHG). Mr. Rosenblum worked as a financial consultant for various companies from 2014 to 2017. Prior to that, Mr. Rosenblum served as the chief financial officer of Advaxis, Inc. (Nasdaq: ADXS), a biotechnology company, from January 2010 to April 2014. From 1985 through 2003, Mr. Rosenblum was employed by Wellman, Inc., a global public chemical manufacturer, which was subsequently acquired by DAK Americas, serving in various capacities including chief accounting officer. Mr. Rosenblum holds both a Masters in Accountancy and a B.S. degree in Accounting from the University of South Carolina. Mr. Rosenblum began his career in 1977 with Haskins & Sells, CPA (currently known as Deloitte), was a
103
58582473.18
licensed Certified Public Accountant for over 30 years, and is currently a member of the American Institute of Certified Public Accountants.
Peter Marschel. Mr. Marschel, MSA MBA has been Decoy’s Chief Business Officer and director since he co-founded it in 2020. Until April 2020 Mr. Marschel was co-founder and Chief Financial Officer of PercepTx, a targeted cancer immunotherapy accelerator focused on using computational modeling and quantitative pharmacology to rapidly increase the value of preclinical monoclonal antibody-based therapeutic assets. Prior to that he served in a range of business development, analytics, and commercial roles at Merck, Vertex Pharmaceuticals, and Takeda Pharmaceuticals, including leading market analytics for the cystic fibrosis franchise at Vertex Pharmaceuticals.
Barbara Hibner. Ms. Hibner, Ph.D has been Decoy’s Chief Scientific Officer, Director and Board Chair since she co-founded the company in 2020. From January 2017 to April 2020 Dr. Hibner was co-founder and Chief Executive Officer of PercepTx, a targeted cancer immunotherapy company focused on using computational modeling and quantitative pharmacology to discover and develop novel antibody drug conjugates. Prior to that she served in a range of scientific and managerial positions in discovery, pharmacology and research quality roles in Bayer Pharmacueticals, Chiron, Millennium and Takeda Pharmaceuticals. Dr. Hibner's work has contributed to the approval of two small molecule drugs, sorafenib and ixazomib.
Family Relationships
There are no family relationships among our directors or executive officers.
Related Party Transactions
As of December 31, 2024, Mr. Frederick (Rick) Pierce, an executive officer and founder of Decoy, had an outstanding Demand Note in the principal amount of $55,555, plus accrued interest of $9,002, which Decoy issued in June 2023 (the “Demand Note”). This Demand Note accrues interest at 10% and has a maturity date of December 28, 2024. The Demand Note is recorded as debt on the balance sheet, and interest expense is recognized accordingly.
During the second half of 2024, each of Rick Pierce, Barbara Hibner, Decoy’s Chief Scientific Officer, and Peter Marschel, Decoy’s Chief Business Officer, issued non-interest bearing notes in the amount of $51,873, $48,000, and $24,000, respectively.
DECOY SUMMARY COMPENSATION TABLE FOR 2024 AND 2023
The following information is related to the compensation earned in fiscal 2024 and 2023 by all Chief Executive Officers (principal executive officers) serving Decoy during the last fiscal year and the other most highly compensated executive officers serving at the end of the last fiscal year whose compensation exceeded $100,000.
Decoy Summary Compensation Table
104
58582473.18
Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||
| Frederick Pierce II | 2024 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
| Chief Executive Officer | 2023 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
| Peter Marschel | 2024 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
| Chief Business Officer | 2023 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
| Barbara Hibner | 2024 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
| Chief Scientific Officer | 2023 | 175,000 | - | - | - | - | 175,000 | |||||||||||||||||||
Narrative to Decoy Summary Compensation Table
Decoy’s executive officers are each paid an annual base salary of $175,000 under oral employment arrangements. Decoy anticipates entering into written employment agreements with its executive officers prior to or shortly after the closing of the Merger on terms commensurate with market for executives with their skills and positions. As part of these new agreements, Decoy anticipates each of its executive officers receiving a grant of stock options. As of December 31, 2024, each executive officer had stock options outstanding exercisable for 30,000 shares of Decoy common stock, at an exercise price of $0.833 per share. Such options will be assumed in the Merger and exchanged (in an amount based on the exchange ratio) for stock options to purchase Salarius shares.
POST-MERGER BENEFICIAL OWNERSHIP OF THE COMPANY’S COMMON STOCK
The following table provides information anticipated as of closing of the Merger, regarding beneficial ownership of 5% or more of our common stock by: (i) each person known to us who beneficially owns more than five percent of our common stock; (ii) each of the expected officers and directors of the combined company. The following table assumes (i) no adjustment to the exchange ratio based on Salarius or Decoy cash at closing, (ii) 3,333,333 shares of Salarius Common Stock will be issued in the Qualified Financing (based on the closing price of Salarius Common Stock on January 6, 2025) and (ii) conversion of the Salarius preferred stock to be issued at the closing into common stock at a ratio of 1:1,000.
We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options that are either immediately exercisable or exercisable within 60 days after the Closing. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares.
105
58582473.18
Name and Address | Beneficial Ownership | Percent of Class(1) | ||||||||||||||||||||||||
Stockholders of 5% or more(2) | - | - | ||||||||||||||||||||||||
Officers and Directors | ||||||||||||||||||||||||||
Frederick E. Pierce(3) | 760,495 | 6.4% | ||||||||||||||||||||||||
Barbara Hibner(4) | 760,495 | 6.4% | ||||||||||||||||||||||||
Peter Marschel(5) | 760,495 | 6.4% | ||||||||||||||||||||||||
Mark J. Rosenblum(6) | 5,098 | * | ||||||||||||||||||||||||
Tess Burleson(7) | 3,269 | * | ||||||||||||||||||||||||
Arnold C. Hanish(8) | 3,341 | * | ||||||||||||||||||||||||
Jonathan Lieber(9) | 3,246 | * | ||||||||||||||||||||||||
Paul Lammers(10) | 3,123 | * | ||||||||||||||||||||||||
Bruce J. McCreedy(11) | 3,131 | * | ||||||||||||||||||||||||
William K McVicar(12) | 3,308 | * | ||||||||||||||||||||||||
David J. Arthur(13) | 11,601 | * | ||||||||||||||||||||||||
All Directors and Officers as a group(14) | 2,317,602 | 19.4 | % | |||||||||||||||||||||||
* Represents beneficial ownership of less than 1%.
(1) Applicable percentage ownership is based on 11,870,060 shares of common stock outstanding including and assuming the full conversion of Decoy’s holders of convertible notes and assumed issuance of shares in the Qualified Financing. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of January 10, 2025 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) Salarius does not expect any individual stockholder to beneficially own more than 5.0% or more of the common stock of the combined company on a pro forma basis, as the Certificate of Designations for the Preferred Stock provides for a cap on conversion to the extent such conversion would result in beneficial ownership of over 4.99% of Salarius’ Common Stock.
(3) Represents (i) 685,590 shares of common stock and (ii) 74,905 shares of common stock subject to options that are exercisable within 60 days.
(4) Represents (i) 685,590 shares of common stock and (ii) 74,905 shares of common stock subject to options that are exercisable within 60 days.
(5) Represents (i) 685,590 shares of common stock and (ii) 74,905 shares of common stock subject to options that are exercisable within 60 days.
(6) Represents (i) 2,731 shares of common stock and (ii) 2,367 shares of common stock subject to options that are exercisable within 60 days.
(7) Represents (i) 340 shares of common stock, (ii) 2,908 shares of common stock subject to options that are exercisable within 60 days, and (iii) 21 warrants to purchase shares of common stock.
(8) Represents (i) 412 shares of common stock, (ii) 2,908 shares of common stock subject to options that are exercisable within 60 days, and (iii) 21 warrants to purchase shares of common stock.
(9) Represents (i) 368 shares of common stock and (ii) 2,878 shares of common stock subject to options that are exercisable within 60 days.
(10) Represents (i) 215 shares of common stock and (ii) 2,908 shares of common stock subject to options that are exercisable within 60 days.
(11) Represents (i) 180 shares of common stock, (ii) 2,908 shares of common stock subject to options that are exercisable within 60 days, and (iii) 43 warrants to purchase shares of common stock.
106
58582473.18
(12) Represents (i) 357 shares of common stock, (ii) 2,908 shares of common stock subject to options that are exercisable within 60 days, and (iii) 43 warrants to purchase shares of common stock.
(13) Represents (i) 6,142 shares of common stock, (ii) 5,449 shares of common stock subject to options that are exercisable within 60 days, and (iii) 10 warrants to purchase shares of common stock.
(14) Represents (i) 2,067,515 shares of common stock, (ii) 249,949 shares of common stock subject to options that are exercisable within 60 days, and (iii) 138 warrants to purchase shares of common stock.
Legal Matters of Decoy
Decoy is not currently a party to any legal proceedings that, in the opinion of Decoy’s management, are likely to have a material adverse effect on its business.
Description of Series A Preferred Stock
Preferred Stock
Salarius’ board of directors is authorized, subject to limitations prescribed by Delaware law, to issue Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each series and to fix the designation, powers, preferences and rights of the shares of each series and any of their qualifications, limitations or restrictions, in each case without further vote or action by our stockholders. Subject to the Certificate of Designation, our board of directors can also increase or decrease the number of shares of any series of Preferred Stock, but not below the number of shares of that series then outstanding, without any further vote or action by our stockholders. Our board of directors may authorize the issuance of Preferred Stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of our Common Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of our company and might adversely affect the market price of our Common Stock and the voting and other rights of the holders of our Common Stock. We have no current plan to issue any shares of Preferred Stock other than the shares of our Series A Preferred Stock to be issued to Decoy stockholders in connection with the Merger.
Series A Preferred Stock
Upon the filing of the Certificate of Designations, a form of which is attached as Exhibit 4.1 hereto and incorporated herein by reference, holders of Series A Preferred Stock will be entitled to receive dividends on shares of Series A Preferred Stock equal to, on an as-if-converted-to-common-stock basis, and in the same form as dividends actually paid on shares of our Common Stock. Except as provided in the Series A Certificate of Designation or as otherwise required by law, the Series A Preferred Stock does not have voting rights. However, as long as any shares of Series A Preferred Stock are outstanding, we will not, without the affirmative vote of the holders of a majority of the then outstanding shares of the Series A Preferred Stock: (a) alter or change adversely the powers, preferences or rights given to the Series A Preferred Stock, or alter or amend the Series A Certificate of Designation, amend or repeal any provision of, or add any provision to, our Certificate of Incorporation or its Bylaws, or file any articles of amendment, certificate of designations, preferences, limitations and relative rights of any series of Preferred Stock, if such action would adversely alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of the Series A Preferred Stock, regardless of whether any of the foregoing actions will be by means of amendment to the Certificate of Incorporation or by merger, consolidation, recapitalization, reclassification, conversion or otherwise, (b) issue further shares of Series A Preferred Stock or increase or decrease (other than by conversion) the number of authorized shares of Series A Preferred Stock, (c) authorize, create or issue classes or series of equity securities other than Junior Securities; (d) authorize, create and/
107
58582473.18
or issue any funded indebtedness (other than indebtedness already incurred); (e) sell or transfer, other than in the ordinary course of its business, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Corporation’s assets or (f) enter into any agreement with respect to any of the foregoing. The Series A Preferred Stock does not have a preference upon any liquidation, dissolution or winding-up of the Company.
Following stockholder approval of the Series A Conversion Proposal, each share of Series A Preferred Stock will be automatically converted into 1,000 shares of Common Stock, subject to certain limitations, including that no holder, together with its affiliates, may convert shares of Series A Preferred Stock in excess of 4.99% of the then issued and outstanding Common Stock after giving effect to the issuance of shares in connection with the conversion (the “Beneficial Ownership Limitation”), subject to the each holder’s right, upon 61 days prior written notice to the Company, to increase the Beneficial Ownership Limitation to 9.99%.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of Decoy for the years ended December 31, 2023 and 2022 are filed herewith as Exhibit 99.1, respectively, and are incorporated herein by reference.
The unaudited consolidated financial statements of Decoy for the nine months September 30, 2024 and September 30, 2023 are filed herewith as Exhibit 99.2, respectively, and are incorporated herein by reference.
The unaudited pro forma balance sheet as of September 30, 2024 and statement of operations of the Company and Decoy for the periods ended September 30, 2024 and December 31, 2023 and the notes thereto are filed herewith as Exhibit 99.3 hereto and are incorporated herein by reference.
108
58582473.18
| Item 9.01 Financial Statements and Exhibits. | ||||||||
(d) | Exhibits | |||||||
2.1^ | ||||||||
4.1 | ||||||||
10.1 | ||||||||
10.2 | ||||||||
10.3 | ||||||||
10.4 | ||||||||
23.1 | ||||||||
99.1 | ||||||||
99.2 | ||||||||
99.3 | ||||||||
99.4 | ||||||||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
^ | Certain identified information in the exhibit has been excluded from the exhibit because it is both (i) not material and (ii) would likely cause competitive harm to the Company if publicly disclosed. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. | |||||||
109
58582473.18
SIGNATURES
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 hereunto duly authorized.
| SALARIUS PHARMACEUTICALS, INC. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Date: January 13, 2025 | By: | /s/ Mark J. Rosenblum | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Mark J. Rosenblum Executive Vice President & Chief Financial Officer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
110
58582473.18
Exhibit 2.1
Agreement and Plan of Merger
by and among
Salarius Pharmaceuticals, Inc.,
a Delaware corporation;
Decoy Therapeutics MergerSub I, Inc.,
a Delaware corporation;
Decoy Therapeutics MergerSub II, LLC,
a Delaware limited liability company;
and
Decoy Therapeutics Inc.,
a Delaware corporation.
__________________________
Dated as of January 10, 2025
__________________________
__________________________
TABLE OF CONTENTS
Page
i
ii
iii
iv
v
vi
Schedules:
Company Disclosure Schedule
Parent Disclosure Schedule
Schedule 5.6
Exhibits:
Exhibit A—Definitions A-1
Exhibit B—Forms of Lock-Up Agreement B-1, B-2
Exhibit C—Form of Certificate of Designation C-1
Exhibit D—Forms of Support Agreement D-1, D-2
vii
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this “Agreement”) is made and entered into as of January 10, 2025, by and among: Salarius Pharmaceuticals, Inc., a Delaware corporation (“Parent”); Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and wholly owned subsidiary of Parent (“First Merger Sub”); Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and wholly owned subsidiary of Parent (“Second Merger Sub” and together with First Merger Sub, “Merger Subs”); and Decoy Therapeutics Inc., a Delaware corporation (the “Company”). Certain capitalized terms used in this Agreement are defined in Exhibit A.
Recitals
Whereas, Parent and the Company intend to effect a merger of First Merger Sub with and into the Company (the “First Merger”) in accordance with this Agreement and the DGCL. Upon consummation of the First Merger, First Merger Sub will cease to exist and the Company will become a wholly owned subsidiary of Parent;
Whereas, immediately following the First Merger and as part of the same overall transaction as the First Merger, the Company will merge with and into Second Merger Sub (the “Second Merger” and, together with the First Merger, the “Merger”), with Second Merger Sub being the surviving entity of the Second Merger;
Whereas, the Parties intend that, (i) the First Merger and the Second Merger, taken together, will constitute an integrated transaction described in Rev. Rul. 2001-46, 2001-2 C.B. 321 that qualifies as a “reorganization” within the meaning of Section 368(a) of the Code, and (ii) this Agreement will constitute, and is hereby adopted as, a plan of reorganization within the meaning of Treasury Regulations Sections 1.368-2(g) and 1.368-3(a);
Whereas, the Parent Board has (i) determined that the Contemplated Transactions are fair to, advisable and in the best interests of Parent and its stockholders, (ii) approved and declared advisable this Agreement and the Contemplated Transactions, including the issuance of the Parent Common Stock Payment Shares and the Parent Preferred Stock Payment Shares to the stockholders of the Company pursuant to the terms of this Agreement, and (iii) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the stockholders of the Parent vote to approve the Parent Stockholder Matters at the Parent Stockholders’ Meeting to be convened following the Closing;
Whereas, the First Merger Sub Board has (i) determined that the Contemplated Transactions are fair to, advisable, and in the best interests of First Merger Sub and its sole stockholder, (ii) approved and declared advisable this Agreement and the Contemplated Transactions and (iii) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the stockholder of First Merger Sub votes to adopt this Agreement and thereby approve the Contemplated Transactions;
Whereas, the sole member of the Second Merger Sub has (i) determined that the Contemplated Transactions are fair to, advisable, and in the best interests of Second Merger Sub and its sole member, (ii) approved and declared advisable this Agreement and the Contemplated Transactions and (iii)
1
determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the sole member of Second Merger Sub votes to adopt this Agreement and thereby approve the Contemplated Transactions;
Whereas, the Company Board has (i) determined that the Contemplated Transactions are fair to, advisable and in the best interests of the Company and its stockholders and (ii) approved and declared advisable this Agreement and the Contemplated Transactions and (the “Board Approval”);
Whereas, it is expected that no later than thirty (30) days following the date of this Agreement, the Company shall deliver the Company Stockholder Written Consent evidencing the Required Company Stockholder Vote;
Whereas, concurrently with the execution and delivery of this Agreement, and as a condition and inducement to Parent’s willingness to enter into this Agreement, the officers and directors of the Company listed in Section A of the Company Disclosure Schedule (solely in their capacity as stockholders of the Company) (the “Company Signatories”) are executing (a) support agreements in favor of Parent in substantially the form attached hereto as Exhibit D-1 (the “Company Stockholder Support Agreement”), pursuant to which the Company Signatories have, subject to the terms and conditions set forth therein, agreed to vote all of their shares of Company Common Stock in favor of the Company Stockholder Matters and against any proposals that compete with the Contemplated Transactions, and (b) lock-up agreements in substantially the form attached hereto as Exhibit B (the “Company Lock-Up Agreement”);
Whereas, concurrently with the execution and delivery of this Agreement and as a condition and inducement to the Company’s willingness to enter into this Agreement, the officers and directors of Parent listed in Section A of the Parent Disclosure Schedule (solely in their capacity as stockholders of Parent) (the “Parent Signatories”) are executing (a) support agreements in favor of Parent in substantially the form attached hereto as Exhibit D-2 (the “Parent Support Agreement”), pursuant to which the Parent Signatories have, subject to the terms and conditions set forth therein, agreed to vote all of their shares of Parent Common Stock in favor of the Parent Stockholder Matters and against any proposals that compete with the Contemplated Transactions, and (b) lock-up agreements in substantially the form attached hereto as Exhibit B (the “Parent Lock-Up Agreement”).
Whereas, following the execution and delivery of this Agreement, and as a condition to consummation of the transactions contemplated hereby, Parent will complete equity financing(s) in which Parent issues or sells shares of common stock or other securities convertible into common stock or units comprised of common stock or other securities convertible into common stock and warrants exercisable for shares of Parent Common Stock which equity financing results in gross proceeds to the Company of at least six million dollars ($6,000,000.00) (collectively, including for the avoidance of doubt, sales made under the Parent ATM Program and/or Parent ELOC, the “Qualified Financing”); and
Whereas, immediately following satisfaction of the closing conditions set forth in this Agreement, but prior to the filing of the Certificate of Merger, Parent will file the Certificate of Designation with the office of the Secretary of State of the State of Delaware.
2
Agreement
Now, Therefore, in consideration of the foregoing premises and the mutual agreements and covenants set forth herein, for other good and valuable consideration, the Parties to this Agreement, intending to be legally bound, hereby agree as follows:
1.DESCRIPTION OF TRANSACTION.
1.1The Merger. Upon the terms and subject to the conditions set forth in this Agreement, at the First Effective Time, First Merger Sub shall be merged with and into the Company, and the separate existence of First Merger Sub shall cease. As a result of the First Merger, the Company will continue as the surviving corporation in the First Merger (the “First Step Surviving Corporation”). Upon the terms and subject to the conditions set forth in this Agreement, at the Second Effective Time, the First Step Surviving Corporation will merge with and into Second Merger Sub, and the separate existence of the First Step Surviving Corporation shall cease. As a result of the Second Merger, Second Merger Sub will continue as the surviving entity in the Second Merger (the “Surviving Entity”).
1.2Effects of the Merger. At and after the First Effective Time, the First Merger shall have the effects set forth in this Agreement, the First Certificate of Merger and in the applicable provisions of the DGCL. As a result of the First Merger, the First Step Surviving Corporation will become a wholly owned subsidiary of Parent. At and after the Second Effective Time, the Second Merger shall have the effects set forth in this Agreement, the Second Certificate of Merger and in the applicable provisions of the DGCL and the DLLCA.
1.3The Closing; First Effective Time; Second Effective Time. The consummation of the Merger (the “Closing”) will be consummated remotely via the electronic exchange of documents and signatures as promptly as practicable (but in no event later than the third (3rd) Business Day following the satisfaction or waiver (to the extent permitted by applicable Law) of the last to be satisfied or waived of the conditions set forth in Sections 6, 7 and 8, other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of each of such conditions), or at such other time, date and place as Parent and the Company may mutually agree in writing. The date on which the Closing actually takes place is referred to as the “Closing Date.” At the Closing, (i) the Parties shall cause the First Merger to be consummated by executing and filing with the Secretary of State of the State of Delaware a certificate of merger with respect to the First Merger, satisfying the applicable requirements of the DGCL and in form and substance to be agreed upon by the Parties (the “First Certificate of Merger”) and (ii) the Parties shall cause the Second Merger to be consummated by executing and filing with the Secretary of State of the State of Delaware a certificate of merger with respect to the Second Merger, satisfying the applicable requirements of the DGCL and the DLLCA and in form and substance to be agreed upon by the Parties (the “Second Certificate of Merger” and together with the First Certificate of Merger, the “Certificates of Merger”). The First Merger shall become effective at the time of the filing of such First Certificate of Merger with the Secretary of State of the State of Delaware or at such later time as may be specified in such First Certificate of Merger with the consent of Parent and the Company (the time as of which the First Merger becomes effective being referred to as the “First Effective Time”). The Second Merger shall become effective at the time of the filing of such Second Certificate of Merger with the Secretary of State of the State of Delaware or at such later time as may be specified in such Second Certificate of Merger with the consent of Parent and the Company (the time as of which the Second Merger becomes effective being referred to as (the “Second Effective Time”).
3
1.4Certificate of Designation; Certificate of Incorporation and Bylaws; Directors and Officers.
(a)Prior to the First Effective Time, Parent will file the Certificate of Designation with the office of the Secretary of State of the State of Delaware.
(b)At the First Effective Time:
(i)the certificate of incorporation of the First Step Surviving Corporation shall be amended and restated as set forth in an exhibit to the First Certificate of Merger, until thereafter amended as provided by the DGCL and such certificate of incorporation;
(ii)the bylaws of the First Step Surviving Corporation shall be amended and restated in their entirety to read identically to the bylaws of the Company as in effect immediately prior to the First Effective Time, until thereafter amended as provided by the DGCL and such bylaws; and
(iii)the directors and officers of the First Step Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the First Step Surviving Corporation, shall be such Persons as shall be mutually agreed upon by Parent and the Company.
(c)At the Second Effective Time:
(i)the certificate of formation of the Surviving Entity shall be the certificate of formation of Second Merger Sub as in effect immediately prior to the Second Effective Time, until thereafter amended as provided by the DLLCA and such certificate of formation; provided, however, that at the Second Effective Time (as part of the Second Certificate of Merger), the certificate of formation shall be amended to comply with Section 5.7, and (C) make such other changes as are mutually agreed to by Parent and the Company;
(ii)the limited liability company agreement of the Surviving Entity shall be amended and restated in its entirety to read identically to the limited liability company agreement of Second Merger Sub as in effect immediately prior to the Second Effective Time, until thereafter amended as provided by the DLLCA and such limited liability company agreement; provided, however, that following the Second Effective Time (but as soon thereafter as practicable), the limited liability company agreement shall be amended to comply with Section 5.7;
(iii)the managers and officers of the Surviving Entity, each to hold office in accordance with the certificate of formation and limited liability company agreement of the Surviving Entity, shall be such Persons as shall be mutually agreed upon by Parent and the Company; and
(iv)the certificate of incorporation of Parent shall be identical to the certificate of incorporation of Parent immediately prior to the Second Effective Time, until thereafter amended as provided by the DGCL and such certificate of incorporation.
1.5Merger Consideration; Effect of Merger on Company Capital Stock. The aggregate merger consideration (the “Merger Consideration”) to be paid by Parent for all of the outstanding shares of Company Capital Stock at the Closing and amounts reserved for Company Options and Company Warrants shall be:
4
(a)(i) shares of Parent Common Stock (“Parent Common Stock Payment Shares”), equal to 19.9% of the outstanding shares of Parent Common Stock as of January 10, 2025 minus (ii) any shares of Parent Common Stock issued in any private placement between January 10, 2025 and the First Effective Time (the “Parent Common Stock Consideration Cap”); and
(b)shares of Parent Convertible Preferred Stock (“Parent Preferred Stock Payment Shares”) such that the total amount of Parent Common Stock Payment Shares and Parent Common Stock underlying the Parent Preferred Stock shall equal the Exchange Ratio. Each Parent Preferred Stock Payment Share shall be convertible into 1,000 shares of Parent Common Stock, subject to and contingent upon the affirmative vote of a majority of the Parent Common Stock present or represented and entitled to vote at a meeting of stockholders of Parent to approve, for purposes of the Nasdaq Stock Market Rules, the issuance of shares of Parent Common Stock to the stockholders of the Company upon conversion of any and all shares of Parent Convertible Preferred Stock in accordance with the terms of the Certificate of Designation in substantially the form attached hereto as Exhibit C (the “Preferred Stock Conversion Proposal”).
1.6Conversion of Shares.
(a)At the First Effective Time, by virtue of the First Merger and without any further action on the part of Parent, Merger Subs, the Company or any stockholder of the Company or Parent:
(i)any shares of Company Common Stock held as treasury stock or held or owned by the Company or any wholly owned Subsidiary of the Company immediately prior to the First Effective Time shall be canceled and retired and shall cease to exist, and no consideration shall be delivered in exchange therefor; and
(ii)subject to Section 1.5 and Section 1.6(c), each share of Company Capital Stock outstanding immediately prior to the First Effective Time (excluding shares to be canceled pursuant to Section 1.6(a)(i) and excluding Dissenting Shares) shall be automatically converted solely into the right to receive a pro rata share of Parent Common Stock Payment Shares and/or Parent Preferred Stock Payment Shares, as applicable (as calculated pursuant to Section 1.5(b)).
(b)If any shares of Company Common Stock outstanding immediately prior to the First Effective Time are subject to a repurchase option or a risk of forfeiture under any applicable restricted stock purchase agreement or other similar agreement with the Company, such shares of Company Common Stock shall no longer be subject to any right of repurchase, risk of forfeiture or other such conditions.
(c)No fractional shares of Parent Common Stock and Parent Convertible Preferred Stock shall be issued in connection with the First Merger, and no certificates or scrip for any such fractional shares shall be issued and no cash shall be paid for any such fractional shares. Any fractional shares of Parent Common Stock that a holder of Company Common Stock would otherwise be entitled to receive shall be aggregated with all fractional shares of Parent Common Stock issuable to such holder) or a fraction of a share of Parent Convertible Preferred Stock issuable to such holder and any remaining fractional shares shall be rounded up to the nearest whole share.
(d)At the First Effective Time, by virtue of the First Merger and without any further action on the part of Parent, Merger Subs, the Company or any member of the Company or stockholder of Parent, each share of common stock of First Merger Sub issued and outstanding
5
immediately prior to the First Effective Time shall be converted into and exchanged for one share of common stock of the First Step Surviving Corporation. If applicable, each stock certificate of First Merger Sub evidencing ownership of any such shares shall, as of the First Effective Time, evidence ownership of such shares of common stock of the First Step Surviving Corporation.
(e)If, between the date of this Agreement and the First Effective Time, the outstanding shares of Company Common Stock or Parent Common Stock or Parent Convertible Preferred Stock shall have been changed into, or exchanged for, a different number of shares or a different class, by reason of any stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares or other like change, the Exchange Ratio shall, to the extent necessary, be equitably adjusted to reflect such change to the extent necessary to provide the holders of Company Common Stock and Parent Common Stock and Parent Convertible Preferred Stock, with the same economic effect as contemplated by this Agreement prior to such stock dividend, subdivision, reclassification, recapitalization, split, combination or exchange of shares or other like change; provided, however, that nothing herein will be construed to permit the Company or Parent to take any action with respect to Company Common Stock or Parent Common Stock or Parent Convertible Preferred Stock, respectively, that is prohibited or not expressly permitted by the terms of this Agreement.
(f)At the Second Effective Time, by virtue of the Second Merger and without any action on the part of Parent, the First Step Surviving Corporation, Second Merger Sub or their respective stockholders, each share of the First Step Surviving Corporation issued and outstanding immediately prior to the Second Effective Time shall be canceled and extinguished without any conversion thereof and no payment or distribution shall be made with respect thereto.
1.7Closing of the Company’s Transfer Books. At the First Effective Time: (a) all holders of (i) certificates representing shares of Company Capital Stock and (ii) book-entry shares representing shares of Company Capital Stock (“Book-Entry Shares”), in each case, that were outstanding immediately prior to the First Effective Time shall cease to have any rights as stockholders of the Company; and (b) the stock transfer books of the Company shall be closed with respect to all shares of Company Capital Stock outstanding immediately prior to the First Effective Time. No further transfer of any such shares of Company Capital Stock shall be made on such stock transfer books after the First Effective Time. If, after the First Effective Time, a valid certificate previously representing any shares of Company Capital Stock outstanding immediately prior to the First Effective Time (a “Company Stock Certificate”) is presented to the Exchange Agent or to the Surviving Entity, such Company Stock Certificate shall be canceled and shall be exchanged as provided in Sections 1.6 and 1.8.
1.8Exchange of Shares.
(a)On or prior to the Closing Date, Parent and the Company shall agree upon and select a reputable bank, transfer agent or trust company to act as exchange agent in the Merger (the “Exchange Agent”). At the First Effective Time, Parent shall deposit with the Exchange Agent certificates or evidence of book-entry shares representing the Parent Common Stock and Parent Convertible Preferred Stock issuable pursuant to Section 1.6(a). The Parent Common Stock and Parent Convertible Preferred Stock so deposited with the Exchange Agent, together with any dividends or distributions received by the Exchange Agent with respect to such shares, are referred to collectively as the “Exchange Fund.”
(b)On the Closing Date, the Exchange Agent shall issue book-entry shares representing the Merger Consideration (in a number of whole shares of Parent Common Stock and Parent
6
Convertible Preferred Stock) that each holder of Company Common Stock has the right to receive pursuant to the provisions of Section 1.6(a) and each Company Stock Certificate or Book-Entry Share formerly held by each such holder shall be deemed, from and after the First Effective Time, to represent only the right to receive book-entry shares of Parent Common Stock and Parent Convertible Preferred Stock representing the Merger Consideration and, following issuance of book-entry shares representing the Merger Consideration, shall be canceled. The Merger Consideration and any dividends or other distributions as are payable pursuant to Section 1.8(d) shall be deemed to have been in full satisfaction of all rights pertaining to Company Capital Stock formerly represented by such Company Stock Certificates or Book-Entry Shares.
(c)No dividends or other distributions declared or made with respect to Parent Common Stock or Parent Convertible Preferred Stock with a record date on or after the First Effective Time shall be paid to the holder of any unsurrendered Company Stock Certificate or Book-Entry Shares with respect to the shares of Parent Common Stock and/or Parent Convertible Preferred Stock that such holder has the right to receive in the Merger until such holder surrenders such Company Stock Certificate or transfers such Book-Entry Shares or provides an affidavit of loss or destruction in lieu thereof in accordance with this Section 1.8 (at which time (or, if later, on the applicable payment date) such holder shall be entitled, subject to the effect of applicable abandoned property, escheat or similar Laws, to receive all such dividends and distributions, without interest).
(d)Any portion of the Exchange Fund that remains unclaimed by holders of shares of Company Capital Stock as of the date that is one year after the Closing Date shall be delivered to Parent upon demand, and any holders of Company Stock Certificates or Book-Entry Shares who have not theretofore surrendered their Company Stock Certificates or transferred their Book-Entry Shares in accordance with this Section 1.8 shall thereafter look only to Parent as general creditors for satisfaction of their claims for Parent Common Stock and Parent Convertible Preferred Stock and any dividends or distributions with respect to shares of Parent Common Stock and Parent Convertible Preferred Stock.
(e)No Party shall be liable to any holder of any shares of Company Capital Stock or to any other Person with respect to any shares of Parent Common Stock or Parent Convertible Preferred Stock (or dividends or distributions with respect thereto) or for any cash amounts delivered to any public official pursuant to any applicable abandoned property Law, escheat Law or similar Law. Any portion of the Exchange Fund that remains unclaimed by holders of shares of Company Capital Stock as of the date that is two years after the Closing Date (or immediately prior to such earlier date on which the related Exchange Funds (and all dividends or other distributions in respect thereof) would otherwise escheat to or become the property of any Governmental Body) shall, to the extent permitted by applicable Law, become the property of the Surviving Entity, free and clear of all claims or interest of any Person previously entitled thereto.
1.9Company Options; Company Warrants.
(a)At the First Effective Time, each Company Option that is outstanding and unexercised immediately prior to the First Effective Time under the Company Plan, whether or not vested, shall be converted into and become an option to purchase Parent Common Stock, and Parent shall assume the Company Plan and each such Company Option in accordance with the terms (as in effect as of the date of this Agreement) of the Company Plan and the terms of the stock option agreement by which such Company Option is evidenced (but with changes to such documents as Parent in good faith determines are necessary to reflect the substitution of the Company Options by Parent to purchase shares of Parent Common Stock). All rights with respect to Company Common Stock under Company Options
7
assumed by Parent shall thereupon be converted into rights with respect to Parent Common Stock. Accordingly, from and after the First Effective Time: (i) each Company Option assumed by Parent may be exercised solely for shares of Parent Common Stock; (ii) the number of shares of Parent Common Stock subject to each Company Option assumed by Parent shall be determined by multiplying (A) the number of shares of Company Common Stock that were subject to such Company Option, as in effect immediately prior to the First Effective Time, by (B) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Parent Common Stock; (iii) the per share exercise price for the Parent Common Stock issuable upon exercise of each Company Option assumed by Parent shall be determined by dividing (A) the per share exercise price of Company Common Stock subject to such Company Option, as in effect immediately prior to the First Effective Time, by (B) the Exchange Ratio and rounding the resulting exercise price up to the nearest whole cent; and (iv) any restriction on the exercise of any Company Option assumed by Parent shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Company Option shall otherwise remain unchanged; provided, that, (I) in the case of any Company Option to which Section 421 of the Code applies as of the First Effective Time by reason of its qualification under Section 422 of the Code, the exercise price, the number of shares of Parent Common Stock subject to such option and the terms and conditions of exercise of such option shall be determined in a manner consistent with the requirements of Section 424(a) of the Code; and (II) the exercise price, the number of shares of Parent Common Stock subject to, and the terms and conditions of exercise of each option to purchase Parent Common Stock shall also be determined in a manner consistent with the requirements of Section 409A of the Code; provided, further, that: (x) Parent may amend the terms of the Company Options and the Company Plan as may be necessary to reflect Parent’s substitution of the Company Options with options to purchase Parent Common Stock (such as by making any change in control or similar definition relate to Parent and having any provision that provides for the adjustment of Company Options upon the occurrence of certain corporate events relate to corporate events that relate to Parent and/or Parent Common Stock); and (y) the Parent Board or a committee thereof shall succeed to the authority and responsibility of the Company Board or any committee thereof with respect to each Company Option assumed by Parent.
(b)Parent shall file with the SEC, promptly after the First Effective Time (and in any event, not later than thirty (30) days thereafter), a registration statement on Form S-8 (or any successor form), if available for use by Parent, relating to the shares of Parent Common Stock issuable with respect to Company Options assumed by Parent in accordance with Section 1.9.
(c)At the First Effective Time, each Company Warrant that is outstanding and unexercised immediately prior to the First Effective Time, whether or not vested, shall be converted into and become a warrant to purchase Parent Common Stock, and Parent shall assume each such Company Warrant in accordance with the terms (as in effect as of the date of this Agreement) the warrant agreement by which such Company Warrant is evidenced (but with changes to such documents as Parent in good faith determines are necessary to reflect the substitution of the Company Warrant by Parent to purchase shares of Parent Common Stock). All rights with respect to Company Common Stock under Company Warrants assumed by Parent shall thereupon be converted into rights with respect to Parent Common Stock. Accordingly, from and after the First Effective Time: (i) each Company Warrant assumed by Parent may be exercised solely for shares of Parent Common Stock; (ii) the number of shares of Parent Common Stock subject to each Company Warrant assumed by Parent shall be determined by multiplying (A) the number of shares of Company Common Stock that were subject to such Company Warrant, as in effect immediately prior to the First Effective Time, by (B) the Exchange Ratio, and rounding the resulting number down to the nearest whole number of shares of Parent Common Stock; (iii) the per share exercise price for the Parent Common Stock issuable upon exercise of each Company Warrant assumed by Parent shall be determined by dividing (A) the per share exercise price of Company
8
Common Stock subject to such Company Warrant, as in effect immediately prior to the First Effective Time, by (B) the Exchange Ratio and rounding the resulting exercise price up to the nearest whole cent; and (iv) any restriction on the exercise of any Company Warrant assumed by Parent shall continue in full force and effect and the term, exercisability, vesting schedule and other provisions of such Company Warrant shall otherwise remain unchanged.
1.10Calculation of Parent Cash Amount and Company Cash Amount.
(a)For the purposes of this Agreement, the “Determination Date” shall be the date that is ten (10) Business Days prior to the anticipated date for Closing (the “Anticipated Closing Date”). Within five (5) Business Days following the Determination Date:
(i) Parent shall deliver to the Company a schedule (the “Parent Cash Schedule”) setting forth, in reasonable detail, Parent’s good faith, estimated calculation of the Parent Cash Amount (determined in a manner substantially consistent with the manner in which such items were determined for Parent’s most recent SEC filings) (the “Parent Cash Calculation”) as of the Anticipated Closing Date prepared and certified by Parent’s principal financial officer. Parent shall make the work papers and back-up materials used in preparing the Parent Cash Schedule, as reasonably requested by the Company, available to the Company and, if requested by the Company, its accountants and counsel at reasonable times and upon reasonable notice; and
(ii)The Company shall deliver to Parent a schedule (the “Company Cash Schedule”, and together with the Parent Cash Schedule, the “Cash Schedules”) setting forth, in reasonable detail, the Company’s good faith, estimated calculation of the Company Cash Amount (determined in a manner substantially consistent with the manner in which such items were determined for Parent’s most recent SEC filings) (the “Company Cash Calculation”, and together with the Parent Cash Calculation, the “Cash Calculations”) as of the Anticipated Closing Date prepared and certified by the Company’s principal financial officer. The Company shall make the work papers and back-up materials used in preparing the Company Cash Schedule, as reasonably requested by Parent, available to Parent and, if requested by Parent, its accountants and counsel at reasonable times and upon reasonable notice.
(b)Within three (3) calendar days following delivery of either Cash Schedule to a Party (the “Response Date”), such Party (the “Disputing Party”) will have the right to dispute any part of the other Party’s Cash Schedule by delivering a written notice to that effect (a “Dispute Notice”). Any Dispute Notice shall identify in reasonable detail the nature of any proposed revisions to the applicable Cash Calculation.
(c)If on or prior to the Response Date the Disputing Party fails to deliver a Dispute Notice as provided in Section 1.10(b), then the applicable Cash Calculation as set forth in the applicable Cash Schedule shall be deemed to have been finally determined for purposes of this Agreement and to represent the Parent Cash Amount or Company Cash Amount, as applicable, at the Anticipated Closing Date for purposes of this Agreement.
(d)If the Disputing Party delivers a Dispute Notice on or prior to the Response Date, then Representatives of the Parties shall promptly meet and attempt in good faith to resolve the disputed item(s) and negotiate an agreed-upon determination of the applicable Cash Amount, which agreed-upon Parent Cash Amount or Company Cash Amount shall be deemed to have been finally determined for purposes of this Agreement.
9
(e)If Representatives of Parent and the Company are unable to negotiate an agreed-upon determination of the Parent Cash Amount or Company Cash Amount at the Anticipated Closing Date pursuant to Section 1.10(d) within three (3) calendar days after delivery of the Dispute Notice (or such other period as Parent and the Company may mutually agree upon), then any remaining disagreements as to the applicable Cash Calculation shall be referred to Weaver & Tidwell, provided that if such firm is unwilling or unable to serve within three (3) Business Days after any remaining disagreements are referred to it, then any remaining disagreements shall be referred to Deloitte LLP, provided, further, that if such firm is unwilling or unable to serve within three (3) Business Days after any remaining disagreements are referred to it, then any remaining disagreements shall be referred to Crowe LLP, provided, further, that if such firm is unwilling or unable to serve within three (3) Business Days after any remaining disagreements are referred to it, then any remaining disagreements shall be referred to another independent auditor of recognized national standing mutually agreed upon by the Company and Parent (the “Accounting Firm”). The Parties shall promptly deliver to the Accounting Firm the work papers and back-up materials used in preparing the applicable Cash Schedule, and Parent and the Company shall use commercially reasonable efforts to cause the Accounting Firm to make its determination within ten (10) calendar days of accepting its selection. The Company and Parent shall be afforded the opportunity to present to the Accounting Firm any material related to the unresolved disputes and to discuss the issues with the Accounting Firm; provided, however, that no such presentation or discussion shall occur without the presence of a Representative of each of the Company and Parent. The determination of the Accounting Firm shall be limited to the disagreements submitted to the Accounting Firm. The determination of the Parent Cash Amount or Company Cash Amount made by the Accounting Firm shall be deemed to have been finally determined for purposes of this Agreement and to represent the Parent Cash Amount or Company Cash Amount at the Anticipated Closing Date for purposes of this Agreement, and the Parties shall delay the Closing until the resolution of the matters described in this Section 1.10(e). The fees and expenses of the Accounting Firm shall be allocated between Parent and the Company in the same proportion that the disputed amount of the Parent Cash Amount or Company Cash Amount that was unsuccessfully disputed by such Party (as finally determined by the Accounting Firm) bears to the total disputed amount of the Parent Cash Amount or Company Cash Amount (and for the avoidance of doubt the fees and expenses to be paid by Parent shall reduce the Parent Cash Amount). If this Section 1.10(e) applies as to the determination of the Parent Cash Amount or Company Cash Amount at the Anticipated Closing Date described in Section 1.10(e), upon resolution of the matter in accordance with this Section 1.10(e), the Parties shall not be required to determine the Parent Cash Amount or Company Cash Amount again even though the Closing Date may occur later than the Anticipated Closing Date, except that either Party may request a re-determination of the Parent Cash Amount or Company Cash Amount if the Closing Date is more than thirty (30) calendar days after the Anticipated Closing Date.
(f)Within five (5) Business Days following the end of each calendar month before the Closing Date, each Party shall provide the other Party in writing its good faith estimated calculation of the Parent Cash Amount and/or Company Cash Amount (as of the last day of such calendar month.
1.11Further Action. If, at any time after the First Effective Time, any further action is determined by the Surviving Entity to be necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Entity with full right, title and possession of and to all rights and property of the Company, then the officers and directors of the Surviving Entity shall be fully authorized, and shall use their and its reasonable best efforts (in the name of the Company, in the name of Merger Subs, in the name of the Surviving Entity and otherwise) to take such action.
10
1.12Withholding. The Parties and the Exchange Agent (each, a “Withholding Agent”) shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of Company Capital Stock or any other Person such amounts as such Party or the Exchange Agent is required to deduct and withhold under the Code or any other Law with respect to the making of such payment; provided, however, that if a Withholding Agent determines that any payment to any stockholder of the Company hereunder is subject to deduction and/or withholding, then, except with respect to compensatory payments, or as a result of a failure to deliver the certificate described in Section 7.4, such Withholding Agent shall (i) provide notice to such stockholder as soon as reasonably practicable after such determination (and no later than three (3) Business Days prior to undertaking such deduction and/or withholding), and (ii) use commercially reasonable efforts to cooperate with such stockholder prior to Closing to reduce or eliminate any such deduction and/or withholding. To the extent that amounts are so withheld and paid over to the appropriate Governmental Body, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of whom such deduction and withholding was made.
2REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Subject to Section 10.13(h), except as set forth in the disclosure schedule delivered by the Company to Parent (the “Company Disclosure Schedule”), the Company represents and warrants to Parent and Merger Subs as follows:
2.1Due Organization; Subsidiaries
(a)The Company is a corporation duly incorporated, validly existing and in good standing under the Laws of Delaware and has all necessary corporate power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own or lease and use its property and assets in the manner in which its property and assets are currently owned or leased and used; and (iii) to perform its obligations under all Contracts by which it is bound.
(b)The Company is duly licensed and qualified to do business, and is in good standing (to the extent applicable in such jurisdiction), under the Laws of all jurisdictions where the nature of its business requires such licensing or qualification other than in jurisdictions where the failure to be so qualified individually or in the aggregate would not be reasonably expected to have a Company Material Adverse Effect.
(c)Except as set forth on Schedule 2.1(c) of the Company Disclosure Schedule, the Company has no Subsidiaries and the Company does not own any capital stock of, or any equity, ownership or profit-sharing interest of any nature in, or controls directly or indirectly, any other Entity.
(d)The Company is not nor has ever been, directly or indirectly, a party to, member of or participant in any partnership, joint venture or similar business entity. The Company has not agreed to, and is not obligated to make, nor is bound by any Contract under which it may become obligated to make, any future investment in or capital contribution to any other Entity. The Company has not, at any time, been a general partner of, or has otherwise been liable for any of the debts or other obligations of, any general partnership, limited partnership or other Entity.
2.2Organizational Documents. The Company has made available to Parent accurate and complete copies of the Organizational Documents of the Company in effect as of the date of this Agreement. The Company is not in breach or violation of its respective Organizational Documents.
11
2.3Authority; Binding Nature of Agreement.
(a)The Company has all necessary corporate power and authority to enter into and to perform its obligations under this Agreement and subject to receipt of the Required Company Stockholder Vote, to consummate the Contemplated Transactions. The Company Board (at meetings duly called and held or by unanimous written consent) has (i) determined that the Contemplated Transactions are fair to, advisable and in the best interests of the Company and its stockholders, (ii) authorized, approved and declared advisable this Agreement and the Contemplated Transactions and (iii) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the stockholders of the Company vote in favor of the Company Stockholder Matters.
(b)This Agreement has been duly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Merger Subs, constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to the Enforceability Exceptions.
2.4Vote Required. The affirmative vote (or written consent) of the holders of a majority of the shares of Company Common Stock outstanding on the record date for the Stockholder Written Consent and entitled to vote thereon, voting as a single class (the “Required Company Stockholder Vote”), is the only vote (or written consent) of the holders of any class or series of Company Capital Stock necessary to adopt and approve this Agreement and approve the Contemplated Transactions. The Stockholder Written Consent became effective upon the execution of this Agreement by the Parties hereto and provided the Required Company Stockholder Vote. No other corporate proceedings by the Company are necessary to authorize this Agreement or to consummate the Contemplated Transactions.
2.5Non-Contravention; Consents. Subject to obtaining the Required Company Stockholder Vote, the filing of the Certificates of Merger required by the DGCL, and the filing of the Certificate of Designation, neither (x) the execution, delivery or performance of this Agreement by the Company, nor (y) the consummation of the Contemplated Transactions, will directly or indirectly (with or without notice or lapse of time):
(a)contravene, conflict with or result in a violation of any of the provisions of the Company’s Organizational Documents;
(b)contravene, conflict with or result in a violation of, or give any Governmental Body or other Person the right to challenge the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Law or any order, writ, injunction, judgment or decree to which the Company, or any of the assets owned or used by the Company, is subject, except as would not reasonably be expected to be material to the Company or its business;
(c)contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by the Company, except as would not reasonably be expected to be material to the Company or its business;
(d)contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Company Material Contract, or give any Person the right to: (i) declare a default or exercise any remedy under any Company Material Contract; (ii) any material payment, rebate, chargeback, penalty or change in delivery schedule under any Company Material
12
Contract; (iii) accelerate the maturity or performance of any Company Material Contract; or (iv) cancel, terminate or modify any term of any Company Material Contract, except in the case of any non-material breach, default, penalty or modification; or
(e)result in the imposition or creation of any Encumbrance upon or with respect to any asset owned or used by the Company (except for Permitted Encumbrances).
Except for (i) any Consent set forth in Section 2.5 of the Company Disclosure Schedule under any Company Contract, (ii) the Required Company Stockholder Vote, (iii) the filing of the Certificates of Merger with the Secretary of State of the State of Delaware pursuant to the DGCL, (iv) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware pursuant to the DGCL and (v) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities Laws, the Company is not required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with (A) the execution, delivery or performance of this Agreement, or (B) the consummation of the Contemplated Transactions. The Company Board has taken and will take all actions necessary to ensure that the restrictions applicable to business combinations contained in Section 203 of the DGCL are, and will be, inapplicable to the execution, delivery and performance of this Agreement, the Lock-Up Agreements and to the consummation of the Contemplated Transactions. No other state takeover statute or similar Law applies or purports to apply to the Merger, this Agreement, the Lock-Up Agreements or any of the Contemplated Transactions.
2.6Capitalization.
(a)The authorized Company Capital Stock as of the date of this Agreement consists of (i) 5,000,000 shares of voting Company Common Stock, par value $0.001 per share, of which 1,287,930 shares have been issued and are outstanding as of the date of this Agreement, (ii) 1,000,000 shares of non-voting Company Common Stock, par value $0.001 per share, which no shares have been issued and are outstanding as of the date of this Agreement, and (ii) 2,000,000 shares of Preferred Stock, par value $0.001 per share (the “Company Preferred Stock”), which no shares have been issued and are outstanding as of the date of this Agreement. The Company does not hold any shares of its capital stock in treasury. Section 2.6(a) of the Company Disclosure Schedule lists, as of the date of this Agreement (i) each record holder of issued and outstanding Company Capital Stock and the number and type of shares of Company Capital Stock held by such holder; and (ii)(A) each holder of issued and outstanding Company Convertible Notes, (B) the date each Company Convertible Note was issued, (C) the number, issuer and type of securities subject to each such Company Convertible Note, (D) the underlying principal amount and accrued interest of such Company Convertible Notes, (E) the maturity date of each Company Convertible Note and (F) the number of shares of Company Capital Stock issuable upon the exercise of such, or upon the conversion of all securities issuable upon the exercise of such, Company Convertible Notes.
(b)All of the outstanding shares of Company Common Stock and Company Preferred Stock have been duly authorized and validly issued, and are fully paid and nonassessable. Except as set forth in the Investor Agreements, none of the outstanding shares of Company Capital Stock is entitled or subject to any preemptive right, right of participation, right of maintenance or any similar right and none of the outstanding shares of Company Capital Stock is subject to any right of first refusal in favor of the Company. Except as contemplated herein, on Section 2.6(b) of the Company Disclosure
13
Schedule or as set forth in the Investor Agreements, there is no Company Contract relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or otherwise disposing of (or granting any option or similar right with respect to), any shares of Company Capital Stock. The Company is not under any obligation, nor is it bound by any Contract pursuant to which it may become obligated, to repurchase, redeem or otherwise acquire any outstanding shares of Company Capital Stock or other securities. Section 2.6(b) of the Company Disclosure Schedule accurately and completely lists all repurchase rights held by the Company with respect to shares of Company Capital Stock (including shares issued pursuant to the exercise of stock options) and specifies which of those repurchase rights are currently exercisable and whether the holder of such shares of Company Capital Stock timely filed an election with the relevant Governmental Bodies under Section 83(b) of the Code with respect to such shares. Each share of Company Preferred Stock is convertible into one share of Company Common Stock.
(c)Except for the Company’s 2020 Equity Incentive Plan (the “Company Plan”), the Company does not have any stock option plan or any other plan, program, agreement or arrangement providing for any equity-based compensation for any Person. As of the date of this Agreement, the Company has reserved 2,250,000 shares of Company Common Stock for issuance under the Company Plan, of which no shares have been issued and are currently outstanding, 966,000 shares have been reserved for issuance upon exercise of Company Options previously granted and currently outstanding under the Company Plan, and 1,551,000 shares of Company Common Stock remain available for future issuance of awards pursuant to the Company Plan. Section 2.6(c) of the Company Disclosure Schedule sets forth the following information with respect to each Company Option outstanding as of the date of this Agreement: (i) the name of the optionee; (ii) the number of shares of Company Common Stock subject to such Company Option at the time of grant; (iii) the number of shares of Company Common Stock subject to such Company Option as of the date of this Agreement; (iv) the exercise price of such Company Option; (v) the date on which such Company Option was granted; (vi) the applicable vesting schedule, including the number of vested and unvested shares as of the date of this Agreement and any acceleration provisions; (vii) the date on which such Company Option expires; (viii) whether such Company Option is intended to constitute an “incentive stock option” (as defined in the Code) or a non-qualified stock option; and (ix) whether such Company Option is “early exercisable.” The Company has made available to Parent an accurate and complete copy of the Company Plan and a form of stock option agreement that is consistent in all material respects with the stock option agreements evidencing outstanding Company Options granted thereunder.
(d)Except for Company Options and Company Warrants set forth in Section 2.6(c) of the Company Disclosure Schedule, there is no: (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of the Company; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of the Company; or (iii) condition or circumstance that could be reasonably likely to give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of the Company. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or other similar rights with respect to the Company.
(e)All outstanding shares of Company Common Stock, Company Preferred Stock, Company Options, and other securities of the Company have been issued and granted in material compliance with (i) the Organizational Documents of the Company in effect as of the relevant time and all applicable securities Laws and other applicable Law, and (ii) all requirements set forth in applicable Contracts.
14
(f)All distributions, dividends, repurchases and redemptions of the Company Capital Stock or other equity interests of the Company were undertaken in material compliance with (i) the Organizational Documents of the Company in effect as of the relevant time and all applicable securities Laws and other applicable Laws, and (ii) all requirements set forth in applicable Contract.
2.7Financial Statements.
(a)Concurrently with the execution hereof, the Company has provided to Parent true and complete copies of (i) the Company’s audited consolidated balance sheets as of December 31, 2023 and 2022, (ii) the Company’s audited consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2023 and 2022, (iii) the Company Unaudited Interim Balance Sheet, and (iv) the unaudited statements of operations and cash flows of the Company for the period reflected in the Company Unaudited Interim Balance Sheet (collectively, the “Company Financials”). The Company Financials were prepared in accordance with GAAP (except as may be indicated in the notes to such financial statements and except that the unaudited financial statements may not contain footnotes and are subject to normal and recurring year-end adjustments, none of which is material) and fairly present, in all material respects, the financial position and operating results of the Company as of the dates and for the periods indicated therein.
(b)The Company maintains accurate books and records reflecting its assets and liabilities and maintains a system of internal accounting controls designed to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of the financial statements of the Company in accordance with GAAP and to maintain accountability of the Company’s assets; (iii) access to the Company’s assets is permitted only in accordance with management’s general or specific authorization; (iv) the recorded accountability for the Company’s assets is compared with the existing assets at regular intervals and appropriate action is taken with respect to any differences; and (v) accounts, notes and other receivables and inventory are recorded accurately, and proper and adequate procedures are implemented which are designed to effect the collection thereof on a current and timely basis. The Company maintains internal controls consistent with the practices of similarly situated private companies over financial reporting that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.
(c)Section 2.7(c) of the Company Disclosure Schedule lists, and the Company has delivered to Parent accurate and complete copies of the documentation creating or governing, all securitization transactions and “off-balance sheet arrangements” (as defined in Item 303(c) of Regulation S-K under the Exchange Act) effected by the Company since the Company’s inception.
(d)Since the Company’s inception, there have been no formal internal investigations regarding financial reporting or accounting policies and practices discussed with, reviewed by or initiated at the direction of the chief executive officer, chief financial officer or general counsel of the Company, the Company Board or any committee thereof. Since the Company’s inception, neither the Company nor its independent auditors have identified (i) any significant deficiency or material weakness in the design or operation of the system of internal accounting controls utilized by the Company, (ii) any fraud, whether or not material, that involves the Company, the Company’s management or other employees who have a role in the preparation of financial statements or the internal accounting controls utilized by the Company or (iii) any claim or allegation regarding any of the foregoing.
15
2.8Absence of Changes. Except as set forth in Section 2.8 of the Company Disclosure Schedule, after the date of the Company Unaudited Interim Balance Sheet, the Company has conducted its business only in the Ordinary Course of Business (except for the execution and performance of this Agreement and the discussions, negotiations and transactions related thereto) and there has not been any (a) Company Material Adverse Effect and (b) the Company has not done any of the following:
(a)declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of its capital stock; or repurchased, redeemed or otherwise reacquired any shares of its capital stock or other securities (except for shares of Company Common Stock from terminated employees, directors or consultants of the Company or in connection with the payment of the exercise price and/or withholding Taxes incurred upon the exercise, settlement or vesting of any award granted under the Company Plan);
(b)sold, issued, granted, pledged or otherwise disposed of or encumbered or authorized any of the foregoing with respect to: (A) any capital stock or other security of the Company; (B) any option, warrant or right to acquire any capital stock or any other security, other than option grants to employees and service providers in the Ordinary Course of Business; or (C) any instrument convertible into or exchangeable for any capital stock or other security of the Company;
(c)except as required to give effect to anything in contemplation of the Closing, amended any of its Organizational Documents, or effected or been a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction except, for the avoidance of doubt, the Contemplated Transactions;
(d)formed any Subsidiary or acquired any equity interest or other interest in any other Entity or entered into a joint venture with any other Entity;
(e)(i) lent money to any Person (except for the advance of reasonable business expenses to employees, directors and consultants in the Ordinary Course of Business), (ii) incurred or guaranteed any indebtedness for borrowed money, or (iii) guaranteed any debt securities of others;
(f)other than as required by applicable Law or the terms of any Company Benefit Plan as in effect on the date of this Agreement and other than the Company Plan or any Company Option: (A) adopted, terminated, established or entered into any Company Benefit Plan; (B) caused or permitted any Company Benefit Plan to be amended in any material respect; (C) paid any material bonus or distributed any profit-sharing account balances or similar payment to, or, other than in the Ordinary Course of Business, increased the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers or employees; (D) increased the severance or change-of-control benefits offered to any current, former or new employees, directors or consultants; or (E) hired, terminated or gave notice of termination (other than for cause) to, any (x) officer or (y) employee whose annual base salary is or is expected to be more than $125,000 per year;
(g)entered into any collective bargaining agreement or similar agreement with any labor union or similar labor organization;
(h)entered into any material transaction other than (A) in the Ordinary Course of Business or (B) in connection with the Contemplated Transactions;
16
(i)acquired any material asset or sold, leased or otherwise irrevocably disposed of any of its assets or properties, or granted any Encumbrance (other than Permitted Encumbrances) with respect to such assets or properties, except in the Ordinary Course of Business;
(j)sold, assigned, transferred, licensed, sublicensed or otherwise disposed of any material Company IP (other than pursuant to non-exclusive licenses in the Ordinary Course of Business);
(k)made, changed or revoked any material Tax election, failed to pay any income or other material Tax as such Tax becomes due and payable, filed any amendment making any material change to any Tax Return, settled or compromised any income or other material Tax liability, entered into any Tax allocation, sharing, indemnification or other similar agreement or arrangement (including any “closing agreement” described in Section 7121 of the Code (or any similar Law) with any Governmental Body, but excluding customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes), requested or consented to any extension or waiver of any limitation period with respect to any claim or assessment for any income or other material Taxes (other than pursuant to an extension of time to file any Tax Return granted in the Ordinary Course of Business of not more than six months), or adopted or changed any material accounting method in respect of Taxes;
(l)made any expenditures, incurred any Liabilities or discharged or satisfied any Liabilities, in each case, in amounts that exceed $100,000;
(m)other than as required by Law or GAAP, taken any action to change accounting policies or procedures;
(n)initiated or settled any Legal Proceeding; or
(o)agreed, resolved or committed to do any of the foregoing.
2.9Absence of Undisclosed Liabilities. As of the date hereof, the Company has no any liability, indebtedness, obligation or expense of any kind, whether accrued, absolute, contingent, matured or unmatured (whether or not required to be reflected in the financial statements in accordance with GAAP) (each a “Liability”), individually or in the aggregate, of a type required to be recorded or reflected on a balance sheet or disclosed in the footnotes thereto under GAAP, except for: (a) Liabilities disclosed, reflected or reserved against in the Company Unaudited Interim Balance Sheet; (b) Liabilities that have been incurred by the Company since the date of the Company Unaudited Interim Balance Sheet in the Ordinary Course of Business; (c) Liabilities for performance of obligations under Company Contracts in the Ordinary Course of Business; (d) Liabilities incurred in connection with the Contemplated Transactions; (e) Liabilities which would not, individually or in the aggregate, reasonably be expected to be material to the Company; and (f) Liabilities described in Section 2.9 of the Company Disclosure Schedule.
2.10Title to Assets. The Company owns, and has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all tangible properties or tangible assets and equipment used or held for use in its business or operations or purported to be owned by it that are material to the Company or its business, including: (a) all tangible assets reflected on the Company Unaudited Interim Balance Sheet; and (b) all other tangible assets reflected in the books and records of the Company as being owned by the Company. All of such assets are owned or, in the case of leased assets, leased by the Company free and clear of any Encumbrances, other than Permitted Encumbrances.
17
2.11Real Property; Leasehold. The Company does not own, nor has ever owned, any real property. The Company has made available to Parent (a) an accurate and complete list of all real properties with respect to which the Company directly or indirectly holds a valid leasehold interest as well as any other real estate that is in the possession of, or occupied or leased by, the Company and (b) copies of all leases under which any such real property is possessed, occupied or leased, each of which is in full force and effect, with no existing material default thereunder by the Company, or to the Knowledge of the Company, any other party thereto. The Company’s possession, occupancy, lease, use and/or operation of each such leased property conforms to all applicable Laws in all material respects, and the Company has exclusive possession of each such leased property and leasehold interest and has not granted any occupancy rights to tenants or licensees with respect to such leased property or leasehold interest. In addition, each such leased property and leasehold interest is free and clear of all Encumbrances other than Permitted Encumbrances. The Company has not received any written notice from its landlords or any Governmental Body that: (i) relates to violations of building, zoning, safety or fire ordinances or regulations; (ii) claims any defect or deficiency with respect to any of such properties; or (iii) requests the performance of any repairs, alterations or other work to such properties.
2.12Intellectual Property; Privacy.
(a)Section 2.12(a) of the Company Disclosure Schedule identifies each item of material Registered IP owned in whole or in part by the Company, including, with respect to each application and registration: (i) the name of the applicant or registrant and any other co-owner, (ii) the jurisdiction of application or registration, and (iii) the application or registration number. To the Knowledge of the Company, each of the patents and patent applications included in Section 2.12(a) of the Company Disclosure Schedule properly identifies by name each and every inventor of the inventions claimed therein as determined in accordance with applicable Laws of the United States. As of the date of this Agreement, no cancellation, interference, opposition, reissue, reexamination or other proceeding of any nature (other than office actions or similar communications issued by any Governmental Body in the ordinary course of prosecution of any pending applications for registration) is pending. Except as set forth in Schedule 2.12(a) and to the Knowledge of the Company, the Company has not been threatened in writing as to the scope, validity, enforceability or ownership of any Company IP is being or has been contested or challenged.
(b)Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, the Company exclusively own, are the sole assignee of, or have exclusively licensed all material Company IP (other than as disclosed in Section 2.12(b) of the Company Disclosure Schedule), free and clear of all Encumbrances other than Permitted Encumbrances. The Company IP and the Intellectual Property Rights licensed to the Company pursuant to a valid, enforceable written agreement constitute all Intellectual Property Rights used in, material to or otherwise necessary for the operation of the Company’s business as currently conducted. Each Company Associate involved in the creation or development of any material Company IP, pursuant to such Company Associate’s activities on behalf of the Company, has signed a valid and enforceable written agreement containing an assignment of such Company Associate’s rights in such Company IP to the Company and such agreement has been recorded with the respective Governmental Body. To Company’s knowledge, a valid and enforceable written agreement containing an assignment of inventor rights has been executed for all Company IP included in Company In-bound Licenses and such agreement has been recorded with the respective Governmental Body. Each Company Associate who has or has had access to the Company’s trade secrets or confidential information has signed a valid and enforceable written agreement containing confidentiality provisions protecting the Company IP, trade secrets and
18
confidential information. The Company has taken commercially reasonable steps to protect and preserve the confidentiality of its trade secrets and confidential information.
(c)To the Knowledge of the Company, no funding, facilities or personnel of any Governmental Body or any university, college, research institute or other educational institution has been used to create Company IP, except for any such funding or use of facilities or personnel that does not result in such Governmental Body or institution owning such Company IP as of the date of this Agreement.
(d)Section 2.12(d) of the Company Disclosure Schedule sets forth each license agreement pursuant to which the Company (i) is granted a license under any material Intellectual Property Right owned by any third party that is used by the Company in its business as currently conducted (each a “Company In-bound License”) or (ii) grants to any third party a license under any material Company IP or material Intellectual Property Right licensed to the Company under a Company In-bound License (each a “Company Out-bound License”) (provided, that, Company In-bound Licenses shall not include, when entered into in the Ordinary Course of Business, material transfer agreements, clinical trial agreements, agreements with Company Associates, services agreements, non-disclosure agreements, commercially available Software-as-a-Service offerings, or off-the-shelf software licenses; and Company Out-bound Licenses shall not include, when entered into in the Ordinary Course of Business, material transfer agreements, clinical trial agreements, services agreements, non-disclosure agreements, or non-exclusive outbound licenses). All Company In-bound Licenses and Company Out-bound Licenses are in full force and effect and are valid, enforceable and binding obligations of the Company and, to the Knowledge of Company, each other party to such Company In-bound Licenses or Company Out-bound Licenses. Except as disclosed in Schedule 2.12(d) of the Company Disclosure Schedule, neither the Company, nor to the Knowledge of the Company, any other party to such Company In-bound Licenses or Company Out-bound Licenses, is in material breach under any Company In-bound Licenses or Company Out-bound Licenses.
(e)To the Knowledge of the Company: (i) the operation of the business of the Company as currently conducted does not infringe, misappropriate or otherwise violate any Intellectual Property Rights of any other Person and (ii) no other Person is infringing, misappropriating or otherwise violating any Company IP. No Legal Proceeding is pending (or, to the Knowledge of the Company, is threatened in writing) (A) against the Company alleging that the operation of the business of the Company infringes or constitutes the misappropriation or other violation of any Intellectual Property Rights of another Person or (B) by the Company alleging that another Person has infringed, misappropriated or otherwise violated any of the Company IP. Since the Company’s inception, the Company has not received any written notice or other written communication alleging that the operation of the business of the Company infringes or constitutes the misappropriation or other violation of any Intellectual Property Right of another Person.
(f)None of the Company IP owned by the Company or, to the Knowledge of the Company, none of the material Intellectual Property Rights exclusively licensed to the Company is subject to any pending or outstanding injunction, directive, order, judgment or other disposition of dispute that adversely and materially restricts the use, transfer, registration or licensing by the Company of any such Company IP.
(g)To the Knowledge of the Company, the Company and the operation of the Company’s business are and since December 31, 2021 has been, in material compliance with Privacy and Data Processing Requirements. To the Knowledge of the Company, the Company has at all
19
applicable times provided all notices, and obtained and maintained all rights, consents, and authorizations, to Process Company Data as Processed by or for the Company. Since the Company’s inception, there have been (i) no loss or theft or security breach relating to Company Data, (ii) no violation of any security policy of the Company regarding any such Company Data, and (iii) no unauthorized access to, or unauthorized, unintended, or improper use disclosure, or other Processing of any Company Data. The Company has taken commercially reasonable steps and implemented reasonable disaster recovery and security plans and procedures to protect the information technology systems used in, material to or necessary for operation of the Company’s business as currently conducted and Company Data from unauthorized use access, or other Processing. To the Knowledge of the Company, there have been no (i) material malfunctions or unauthorized intrusions or breaches of the information technology systems used in, material to or necessary for the operation of the Company’s business or (ii) material unauthorized access to, or other processing of, Company Data.
2.13Agreements, Contracts and Commitments.
(a)Section 2.13(a) of the Company Disclosure Schedule lists the following Company Contracts in effect as of the date of this Agreement other than any Company Benefit Plans (each, a “Company Material Contract” and collectively, the “Company Material Contracts”):
(i)each Company Contract relating to any agreement of indemnification or guaranty not entered into in the Ordinary Course of Business;
(ii)each Company Contract containing (A) any covenant limiting the freedom of the Company or the Surviving Entity to engage in any line of business or compete with any Person, (B) any most-favored nation or other preferred pricing arrangement in favor of a Person other than the Company or any similar term by which any Person is or could become entitled to any benefit, right or privilege that must be at least as favorable to such Person as those offered to any other Person, (C) any exclusivity provision, right of first refusal or right of first negotiation or similar covenant in favor of a Person other than the Company, or (D) any non-solicitation provision not entered into the Ordinary Course of Business;
(iii)each Company Contract relating to capital expenditures and requiring payments after the date of this Agreement in excess of $100,000 pursuant to its express terms and not cancelable without penalty;
(iv)each Company Contract relating to the disposition or acquisition of material assets or any ownership interest in any Entity, except as contemplated hereby;
(v)each Company Contract relating to any mortgages, indentures, loans, notes or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit or creating any material Encumbrances with respect to any assets of the Company or any loans or debt obligations with officers or directors of the Company;
(vi)each Company Contract requiring payment by or to the Company after the date of this Agreement in excess of $100,000 in the aggregate in the current calendar year or any future calendar year pursuant to its express terms relating to: (A) any distribution agreement (identifying any that contain exclusivity provisions); (B) any agreement involving provision of services or products with respect to any pre-clinical or clinical development activities of the Company; (C) any dealer, distributor, joint marketing, alliance, joint venture, cooperation, development or other agreement currently in force under which the Company has continuing obligations to develop or market any product,
20
technology or service, or any agreement pursuant to which the Company has continuing obligations to develop any Intellectual Property Rights that will not be owned, in whole or in part, by the Company; or (D) any Contract with any third party providing any services relating to the manufacture or production of any product, service or technology of the Company or any Contract to sell, distribute or commercialize any products or service of the Company;
(vii)each Company Contract with any financial advisor, broker, finder, investment banker or other similar Person providing financial advisory services to the Company in connection with the Contemplated Transactions;
(viii)each Company Real Estate Lease;
(ix)each Company Contract with any Governmental Body;
(x)each Company Out-bound License and Company In-bound License, and each Company Contract containing a covenant not to sue or otherwise enforce any Intellectual Property Rights;
(xi)each Company Contract requiring the payment of any royalty, dividend or similar arrangement based on the revenues or profits of the Company;
(xii)each Company Contract, offer letter, employment agreement, or independent contractor agreement with any employee, independent contractor or other natural person service provider whose annual compensation equals or exceeds $125,000 that (A) is not immediately terminable at will by the Company without notice, severance or other cost or payment, except as required under applicable Law, or (B) provides for retention payments, change of control payments, severance, accelerated vesting, or any similar payment or benefit that may or will become due as a result of the Merger;
(xiii)each Company Contract providing any option to receive a license or other right, any right of first negotiation, any right of first refusal or any similar right to any Person related to any material Company IP or material Intellectual Property Right licensed to the Company under a Company In-bound License;
(xiv)each Company Contract entered into in settlement of any Legal Proceeding or other dispute; and
(xv)any other Company Contract that is not terminable at will (with no penalty or payment or requirement for prior notice, except as required by applicable law) by the Company and (A) which involves payment or receipt by the Company after the date of this Agreement under any such agreement, Contract or commitment of more than $100,000 in the aggregate, or obligations after the date of this Agreement in excess of $100,000 in the aggregate, or (B) that is material to the business or operations of the Company taken as a whole.
(b)The Company has delivered or made available to Parent accurate and complete copies of all Company Material Contracts, including all amendments thereto. Except as set forth in Section 2.13(b) of the Company Disclosure Schedule, there are no Company Material Contracts that are not in written form. Neither the Company nor, to the Company’s Knowledge, as of the date of this Agreement any other party to a Company Material Contract, has breached, violated or defaulted under, or received notice that it breached, violated or defaulted under, any of the terms or conditions of any
21
Company Material Contract in such manner as would permit any other party to cancel or terminate any such Company Material Contract, or would permit any other party to seek damages which would reasonably be expected to be material to the Company or its business. As to the Company, as of the date of this Agreement, each Company Material Contract is valid, binding, enforceable and in full force and effect, subject to the Enforceability Exceptions. No Person is renegotiating, or has a right pursuant to the terms of any Company Material Contract to change, any material amount paid or payable to the Company under any Company Material Contract or any other material term or provision of any Company Material Contract, and no Person has indicated in writing to the Company that it desires to renegotiate, modify, not renew or cancel any Company Material Contract.
2.14Compliance; Permits; Restrictions.
(a)The Company is, and since the Company’s inception, has been, in compliance in all material respects with all applicable Laws, including the Federal Food, Drug and Cosmetic Act and regulations issued thereunder by the United States Food and Drug Administration (“FDA” and collectively, the “FDCA”), the Public Health Service Act and its implementing regulations ( “PHSA”) and any other similar Law administered or promulgated by the FDA or other comparable Governmental Body responsible for regulation of the research, development, pre-clinical and clinical testing, development, research, manufacturing, storage, supply, approval, sale, marketing, distribution and importation or exportation of drug and biological products (each, a “Drug Regulatory Agency”), except for any noncompliance, either individually or in the aggregate, which would not be material to the Company. No investigation, claim, suit, proceeding, audit or other action by any Governmental Body is pending or, to the Knowledge of the Company, threatened against the Company. There is no agreement, judgment, injunction, order or decree binding upon the Company which (i) has or would reasonably be expected to have the effect of prohibiting or materially impairing any business practice of the Company, any acquisition of material property by the Company or the conduct of business by the Company as currently conducted, (ii) is reasonably likely to have an adverse effect on the Company’s ability to comply with or perform any covenant or obligation under this Agreement, or (iii) is reasonably likely to have the effect of preventing, delaying, making illegal or otherwise interfering with the Contemplated Transactions.
(b)The Company holds all required Governmental Authorizations which are material to the operation of the business of the Company as currently conducted (the “Company Permits”), including the development of Company Products. Section 2.14(b) of the Company Disclosure Schedule identifies each Company Permit. Each such Company Permit is valid and in full force and effect, and the Company is in material compliance with the terms of the Company Permits. No Legal Proceeding is pending or, to the Knowledge of the Company, threatened, which seeks to revoke, limit, suspend, or materially modify any Company Permit. The rights and benefits of each Company Permit will be available to the Surviving Entity, as applicable, immediately after the Second Effective Time on terms substantially identical to those enjoyed by the Company as of the date of this Agreement and immediately prior to the First Effective Time.
(c)There are no proceedings pending or, to the Knowledge of the Company, threatened against the Company with respect to an alleged material violation by the Company of the FDCA, PHSA or any other similar Law administered or promulgated by any Drug Regulatory Agency. Neither the Company nor any of its officers and employees has been or is subject to any enforcement proceedings by the FDA or other Governmental Body and, to the Knowledge of the Company, no such proceedings have been threatened. There has not been and is not now any Form FDA-483 observation, civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, demand
22
letter, warning letter, untitled letter, or proceeding pending or in effect against the Company or any of their respective officers and employees, and the Company has no liability for failure to comply with the FDCA, PHSA, or other similar Laws. There is no act, omission, event, or circumstance of which the Company has Knowledge that would reasonably be expected to give rise to or form the basis for any civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, demand letter, warning letter, untitled letter, proceeding or request for information or any liability (whether actual or contingent) for failure to comply with the FDCA, PHSA or other similar Laws.
(d)The Company holds all required Governmental Authorizations issuable by any Drug Regulatory Agency necessary or material to the conduct of the business of the Company as currently conducted (collectively, the “Company Regulatory Permits”) and no such Company Regulatory Permit has been (i) revoked, withdrawn, suspended, cancelled or terminated or (ii) modified in any adverse manner. There is no basis for believing that such Company Regulatory Permits will not be renewable upon expiration. The Company is in compliance in all material respects with the Company Regulatory Permits and has not received any written notice or other written communication, or to the Knowledge of the Company, any other communication from any Drug Regulatory Agency regarding (A) any material violation of or failure to comply materially with any term or requirement of any Company Regulatory Permit or (B) any revocation, withdrawal, suspension, cancellation, termination or material modification of any Company Regulatory Permit. The Company has complied in all material respects with the ICH E9 Guidance for Industry: Statistical Principles for Clinical Trials in the management of the clinical data that have been presented to the Company. To the Knowledge of the Company, there are no facts that would be reasonably likely to result in any warning, untitled or notice of violation letter or Form FDA-483 from the FDA.
(e)All clinical, pre-clinical and other studies and tests conducted by or on behalf of, or sponsored by, the Company, or in which the Company or its current products or product candidates have participated, were and, if still pending, are being conducted in all material respects in accordance with standard medical and scientific research procedures and in compliance in all material respects with the applicable regulations of any applicable Drug Regulatory Agency and other applicable Law, including the Good Clinical Practice (“GCP”) regulations under 21 C.F.R. Parts 50, 54, 56 and 312 and Good Laboratory Practice (“GLP”) regulations under 21 C.F.R. Part 58. No preclinical study or clinical trial conducted by or on behalf of the Company has been terminated or suspended prior to completion for safety or noncompliance reasons. Since their inception, the Company has not received any notices, correspondence, or other communications from any Drug Regulatory Agency requiring, or to the Knowledge of the Company, threatening to initiate, the termination or suspension of any clinical studies conducted by or on behalf of, or sponsored by, the Company or in which the Company or its current products or product candidates have participated.
(f)The Company is not the subject of any pending or, to the Knowledge of the Company, threatened investigation in respect of its business or products or product candidates pursuant to the FDA’s “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” Final Policy set forth in 56 Fed. Reg. 46191 (September 10, 1991) and any amendments thereto. To the Knowledge of the Company, the Company has not committed any acts, made any statement, or failed to make any statement, in each case in respect of its business or products that would violate the FDA’s “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” Final Policy, and any amendments thereto.
(g)None of the Company or any of its officers, directors, employees or, to the Knowledge of the Company, agents has been, is, or is in anticipation of being (based on a conviction
23
by the courts or a finding of fault by a regulatory authority): (i) debarred pursuant to the Generic Drug Enforcement Act of 1992 (21 U.S.C. § 335a), as amended from time to time; (ii) disqualified from participating in clinical trials pursuant to 21 C.F.R. § 312.70, as amended from time to time; (iii) disqualified as a testing facility under 21 C.F.R. Part 58, Subpart K, as amended from time to time; (iv) excluded, debarred or suspended from or otherwise ineligible to participate in a “Federal Health Care Program” as that term is defined in 42 U.S.C. § 1320a-7b(f), including under 42 U.S.C. § 1320a-7 or relevant regulations in 42 C.F.R. Part 1001; (v) assessed or threatened with assessment of civil money penalties pursuant to 42 C.F.R. Part 1003; or (vi) included on the HHS/OIG List of Excluded Individuals/Entities, the General Services Administration’s System for Award Management, or the FDA Debarment List or the FDA Disqualified/Restricted List. Neither the Company nor any of its officers, directors, employees or, to the Knowledge of the Company, agents has engaged in any activities that are prohibited, or are cause for civil penalties, or grounds for mandatory or permissive exclusion, debarment, or suspension pursuant to any of these authorities. The Company is not using, and has never used, in any capacity any Person that has ever been, or to the Knowledge of Company, is the subject of a proceeding that could lead to the Persons becoming debarred, excluded, disqualified, restricted or suspended pursuant to any of these authorities.
(h)The Company has complied with all Laws relating to patient, medical or individual health information, including the Health Insurance Portability and Accountability Act of 1996 and its implementing regulations promulgated thereunder, all as amended from time to time (collectively “HIPAA”), including the standards for the privacy of Individually Identifiable Health Information at 45 C.F.R. Parts 160 and 164, Subparts A and E, the standards for the protection of Electronic Protected Health Information set forth at 45 C.F.R. Part 160 and 45 C.F.R. Part 164, Subpart A and Subpart C, the standards for transactions and code sets used in electronic transactions at 45 C.F.R. Part 160, Subpart A and Part 162, and the standards for Breach Notification for Unsecured Protected Health Information at 45 C.F.R. Part 164, Subpart D, all as amended from time to time. The Company has entered into, where required, and is in compliance in all material respects with the terms of all Business Associate (as defined in HIPAA) agreements (“Business Associate Agreements”) to which the Company is a party or otherwise bound. The Company has created and maintained written policies and procedures to protect the privacy of all Protected Health Information, has provided training to all employees and agents as required under HIPAA, and has implemented security procedures, including physical, technical and administrative safeguards, to protect all personal information and Protected Health Information stored or transmitted in electronic form. The Company has not received written notice from the Office for Civil Rights for the U.S. Department of Health and Human Services or any other Governmental Body of any allegation regarding its failure to comply with HIPAA or any other federal or state law or regulation applicable to the protection of individually identifiable health information or personally identifiable information. No successful Security Incident, Breach of Unsecured Protected Health Information, unpermitted disclosure of Personal Health Information or breach of personally identifiable information under applicable Laws has occurred with respect to information maintained or transmitted to the Company or an agent or third party subject to a Business Associate Agreement with the Company. The Company is currently submitting, receiving and handling or is capable of submitting, receiving and handling transactions in accordance with the Transactions and Code Sets Rule. All capitalized terms in this Section 2.14(h) not otherwise defined in this Agreement shall have the meanings set forth under HIPAA.
(i)Recordkeeping / Reporting. Company has maintained records relating to the research, development, testing, manufacture, handling, labeling, packaging, storage, supply, promotion, distribution, marketing, commercialization, import, export, and sale of all Company Products in compliance with applicable Laws, and the Company has submitted to the FDA and other applicable Governmental Bodies in a timely manner all required notices and annual or other reports, including but
24
not limited to adverse experience reports and annual reports, related to the research, development, testing, manufacture, handling, labeling, packaging, storage, supply, promotion, distribution, marketing, commercialization, import, export, and sale of Company Products.
2.15Legal Proceedings; Orders.
(a)Except as set forth in Schedule 2.15(a) of the Company Disclosure Schedule, as of the date of this Agreement, there is no material pending Legal Proceeding and, to the Knowledge of the Company, no Person has threatened in writing to commence any Legal Proceeding: (i) that involves (A) the Company, (B) any Company Associate (in his or her capacity as such) or (C) any of the material assets owned or used by the Company; or (ii) that challenges, or that would have the effect of preventing, delaying, making illegal or otherwise interfering with, the Contemplated Transactions.
(b)Except as set forth in Section 2.15(b) of the Company Disclosure Schedule, since the Company’s inception through the date of this Agreement, no Legal Proceeding has been pending against the Company that resulted in material liability to the Company.
(c)There is no order, writ, injunction, judgment or decree to which the Company, or any of the material assets owned or used by the Company, is subject. To the Knowledge of the Company, no officer or employees of the Company is subject to any order, writ, injunction, judgment or decree that prohibits such officer or employee from engaging in or continuing any conduct, activity or practice relating to the business of the Company or to any material assets owned or used by the Company.
2.16Tax Matters.
(a)The Company has timely filed all income and other material Tax Returns that were required to be filed by or with respect to it under applicable Law. All such Tax Returns are correct and complete in all material respects and have been prepared in compliance with all applicable Law. No written claim has ever been made by any Governmental Body in any jurisdiction where the Company does not file a particular Tax Return or pay a particular Tax that the Company or such Subsidiary is subject to taxation by that jurisdiction.
(b)All income and other material Taxes due and owing by the Company on or before the date hereof (whether or not shown on any Tax Return) have been fully and timely paid. The unpaid Taxes of the Company did not, as of the date of the Company Unaudited Interim Balance Sheet, materially exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax items) set forth on the face of the Company Unaudited Interim Balance Sheet. Since the date of the Company Unaudited Interim Balance Sheet, the Company has not incurred any material Liability for Taxes outside the Ordinary Course of Business.
(c)All Taxes that the Company is or was required by Law to withhold or collect have been duly and timely withheld or collected in all material respects on behalf of its respective employees, independent contractors, stockholders, lenders, customers or other third parties and have been timely paid to the proper Governmental Body or other Person or properly set aside in accounts for this purpose.
(d)There are no Encumbrances for material Taxes (other than Taxes not yet due and payable) upon any of the assets of the Company.
25
(e)No deficiencies for a material amount of Taxes with respect to the Company have been claimed, proposed or assessed by any Governmental Body in writing. There are no pending or ongoing and, to the Knowledge of the Company, no threatened audits, assessments or other actions for or relating to any liability in respect of a material amount of Taxes of the Company. The Company nor any of its predecessors has waived any statute of limitations or agreed to any extension of time with respect to any income or other material Tax assessment or deficiency.
(f)The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(g)The Company is not a party to any Tax allocation agreement, Tax sharing agreement, Tax indemnity agreement, or similar agreement or arrangement, other than customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes.
(h)Neither the Company (nor Parent as a result of the Mergers) will be required to include any item of income in, or exclude any item of deduction from, taxable income for any Tax period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for Tax purposes for a Tax period ending on or prior to the Closing Date; (ii) use of an improper method of accounting for a Tax period ending on or prior to the Closing Date; (iii) “closing agreement” as described in Section 7121 of the Code (or any similar provision of state, local or foreign Law) executed on or prior to the Closing Date; (iv) intercompany transaction or excess loss account described in Treasury Regulations under Section 1502 of the Code (or any similar provision of state, local or foreign Law); (v) installment sale or open transaction disposition made on or prior to the Closing Date; (vi) prepaid amount, advance payment or deferred revenue received or accrued on or prior to the Closing Date; or (vii) election under Section 108(i) of the Code.
(i)The Company has not ever been (i) a member of a consolidated, combined or unitary Tax group (other than such a group the common parent of which is the Company) or (ii) a party to any joint venture, partnership, or other arrangement that is treated as a partnership for U.S. federal income Tax purposes. The Company has no Liability for any material Taxes of any Person (other than the Company) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local, or foreign Law), as a transferee or successor, by Contract (other than a Contract entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes) or otherwise by operation of law.
(j)The Company has not ever distributed stock of another Person, or had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Section 355 of the Code or Section 361 of the Code (or any similar provisions of state, local or foreign Law).
(k)The Company has not had a permanent establishment (within the meaning of an applicable Tax treaty) or otherwise had an office or fixed place of business in a country other than the country in which it is organized.
(l)The Company has not participated in or been a party to a transaction that, as of the date of this Agreement, constitutes a “reportable transaction” within the meaning of Section 6707A(c)(1) of the Code and Treasury Regulations Section 1.6011-4(b).
26
(m)Neither the Company nor any Subsidiary of the Company has taken any action, or knows of any fact or circumstance, that could reasonably be expected to prevent the Merger from being treated as an integrated transaction that qualifies as a “reorganization” within the meaning of Section 368(a) of the Code.
(n)The Company operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treasury Regulations Section 1.368-1(d).
(o)Section 2.16(n) of the Company Disclosure Schedule sets forth the entity classification of the Company for U.S. federal income tax purposes. The Company has not made an election or taken any other action to change its federal and state income tax classification from such classification.
For purposes of this Section 2.16, each reference to the Company shall be deemed to include any Person that was liquidated into, merged with, or is otherwise a predecessor to, the Company.
2.17Employee and Labor Matters; Benefit Plans.
(a)Section 2.17(a) of the Company Disclosure Schedule is a list of all material Company Benefit Plans, other than at-will employment offer letters on the Company’s standard form and other than individual compensatory equity award agreements made pursuant to the Company’s standard forms, in which case only representative standard forms of such agreements shall be scheduled. “Company Benefit Plan” means each (i) “employee benefit plan” as defined in Section 3(3) of ERISA and (ii) other pension, retirement, deferred compensation, excess benefit, profit-sharing, bonus, incentive, equity or equity-based, phantom equity, employment, consulting, severance, change-of-control, retention, health, life, disability, group insurance, paid time off, holiday, welfare and fringe benefit plan, program, agreement, Contract, or arrangement (whether written or unwritten, qualified or nonqualified, funded or unfunded, subject or not subject to ERISA and including any that have been frozen), in each case, sponsored, maintained, administered, contributed to, or required to be contributed to, by the Company for the benefit of any current or former employee, director, officer or independent contractor of the Company (or beneficiary thereof) or under which the Company has any actual or contingent liability (including, without limitation, by reason of having a Company ERISA Affiliate).
(b)As applicable with respect to each material Company Benefit Plan, the Company has made available to Parent, true and complete copies of (i) each material Company Benefit Plan, including all amendments thereto, and in the case of an unwritten material Company Benefit Plan, a written description thereof, (ii) all current trust documents, investment management Contracts, custodial agreements, administrative services agreements and insurance and annuity Contracts relating thereto, (iii) the current summary plan description and each summary of material modifications thereto, (iv) the most recently filed annual reports with any Governmental Body (e.g., Form 5500 and all schedules thereto), (v) the most recent IRS determination, opinion or advisory letter, (vi) the most recent summary annual reports, nondiscrimination testing reports, actuarial reports, financial statements and trustee reports, and (vii) all notices and filings from the IRS or Department of Labor or other Governmental Body concerning audits or investigations, or “prohibited transactions” within the meaning of Section 406 of ERISA or Section 4975 of the Code.
27
(c)Each Company Benefit Plan has been maintained, operated and administered in compliance in all material respects with its terms and the applicable provisions of ERISA, the Code and all other Laws.
(d)The Company Benefit Plans which are “employee pension benefit plans” within the meaning of Section 3(2) of ERISA and which are intended to meet the qualification requirements of Section 401(a) of the Code have received determination or opinion letters from the IRS on which they may currently rely to the effect that such plans are qualified under Section 401(a) of the Code and the related trusts are exempt from federal income Taxes under Section 501(a) of the Code, respectively, and nothing has occurred that would reasonably be expected to materially adversely affect the qualification of such Company Benefit Plan or the tax exempt status of the related trust.
(e)Neither the Company nor any Company ERISA Affiliate maintains, contributes to, is required to contribute to, or has any actual or contingent liability with respect to, (i) any “employee pension benefit plan” (within the meaning of Section 3(2) of ERISA) that is subject to Title IV or Section 302 of ERISA or Section 412 of the Code, (ii) any “multiemployer plan” (within the meaning of Section 3(37) of ERISA), (iii) any “multiple employer plan” (within the meaning of Section 413 of the Code) or (iv) any “multiple employer welfare arrangement” (within the meaning of Section 3(40) of ERISA).
(f)There are no pending audits or investigations by any Governmental Body involving any Company Benefit Plan, and no pending or, to the Knowledge of the Company, threatened claims (except for routine individual claims for benefits payable in the normal operation of the Company Benefit Plans), suits or proceedings involving any Company Benefit Plan, or, to the Knowledge of the Company, any fiduciary thereof or service provider thereto, in any case except as would not be reasonably expected to result in material liability to the Company. All contributions and premium payments required to have been made under any of the Company Benefit Plans or by applicable Law (without regard to any waivers granted under Section 412 of the Code), have been timely made and the Company has no material liability for any unpaid contributions with respect to any Company Benefit Plan.
(g)None of the Company, any Company ERISA Affiliate or, to the Knowledge of the Company, any fiduciary, trustee or administrator of any Company Benefit Plan, has engaged in, or in connection with the Contemplated Transactions will engage in, any transaction with respect to any Company Benefit Plan which would subject any such Company Benefit Plan, the Company, or Parent to a material Tax, material penalty or material liability for a “prohibited transaction” under Section 406 of ERISA or Section 4975 of the Code.
(h)No Company Benefit Plan provides death, medical, dental, vision, life insurance or other welfare benefits beyond termination of service or retirement other than coverage mandated by Law and, to the Knowledge of the Company, the Company has not made a written representation promising the same.
(i)Neither the execution of this Agreement, nor the performance of the Contemplated Transactions (either alone or when combined with the occurrence of any other event, including without limitation, a termination of employment), will: (i) result in any payment becoming due to any current or former employee, director, officer, or independent contractor of the Company thereof, pursuant to any Company Benefit Plan (ii) increase any amount of compensation or benefits otherwise payable under any Company Benefit Plan, (iii) result in the acceleration of the time of payment, funding or vesting of any benefits under any Company Benefit Plan, (iv) require any contribution or payment to
28
fund any obligation under any Company Benefit Plan or (v) limit the right to merge, amend or terminate any Company Benefit Plan.
(j)Except as set forth in Section 2.17(a) of the Company Disclosure Schedule, neither the execution of this Agreement, nor the consummation of the Contemplated Transactions (either alone or when combined with the occurrence of any other event, including without limitation, a termination of employment) will result in the receipt or retention by any person who is a “disqualified individual” (within the meaning of Code Section 280G) with respect to the Company of any payment or benefit that is or could be characterized as a “parachute payment” (within the meaning of Code Section 280G), determined without regard to the application of Code Section 280G(b)(5).
(k)No current or former employee, officer, director or independent contractor of the Company has any “gross up” agreements with the Company or other assurance of reimbursement by the Company for any Taxes imposed under Code Section 409A or Code Section 4999.
(l)The Company does not maintain any Company Benefit Plan for the benefit of any service providers located outside of the United States.
(m)The Company has provided to Parent a true and correct list, as of the date of this Agreement, containing the names of all current full-time, part-time or temporary employees and independent contractors (and indication as such), and, as applicable: (i) the annual dollar amount of all cash compensation in the form of wages, salary, fees, commissions, or director’s fees payable to each person; (ii) dates of employment or service; (iii) title and, with respect to independent contractors, a current written description of such person’s contracting services; (iv) visa status, if applicable; and (v) with respect to employees, (A) a designation of whether they are classified as exempt or non-exempt for purposes of the Fair Labor Standards Act, as amended (“FLSA”) and any similar state law and (B) whether such an employee is on leave and, if so, the expected return date.
(n)The Company is not and has never been a party to, bound by, or has a duty to bargain under, any collective bargaining agreement or other Contract with a labor union or similar labor organization representing any of its employees, and there is no labor union or similar labor organization representing or, to the Knowledge of the Company, purporting to represent or seeking to represent any employees of the Company, including through the filing of a petition for representation election. There is not and has not been in the past five years, nor, to the Knowledge of the Company, is there or has there been since the Company’s inception any threat of, any strike, slowdown, work stoppage, lockout, union election petition, demand for recognition, or any similar activity or dispute or any union organizing activity, affecting the Company.
(o)The Company is, and since the Company’s inception has been, in material compliance with all applicable Laws respecting labor, employment, employment practices, and terms and conditions of employment, including worker classification, discrimination, harassment and retaliation, equal employment opportunities, fair employment practices, meal and rest periods, immigration, employee safety and health, payment of wages (including overtime wages), unemployment and workers’ compensation, leaves of absence, and hours of work. Except as would not be reasonably likely to result in a material liability to the Company, with respect to employees of the Company, the Company, since the Company’s inception, has withheld and reported all amounts required by Law to be withheld and reported with respect to wages, salaries and other payments, benefits, or compensation to employees. There is no material Legal Proceeding pending or, to the Knowledge of the Company,
29
threatened or reasonably anticipated against the Company relating to any current or former employee, applicant for employment, or consultant of the Company.
(p)Within the preceding two years, the Company has complied in all material respects with the WARN Act, and no action that could trigger the WARN Act will be implemented before the Closing Date without advance notification to and approval of Parent.
2.18Environmental Matters. The Company is and since inception has complied with all applicable Environmental Laws, which compliance includes the possession by the Company of all permits and other Governmental Authorizations required under applicable Environmental Laws and compliance with the terms and conditions thereof, except for any failure to be in such compliance that, either individually or in the aggregate, would not reasonably be expected to be material to the Company or its business. The Company has not received since inception any written notice or other communication (in writing or otherwise), whether from a Governmental Body or other Person, that alleges that the Company is not in compliance with or has liability pursuant to any Environmental Law and, to the Knowledge of the Company, there are no circumstances that would reasonably be expected to prevent or interfere with the Company’s compliance in any material respects with any Environmental Law, except where such failure to comply would not reasonably be expected to be material to the Company or its business. No current or (during the time a prior property was leased or controlled by the Company) prior property leased or controlled by the Company has had a release of or exposure to Hazardous Materials in material violation of or as would reasonably be expected to result in any material liability of the Company pursuant to Environmental Law. No consent, approval or Governmental Authorization of or registration or filing with any Governmental Body is required by Environmental Laws in connection with the execution and delivery of this Agreement or consummation of the Contemplated Transactions by the Company. Prior to the date hereof, the Company has provided or otherwise made available to Parent true and correct copies of all material environmental reports, assessments, studies and audits in the possession or control of the Company with respect to any property leased or controlled by the Company or any business operated by it.
2.19Insurance. The Company has delivered or made available to Parent accurate and complete copies of all material insurance policies and all material self-insurance programs and arrangements relating to the business, assets, liabilities and operations of the Company. Each of such insurance policies is in full force and effect and the Company is in compliance in all material respects with the terms thereof. Other than customary end of policy notifications from insurance carriers, since the Company’s inception, the Company has not received any notice or other communication regarding any actual or possible: (a) cancellation or invalidation of any insurance policy; or (b) refusal or denial of any coverage, reservation of rights or rejection of any material claim under any insurance policy. The Company has provided timely written notice to the appropriate insurance carrier(s) of each Legal Proceeding that is currently pending against the Company for which the Company has insurance coverage, and no such carrier has issued a denial of coverage or a reservation of rights with respect to any such Legal Proceeding, or informed the Company of its intent to do so.
2.20No Financial Advisors. Except as set forth in Section 2.20 of the Company Disclosure Schedule, no broker, finder or investment banker is entitled to any brokerage fee, finder’s fee, opinion fee, success fee, transaction fee or other fee or commission in connection with the Contemplated Transactions based upon arrangements made by or on behalf of the Company.
2.21Transactions with Affiliates.
30
(a)Section 2.21(a) of the Company Disclosure Schedule describes any material transactions or relationships, since the Company’s inception, between, on one hand, the Company and, on the other hand, any (i) officer or director of the Company or, to the Knowledge of the Company, any of such officer’s or director’s immediate family members, (ii) owner of more than 5% of the voting power of the outstanding Company Capital Stock or (iii) to the Knowledge of the Company, any “related person” (within the meaning of Item 404 of Regulation S-K under the Securities Act) of any such officer, director or owner (other than the Company) in the case of each of (i), (ii) or (iii) that is of the type that would be required to be disclosed under Item 404 of Regulation S-K under the Securities Act.
(b)Section 2.21(b) of the Company Disclosure Schedule lists each stockholders agreement, voting agreement, registration rights agreement, co-sale agreement or other similar Contract between the Company and any holders of Company Capital Stock, including any such Contract granting any Person investor rights, rights of first refusal, rights of first offer, registration rights, director designation rights or similar rights (collectively, the “Investor Agreements”).
2.22Anti-Bribery. None of the Company nor any of its directors, officers, employees or, to the Company’s Knowledge, agents or any other Person acting on their behalf (in each in their respective capacities as such) has directly or indirectly made any bribes, rebates, payoffs, influence payments, kickbacks, illegal payments, illegal political contributions, or other payments, in the form of cash, gifts, or otherwise, or taken any other action, in violation of the Foreign Corrupt Practices Act of 1977, the UK Bribery Act of 2010 or any other anti-bribery or anti-corruption Law (collectively, the “Anti-Bribery Laws”). The Company is not, nor has ever been, the subject of any investigation or inquiry by any Governmental Body with respect to potential violations of Anti-Bribery Laws.
2.23Disclaimer of Other Representations or Warranties.
(a)Except as previously set forth in this Section 2 or in any certificate delivered by the Company to Parent and/or Merger Subs pursuant to this Agreement, the Company makes no representation or warranty, express or implied, at law or in equity, with respect to it or any of its assets, liabilities or operations, and any such other representations or warranties are hereby expressly disclaimed.
(b)The Company acknowledges and agrees that, except for the representations and warranties of Parent and Merger Subs set forth in Section 3 or in any certificate delivered by Parent and/or Merger Subs to the Company pursuant to this Agreement, none of Parent, Merger Subs or any of their respective Representatives is relying on any other representation or warranty of Parent or any other Person made outside of Section 3 or such certificate, including regarding the accuracy or completeness of any such other representations or warranties or the omission of any material information, whether express or implied, in each case, with respect to the Contemplated Transactions.
3REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUBS. Subject to Section 10.13(h), except (a) as set forth in the disclosure schedule delivered by Parent to the Company (the “Parent Disclosure Schedule”) or (b) as disclosed in the Parent SEC Documents filed with the SEC after December 31, 2021 and prior to the date hereof and publicly available on the SEC’s Electronic Data Gathering Analysis and Retrieval system (but (i) without giving effect to any amendment thereof filed with, or furnished to the SEC on or after the date hereof and (ii) excluding any disclosures contained under the heading “Risk Factors” and any disclosure of risks included in any “forward-looking statements” disclaimer or in any other section to the extent they are forward-looking statements or cautionary, predictive or forward-looking in nature), it being understood that any matter disclosed in the Parent SEC Documents (x) shall not be deemed disclosed for purposes of Section 3.1, Section 3.2,
31
Section 3.3, Section 3.4, Section 3.5, Section 3.6, and Section 3.7 and (y) shall be deemed to be disclosed in a section of the Parent Disclosure Schedule only to the extent that it is readily apparent from a reading of such Parent SEC Documents that is applicable to such section of the Parent Disclosure Schedule, Parent and Merger Sub represent and warrant to the Company as follows:
3.1Due Organization; Subsidiaries.
(a)Each of Parent, First Merger Sub and Second Merger Sub is a corporation duly incorporated, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, and has all necessary corporate power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own or lease and use its property and assets in the manner in which its property and assets are currently owned or leased and used; and (iii) to perform its obligations under all Contracts by which it is bound. Since their respective date of incorporation, no Merger Sub has engaged in any activities other than activities incident to its formation or in connection with or as contemplated by this Agreement.
(b)Parent is duly licensed and qualified to do business, and is in good standing (to the extent applicable in such jurisdiction), under the Laws of all jurisdictions where the nature of its business requires such licensing or qualification other than in jurisdictions where the failure to be so qualified individually or in the aggregate would not be reasonably expected to have a Parent Material Adverse Effect.
(c)Parent has no Subsidiaries, except for the Entities identified in Section 3.1(c) of the Parent Disclosure Schedule; and neither Parent nor any of the Entities identified in Section 3.1(c) of the Parent Disclosure Schedule owns any capital stock of, or any equity, ownership or profit-sharing interest of any nature in, or controls directly or indirectly, any other Entity other than the Entities identified in Section 3.1(c) of the Parent Disclosure Schedule. Each of Parent’s Subsidiaries is a corporation or other legal entity duly organized, validly existing and, if applicable, in good standing under the Laws of the jurisdiction of its organization and has all necessary corporate or other power and authority: (i) to conduct its business in the manner in which its business is currently being conducted; (ii) to own or lease and use its property and assets in the manner in which its property and assets are currently owned or leased and used; and (iii) to perform its obligations under all Contracts by which it is bound.
(d)Neither the Parent nor any of its Subsidiaries is or has otherwise been, directly or indirectly, a party to, member of or participant in any partnership, joint venture or similar business Entity. Neither the Parent nor any of its Subsidiaries has agreed or is obligated to make, or is bound by any Contract under which it may become obligated to make, any future investment in or capital contribution to any other Entity. Neither the Parent nor any of its Subsidiaries has, at any time, been a general partner of, or has otherwise been liable for, any of the debts or other obligations of, any general partnership, limited partnership or other Entity.
3.2Organizational Documents. Parent has made available to the Company accurate and complete copies of the Organizational Documents or Parent and each of its Subsidiaries in effect as of the date of this Agreement. Neither Parent nor any of its Subsidiaries is in breach or violation of its respective Organizational Documents.
3.3Authority; Binding Nature of Agreement.
(a)The Parent and each of its Subsidiaries (including the Merger Subs) have all necessary corporate power and authority to enter into and to perform its obligations under this
32
Agreement and, subject, with respect to Parent, to receipt of the Required Parent Stockholder Vote and, with respect to Merger Subs, the adoption of this Agreement by Parent in its capacity as sole stockholder of Merger Subs, to perform its obligations hereunder and to consummate the Contemplated Transactions. The Parent Board (at meetings duly called and held) has: (i) determined that the Contemplated Transactions are fair to, advisable and in the best interests of Parent and its stockholders; (ii) authorized, approved and declared advisable this Agreement and the Contemplated Transactions, including the issuance of Parent Common Stock Payment Shares and Parent Preferred Stock Payment Shares to the stockholders of the Company pursuant to the terms of this Agreement and the treatment of the Company Options pursuant to this Agreement; and (iii) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the stockholders of Parent vote to approve the Parent Stockholder Matters. The First Merger Sub Board (by unanimous written consent) has: (A) determined that the Contemplated Transactions are fair to, advisable, and in the best interests of First Merger Sub and its sole stockholder; (B) authorized, approved and declared advisable this Agreement and the Contemplated Transactions; and (C) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the stockholder of First Merger Sub vote to adopt this Agreement and thereby approve the Contemplated Transactions. The Second Merger Sub Board (by unanimous written consent) has: (A) determined that the Contemplated Transactions are fair to, advisable, and in the best interests of Second Merger Sub and its sole member; (B) authorized, approved and declared advisable this Agreement and the Contemplated Transactions; and (C) determined to recommend, upon the terms and subject to the conditions set forth in this Agreement, that the member of Second Merger Sub vote to adopt this Agreement and thereby approve the Contemplated Transactions.
(b)This Agreement has been duly executed and delivered by Parent and each Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes the legal, valid and binding obligation of Parent and Merger Subs, enforceable against each of Parent and Merger Subs in accordance with its terms, subject to the Enforceability Exceptions.
3.4Vote Required. The approval of holders of Parent Common Stock is not required in order to approve this Agreement or, except with respect to Parent Stockholder Matters, the transactions contemplated hereby. The affirmative vote of a majority of the votes cast at the Parent Stockholders’ Meeting by the holders of Parent Common Stock (other than the Parent Common Stock Payment Shares to be issued at Closing pursuant to this Agreement) are the only vote of the holders of any class or series of Parent’s capital stock necessary to approve the proposal described in Section 5.1(a)(i) (“Required Parent Stockholder Vote”).
3.5Non-Contravention; Consents. Subject to obtaining the Required Parent Stockholder Vote and the filing of the Certificates of Merger required by the DGCL and the filing of the Certificate of Designation, neither (x) the execution, delivery or performance of this Agreement by Parent or Merger Subs, nor (y) the consummation of the Contemplated Transactions, will directly or indirectly (with or without notice or lapse of time):
(a)contravene, conflict with or result in a violation of any of the provisions of the Organizational Documents of Parent or Merger Subs;
(b)contravene, conflict with or result in a violation of, give any Governmental Body or other Person the right to challenge the Contemplated Transactions or to exercise any remedy or obtain any relief under, any Law or any order, writ, injunction, judgment or decree to which Parent or its Subsidiaries, or any of the assets owned or used by Parent or its Subsidiaries, is subject, except as would not reasonably be expected to be material to Parent or its business;
33
(c)contravene, conflict with or result in a violation of any of the terms or requirements of, or give any Governmental Body the right to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental Authorization that is held by Parent, except as would not reasonably be expected to be material to Parent or its business;
(d)contravene, conflict with or result in a violation or breach of, or result in a default under, any provision of any Parent Material Contract, or give any Person the right to: (i) declare a default or exercise any remedy under any Parent Material Contract; (ii) any material payment, rebate, chargeback, penalty or change in delivery schedule under any Parent Material Contract; (iii) accelerate the maturity or performance of any Parent Material Contract; or (iv) cancel, terminate or modify any term of any Parent Material Contract, except in the case of any non-material breach, default, penalty or modification; or
(e)result in the imposition or creation of any Encumbrance upon or with respect to any asset owned or used by Parent (except for Permitted Encumbrances).
Except for (i) any Consent set forth in Section 3.5 of the Parent Disclosure Schedule under any Parent Contract, (ii) the Required Parent Stockholder Vote, (iii) the filing of the Certificates of Merger with the Secretary of State of the State of Delaware pursuant to the DGCL, (iv) the filing of the Certificate of Designation with the Secretary of State of the State of Delaware pursuant to the DGCL and (v) such consents, waivers, approvals, orders, authorizations, registrations, declarations and filings as may be required under applicable federal and state securities Laws, neither Parent nor any of its Subsidiaries is or will be required to make any filing with or give any notice to, or to obtain any Consent from, any Person in connection with (A) the execution, delivery or performance of this Agreement, or (B) the consummation of the Contemplated Transactions. The Parent Board and the First Merger Sub Board and the Second Merger Sub Board have taken and will take all actions necessary to ensure that the restrictions applicable to business combinations contained in Section 203 of the DGCL (or analogous provisions) are, and will be, inapplicable to the execution, delivery and performance of this Agreement, the Lock-Up Agreements and to the consummation of the Contemplated Transactions. No other state takeover statute or similar Law applies or purports to apply to the Merger, this Agreement or any of the other Contemplated Transactions.
3.6Capitalization.
(a)The authorized capital stock of Parent as of the date of this Agreement consists of 100,000,000 shares of Parent Common Stock, par value $0.0001 per share, of which 1,441,157 shares have been issued and are outstanding as of the close of business on the Reference Date and 10,000,000 shares of preferred stock of Parent, par value $0.0001 per share, of which no shares have been issued and are outstanding as of the date of this Agreement. Parent does not hold any shares of its capital stock in its treasury.
(b)All of the outstanding shares of Parent Common Stock have been duly authorized and validly issued, and are fully paid and nonassessable. None of the outstanding shares of Parent Common Stock are entitled or subject to any preemptive right, right of participation, right of maintenance or any similar right and none of the outstanding shares of Parent Common Stock is subject to any right of first refusal in favor of Parent. Except as contemplated herein, there is no Parent Contract relating to the voting or registration of, or restricting any Person from purchasing, selling, pledging or
34
otherwise disposing of (or granting any option or similar right with respect to), any shares of Parent Common Stock. Parent is not under any obligation, nor is it bound by any Contract pursuant to which it may become obligated, to repurchase, redeem or otherwise acquire any outstanding shares of Parent Common Stock or other securities. Section 3.6(b) of the Parent Disclosure Schedule accurately and completely lists all repurchase rights held by Parent with respect to shares of Parent Common Stock (including shares issued pursuant to the exercise of stock options) and specifies which of those repurchase rights are currently exercisable and whether the holder of such shares of Parent Common Stock timely filed an election with the relevant Governmental Bodies under Section 83(b) of the Code with respect to such shares.
(c)Except for the Parent Stock Plans, and except as set forth in Section 3.6(c) of the Parent Disclosure Schedule, Parent does not have any stock option plan or any other plan, program, agreement or arrangement providing for any equity-based compensation for any Person. As of the close of business on the Reference Date, Parent has reserved 67,030 shares of Parent Common Stock for issuance under the Parent Stock Plans, of which Parent RSUs and Parent Options to purchase a total of 31,685 shares, in the aggregate, have been issued and are currently outstanding of, which no shares are subject to Parent’s right of repurchase, of which (1) 31,554 shares have been reserved for issuance upon exercise of Parent Options previously granted and currently outstanding under the Parent Stock Plans, (2) 131 shares have been reserved for issuance upon the settlement of Parent RSUs granted under the Parent Stock Plans that are outstanding as of the close of business on the Reference Date, and (3) 35,345 shares remain available for future issuance pursuant to the Parent Stock Plans. Section 3.6(c) of the Parent Disclosure Schedule sets forth the following information with respect to each Parent Option and Parent RSU outstanding as of the Reference Date: (i) the name of the holder; (ii) the number of shares of Parent Common Stock subject to such Parent Option or Parent RSU at the time of grant; (iii) the number of shares of Parent Common Stock subject to such Parent Option or Parent RSU as of the close of business on the Reference Date; (iv) the exercise price of such Parent Option; (v) the date on which such Parent Option or Parent RSU was granted; (vi) the applicable vesting schedule, including the number of vested and unvested shares as of the close of business on the Reference Date and any acceleration provisions; (vii) the date on which such Parent Option or Parent RSU expires; (viii) whether such Parent Option is intended to constitute an “incentive stock option” (as defined in the Code) or a non-qualified stock option and (ix) whether such Parent Option is “early exercisable”. Parent has made available to the Company accurate and complete copies of the Parent Stock Plans and the form of the stock option agreements and restricted stock unit agreements evidencing outstanding Parent Options and Parent RSUs granted thereunder.
(d)Except for the Parent Options and the Parent RSUs granted pursuant to the Parent Stock Plans, and as otherwise set forth in Section 3.6(d) of the Parent Disclosure Schedule, there is no: (i) outstanding subscription, option, call, warrant or right (whether or not currently exercisable) to acquire any shares of the capital stock or other securities of Parent or any of its Subsidiaries; (ii) outstanding security, instrument or obligation that is or may become convertible into or exchangeable for any shares of the capital stock or other securities of Parent or any of its Subsidiaries; or (iii) condition or circumstance that could be reasonably likely to give rise to or provide a basis for the assertion of a claim by any Person to the effect that such Person is entitled to acquire or receive any shares of capital stock or other securities of Parent or any of its Subsidiaries (it being understood that Parent intends to issue prior to (but contingent upon) the Closing restricted stock units to certain employees of the Company identified in the Company Disclosure Schedule). There are no outstanding or authorized stock appreciation, phantom stock, profit participation or other similar rights with respect to Parent or any of its Subsidiaries. In addition, there are no stockholder rights plans (or similar plan commonly referred to as a “poison pill”) or bonds, debentures, notes or other indebtedness of Parent
35
having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of Parent may vote.
(e)All outstanding shares of Parent Common Stock, Parent Options, Parent RSUs and other securities of Parent have been issued and granted in material compliance with (i) the Organizational Documents of Parent in effect as of the relevant time and all applicable securities Laws and other applicable Law, and (ii) all requirements set forth in applicable Contracts.
(f)All distributions, dividends, repurchases and redemptions of Parent Common Stock or other equity interests of Parent were undertaken in material compliance with (i) the Organizational Documents of Parent in effect as of the relevant time and all applicable securities Laws and other applicable Laws, and (ii) all requirements set forth in applicable Contracts.
3.7SEC Filings; Financial Statements.
(a)Parent has delivered or made available to the Company accurate and complete copies of all registration statements, proxy statements, Certifications (as defined below) and other statements, reports, schedules, forms and other documents filed by Parent with the SEC since December 31, 2021 (the “Parent SEC Documents”), other than such documents that can be obtained on the SEC’s website at www.sec.gov. Since December 31, 2021, all material statements, reports, schedules, forms and other documents required to have been filed by Parent or its officers with the SEC have been so filed on a timely basis. As of the time it was filed with the SEC (or, if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing), each of the Parent SEC Documents complied in all material respects with the applicable requirements of the Securities Act or the Exchange Act (as the case may be) and, as of the time they were filed, or if amended or superseded by a filing prior to the date of this Agreement, on the date of the last such amendment or superseding filing prior to the date of this Agreement, none of the Parent SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The certifications and statements required by (i) Rule 13a-14 under the Exchange Act and (ii) 18 U.S.C. §1350 (Section 906 of the Sarbanes-Oxley Act) relating to the Parent SEC Documents (collectively, the “Certifications”) are accurate and complete and comply as to form and content with all applicable Laws, and no current or former executive officer of Parent has failed to make the Certifications required of him or her. Parent has made available to the Company true and complete copies of all correspondence, other than transmittal correspondence or general communications by the SEC not specifically addressed to Parent, between the SEC, on the one hand, and Parent, on the other, since December 31, 2021, including all SEC comment letters and responses to such comment letters and responses to such comment letters by or on behalf of Parent except for such comment letters and responses to such comment letters that are publicly accessible through EDGAR. As of the date of this Agreement, there are no outstanding unresolved comments in comment letters received from the SEC or Nasdaq with respect to Parent SEC Documents. To the Knowledge of Parent, none of the Parent SEC Documents is the subject of ongoing SEC review and there are no inquiries or investigations by the SEC or any internal investigations pending or threatened, including with regards to any accounting practices of Parent. As used in this Section 3.7, the term “file” and variations thereof shall be broadly construed to include any manner in which a document or information is filed, furnished, supplied or otherwise made available to the SEC.
(b)The financial statements (including any related notes) contained or incorporated by reference in the Parent SEC Documents: (i) complied as to form in all material respects with the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance
36
with GAAP (except as may be indicated in the notes to such financial statements or, in the case of unaudited financial statements, except as permitted by Form 10-Q of the SEC, and except that the unaudited financial statements may not contain footnotes and are subject to normal and recurring year-end adjustments) applied on a consistent basis unless otherwise noted therein throughout the periods indicated; and (iii) fairly present, in all material respects, the financial position of Parent and its consolidated Subsidiaries as of the respective dates thereof and the results of operations and cash flows of Parent for the periods covered thereby. Other than as expressly disclosed in the Parent SEC Documents filed prior to the date hereof, there has been no material change in Parent’s accounting methods or principles that would be required to be disclosed in Parent’s financial statements in accordance with GAAP.
(c)Parent’s independent registered public accounting firm has at all times since the date of enactment of the Sarbanes-Oxley Act been: (i) a registered public accounting firm (as defined in Section 2(a)(12) of the Sarbanes-Oxley Act); (ii) to the Knowledge of Parent, “independent” with respect to Parent within the meaning of Regulation S-X under the Exchange Act; and (iii) to the Knowledge of Parent, in compliance with subsections (g) through (l) of Section 10A of the Exchange Act and the rules and regulations promulgated by the SEC and the Public Company Accounting Oversight Board thereunder.
(d)Except as set forth in Section 3.7(d) of the Parent Disclosure Schedule, since December 31, 2021, through the date of this Agreement, Parent has not received any comment letter from the SEC or the staff thereof or any correspondence from officials of Nasdaq or the staff thereof relating to the delisting or maintenance of listing of the Parent Common Stock on Nasdaq. As of the date of this Agreement, Parent has timely responded to all comment letters of the staff of the SEC relating to the Parent SEC Documents, and the SEC has not advised Parent that any final responses are inadequate, insufficient or otherwise non-responsive. Parent has made available to the Company true, correct and complete copies or all comment letters, written inquiries and enforcement correspondences between the SEC, on the one hand, and Parent, on the other hand, occurring since December 31, 2021 and will, reasonably promptly following the receipt thereof, make available to the Company any such correspondence sent or received after the date of this Agreement. To the Knowledge of Parent, as of the date of this Agreement, none of the Parent SEC Documents is the subject of an ongoing SEC review, investigation or outstanding SEC comment.
(e)Since December 31, 2021, there have been no formal investigations regarding financial reporting or accounting policies and practices discussed with, reviewed by or initiated at the direction of the chief executive officer, chief financial officer, principal accounting officer or general counsel of Parent, the Parent Board or any committee thereof, other than ordinary course audits or reviews of accounting policies and practices or internal controls required by the Sarbanes-Oxley Act.
(f)Except as otherwise set forth in Section 3.7(f) of the Parent Disclosure Schedule, Parent is and since its first date of listing on Nasdaq, has been, in compliance in all material respects with the applicable current listing and governance rules and regulations of Nasdaq.
(g)Parent maintains, and at all times since December 31, 2021, has maintained, a system of internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and to provide reasonable assurance (i) that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, (ii) that receipts and expenditures are made
37
only in accordance with authorizations of management and the Parent Board, (iii) regarding prevention or timely detection of the unauthorized acquisition, use or disposition of Parent’s assets that could have a material effect on Parent’s financial statements and (iv) that Parent maintains records in reasonable detail which accurately and fairly reflect the transactions and dispositions of the assets of Parent and any of its Subsidiaries. Parent has evaluated the effectiveness of Parent’s internal control over financial reporting as of December 31, 2023, and, to the extent required by applicable Law, presented in any applicable Parent SEC Document that is a report on Form 10-K or Form 10-Q (or any amendment thereto) its conclusions about the effectiveness of the internal control over financial reporting as of the end of the period covered by such report or amendment based on such evaluation. Parent has disclosed, based on its most recent evaluation of internal control over financial reporting, to Parent’s auditors and audit committee (and has described in Section 3.7(g) of the Parent Disclosure Schedule) (A) all material weaknesses and all significant deficiencies, if any, in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect Parent’s ability to record, process, summarize and report financial information and (B) any fraud, whether or not material, that involves Parent, any of its Subsidiaries, Parent’s management or other employees who have a role in the preparation of financial statements or the internal accounting controls utilized by Parent and its Subsidiaries or (C) any claim or allegation regarding any of the foregoing. Parent has not identified, based on its most recent evaluation of internal control over financial reporting, any significant deficiencies or material weaknesses in the design or operation of Parent’s internal control over financial reporting.
(h)Parent maintains “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) that are reasonably designed to ensure that information required to be disclosed by Parent in the periodic reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the required time periods, and that all such information is accumulated and communicated to Parent’s management as appropriate to allow timely decisions regarding required disclosure and to make the Certifications.
(i)Section 3.7(i) to the Parent Disclosure Schedule sets forth an accurate statement of Parent’s cash and cash equivalents as of the close of business on the Business Day preceding the date of this Agreement, and there has been no material change in the amount thereof from such statement through the date of this Agreement. The cash forecast set forth in Section 3.7(i) to the Parent Disclosure Schedule: (i) has been prepared by Parent in good faith, (ii) is based on assumptions that Parent considers to be reasonable, and (iii) fairly reflects Parent’s reasonably anticipated rate of cash usage for the periods covered therein.
(j)Parent has not been and is not currently a “shell company” as defined under Section 12b-2 of the Exchange Act.
3.8Absence of Changes. Except as set forth in Section 3.8 of the Parent Disclosure Schedule, after the date of the Parent Balance Sheet, Parent and its Subsidiaries have conducted its business only in the Ordinary Course of Business (except for the execution and performance of this Agreement and the discussions, negotiations and transactions related thereto) and there has not been any (a) Parent Material Adverse Effect and (b) neither Parent nor any of its Subsidiaries has done any of the following:
(a)declared, accrued, set aside or paid any dividend or made any other distribution in respect of any shares of its capital stock or repurchased, redeemed or otherwise reacquired any shares of its capital stock or other securities (except in connection with the payment of the exercise
38
price and/or withholding Taxes incurred upon the exercise, settlement or vesting of any award granted under the Parent Stock Plans);
(b)sold, issued, granted, pledged or otherwise disposed of or encumbered or authorized any of the foregoing with respect to: (A) any capital stock or other security of Parent (except for Parent Common Stock issued upon the valid exercise of outstanding Parent Options); (B) any option, warrant or right to acquire any capital stock or any other security, other than option grants to employees in the Ordinary Course of Business; or (C) any instrument convertible into or exchangeable for any capital stock or other security of Parent;
(c)except as required to give effect to anything in contemplation of the Closing, amended any of its Organizational Documents, or effected or been a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction except, for the avoidance of doubt, the Contemplated Transactions;
(d)formed any Subsidiary or acquired any equity interest or other interest in any other Entity or entered into a joint venture with any other Entity;
(e)(A) lent money to any Person (except for the advance of reasonable business expenses to employees, directors and consultants in the Ordinary Course of Business), (B) incurred or guaranteed any indebtedness for borrowed money, or (C) guaranteed any debt securities of others;
(f)other than as required by applicable Law or the terms of any Parent Benefit Plan as in effect on the date of this Agreement: (A) adopted, terminated, established or entered into any Parent Benefit Plan; (B) caused any Parent Benefit Plan to be amended in any material respect; (C) paid any material bonus or distributed any profit-sharing account balances or similar payment to, or, other than in the Ordinary Course of Business, increased the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers or employees; (D) increased the severance or change-of-control benefits offered to any current, former or new employees, directors or consultants or (E) hired, terminated or gave notice of termination (other than for cause) to any (x) officer or (y) employee whose annual base salary is or is expected to be more than $125,000 per year;
(g)entered into any collective bargaining agreement or similar agreement with any labor union, or similar labor organization;
(h)entered into any material transaction other than (A) in the Ordinary Course of Business or (B) in connection with the Contemplated Transactions;
(i)acquired any material asset or sold, leased or otherwise irrevocably disposed of any of its assets or properties, or granted any Encumbrance with respect to such assets or properties, except in the Ordinary Course of Business;
(j)sold, assigned, transferred, licensed, sublicensed or otherwise disposed of any material Parent IP (other than pursuant to non-exclusive licenses in the Ordinary Course of Business);
(k)made, changed or revoked any material Tax election, failed to pay any income or other material Tax as such Tax becomes due and payable, filed any amendment making any material change to any Tax Return, settled or compromised any income or other material Tax liability,
39
entered into any Tax allocation, sharing, indemnification or other similar agreement or arrangement (including any “closing agreement” described in Section 7121 of the Code (or any similar Law) with any Governmental Body, but excluding customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes), requested or consented to any extension or waiver of any limitation period with respect to any claim or assessment for any income or other material Taxes (other than pursuant to an extension of time to file any Tax Return granted in the Ordinary Course of Business of not more than six months), or adopted or changed any material accounting method in respect of Taxes;
(l)made any expenditures, incurred any Liabilities or discharged or satisfied any Liabilities, in each case, in amounts that exceed the aggregate amount of $100,000;
(m)other than as required by Law or GAAP, taken any action to change accounting policies or procedures;
(n)initiated or settled any Legal Proceeding; or
(o)agreed, resolved or committed to do any of the foregoing.
3.9Absence of Undisclosed Liabilities. As of the date hereof, neither Parent nor any of its Subsidiaries has any Liability, individually or in the aggregate, of a type required to be recorded or reflected on a balance sheet or disclosed in the footnotes thereto under GAAP except for: (a) Liabilities disclosed, reflected or reserved against in the Parent Balance Sheet; (b) Liabilities that have been incurred by Parent or its Subsidiaries since the date of the Parent Balance Sheet in the Ordinary Course of Business; (c) Liabilities for performance of obligations of Parent or any of its Subsidiaries under Parent Contracts in the Ordinary Course of Business; (d) Liabilities incurred in connection with the Contemplated Transactions; (e) Liabilities which would not, individually or in the aggregate, reasonably be expected to be material to the Parent; and (f) Liabilities described in Section 3.9 of the Parent Disclosure Schedule.
3.10Title to Assets. Each of Parent and its Subsidiaries owns, and has good and valid title to, or, in the case of leased properties and assets, valid leasehold interests in, all tangible properties or tangible assets and equipment used or held for use in its business or operations or purported to be owned by it, including: (a) all tangible assets reflected on the Parent Balance Sheet; and (b) all other tangible assets reflected in the books and records of Parent or any of its Subsidiaries as being owned by Parent or such Subsidiary. All of such assets are owned or, in the case of leased assets, leased by Parent or its Subsidiaries free and clear of any Encumbrances, other than Permitted Encumbrances.
3.11Real Property; Leasehold. Neither Parent nor any of its Subsidiaries own or ever have owned any real property. Parent has made available to the Company (a) an accurate and complete list of all real properties with respect to which Parent directly or indirectly holds a valid leasehold interest as well as any other real estate that is in the possession of, or occupied or leased by, Parent or any of its Subsidiaries, and (b) copies of all leases under which any such real property is possessed, occupied or leased (the “Parent Real Estate Leases”), each of which is in full force and effect, with no existing material default thereunder by Parent or any of its Subsidiaries, or to the Knowledge of Parent, any other party thereto. Parent’s possession, occupancy, lease, use and/or operation of each such leased property conforms to all applicable Laws in all material respects, and Parent has exclusive possession of each such leased property and leasehold interest and has not granted any occupancy rights to tenants or licensees with respect to such leased property or leasehold interest. In addition, each such
40
leased property and leasehold interest is free and clear of all Encumbrances other than Permitted Encumbrances. Parent has not received any written notice from its landlords or any Governmental Body that: (i) relates to violations of building, zoning, safety or fire ordinances or regulations; (ii) claims any defect or deficiency with respect to any of such properties; or (iii) requests the performance of any repairs, alterations or other work to such properties.
3.12Intellectual Property; Privacy.
(a)Section 3.12(a) of the Parent Disclosure Schedule identifies each item of material Registered IP owned in whole or in part by Parent or its Subsidiaries, including, with respect to each application and registration: (i) the name of the applicant/registrant and any other co-owners, (ii) the jurisdiction of application or registration, and (iii) the application or registration number. To the Knowledge of Parent, each of the U.S. patents included in Section 3.12(a) of the Parent Disclosure Schedule properly identifies by name each and every inventor of the inventions claimed therein as determined in accordance with applicable Laws of the United States. As of the date of this Agreement, no cancellation, interference, opposition, reissue, reexamination or other proceeding of any nature (other than office actions or similar communications issued by any Governmental Body in the ordinary course of prosecution of any pending applications for registration) is pending or, to the Knowledge of Parent, threatened in writing, in which the scope, validity, enforceability or ownership of any Parent IP is being or has been contested or challenged. To the Knowledge of Parent, each item of Parent IP is valid and enforceable, and with respect to the Parent’s material Registered IP, subsisting.
(b)There are no actions that must be taken within ninety (90) days of the Closing, the failure of which will result in the abandonment, lapse or cancellation of any of the Registered IP.
(c)Except as has not had and would not reasonably be expected to have, individually or in the aggregate, a Parent Material Adverse Effect, Parent or its Subsidiaries exclusively own, are the sole assignee of, or have exclusively licensed all of material Parent IP, free and clear of all Encumbrances other than Permitted Encumbrances. The Parent IP constitute all Intellectual Property Rights used in, material to or otherwise necessary for the operation of Parent’s and any of its Subsidiaries’ business as currently conducted. Each Parent Associate involved in the creation or development of any material Parent IP, pursuant to such Parent Associate’s activities on behalf of Parent or any of its Subsidiaries, has signed a valid and enforceable written agreement containing an assignment of such Parent Associate’s rights in such Parent IP to Parent or its Subsidiaries. Each Parent Associate who has or has had access to Parent’s or any of its Subsidiaries’ trade secrets or confidential information has signed a valid and enforceable written agreement containing confidentiality provisions protecting the Parent IP, trade secrets and confidential information. Parent has taken commercially reasonable steps to protect and preserve the confidentiality of its trade secrets and confidential information.
(d)To the Knowledge of Parent, no funding, facilities or personnel of any Governmental Body or any university, college, research institute or other educational institution has been used to create Parent IP, except for any such funding or use of facilities or personnel that does not result in such Governmental Body or institution obtaining ownership rights or a license to such Parent IP or the right to receive royalties for the practice of such Parent IP.
(e)Section 3.12(e) of Parent Disclosure Schedule sets forth each license agreement pursuant to which Parent (i) is granted a license under any material Intellectual Property Right owned by any third party that is used by Parent or its Subsidiaries in its business as currently conducted
41
(each a “Parent In-bound License”) or (ii) grants to any third party a license under any material Parent IP (each a “Parent Out-bound License”) (provided, that, Parent In-bound Licenses shall not include, when entered into in the Ordinary Course of Business, material transfer agreements, services agreements, clinical trial agreements, agreements with Parent Associates, non-disclosure agreements, commercially available Software-as-a-Service offerings, or off-the-shelf software licenses; and Parent Out-bound Licenses shall not include, when entered into in the Ordinary Course of Business, material transfer agreements, clinical trial agreements, services agreements, non-disclosure agreements, or non-exclusive outbound licenses). All Parent In-bound Licenses and Parent Out-bound Licenses are in full force and effect and are valid, enforceable and binding obligations of Parent and, to the Knowledge of Parent, each other party to such Parent In-bound Licenses or Parent Out-bound Licenses. Neither Parent, nor, to the Knowledge of Parent, any other party to such Parent In-bound Licenses or Parent Out-bound Licenses, is in material breach under any Parent In-bound Licenses or Parent Out-bound Licenses. Except as set forth in Section 3.12(e) of the Parent Disclosure Schedule, none of the terms or conditions of any Parent In-Bound License or any Parent Out-bound License requires Parent or any of its Subsidiaries or any of their Affiliates to maintain, develop or prosecute any Intellectual Property Rights.
(f)To the Knowledge of Parent: (i) the operation of the business of Parent and its Subsidiaries as currently conducted does not infringe, misappropriate or otherwise violate any Intellectual Property Rights of any other Person and (ii) no other Person is infringing, misappropriating or otherwise violating any Parent IP. No Legal Proceeding is pending (or, to the Knowledge of Parent, is threatened in writing) (A) against Parent or its Subsidiaries alleging that the operation of the business of Parent or its Subsidiaries infringes or constitutes the misappropriation or other violation of any Intellectual Property Rights of another Person or (B) by Parent or its Subsidiaries alleging that another Person has infringed, misappropriated or otherwise violated any of the Parent IP. Since December 31, 2021, neither Parent nor its Subsidiaries have received any written notice or other written communication alleging that the operation of the business of Parent or its Subsidiaries infringes or constitutes the misappropriation or other violation of any Intellectual Property Right of another Person.
(g)None of the Parent IP or, to the Knowledge of Parent, any material Intellectual Property Rights exclusively licensed by Parent or its Subsidiaries, is subject to any pending or outstanding injunction, directive, order, judgment or other disposition of dispute, that adversely and materially restricts the use, transfer, registration or licensing by Parent or its Subsidiaries of any such Parent IP or material Intellectual Property Rights exclusively licensed to Parent or its Subsidiaries.
(h)To the Knowledge of Parent, Parent and the operation of Parent’s and its Subsidiaries’ business are, and have at all times been, in material compliance with all Privacy and Data Processing Requirements. To the Knowledge of Parent, Parent and its Subsidiaries have at all applicable times provided all notices, and obtained and maintained all rights, consents, and authorizations, to Process Parent Data as Processed by or for Parent or its Subsidiaries. Since Parent’s inception, there have been (i) no loss or theft of, or security breach relating to. Parent Data, (ii) no violation of any security policy of Parent or its Subsidiaries regarding any such Parent Data, and (iii) no unauthorized access to, or unauthorized, unintended, or improper use, disclosure, or other Processing of, any Parent Data. Parent and its Subsidiaries have taken commercially reasonable steps and implemented reasonable disaster recovery and security plans and procedures to protect the information technology systems used in, material to or necessary for operation of Parent’s or its Subsidiaries business as currently conducted and Parent Data from unauthorized use, access, or other Processing. To the Knowledge of Parent, there have been no (i) material malfunctions or unauthorized intrusions or breaches of the information technology systems used in, material to or necessary for the operation of Parent’s or its Subsidiaries’ business or (ii) material unauthorized access to, or other processing of, Parent Data.
42
3.13Agreements, Contracts and Commitments.
(a)Section 3.13 of the Parent Disclosure Schedule lists the following Parent Contracts in effect as of the date of this Agreement other than any Parent Benefit Plans (each, a “Parent Material Contract” and collectively, the “Parent Material Contracts”):
(i)a material Contract as defined in Item 601(b)(10) of Regulation S-K as promulgated under the Securities Act;
(ii)each Parent Contract relating to any agreement of indemnification or guaranty not entered into in the Ordinary Course of Business;
(iii)each Parent Contract containing (A) any covenant limiting in any material respect the freedom of Parent or its Subsidiaries to engage in any line of business or compete with any Person, (B) any most-favored nation or other preferred pricing arrangement in favor of a Person other than Parent or any similar term by which any Person is or could become entitled to any benefit, right or privilege that must be at least as favorable to such Person as those offered to any other Person, (C) any exclusivity provision, option to receive a license, right of first refusal or right of first negotiation or similar covenant in favor of a Person other than Parent, or (D) any non-solicitation provision not entered into in the Ordinary Course of Business;
(iv)each Parent Contract relating to capital expenditures and requiring payments after the date of this Agreement in excess of $100,000 pursuant to its express terms and not cancelable without penalty;
(v)each Parent Contract relating to the disposition or acquisition of material assets or any ownership interest in any Entity;
(vi)each Parent Contract relating to any mortgages, indentures, loans, notes or credit agreements, security agreements or other agreements or instruments relating to the borrowing of money or extension of credit or creating any material Encumbrances with respect to any assets of Parent or its Subsidiaries or any loans or debt obligations with officers or directors of Parent;
(vii)each Parent Contract requiring payment by or to Parent after the date of this Agreement in excess of $100,000 in the aggregate in the current calendar year or any future calendar year pursuant to its express terms relating to: (A) any distribution agreement (identifying any that contain exclusivity provisions); (B) any agreement involving provision of services or products with respect to any pre-clinical or clinical development activities of Parent; (C) any dealer, distributor, joint marketing, alliance, joint venture, cooperation, development or other agreement currently in force under which Parent has continuing obligations to develop or market any product, technology or service, or any agreement pursuant to which Parent has continuing obligations to develop any Intellectual Property Rights that will not be owned, in whole or in part, by Parent; or (D) any Parent Contract with any third party providing any services relating to the manufacture or production of any product, service or technology of Parent or any Parent Contract to sell, distribute or commercialize any products or service of Parent;
(viii)each Parent Contract with any financial advisor, broker, finder, investment banker or other similar Person providing financial advisory services to Parent in connection with the Contemplated Transactions;
43
(ix)each Parent Real Estate Lease;
(x)each Parent Contract with any Governmental Body;
(xi)each Parent Out-bound License and Parent In-bound License, and each Parent Contract containing a covenant not to sue or otherwise enforce any Intellectual Property Rights;
(xii)each Parent Contract requiring the payment of any royalty, dividend or similar arrangement based on the revenues or profits of Parent or its Subsidiaries;
(xiii)each Parent Contract, offer letter, employment agreement, or independent contractor agreement with any employee, independent contractor or other natural person service provider whose annual compensation equals or exceeds $125,000 that (A) is not immediately terminable by Parent without notice, severance, or other cost or liability, except as required under applicable Law, or (B) provides for retention payments, change-of-control payments, severance, accelerated vesting, or any similar payment or benefit that may or will become due as a result of the Merger;
(xiv)any other Contract that is not terminable at will (with no penalty or payment or requirement for prior notice, except as required by applicable law) by Parent or its Subsidiaries, as applicable, and (A) which involves payment or receipt by Parent or its Subsidiaries after the date of this Agreement under any such agreement, Contract or commitment of more than $100,000 in the aggregate, or obligations after the date of this Agreement in excess of $100,000 in the aggregate, or (B) that is material to the business or operations of Parent and its Subsidiaries, taken as a whole;
(xv)each Parent Contract entered into in settlement of any Legal Proceeding or other dispute;
(xvi)each Parent Contract providing any option to receive a license or other right, any right of first negotiation, any right of first refusal or any similar right to any Person related to any material Parent IP or material Intellectual Property Right licensed to Parent under a Parent In-bound License; and
(xvii)each Parent Contract entered into in settlement of any Legal Proceeding or other dispute.
(b)Parent has delivered or made available to the Company accurate and complete copies of all Parent Material Contracts, including all amendments thereto. There are no Parent Material Contracts that are not in written form. Neither Parent nor any of its Subsidiaries has, nor, to Parent’s Knowledge, as of the date of this Agreement, has any other party to a Parent Material Contract, breached, violated or defaulted under, or received notice that it breached, violated or defaulted under, any of the terms or conditions of any Parent Material Contract in such manner as would permit any other party to cancel or terminate any such Parent Material Contract, or would permit any other party to seek damages which would reasonably be expected to be material to Parent or its business. As to Parent and its Subsidiaries, as of the date of this Agreement, each Parent Material Contract is valid, binding, enforceable and in full force and effect, subject to the Enforceability Exceptions. No Person is renegotiating, or has a right pursuant to the terms of any Parent Material Contract to change, any material amount paid or payable to Parent under any Parent Material Contract or any other material term or provision of any
44
Parent Material Contract, and no Person has indicated in writing to Parent that it desires to renegotiate, modify, not renew or cancel any Parent Material Contract.
3.14Compliance; Permits.
(a)Parent and its Subsidiaries are, and since December 31, 2020 have been, in compliance in all material respects with all applicable Laws, including the FDCA, the PHSA and any other similar Law administered or promulgated by the FDA or other Drug Regulatory Agency, except for any noncompliance, either individually or in the aggregate, which would not be material to Parent.
(b)No investigation, claim, suit, proceeding, audit or other action by any Governmental Body is pending or, to the Knowledge of Parent, threatened against Parent or any Subsidiary. There is no agreement, judgment, injunction, order or decree binding upon Parent or any Subsidiary which (i) has or would reasonably be expected to have the effect of prohibiting or materially impairing any business practice of Parent or any Subsidiary, any acquisition of material property by Parent or any Subsidiary or the conduct of business by Parent or any Subsidiary as currently conducted, (ii) is reasonably likely to have an adverse effect on Parent’s or any Subsidiary’s ability to comply with or perform any covenant or obligation under this Agreement, or (iii) is reasonably likely to have the effect of preventing, delaying, making illegal or otherwise interfering with the Contemplated Transactions.
(c)Parent or its Subsidiaries hold all required Governmental Authorizations which are material to the operation of the business of Parent or such Subsidiary as currently conducted (the “Parent Permits”). Section 3.14(c) of the Parent Disclosure Schedule identifies each Parent Permit. Each such Parent Permit is valid and in full force and effect, and Parent is in material compliance with the terms of the Parent Permits. No Legal Proceeding is pending or, to the Knowledge of Parent, threatened, which seeks to revoke, limit, suspend, or materially modify any Parent Permit.
(d)There are no proceedings pending or, to the Knowledge of Parent, threatened against Parent or its Subsidiaries with respect to an alleged material violation by Parent or any of its Subsidiaries of the FDCA, the PHSA or any other similar Law administered or promulgated by any Drug Regulatory Agency. Neither Parent nor any of its Subsidiaries nor any of their respective officers and employees has been or is subject to any enforcement proceedings by the FDA or other Governmental Body and, to the Knowledge of Parent, no such proceedings have been threatened. There has not been and is not now any Form FDA-483 observation, civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, demand letter, warning letter, untitled letter, or proceeding pending or in effect against Parent or any of its Subsidiaries or any of their respective officers and employees, and Parent and its Subsidiaries have no liability for failure to comply with the FDCA, PHSA, or other similar Laws. There is no act, omission, event, or circumstance of which Parent has Knowledge that would reasonably be expected to give rise to or form the basis for any civil, criminal or administrative action, suit, demand, claim, complaint, hearing, investigation, demand letter, warning letter, untitled letter, proceeding or request for information or any liability (whether actual or contingent) for failure to comply with the FDCA, PHSA or other similar Laws.
(e)Parent and each of its Subsidiaries holds all required Governmental Authorizations issuable by any Drug Regulatory Agency necessary or material to the conduct of the business of Parent or such Subsidiary as currently conducted (collectively, the “Parent Regulatory Permits”) and no such Parent Regulatory Permit has been (i) revoked, withdrawn, suspended, cancelled or terminated or (ii) modified in any adverse manner. There is no basis for believing that such Parent Regulatory Permits will not be renewable upon expiration. Parent and each of its Subsidiaries are in
45
compliance in all material respects with the Parent Regulatory Permits and have not received any written notice or other written communication or, to the Knowledge of Parent, any other communication from any Drug Regulatory Agency regarding (A) any material violation of or failure to comply materially with any term or requirement of any Parent Regulatory Permit or (B) any revocation, withdrawal, suspension, cancellation, termination or material modification of any Parent Regulatory Permit. Parent and each of its Subsidiaries have complied in all material respects with the ICH E9 Guidance for Industry: Statistical Principles for Clinical Trials in the management of the clinical data that have been presented to the Company. To the Knowledge of Parent, there are no facts that would be reasonably likely to result in any warning, untitled or notice of violation letter or Form FDA-483 from the FDA.
(f)All clinical, pre-clinical and other studies and tests conducted by or on behalf of, or sponsored by, Parent or its Subsidiaries, or in which Parent or its Subsidiaries or their respective current products or product candidates have participated, were and, if still pending, are being conducted in all material respects in accordance with standard medical and scientific research procedures and in compliance in all material respects with the applicable regulations of any applicable Drug Regulatory Agency and other applicable Law, including the GCP regulations under 21 C.F.R. Parts 50, 54, 56 and 312 and the GLP regulations under 21 C.F.R. Part 58. No preclinical study or clinical trial conducted by or on behalf of Parent or any of its Subsidiaries has been terminated or suspended prior to completion for safety or noncompliance reasons. Since December 31, 2020, neither Parent nor any of its Subsidiaries has received any notices, correspondence, or other communications from any Drug Regulatory Agency requiring, or to the Knowledge of Parent, threatening to initiate, the termination or suspension of any clinical studies conducted by or on behalf of, or sponsored by, Parent or any of its Subsidiaries or in which Parent or any of its Subsidiaries or their respective current products or product candidates have participated.
(g)Neither Parent nor any of its Subsidiaries is the subject of any pending or, to the Knowledge of Parent, threatened investigation in respect of their respective businesses or products or product candidates pursuant to the FDA’s “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” Final Policy set forth in 56 Fed. Reg. 46191 (September 10, 1991) and any amendments thereto. To the Knowledge of Parent, neither Parent nor any of its Subsidiaries has committed any acts, made any statement, or has not failed to make any statement, in each case in respect of its business or products that would violate the FDA’s “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities” Final Policy, and any amendments thereto.
(h)Neither Parent, nor any of its Subsidiaries, nor any of their respective officers, directors, employees or, to the Knowledge of Parent, agents has been, is, or is in anticipation of being (based on a conviction by the courts or a finding of fault by a regulatory authority): (i) debarred pursuant to the Generic Drug Enforcement Act of 1992 (21 U.S.C. § 335a), as amended from time to time; (ii) disqualified from participating in clinical trials pursuant to 21 C.F.R. § 312.70, as amended from time to time; (iii) disqualified as a testing facility under 21 C.F.R. Part 58, Subpart K, as amended from time to time; (iv) excluded, debarred or suspended from or otherwise ineligible to participate in a “Federal Health Care Program” as that term is defined in 42 U.S.C. § 1320a-7b(f), including under 42 U.S.C. § 1320a-7 or relevant regulations in 42 C.F.R. Part 1001; (v) assessed or threatened with assessment of civil money penalties pursuant to 42 C.F.R. Part 1003; or (vi) included on the HHS/OIG List of Excluded Individuals/Entities, the General Services Administration’s System for Award Management, or the FDA Debarment List or the FDA Disqualified/Restricted List. Neither Parent, nor any of its Subsidiaries, nor any of their respective officers, directors, employees or, to the Knowledge of Parent, agents has engaged in any activities that are prohibited, or are cause for civil penalties, or grounds for mandatory or permissive exclusion, debarment, or suspension pursuant to any of these authorities. Parent and its
46
Subsidiaries are not using, nor have they ever used, in any capacity any Person that has ever been, or to the Knowledge of Parent, is the subject of a proceeding that could lead to the Persons becoming debarred, excluded, disqualified, restricted or suspended pursuant to any of these authorities.
(i)Parent and each of its Subsidiaries has complied with all Laws relating to patient, medical or individual health information, including HIPAA, including the standards for the privacy of Individually Identifiable Health Information at 45 C.F.R. Parts 160 and 164, Subparts A and E, the standards for the protection of Electronic Protected Health Information set forth at 45 C.F.R. Part 160 and 45 C.F.R. Part 164, Subpart A and Subpart C, the standards for transactions and code sets used in electronic transactions at 45 C.F.R. Part 160, Subpart A and Part 162, and the standards for Breach Notification for Unsecured Protected Health Information at 45 C.F.R. Part 164, Subpart D, all as amended from time to time. Parent or its Subsidiaries have entered into, where required, and are in compliance in all material respects with the terms of all Business Associate Agreements to which Parent or any of its Subsidiaries is a party or otherwise bound. Parent has created and maintained written policies and procedures to protect the privacy of all Protected Health Information, has provided training to all employees and agents as required under HIPAA, and has implemented security procedures, including physical, technical and administrative safeguards, to protect all personal information and Protected Health Information stored or transmitted in electronic form. Neither Parent nor any of its Subsidiaries has received written notice from the Office for Civil Rights for the U.S. Department of Health and Human Services or any other Governmental Body of any allegation regarding its failure to comply with HIPAA or any other state law or regulation applicable to the protection of individually identifiable health information or personally identifiable information. No successful Security Incident, Breach of Unsecured Protected Health Information, unpermitted disclosure of Personal Health Information or breach of personally identifiable information under applicable Laws has occurred with respect to information maintained or transmitted to Parent or any of its Subsidiaries, or an agent or third party, including any subject to a Business Associate Agreement with Parent or such Subsidiary. Parent or its Subsidiaries is currently submitting, receiving and handling or is capable of submitting receiving and handling transactions in accordance with the Transactions and Code Sets Rule. All capitalized terms in this Section 3.14(i) not otherwise defined in this Agreement shall have the meanings set forth under HIPAA.
3.15Legal Proceedings; Orders.
(a)As of the date of this Agreement, there is no material pending Legal Proceeding and, to the Knowledge of Parent, no Person has threatened in writing to commence any Legal Proceeding: (i) that involves (A) Parent, (B) any of its Subsidiaries, (C) any Parent Associate (in his or her capacity as such) or (D) any of the material assets owned or used by Parent or its Subsidiaries; or (ii) that challenges, or that would have the effect of preventing, delaying, making illegal or otherwise interfering with, the Contemplated Transactions.
(b)Except as set forth in Section 3.15(b) of the Parent Disclosure Schedule, since December 31, 2021 through the date of this Agreement, no Legal Proceeding has been pending against Parent that resulted in material liability to Parent.
(c)There is no order, writ, injunction, judgment or decree to which Parent or any of its Subsidiaries, or any of the material assets owned or used by Parent or any of its Subsidiaries, is subject. To the Knowledge of Parent, no officer of Parent or any of its Subsidiaries is subject to any order, writ, injunction, judgment or decree that prohibits such officer or employee from engaging in or continuing any conduct, activity or practice relating to the business of Parent or any of its Subsidiaries or to any material assets owned or used by Parent or any of its Subsidiaries.
47
3.16Tax Matters.
(a)Parent and each of its Subsidiaries have filed all income and other material Tax Returns that were required to be filed by or with respect to it under applicable Law. All such Tax Returns are correct and complete in all material respects and have been prepared in compliance with all applicable Law. No written claim has ever been made by any Governmental Body in any jurisdiction where Parent or any of its Subsidiaries does not file a particular Tax Return or pay a particular Tax that Parent or such Subsidiary is subject to taxation by that jurisdiction.
(b)All income and other material Taxes due and owing by Parent or any of its Subsidiaries on or before the date hereof (whether or not shown on any Tax Return) have been fully and timely paid. The unpaid Taxes of Parent and its Subsidiaries did not, as of the date of the Parent Balance Sheet, materially exceed the reserve for Tax liability (excluding any reserve for deferred Taxes established to reflect timing differences between book and Tax items) set forth on the face of the Parent Balance Sheet. Since the Parent Balance Sheet Date, neither Parent nor any of its Subsidiaries has incurred any material Liability for Taxes outside the Ordinary Course of Business.
(c)All Taxes that Parent and each of its Subsidiaries is or was required by Law to withhold or collect have been duly and timely withheld or collected in all material respects on behalf of its respective employees, independent contractors, stockholders, lenders, customers or other third parties and have been timely paid to the proper Governmental Body or other Person or properly set aside in accounts for this purpose.
(d)There are no Encumbrances for material Taxes (other than Taxes not yet due and payable) upon any of the assets of Parent or any of its Subsidiaries.
(e)No deficiencies for a material amount of Taxes with respect to Parent or any of its Subsidiaries have been claimed, proposed or assessed by any Governmental Body in writing. There are no pending or ongoing and, to the Knowledge of Parent, threatened audits, assessments or other actions for or relating to any liability in respect of a material amount of Taxes of Parent. Neither Parent nor any of its Subsidiaries (or predecessors thereof) has waived any statute of limitations or agreed to any extension of time with respect to any income or other material Tax assessment or deficiency.
(f)Neither Parent nor any of its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(g)Neither Parent nor any of its Subsidiaries is a party to any Tax allocation agreement, Tax sharing agreement, Tax indemnity agreement, or similar agreement or arrangement, other than customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes.
(h)Neither Parent nor any of its Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any Tax period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for Tax purposes for a Tax period ending on or prior to the Closing Date; (ii) use of an improper method of accounting for a Tax period ending on or prior to the Closing Date; (iii) “closing agreement” as described in Section 7121 of the Code (or any similar provision of state, local or foreign Law) executed on or prior to the Closing Date; (iv) intercompany transaction or excess loss account described in Treasury Regulations under Section 1502 of the Code (or any similar provision of state, local or foreign Law); (v)
48
installment sale or open transaction disposition made on or prior to the Closing Date; (vi) prepaid amount, advance payment or deferred revenue received or accrued on or prior to the Closing Date; (vii) application of Section 367(d) of the Code to any transfer of intangible property on or prior to the Closing Date; (viii) application of Sections 951 or 951A of the Code (or any similar provision of state, local or foreign Law) to any income received or accrued on or prior to the Closing Date. Parent has not made any election under Section 965(h) of the Code; or (ix) election under Section 108(i) of the Code.
(i)Neither Parent nor any of its Subsidiaries has ever been (i) a member of a consolidated, combined or unitary Tax group (other than such a group the common parent of which is Parent) or (ii) a party to any joint venture, partnership, or other arrangement that is treated as a partnership for U.S. federal income Tax purposes. Parent has no Liability for any material Taxes of any Person (other than Parent and any of its Subsidiaries) under Treasury Regulations Section 1.1502-6 (or any similar provision of state, local, or foreign Law), as a transferee or successor, by Contract (other than a Contract entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes) or otherwise by operation of Law.
(j)Neither Parent nor any of its Subsidiaries has distributed stock of another Person, or had its stock distributed by another Person, in a transaction that was purported or intended to be governed in whole or in part by Section 355 of the Code or Section 361 of the Code (or any similar provisions of state, local or foreign Law).
(k)Parent has never had a permanent establishment (within the meaning of an applicable Tax treaty) or otherwise had an office or fixed place of business in a country other than the country in which it is organized.
(l)Neither Parent nor any of its Subsidiaries has participated in or been a party to a transaction that, as of the date of this Agreement, constitutes a “reportable transaction” within the meaning of Section 6707A(c)(1) of the Code and Treasury Regulations Section 1.6011-4(b).
(m)Section 3.16(m) of the Parent Disclosure Schedule sets forth the entity classification of Parent and each of its Subsidiaries for U.S. federal income tax purposes. Neither Parent nor any of its Subsidiaries has made an election or taken any other action to change its federal and state income tax classification from such classification.
(n)Neither the Parent nor any of its Subsidiaries has taken any action, or knows of any fact or circumstance that could reasonably be expected to prevent the Merger from being treated as an integrated transaction that qualified as a “reorganization” within the meaning of Section 368(a) of the Code.
(o)The Parent operates at least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treasury Regulations Section 1.368-1(d).
For purposes of this Section 3.16, each reference to Parent or any of its Subsidiaries shall be deemed to include any Person that was liquidated into, merged with, or is otherwise a predecessor to, Parent.
3.17Employee and Labor Matters; Benefit Plans.
49
(a)Section 3.17(a) of the Parent Disclosure Schedule is a list of all material Parent Benefit Plans, other than employment offer letters on Parent’s standard form and other than individual Parent Options or other compensatory equity award agreements made pursuant to the Parent’s standard forms, in which case only representative standard forms of such agreements shall be scheduled. “Parent Benefit Plan” means each (i) “employee benefit plan” as defined in Section 3(3) of ERISA and (ii) other pension, retirement, deferred compensation, excess benefit, profit sharing, bonus, incentive, equity or equity-based, phantom equity, employment, consulting, severance, change-of-control, retention, health, life, disability, group insurance, paid time off, holiday, welfare and fringe benefit plan, program, agreement, Contract, or arrangement (whether written or unwritten, qualified or nonqualified, funded or unfunded, subject or not subject to ERISA and including any that have been frozen), in each case, sponsored, maintained, administered, contributed to, or required to be contributed to, by Parent or any of its Subsidiaries for the benefit of any current or former employee, director, officer or independent contractor of Parent or any of its Subsidiaries or under which Parent or any of its Subsidiaries has any actual or contingent liability (including, without limitation, by reason of having a Parent ERISA Affiliate).
(b)As applicable with respect to each material Parent Benefit Plan, Parent has made available to the Company true and complete copies of (i) each material Parent Benefit Plan, including all amendments thereto, and in the case of an unwritten material Parent Benefit Plan, a written description thereof, (ii) all current trust documents, investment management Contracts, custodial agreements, administrative services agreements and insurance and annuity Contracts relating thereto, (iii) the current summary plan description and each summary of material modifications thereto, (iv) the most recently filed annual reports with any Governmental Body (e.g., Form 5500 and all schedules thereto), (v) the most recent IRS determination, opinion or advisory letter, (vi) the most recent summary annual reports, nondiscrimination testing reports, actuarial reports, financial statements and trustee reports, and (vii) all notices and filings from the IRS or Department of Labor or other Governmental Body concerning audits or investigations, or “prohibited transactions” within the meaning of Section 406 of ERISA or Section 4975 of the Code.
(c)Each Parent Benefit Plan has been maintained, operated and administered in compliance in all material respects with its terms and the applicable provisions of ERISA, the Code and all other Laws.
(d)The Parent Benefit Plans which are “employee pension benefit plans” within the meaning of Section 3(2) of ERISA and which are intended to meet the qualification requirements of Section 401(a) of the Code have received determination or opinion letters from the IRS on which they may currently rely to the effect that such plans are qualified under Section 401(a) of the Code and the related trusts are exempt from federal income Taxes under Section 501(a) of the Code, respectively, and nothing has occurred that would reasonably be expected to materially adversely affect the qualification of such Parent Benefit Plan or the tax exempt status of the related trust.
(e)Neither Parent, any of its Subsidiaries nor any Parent ERISA Affiliate maintains, contributes to, is required to contribute to, or has any actual or contingent liability with respect to, (i) any “employee pension benefit plan” (within the meaning of Section 3(2) of ERISA) that is subject to Title IV or Section 302 of ERISA or Section 412 of the Code, (ii) any “multiemployer plan” (within the meaning of Section 3(37) of ERISA), (iii) any “multiple employer plan” (within the meaning of Section 413 of the Code) or (iv) any “multiple employer welfare arrangement” (within the meaning of Section 3(40) of ERISA).
50
(f)There are no pending audits or investigations by any Governmental Body involving any Parent Benefit Plan, and no pending or, to the Knowledge of Parent, threatened claims (except for routine individual claims for benefits payable in the normal operation of the Parent Benefit Plans), suits or proceedings involving any Parent Benefit Plan, or, to the Knowledge of Parent, any fiduciary thereof or service provider thereto, in any case except as would not be reasonably expected to result in material liability to Parent or any of its Subsidiaries. All contributions and premium payments required to have been made under any of the Parent Benefit Plans or by applicable Law (without regard to any waivers granted under Section 412 of the Code), have been timely made and neither Parent nor any Parent ERISA Affiliate has any material liability for any unpaid contributions with respect to any Parent Benefit Plan.
(g)None of Parent, any of its Subsidiaries or any Parent ERISA Affiliates, or to the Knowledge of Parent, any fiduciary, trustee or administrator of any Parent Benefit Plan, has engaged in, or in connection with the Contemplated Transactions will engage in, any transaction with respect to any Parent Benefit Plan which would subject any such Parent Benefit Plan, Parent, any of its Subsidiaries or Parent ERISA Affiliates to a material Tax, material penalty or material liability for a “prohibited transaction” under Section 406 of ERISA or Section 4975 of the Code.
(h)No Parent Benefit Plan provides death, medical, dental, vision, life insurance or other welfare benefits beyond termination of service or retirement other than coverage mandated by Law and to the Knowledge of Parent, neither Parent nor any of its Subsidiaries has made a written representation promising the same.
(i)Except as set forth in Section 3.17(i) of the Parent Disclosure Schedule, neither the execution of this Agreement, nor the performance of the Contemplated Transactions (either alone or when combined with the occurrence of any other event, including without limitation, a termination of employment) will: (i) result in any payment becoming due to any current or former employee, director, officer, or independent contractor of Parent or any Subsidiary thereof pursuant to any Parent Benefit Plan, (ii) increase any amount of compensation or benefits otherwise payable under any Parent Benefit Plan, (iii) result in the acceleration of the time of payment, funding or vesting of any benefits under any Parent Benefit Plan, (iv) require any contribution or payment to fund any obligation under any Parent Benefit Plan or (v) limit the right to merge, amend or terminate any Parent Benefit Plan.
(j)Except as set forth in Section 3.17(j) of the Parent Disclosure Schedule, neither the execution of, nor the consummation of the Contemplated Transactions (either alone or when combined with the occurrence of any other event, including without limitation, a termination of employment) will result in the receipt or retention by any person who is a “disqualified individual” (within the meaning of Code Section 280G) with respect to Parent and its Subsidiaries of any payment or benefit that is or could be characterized as a “parachute payment” (within the meaning of Code Section 280G), determined without regard to the application of Code Section 280G(b)(5).
(k)No current or former employee, officer, director or independent contractor of Parent or any of its Subsidiaries has any “gross up” agreements with the Parent or any of its Subsidiaries or other assurance of reimbursement by Parent or any of its Subsidiaries for any Taxes imposed under Code Section 409A or Code Section 4999.
(l)Parent has provided to the Company a true and correct list, as of the date of this Agreement, containing the names of all current full-time, part-time or temporary employees and independent contractors (and indication as such), and, as applicable: (i) the annual dollar amount of all
51
cash compensation in the form of wages, salary, fees, commissions, or director’s fees payable to each person; (ii) dates of employment or service; (iii) title and, with respect to independent contractors, a current written description of such person’s contracting services; (iv) visa status, if applicable; and (v) with respect to employees, (A) a designation of whether they are classified as exempt or non-exempt for purposes of FLSA and any similar state, federal or foreign Law and (B) whether such an employee is on leave, and if so, the expected return date.
(m)Neither Parent nor any of its Subsidiaries is or has ever been a party to, bound by, or has a duty to bargain under, any collective bargaining agreement or other Contract with a labor union or similar labor organization representing any of its employees, and there is no labor union or similar labor organization representing or, to the Knowledge of Parent, purporting to represent or seeking to represent any employees of Parent or its Subsidiaries, including through the filing of a petition for representation election. There is not and has not been in the past five years, nor, to the Knowledge of Parent, is there or has there been in the past five years any threat of, any strike, slowdown, work stoppage, lockout, union election petition, demand for recognition, or any similar activity or dispute, or any union organizing activity, against Parent or any of its Subsidiaries.
(n)Parent and each of its Subsidiaries is, and since December 31, 2021 has been, in material compliance with all applicable Laws respecting labor, employment, employment practices, and terms and conditions of employment, including worker classification, discrimination, harassment and retaliation, equal employment opportunities, fair employment practices, meal and rest periods, immigration, employee safety and health, payment of wages (including overtime wages), unemployment and workers’ compensation, leaves of absence, and hours of work. Except as would not be reasonably likely to result in a material liability to Parent or any of its Subsidiaries, with respect to employees of Parent and its Subsidiaries, each of Parent and its Subsidiaries, since December 31, 2021, has withheld and reported all amounts required by Law to be withheld and reported with respect to wages, salaries and other payments, benefits, or compensation to employees. There is no material Legal Proceeding pending or, to the Knowledge of Parent, threatened or reasonably anticipated against Parent or any of its Subsidiaries relating to any current or former employee, applicant for employment, or consultant of Parent.
(o)Within the preceding two years, Parent has complied in all material respects with the WARN Act.
3.18Environmental Matters. Parent and each of its Subsidiaries are in compliance and since December 31, 2021 have complied with all applicable Environmental Laws, which compliance includes the possession by Parent of all permits and other Governmental Authorizations required under applicable Environmental Laws and compliance with the terms and conditions thereof, except for any failure to be in such compliance that, either individually or in the aggregate, would not reasonably be expected to be material to Parent or its business. Neither Parent nor any of its Subsidiaries has received since December 31, 2021 (or prior to that time, which is pending and unresolved), any written notice or other communication (in writing or otherwise), whether from a Governmental Body or other Person, that alleges that Parent or any of its Subsidiaries is not in compliance with or has liability pursuant to any Environmental Law and, to the Knowledge of Parent, there are no circumstances that would reasonably be expected to prevent or interfere with Parent’s or any of its Subsidiaries’ compliance in any material respects with any Environmental Law, except where such failure to comply would not reasonably be expected to be material to Parent or its business. No current or (during the time a prior property was leased or controlled by Parent or any of its Subsidiaries) prior property leased or controlled by Parent or any of its Subsidiaries has had a release of or exposure to Hazardous Materials in material violation of or
52
as would reasonably be expected to result in any material liability of Parent or any of its Subsidiaries pursuant to Environmental Law. No consent, approval or Governmental Authorization of or registration or filing with any Governmental Body is required by Environmental Laws in connection with the execution and delivery of this Agreement or the consummation of the Contemplated Transactions by Parent or Merger Subs. Prior to the date hereof, Parent has provided or otherwise made available to the Company true and correct copies of all material environmental reports, assessments, studies and audits in the possession or control of Parent or any of its Subsidiaries with respect to any property leased or controlled by Parent or any of its Subsidiaries or any business operated by them.
3.19Transactions with Affiliates. Except as set forth in the Parent SEC Documents filed prior to the date of this Agreement, since the date of Parent’s last proxy statement filed in November 2024 with the SEC, no event has occurred that would be required to be reported by Parent pursuant to Item 404 of Regulation S-K. Section 3.19 of the Parent Disclosure Schedule identifies each Person who is (or who may be deemed to be) an Affiliate of Parent as of the date of this Agreement.
3.20Insurance. Parent has delivered or made available to the Company accurate and complete copies of all material insurance policies and all material self-insurance programs and arrangements relating to the business, assets, liabilities and operations of Parent and each of its Subsidiaries. Each of such insurance policies is in full force and effect and Parent and each of its Subsidiaries is in compliance in all material respects with the terms thereof. Other than customary end of policy notifications from insurance carriers, since January 1, 2020, neither Parent nor any of its Subsidiaries has received any notice or other communication regarding any actual or possible: (a) cancellation or invalidation of any insurance policy; or (b) refusal or denial of any coverage, reservation of rights or rejection of any material claim under any insurance policy. Parent and each of its Subsidiaries has provided timely written notice to the appropriate insurance carrier(s) of each Legal Proceeding that is currently pending against Parent or any of its Subsidiaries for which Parent or such Subsidiary has insurance coverage, and no such carrier has issued a denial of coverage or a reservation of rights with respect to any such Legal Proceeding, or informed Parent or any of its Subsidiaries of its intent to do so.
3.21Opinion of Financial Advisor. The Parent Board has received an opinion of Canaccord Genuity LLC, dated on or about the date of the Agreement, to the effect that, as of the date of such opinion and subject to the assumptions, qualifications, limitations and other matters set forth therein, the Exchange Ratio (as specified in such opinion) is fair, from a financial point of view, to Parent. It is agreed and understood that such opinion is furnished solely for the use of the Parent Board and may not be relied upon by the Company or any other Party.
3.22No Financial Advisors. No broker, finder or investment banker, other than Canaccord Genuity LLC and Ladenburg Thalmann & Co. is entitled to any brokerage fee, finder’s fee, opinion fee, success fee, transaction fee or other fee or commission in connection with the Contemplated Transactions based upon arrangements made by or on behalf of Parent or any of its Subsidiaries.
3.23Anti-Bribery. None of Parent or any of its Subsidiaries nor any of their respective directors, officers, employees or, to Parent’s Knowledge, agents or any other Person acting on its behalf has directly or indirectly made any bribes, rebates, payoffs, influence payments, kickbacks, illegal payments, illegal political contributions, or other payments, in the form of cash, gifts, or otherwise, or taken any other action, in violation of Anti-Bribery Laws. Neither Parent nor any of its Subsidiaries is or has been the subject of any investigation or inquiry by any Governmental Body with respect to potential violations of Anti-Bribery Laws.
53
3.24Valid Issuance. The Parent Common Stock and Parent Convertible Preferred Stock to be issued in the Merger will, when issued in accordance with the provisions of this Agreement, be validly issued, fully paid and nonassessable. To the Knowledge of Parent as of the date of this Agreement, no “bad actor” disqualifying event described in Rule 506(d)(1)(i)–(viii) of the Securities Act (a “Disqualifying Event”) is applicable to Parent or, to Parent’s Knowledge, any Parent Covered Person, except for a Disqualifying Event as to which Rule 506(d)(2)(ii)–(iv) or (d)(3) of the Securities Act is applicable.
3.25Disclaimer of Other Representations or Warranties.
(a)Except as previously set forth in this Section 3 or in any certificate delivered by Parent or Merger Subs to the Company pursuant to this Agreement, neither Parent nor any Merger Sub makes any representation or warranty, express or implied, at law or in equity, with respect to it or any of its assets, liabilities or operations, and any such other representations or warranties are hereby expressly disclaimed.
(b)Each of Parent, First Merger Sub and Second Merger Sub acknowledges and agrees that, except for the representations and warranties of the Company set forth in Section 2 or in any certificate delivered by the Company to Parent or the Merger Subs pursuant to this Agreement, none of the Company or any of their respective Representatives is relying on any other representation or warranty of the Company or any other Person made outside of Section 2 or such certificates, including regarding the accuracy or completeness of any such other representations or warranties or the omission of any material information, whether express or implied, in each case, with respect to the Contemplated Transactions.
4CERTAIN COVENANTS OF THE PARTIES.
4.1Operation of Parent’s Business.
(a)Except as set forth in Section 4.1(a) of the Parent Disclosure Schedule, as expressly permitted by this Agreement (including the Qualified Financing), as required by applicable Law or unless the Company shall otherwise consent in writing (which consent shall not be unreasonably withheld, delayed or conditioned), during the period commencing on the date of this Agreement and continuing until the earlier to occur of the termination of this Agreement pursuant to Section 9 and the First Effective Time (the “Pre-Closing Period”), each of Parent and Merger Subs shall conduct its business and operations in the Ordinary Course of Business and in compliance in all material respects with all applicable Laws and the requirements of all Contracts that constitute Parent Material Contracts.
(b)Except (i) as expressly permitted by this Agreement (including the Qualified Financing), (ii) as set forth in Section 4.1(b) of the Parent Disclosure Schedule, (iii) as required by applicable Law or (iv) with the prior written consent of the Company (which consent shall not be unreasonably withheld, delayed or conditioned), at all times during the Pre-Closing Period, Parent shall not, nor shall it cause or permit Merger Subs to, do any of the following:
(i)declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of its capital stock or repurchase, redeem or otherwise reacquire any shares of its capital stock or other securities (except in connection with the payment of the exercise price and/or withholding Taxes incurred upon the exercise, settlement or vesting of any award granted under the Parent Stock Plans in accordance with the terms of such award in effect on the date of this Agreement);
54
(ii)sell, issue, grant, pledge or otherwise dispose of or encumber or authorize any of the foregoing with respect to: (A) any capital stock or other security of Parent (except for Parent Common Stock issued upon the valid exercise of outstanding Parent Options or Parent Warrants, as applicable); (B) any option, warrant or right to acquire any capital stock or any other security, other than option grants to employees and service providers in the Ordinary Course of Business; or (C) any other instrument convertible into or exchangeable for any capital stock or other security of Parent;
(iii)except as required to give effect to anything in contemplation of the Closing, amend any of its Organizational Documents, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction except, for the avoidance of doubt, the Contemplated Transactions;
(iv)form any Subsidiary or acquire any equity interest or other interest in any other Entity, or enter into a joint venture with any other Entity;
(v)(A) lend money to any Person (except for the advancement of reasonable expenses to employees, directors and consultants in the Ordinary Course of Business), (B) incur or guarantee any indebtedness for borrowed money, (C) guarantee any debt securities of others or (D) make any capital expenditure or capital commitment in excess of the budgeted capital expenditure and commitment amounts set forth in the Parent operating budget;
(vi)other than as required by applicable Law or the terms of any Parent Benefit Plan as in effect on the date of this Agreement: (A) adopt, terminate, establish or enter into any Parent Benefit Plan; (B) cause or permit any Parent Benefit Plan to be amended in any material respect (other than in connection with the termination thereof); (C) pay any bonus or make any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers or employees, other than increases in base salary and annual cash bonus opportunities and payments made in the Ordinary Course of Business consistent with past practice; or (D) increase the severance, retention or change of control benefits offered to any current or former or new employees, directors or consultants;
(vii)recognize any labor union, labor organization, or similar Person, except as otherwise required by law and after advance notice to the Company;
(viii)acquire any material asset or sell, lease or otherwise irrevocably dispose of any of its material assets or properties, or grant any Encumbrance with respect to such assets or properties;
(ix)make, change or revoke any material Tax election, fail to pay any income or other material Tax as such Tax becomes due and payable, file any material amended Tax Return, settle or compromise any income or other material Tax liability, enter into any Tax allocation, sharing, indemnification or other similar agreement or arrangement (other than customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes), request or Consent to any extension or waiver of any limitation period with respect to any claim or assessment for any income or other material Taxes (other than pursuant to an extension of time to file any Tax Return granted in the Ordinary Course of Business of not more than six (6) months), or adopt or change any material accounting method in respect of Taxes;
55
(x)enter into, materially amend or terminate any Parent Material Contract;
(xi)other than the incurrence or payment of Parent Transaction Expenses, make any expenditures, incur any Liabilities or discharge or satisfy any Liabilities, in each case, outside of the Ordinary Course of Business;
(xii)other than as required by Law or GAAP, take any action to change accounting policies or procedures;
(xiii)initiate or settle any Legal Proceeding; or
(xiv)agree, resolve or commit to do any of the foregoing.
Nothing contained in this Agreement shall give the Company, directly or indirectly, the right to control or direct the operations of Parent prior to the First Effective Time. Prior to the First Effective Time, Parent shall exercise, consistent with the terms and conditions of this Agreement, complete unilateral control and supervision over its business operations.
4.2Operation of the Company’s Business.
(a)Except as set forth in Section 4.2(a) of the Company Disclosure Schedule, as expressly permitted by this Agreement (including the Qualified Financing), as required by applicable Law or unless Parent shall otherwise consent in writing (which consent shall not be unreasonably withheld, delayed or conditioned), during the Pre-Closing Period, each of the Company and its Subsidiaries shall conduct its respective business and operations in the Ordinary Course of Business and in compliance in all material respects with all applicable Laws and the requirements of all Contracts that constitute Company Material Contracts.
(b)Except (i) as expressly permitted by this Agreement (including the Qualified Financing), (ii) as set forth in Section 4.2(b) of the Company Disclosure Schedule, (iii) as required by applicable Law or (iv) with the prior written consent of Parent (which consent shall not be unreasonably withheld, delayed or conditioned), at all times during the Pre-Closing Period, the Company shall not, nor shall it cause or permit any of its Subsidiaries to, do any of the following:
(i)declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of its capital stock or repurchase, redeem or otherwise reacquire any shares of its capital stock or other securities;
(ii)sell, issue, grant, pledge or otherwise dispose of or encumber or authorize any of the foregoing with respect to: (A) any capital stock or other security of the Company or any of its Subsidiaries (except for shares of outstanding Company Common Stock issued upon the valid exercise of Company Options); (B) any option, warrant or right to acquire any capital stock or any other security, other than option grants to employees and service providers in the Ordinary Course of Business; or (C) any other instrument convertible into or exchangeable for any capital stock or other security of the Company or any of its Subsidiaries;
(iii)except as required to give effect to anything in contemplation of the Closing, amend any of its or its Subsidiaries’ Organizational Documents, or effect or be a party to any
56
merger, consolidation, share exchange, business combination, recapitalization, reclassification of shares, stock split, reverse stock split or similar transaction except, for the avoidance of doubt, the Contemplated Transactions;
(iv)form any Subsidiary or acquire any equity interest or other interest in any other Entity, or enter into a joint venture with any other Entity;
(v)(A) lend money to any Person (except for the advancement of reasonable expenses to employees, directors and consultants in the Ordinary Course of Business), (B) incur or guarantee any indebtedness for borrowed money, (C) guarantee any debt securities of others or (D) make any capital expenditure or capital commitment in excess of the budgeted capital expenditure and commitment amounts set forth in the Company operating budget;
(vi)other than as required by applicable Law or the terms of any Company Benefit Plan as in effect on the date of this Agreement: (A) adopt, terminate, establish or enter into any Company Benefit Plan; (B) cause or permit any Company Benefit Plan to be amended in any material respect; (C) pay any bonus or make any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers or employees, other than increases in base salary and annual cash bonus opportunities and payments made in the Ordinary Course of Business consistent with past practice; or (D) increase the severance, retention or change of control benefits offered to any current or former or new employees, directors or consultants;
(vii)recognize any labor union, labor organization, or similar Person, except as otherwise required by law and after advance notice to Parent;
(viii)acquire any material asset or sell, lease or otherwise irrevocably dispose of any of its material assets or properties, or grant any Encumbrance with respect to such assets or properties;
(ix)sell, assign, transfer, license, sublicense, abandon, permit to lapse or otherwise dispose of any material Company IP (other than pursuant to non-exclusive licenses in the Ordinary Course of Business);
(x)make, change or revoke any material Tax election, fail to pay any income or other material Tax as such Tax becomes due and payable, file any material amended Tax Return, settle or compromise any income or other material Tax liability, enter into any Tax allocation, sharing, indemnification or other similar agreement or arrangement (other than customary commercial Contracts entered into in the Ordinary Course of Business the principal subject matter of which is not Taxes), request or Consent to any extension or waiver of any limitation period with respect to any claim or assessment for any income or other material Taxes (other than pursuant to an extension of time to file any Tax Return granted in the Ordinary Course of Business of not more than six (6) months), or adopt or change any material accounting method in respect of Taxes;
(xi)enter into, materially amend or terminate any Company Material Contract;
(xii)other than the incurrence or payment of Company Transaction Expenses, make any expenditures, incur any Liabilities or discharge or satisfy any Liabilities, in each case, outside of the Ordinary Course of Business;
57
(xiii)other than as required by Law or GAAP, take any action to change accounting policies or procedures;
(xiv)initiate or settle any Legal Proceeding; or
(xv)agree, resolve or commit to do any of the foregoing.
(c)Nothing contained in this Agreement shall give Parent, directly or indirectly, the right to control or direct the operations of the Company prior to the First Effective Time. Prior to the First Effective Time, the Company shall exercise, consistent with the terms and conditions of this Agreement, complete unilateral control and supervision over its business operations.
4.3Access and Investigation.
(a)Subject to the terms of the Confidentiality Agreement, which the Parties agree will continue in full force following the date of this Agreement, during the Pre-Closing Period, upon reasonable notice, Parent, on the one hand, and the Company, on the other hand, shall and shall use commercially reasonable efforts to cause such Party’s Representatives to: (i) provide the other Party and such other Party’s Representatives with reasonable access, upon reasonable notice and during normal business hours to such Party’s Representatives, personnel, property and assets and to all existing books, records, Tax Returns, work papers and other documents and information relating to such Party and its Subsidiaries; (ii) provide the other Party and such other Party’s Representatives with such copies of the existing books, records, Tax Returns, work papers, product data, and other documents and information relating to such Party and its Subsidiaries, and with such additional financial, operating and other data and information regarding such Party and its Subsidiaries as the other Party may reasonably request; (iii) permit the other Party’s officers and other employees to meet, upon reasonable notice and during normal business hours, with the principal financial officer and other officers and managers of such Party responsible for such Party’s financial statements and the internal controls of such Party to discuss such matters as the other Party may deem necessary or appropriate; and (iv) make available to the other Party copies of unaudited financial statements, material operating and financial reports prepared for senior management or the board of directors of such Party, and any material notice, report or other document filed with or sent to or received from any Governmental Body in connection with the Contemplated Transactions. Any investigation conducted by either Parent or the Company pursuant to this Section 4.3(a) shall be conducted in such manner as not to interfere unreasonably with the conduct of the business of the other Party. Each Party shall provide the other Party with good faith unaudited cash balances and a statement of accounts payable of the respective Party as of the end of each calendar month, which shall be prepared consistent with past practice and delivered within ten (10) Business Days after the end of such calendar month before the Closing Date, or such longer period as the Parties may agree to in writing.
(b)Notwithstanding the foregoing, any Party may restrict the foregoing access to the extent that any Law applicable to such Party requires such Party to restrict or prohibit access to any such properties or information or, if in the reasonable judgment of such Party, access would jeopardize protections afforded the Party under the attorney-client privilege or the attorney work product doctrine; provided, however, that such Party shall use commercially reasonable efforts to allow for such access in a manner that does not violate any such applicable Law or jeopardize protections afforded the Party under the attorney-client privilege or the attorney work product doctrine.
4.4Parent Non-Solicitation.
58
(a)Except as expressly permitted by this Agreement, Parent agrees that, during the Pre-Closing Period, it shall not, and it shall instruct and cause its Representatives not to, directly or indirectly: (i) solicit, initiate or knowingly encourage, induce or facilitate the communication, making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry or take any action that could reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry; (ii) furnish any non-public information regarding Parent to any Person in connection with or in response to an Acquisition Proposal or Acquisition Inquiry; (iii) engage in discussions (other than to inform any Person of the existence of the provisions contained in this Section 4.4) or negotiations with any Person with respect to any Acquisition Proposal or Acquisition Inquiry; (iv) approve, endorse or recommend any Acquisition Proposal; (v) execute or enter into any letter of intent or any Contract contemplating or otherwise relating to any Acquisition Transaction (other than a confidentiality agreement permitted under this Section 4.4(a)); or (vi) publicly propose to do any of the foregoing; provided, however, that, notwithstanding anything contained in this Section 4.4 and subject to compliance with this Section 4.4, prior to obtaining the Required Parent Stockholder Vote, Parent may, directly or indirectly through any of its Representatives, furnish non-public information regarding Parent to, and enter into discussions or negotiations with, any Person in response to a bona fide Acquisition Proposal by such Person, which the Parent Board determines in good faith, after consultation with Parent’s outside financial advisors and outside legal counsel, constitutes, or is reasonably likely to result in, a Superior Offer (and is not withdrawn) if: (A) neither Parent nor any of its Representatives shall have breached this Section 4.4 in any material respect, (B) the Parent Board concludes in good faith, after consultation with Parent’s outside legal counsel, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the Parent Board under applicable Law; (C) Parent receives from such Person an executed confidentiality agreement containing provisions, in the aggregate, at least as favorable to Parent as those contained in the Confidentiality Agreement, or is already party to a confidentiality agreement with such Person that is still in effect and contains provisions that require any counterparty thereto (and any of its Affiliates and Representatives named therein) that receives material nonpublic information of or with respect to Parent to keep such information confidential; and (D) prior to or substantially contemporaneously with furnishing any such nonpublic information to such Person, Parent furnishes such nonpublic information to the Company (to the extent such information has not been previously furnished by Parent to the Company). Without limiting the generality of the foregoing, Parent acknowledges and agrees that, in the event any Representative of Parent (whether or not such Representative is purporting to act on behalf of Parent) takes any action that, if taken by Parent, would constitute a breach of this Section 4.4, the taking of such action by such Representative shall be deemed to constitute a breach of this Section 4.4 by Parent for purposes of this Agreement.
(b)If Parent or any Representative of Parent receives an Acquisition Proposal or Acquisition Inquiry at any time during the Pre-Closing Period, then Parent shall promptly (and in no event later than one (1) Business Day after Parent becomes aware of such Acquisition Proposal or Acquisition Inquiry) advise the Company in writing of such Acquisition Proposal or Acquisition Inquiry (including the identity of the Person making or submitting such Acquisition Proposal or Acquisition Inquiry, and the material terms thereof). Parent shall keep the Company reasonably informed with respect to the status and material terms of any such Acquisition Proposal or Acquisition Inquiry and any material modification or proposed material modification thereto.
(c)Parent shall immediately cease and cause to be terminated any existing discussions, negotiations and communications with any Person that relate to any Acquisition Proposal or Acquisition Inquiry as of the date of this Agreement and request the destruction or return of any nonpublic information of Parent provided to such Person.
59
4.5The Company Non-Solicitation.
(a)Except as expressly permitted by this Agreement, the Company agrees that, during the Pre-Closing Period, neither it nor any of its Subsidiaries shall, and it shall instruct and cause its Representatives not to, directly or indirectly: (i) solicit, initiate or knowingly encourage, induce or facilitate the communication, making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry or take any action that could reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry; (ii) furnish any non-public information regarding the Company or any of its Subsidiaries to any Person in connection with or in response to an Acquisition Proposal or Acquisition Inquiry; (iii) engage in discussions (other than to inform any Person of the existence of the provisions contained in this Section 4.5) or negotiations with any Person with respect to any Acquisition Proposal or Acquisition Inquiry; (iv) approve, endorse or recommend any Acquisition Proposal; (v) execute or enter into any letter of intent or any Contract contemplating or otherwise relating to any Acquisition Transaction (other than a confidentiality agreement permitted under this Section 4.5(a)); or (vi) publicly propose to do any of the foregoing; provided, however, that, notwithstanding anything contained in this Section 4.5 and subject to compliance with this Section 4.5, prior to obtaining the Required Company Stockholder Vote, the Company may, directly or indirectly through any of its Representatives, furnish non-public information regarding the Company to, and enter into discussions or negotiations with, any Person in response to a bona fide Acquisition Proposal by such Person, which the Company Board determines in good faith, after consultation with the Company’s outside financial advisors and outside legal counsel, constitutes, or is reasonably likely to result in, a Superior Offer (and is not withdrawn) if: (A) neither the Company nor any of its Representatives shall have breached this Section 4.5 in any material respect, (B) the Company Board concludes in good faith, after consultation with the Company’s outside legal counsel, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the Company Board under applicable Law; (C) the Company receives from such Person an executed confidentiality agreement containing provisions, in the aggregate, at least as favorable to the Company as those contained in the Confidentiality Agreement, or is already party to a confidentiality agreement with such Person that is still in effect and contains provisions that require any counterparty thereto (and any of its Affiliates and Representatives named therein) that receives material nonpublic information of or with respect to the Company to keep such information confidential; and (D) prior to or substantially contemporaneously with furnishing any such nonpublic information to such Person, the Company furnishes such nonpublic information to Parent (to the extent such information has not been previously furnished by the Company to Parent). Without limiting the generality of the foregoing, the Company acknowledges and agrees that, in the event any Representative of the Company (whether or not such Representative is purporting to act on behalf of the Company) takes any action that, if taken by the Company, would constitute a breach of this Section 4.5, the taking of such action by such Representative shall be deemed to constitute a breach of this Section 4.5 by the Company for purposes of this Agreement.
(b)If the Company or any Representative of the Company receives an Acquisition Proposal or Acquisition Inquiry at any time during the Pre-Closing Period, then the Company shall promptly (and in no event later than one (1) Business Day after the Company becomes aware of such Acquisition Proposal or Acquisition Inquiry) advise Parent in writing of such Acquisition Proposal or Acquisition Inquiry (including the identity of the Person making or submitting such Acquisition Proposal or Acquisition Inquiry, and the material terms thereof). The Company shall keep Parent reasonably informed with respect to the status and material terms of any such Acquisition Proposal or Acquisition Inquiry and any material modification or proposed material modification thereto.
60
(c)The Company shall immediately cease and cause to be terminated any existing discussions, negotiations and communications with any Person that relate to any Acquisition Proposal or Acquisition Inquiry as of the date of this Agreement and request the destruction or return of any nonpublic information of the Company or any of its Subsidiaries provided to such Person.
4.6Notification of Certain Matters.
(a)During the Pre-Closing Period, the Company shall promptly notify Parent (and, if in writing, furnish copies of) if any of the following occurs: (i) any notice or other communication is received from any Person alleging that the Consent of such Person is or may be required in connection with any of the Contemplated Transactions; (ii) any Legal Proceeding against or involving or otherwise affecting the Company or its Subsidiaries is commenced, or, to the Knowledge of the Company, threatened against the Company or its Subsidiaries or, to the Knowledge of the Company, any director or officer of the Company or its Subsidiaries; (iii) the Company becomes aware of any inaccuracy in any representation or warranty made by it in this Agreement; or (iv) the failure of the Company to comply with any covenant or obligation of the Company; in the case of (iii) and (iv) that could reasonably be expected to make the timely satisfaction of any of the conditions set forth in Sections 6 or 7, as applicable, impossible or materially less likely. No notification given to Parent pursuant to this Section 4.6(a) shall change, limit or otherwise affect any of the representations, warranties, covenants or obligations of the Company or any of its Subsidiaries contained in this Agreement or the Company Disclosure Schedule for purposes of Sections 6 and 7, as applicable.
(b)During the Pre-Closing Period, Parent shall promptly notify the Company (and, if in writing, furnish copies of) if any of the following occurs: (i) any notice or other communication is received from any Person alleging that the Consent of such Person is or may be required in connection with any of the Contemplated Transactions; (ii) any Legal Proceeding against or involving or otherwise affecting Parent is commenced, or, to the Knowledge of Parent, threatened against Parent or, to the Knowledge of Parent, any director or officer of Parent; (iii) Parent becomes aware of any inaccuracy in any representation or warranty made by it in this Agreement; or (iv) the failure of Parent to comply with any covenant or obligation of Parent or Merger Sub; in the case of (iii) and (iv) that could reasonably be expected to make the timely satisfaction of any of the conditions set forth in Sections 6 or 8, as applicable, impossible or materially less likely. No notification given to the Company pursuant to this Section 4.6(b) shall change, limit or otherwise affect any of the representations, warranties, covenants or obligations of Parent contained in this Agreement or the Parent Disclosure Schedule for purposes of Sections 6 and 8, as applicable.
5ADDITIONAL AGREEMENTS OF THE PARTIES.
5.1Parent Stockholders’ Meeting.
(a)As promptly as practicable following the Closing Date, Parent shall use commercially reasonable efforts to call, give notice of and hold a meeting of the holders of Parent Common Stock for the purpose of seeking:
(i)approval of the Preferred Stock Conversion Proposal;
(ii)approval of a new equity incentive plan in form reasonably acceptable to Parent and the Company (the “2025 Plan”) and the assumption of the Company Plan; and
61
(iii)if deemed necessary or appropriate by Parent or as otherwise required by applicable Law or Contract, to authorize the amendment of Parent’s certificate of incorporation to authorize sufficient Parent Common Stock in Parent’s certificate of incorporation for the conversion of the Parent Convertible Preferred Stock issued pursuant to this Agreement and/or to effectuate the Nasdaq Reverse Split (the “Charter Amendment Proposal”) (the matters contemplated by the clauses 4.2(a)(i)–(iii) are referred to as the “Parent Stockholder Matters,” and such meeting, the “Parent Stockholders’ Meeting”).
(b)If the approval of the Parent Stockholder Matters is not obtained at the Parent Stockholders’ Meeting or if on a date preceding the Parent Stockholders’ Meeting, Parent reasonably believes that (i) it will not receive proxies sufficient to obtain the Required Parent Stockholder Vote, whether or not quorum would be present or (ii) it will not have sufficient shares of Parent Common Stock represented (whether in person or by proxy) to constitute a quorum necessary to conduct the business of the Parent Stockholders’ Meeting, then, in each case, Parent will use its commercially reasonable efforts to adjourn the Parent Stockholders’ Meeting one or more times to a date or dates no more than 30 days after the scheduled date for such meeting, and to obtain such approvals at such time. If the Parent Stockholders’ Meeting is not so adjourned, and/or if the approval of the Parent Stockholder Matters is not then obtained, Parent will use its commercially reasonable efforts to obtain such approvals as soon as practicable thereafter, and in any event to obtain such approvals at the next occurring annual meeting of the stockholders of Parent or, if such annual meeting is not scheduled to be held within four months after the Parent Stockholders’ Meeting, a special meeting of the stockholders of Parent to be held within four months after the Parent Stockholders’ Meeting. Parent will hold an annual meeting or special meeting of its stockholders, at which a vote of the stockholders of Parent to approve the Parent Stockholder Matters will be solicited and taken, at least once every four months until Parent obtains approval of the Parent Stockholder Matters.
(c)The Company and Parent acknowledge that, under the Nasdaq Stock Market Rules, the Parent Common Stock Payment Shares and the Parent Preferred Stock Payment Shares will not be entitled to vote on the Preferred Stock Conversion Proposal.
5.2Company Stockholder Matters.
(a)Promptly after the date of this Agreement, unless otherwise satisfied by unanimous written consent of the Company’s stockholders, the Company shall prepare, with the reasonable cooperation of Parent, and cause to be mailed to its stockholders an information statement (the “Information Statement”) to solicit (i) the Required Company Stockholder Vote for purposes of: (i) adopting and approving this Agreement and the Contemplated Transactions, (ii) acknowledging that the approval given thereby is irrevocable and that such stockholder is aware of its rights to demand appraisal for its shares pursuant to Section 262 of the DGCL, a true and correct copy of which will be attached thereto, and that such stockholder has received and read a copy of Section 262 of the DGCL and (iii) acknowledging that by its approval of the Merger it is not entitled to appraisal rights with respect to its shares in connection with the Merger and thereby waives any rights to receive payment of the fair value of its capital stock under the DGCL (collectively, the “Company Stockholder Matters”). Under no circumstances shall the Company assert that any other approval or consent is necessary by its stockholders to approve the Company Stockholder Matters. The Information Statement and any other materials (including any amendments thereto) submitted to the stockholders of the Company in accordance with this Section 5.2(a) shall be subject to Parent’s advance review and reasonable approval.
62
(b)The Company covenants and agrees that the Information Statement, including any pro forma financial statements included therein (and the letter to stockholders and form of Company Stockholder Written Consent included therewith), will not, at the time that the Information Statement or any amendment or supplement thereto is first mailed to the stockholders of the Company, at the time of receipt of the Required Company Stockholder Vote and at the First Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Notwithstanding the foregoing, the Company makes no covenant, representation or warranty with respect to statements made in the Information Statement (and the letter to the stockholders and form of Company Stockholder Written Consent included therewith), if any, based on information furnished in writing by Parent specifically for inclusion therein. Each of the Parties shall use commercially reasonable efforts to cause the Information Statement to comply in all material respects with the applicable rules and regulations promulgated by the SEC.
(c)Promptly following receipt of the Required Company Stockholder Vote, the Company shall prepare and mail a notice (the “Stockholder Notice”) to every stockholder of the Company that did not execute the Company Stockholder Written Consent. The Stockholder Notice shall (i) be a statement to the effect that the Company Board determined that the Merger is advisable in accordance with Section 251(b) of the DGCL and in the best interests of the stockholders of the Company and approved and adopted this Agreement, the Merger and the other Contemplated Transactions, (ii) provide the stockholders of the Company to whom it is sent with notice of the actions taken in the Company Stockholder Written Consent, including the adoption and approval of this Agreement, the Merger and the other Contemplated Transactions in accordance with Section 228(e) of the DGCL and the certificate of incorporation and bylaws of the Company and (iii) include a description of the appraisal rights of the Company’s stockholders available under the DGCL, along with such other information as is required thereunder and pursuant to applicable Law. The Stockholder Notice (including any amendments thereto) and any other materials submitted to the stockholders of the Company in accordance with this Section 5.2(c) shall be subject to Parent’s advance review and reasonable approval.
5.3Parent Options and Parent Warrants.
(a)Prior to the Closing, the Parent Board shall have adopted appropriate resolutions and taken all other actions necessary and appropriate to provide that (i) each unexpired, unexercised and unvested Parent Option granted under the Parent Stock Plans and (ii) each unvested Parent RSU shall be accelerated in full effective as of immediately prior to the First Effective Time.
(b)Promptly after the date of this Agreement, and in any event within twenty (20) days before the First Effective Time, Parent shall notify the holders of the Parent Warrants of the Contemplated Transactions in accordance with the terms of the applicable Parent Warrants, which notice shall be subject to the review and approval of the Company (not to be unreasonably withheld, conditioned or delayed). At the First Effective Time, each Parent Warrant that is outstanding and unexercised immediately prior to the First Effective Time, shall survive the Closing and remain outstanding in accordance with its terms.
5.4Reservation of Parent Common Stock; Issuance of Shares of Parent Common Stock. For as long as any Parent Preferred Stock Payment Shares remain outstanding, Parent shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Parent Common Stock or shares of Parent Common Stock held in treasury by Parent, for the purpose of effecting the conversion of the Parent Preferred Stock Payment Shares, the full number of
63
shares of Parent Common Stock then issuable upon the conversion of all Parent Preferred Stock Payment Shares then outstanding. All shares of Parent Common Stock delivered upon conversion of the Parent Preferred Stock Payment Shares shall be newly issued shares or shares held in treasury by Parent, shall have been duly authorized and validly issued and shall be fully paid and nonassessable, and shall be free from preemptive rights and free of any Encumbrance.
5.5Employee Benefits.
(a)For purposes of vesting, eligibility to participate, and level of benefits (other than for purposes of determining awards under an equity incentive plan or accrued benefits under any defined benefit pension plan) under the benefit plans, programs, Contracts or arrangements of Parent or any of its Subsidiaries (including, following the Closing, the Surviving Entity and its Subsidiaries) (the “Post-Closing Plans”), Parent shall use reasonable best efforts to cause each employee of the Company who remains employed by Parent or the Surviving Entity, or any of their respective Subsidiaries following the Closing, (together, the “Continuing Employees”) to be credited with his or her years of service with the Company or any of its predecessors; provided that the foregoing shall not apply to the extent that its application would result in a duplication of benefits. In addition, and without limiting the generality of the foregoing, for purposes of each Post-Closing Plan providing medical, dental, pharmaceutical and/or vision benefits to a Continuing Employee, Parent shall use reasonable best efforts to cause all pre-existing condition exclusions and actively-at-work requirements of such Post-Closing Plan to be waived for such Continuing Employee and his or her covered dependents to the extent and unless such conditions would have been waived or satisfied under the employee benefit plan whose coverage is being replaced under the Post-Closing Plan, and Parent shall use its best efforts to cause any eligible expenses incurred by a Continuing Employee and his or her covered dependents during the portion of such plan year in which coverage is replaced with coverage under a Post-Closing Plan to be taken into account under such Post-Closing Plan with respect to the plan year in which participation in such Post-Closing Plan begins for purposes of satisfying all deductible, coinsurance and maximum out-of-pocket requirements applicable to such Continuing Employee and his or her covered dependents for such plan year as if such amounts had been paid in accordance with such Post-Closing Plan. For employees of Parent who are not Continuing Employees and who are entitled to severance under their applicable employment agreements, Parent shall prepay for medical, dental, pharmaceutical and/or vision benefits for such employees, if the provider of such benefits is under an individual plan.
(b)Parent shall, or shall cause one of its Affiliates to, (i) provide Continuing Employees with base salary or hourly wage rate, as applicable, that are no less than the base salary or hourly wage rate, as applicable, in effect as of immediately prior to the First Effective Time through December 31, 2025 and, (ii) at all times from the First Effective Time through December 31, 2025, honor all severance commitments of Parent in effect as of immediately prior to the First Effective Time that pertain to the Continuing Employees.
(c)The provisions of this Section 5.5 are for the sole benefit of Parent and the Company and no provision of this Agreement shall (i) create any third-party beneficiary or other rights in any Person, including rights in respect of any benefits that may be provided, directly or indirectly, under any Company Benefit Plan, Parent Benefit Plan or Post-Closing Plan or rights to continued employment or service with the Company or the Parent (or any Subsidiary thereof), (ii) be construed as an amendment, waiver or creation of or limitation on the ability to terminate any Company Benefit Plan, Parent Benefit Plan or Post-Closing Plan, or (iii) limit the ability of the Parent to terminate the employment of any Continuing Employee or modify the at-will status of any Continuing Employees.
64
(d)Parent shall terminate the employment and service, as applicable, of each employee, independent contractor or officer of Parent listed in Section 5.5(d) of the Parent Disclosure Schedule, effective immediately after the First Effective Time, and shall comply with the terms of any employment, severance, retention, change of control, or similar Contract specified in Section 5.5(d) of the Parent Disclosure Schedule.
5.6Indemnification of Officers and Directors.
(a)From the First Effective Time through the sixth anniversary of the date on which the First Effective Time occurs, each of Parent and the Surviving Entity shall indemnify and hold harmless each person who is now, or has been at any time prior to the date hereof, or who becomes prior to the First Effective Time, a director or officer of Parent or the Company or any of their respective Subsidiaries, respectively (the “D&O Indemnified Parties”), against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that the D&O Indemnified Party is or was a director or officer of Parent or of the Company, or any Subsidiary thereof, asserted or claimed prior to the First Effective Time, in each case, to the fullest extent permitted under applicable Law. Except in the case of fraud, each D&O Indemnified Party will be entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding or investigation from each of Parent and the Surviving Entity, jointly and severally, upon receipt by Parent or the Surviving Entity from the D&O Indemnified Party of a request therefor; provided that any such person to whom expenses are advanced provides an undertaking to Parent, to the extent then required by the DGCL or DLLCA, as applicable, to repay such advances if it is ultimately determined that such person is not entitled to indemnification.
(b)The provisions of the certificate of incorporation and bylaws of Parent with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of Parent that are presently set forth in the certificate of incorporation and bylaws of Parent shall not be amended, modified or repealed for a period of six years from the First Effective Time in a manner that would adversely affect the rights thereunder of individuals who, at or prior to the First Effective Time, were officers or directors of Parent, unless such modification is required by applicable Law. The certificate of formation and limited liability company agreement of the Surviving Entity shall contain, and Parent shall cause the certificate of formation and limited liability company agreement of the Surviving Entity to so contain, provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers as those presently set forth in the certificate of incorporation and bylaws of Parent.
(c)From and after the First Effective Time, (i) the Surviving Entity shall fulfill and honor in all respects the obligations of the Company to its D&O Indemnified Parties as of immediately prior to the Closing pursuant to any indemnification provisions under the Company’s Organizational Documents and pursuant to any indemnification agreements between the Company and such D&O Indemnified Parties, with respect to claims arising out of matters occurring at or prior to the First Effective Time and (ii) Parent shall fulfill and honor in all respects the obligations of Parent to its D&O Indemnified Parties as of immediately prior to the Closing pursuant to any indemnification provisions under Parent’s Organizational Documents and pursuant to any indemnification agreements between Parent and such D&O Indemnified Parties, with respect to claims arising out of matters occurring at or prior to the First Effective Time.
65
(d)From and after the First Effective Time, Parent shall continue to maintain directors’ and officers’ liability insurance policies, with an effective date as of the Closing Date, on commercially available terms and conditions and with coverage limits customary for U.S. public companies similarly situated to Parent. From and after the First Effective Time, Parent shall pay all expenses, including reasonable attorneys’ fees, that are incurred by the persons referred to in this Section 5.6 in connection with their successful enforcement of the rights provided to such persons in this Section 5.6.
(e)The provisions of this Section 5.6 are intended to be in addition to the rights otherwise available to the current and former officers and directors of Parent and the Company by Law, charter, statute, bylaw or agreement, and shall operate for the benefit of, and shall be enforceable by, each of the D&O Indemnified Parties, their heirs and their representatives.
(f)In the event Parent or the Surviving Entity or any of their respective successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers all or substantially all of its properties and assets to any Person, then, and in each such case, proper provision shall be made so that the successors and assigns of Parent or the Surviving Entity, as the case may be, shall succeed to the obligations set forth in this Section 5.6. Parent shall cause the Surviving Entity to perform all of the obligations of the Surviving Entity under this Section 5.6.
5.7Additional Agreements. The Parties shall use reasonable best efforts to cause to be taken all actions necessary to consummate the Contemplated Transactions. Without limiting the generality of the foregoing, each Party to this Agreement: (a) shall make all filings and other submissions (if any) and give all notices (if any) required to be made and given by such Party in connection with the Contemplated Transactions; (b) shall use reasonable best efforts to obtain each Consent (if any) reasonably required to be obtained (pursuant to any applicable Law or Contract, or otherwise) by such Party in connection with the Contemplated Transactions or for such Contract to remain in full force and effect; (c) shall use reasonable best efforts to lift any injunction prohibiting, or any other legal bar to, the Contemplated Transactions; and (d) shall use reasonable best efforts to satisfy the conditions precedent to the consummation of this Agreement.
5.8Listing. Parent shall (a) maintain its existing listing on Nasdaq; (b) prepare and submit to Nasdaq a notification form for the listing of the shares of Parent Common Stock Payment Shares and the Parent Common Stock to be issued upon conversion of the Parent Preferred Stock Payment Shares to be issued in connection with the Contemplated Transactions, to cause such shares to be approved for listing (subject to official notice of issuance); (c) effect the Nasdaq Reverse Split and (d) to the extent required by Nasdaq rules and regulations, file an initial listing application for the Parent Common Stock on Nasdaq (the “Nasdaq Listing Application”), which Nasdaq Listing Application shall be prepared in cooperation with the Company. The Parties will use reasonable best efforts to coordinate with respect to compliance with Nasdaq rules and regulations. Each Party will promptly inform the other Party of all verbal or written communications between Nasdaq and such Party or its Representatives. The Company will cooperate with Parent as reasonably requested by Parent with respect to the Nasdaq Listing Application and promptly furnish to Parent all information concerning the Company and its stockholders that may be required or reasonably requested in connection with any action contemplated by this Section 5.8.
5.9Tax Matters. For U.S. federal income Tax purposes, (i) the Parties intend that the First Merger and the Second Merger, taken together, constitute an integrated transaction described in
66
Rev. Rul. 2001-46, 2001-2 C.B. 321 that qualifies as a “reorganization” within the meaning of Section 368(a) of the Code and the Treasury Regulations promulgated thereunder (the “Intended Tax Treatment”), and (ii) this Agreement is intended to be, and is hereby adopted as, a “plan of reorganization” for purposes of Sections 354 and 361 of the Code and Treasury Regulations Sections 1.368-2(g) and 1.368-3(a), to which the Parent, Merger Subs and the Company are parties under Section 368(b) of the Code. The Parties shall treat and shall not take any tax reporting position (including during the course of any audit, litigation or other proceeding with respect to Taxes) inconsistent with the treatment of the Merger as a reorganization within the meaning of Section 368(a) of the Code for U.S. federal, state and other relevant Tax purposes, unless otherwise required pursuant to a “determination” within the meaning of Section 1313(a) of the Code. The Parties shall not (and shall cause their Affiliates not to) take any action or cause any action to be taken, or fail to take or cause to be taken any action, which action or failure to act would reasonably be expected to prevent the Merger from qualifying, for the Intended Tax Treatment.
5.10Legends. Parent shall be entitled to place appropriate legends, including the legend noted in Section 5.21, on the book entries and/or certificates evidencing any shares of Parent Common Stock or Parent Convertible Preferred Stock to be received in the Merger by equity holders of the Company who may be considered “affiliates” of Parent for purposes of Rules 144 and 145 under the Securities Act reflecting the restrictions set forth in Rules 144 and 145 and to issue appropriate stop transfer instructions to the transfer agent for Parent Common Stock and Parent Convertible Preferred Stock.
5.11Directors and Officers. The Parties shall take all necessary action so that (a) immediately after the Second Effective Time, Parent shall appoint two designees of the Company to the Parent Board; provided, that at such time at least five members of the Parent Board shall continue to serve in office; and (b) the Persons set forth on Section 5.11(b) of the Parent Disclosure Schedule under the heading “Officers” are elected or appointed, as applicable, to the positions of officers of Parent and the Surviving Entity, as set forth therein, to serve in such positions effective as of the Second Effective Time until successors are duly appointed and qualified in accordance with applicable Law. As soon as practicable after approval of the Parent Stockholder Matters, the Parties shall take all necessary action so that: (a) (i) if the Board of the Surviving Entity is comprised of five members, one such member shall be designated by Parent, (ii) if the Board of the Surviving Entity is comprised of seven members, two such members shall be designated by Parent, and (iii) if the Board of the Surviving Entity is greater than seven members, Parent shall have the right to appoint a similar number of board members that is commensurate with Parent’s existing stockholders’ percentage ownership in the Surviving Entity following application of the Exchange Ratio.
5.12Section 16 Matters. Prior to the First Effective Time, Parent and the Company shall take all such steps as may be required (to the extent permitted under applicable Laws) to cause any acquisitions of Parent Common Stock, restricted stock awards to acquire Parent Common Stock and any Parent Options to purchase Parent Common Stock in connection with the Contemplated Transactions, by each individual who is reasonably expected to become subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Parent, to be exempt under Rule 16b-3 promulgated under the Exchange Act.
5.13Cooperation. Each Party shall cooperate reasonably with the other Party and shall provide the other Party with such assistance as may be reasonably requested for the purpose of facilitating the performance by each Party of its respective obligations under this Agreement and to enable the combined entity to continue to meet its obligations following the First Effective Time.
67
5.14Post Closing Therapeutic Development Cooperation. As the Company believes the Merger will expand the Company’s opportunities to create a novel platform for targeted peptide conjugates to treat diseases, specifically peptide-based proteolysis targeting chimeras, or PROTACs, the Parties shall reasonably cooperate following the Closing to (i) leverage the Parent’s proprietary compound SP-3164, which specifically binds to the E3 ligase complex CRLCBRN, and the Company’s peptide engineering platform to target a variety of disease relevant intracellular proteins, including previously ‘undruggable’ proteins across therapeutic areas including oncology and infectious disease, and (ii) continuing support for the ongoing clinical trials evaluating seclidemstat (SP-2577) in combination with azacytidine for certain blood disorders while conducting a review of Parent’s small molecule program (the “Synergistic Opportunities”). Each Party and its Affiliates shall cooperate reasonably with the other Party and shall provide the other Party with such assistance as may be reasonably requested for the purpose of the Synergistic Opportunities and commercialization of peptide-conjugate therapeutics.
5.15Closing Certificates.
(a)The Company will prepare and deliver to Parent at least five (5) Business Days prior to the Closing Date a certificate signed by the Chief Executive Officer of the Company in a form reasonably acceptable to Parent setting forth (as of immediately prior to the First Effective Time, after giving effect to the Convertible Note Conversion) (i) each holder of Company Common Stock, Company Options and Company Warrants, (ii) such holder’s name and address, (iii) the number and type of Company Common Stock held and/or underlying the Company Options or Company Warrants as of immediately prior to the First Effective Time for each such holder, and (v) the number of shares of Parent Common Stock and/or Parent Convertible Preferred Stock to be issued to such holder, or to underlie any Parent Option or Parent Warrant to be issued to such holder, pursuant to this Agreement in respect of the Company Capital Stock, Company Options or Company Warrants held by such holder as of immediately prior to the First Effective Time (the “Allocation Certificate”).
(b)Parent will prepare and deliver to the Company at least five (5) Business Days prior to the Closing Date a certificate signed by the Chief Financial Officer of Parent in a form reasonably acceptable to the Company, setting forth (as of immediately prior to the First Effective Time, excluding any shares to be issued in the Qualified Financing) (A) the number of Parent Common Stock outstanding and (B) (i) each record holder of Parent Common Stock, Parent Options, Parent Warrants or Parent RSUs, (ii) such record holder’s name and address, (iii) the number of shares of Parent Common Stock underlying the Parent Options, Parent Warrants or Parent RSUs as of the First Effective Time for such holder (the “Parent Outstanding Shares Certificate”).
5.16Takeover Statutes. If any Takeover Statute is or may become applicable to the Contemplated Transactions, each of the Company, the Company Board, Parent and the Parent Board, as applicable, shall grant such approvals and take such actions as are necessary so that the Contemplated Transactions may be consummated as promptly as practicable on the terms contemplated by this Agreement and otherwise act to eliminate or minimize the effects of such statute or regulation on the Contemplated Transactions.
5.17Stockholder Litigation. Each Party shall promptly notify the other Party in writing, and conduct and control the settlement and defense, of any stockholder litigation brought or threatened against such Party or any of its directors and officers relating to or challenging this Agreement or the consummation of the Contemplated Transactions; provided, that prior to Closing, such Party shall (a) consult with the other Party with respect to any such stockholder litigation and in good faith take any
68
comments of the other Party into account with respect to such stockholder litigation, and (b) keep the other Party reasonably apprised of any material developments in connection with any such stockholder litigation.
5.18Termination of Certain Agreements and Rights. The Company shall cause any Investor Agreements (excluding the Company Stockholder Support Agreements and the Company Lock-Up Agreements) to be terminated immediately prior to the First Effective Time, without any liability being imposed on the part of Parent or the Surviving Entity.
5.19Obligations of Merger Subs. Parent will take all action necessary to cause Merger Subs to perform their obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement.
5.20Company Convertible Note Conversion. The Company shall take all necessary action to effect the conversion of the Company Convertible Notes into Company Common Stock, which shall occur not later than immediately prior to the First Effective Time (the “Convertible Note Conversion”).
5.21Disclosure. The initial press release relating to this Agreement shall be a joint press release issued by the Company and Parent and thereafter Parent and the Company shall consult with each other before issuing any further press release(s) or otherwise making any public statement or making any announcement to Parent Associates or Company Associates (to the extent not previously issued or made in accordance with this Agreement) with respect to the Contemplated Transactions and shall not issue any such press release, public statement or announcement to Parent Associates or Company Associates without the other Party’s written consent (which shall not be unreasonably withheld, conditioned or delayed). Notwithstanding the foregoing: (a) each Party may, without such consultation or consent, make any public statement in response to questions from the press, analysts, investors or those attending industry conferences, make internal announcements to employees and make disclosures in Parent SEC Documents, so long as such statements are consistent with previous press releases, public disclosures or public statements made jointly by the Parties (or individually, if approved by the other Party); (b) a Party may, without the prior consent of the other Party hereto but subject to giving advance notice to the other Party, issue any such press release or make any such public announcement or statement as may be required by any Law; and (c) Parent need not consult with the Company in connection with such portion of any press release, public statement or filing to be issued or made with respect to any Acquisition Proposal.
5.22Private Placement. Each of the Company and Parent shall take all reasonably necessary action on its part such that the issuance of Parent Common Stock Payment Shares and Parent Preferred Stock Payment Shares pursuant to this Agreement constitutes a transaction exempt from registration under the Securities Act in compliance with Rule 506 of Regulation D promulgated thereunder. Each certificate representing Parent Common Stock Payment Shares and the Parent Preferred Stock Payment Shares comprising Merger Consideration shall, until such time that such shares are not so restricted under the Securities Act, bear a legend identical or similar in effect to the following legend (together with any other legend or legends required by applicable state securities applicable Law or otherwise, if any):
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS REGISTERED UNDER THE ACT
69
OR UNLESS AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT IS AVAILABLE.”
6.CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH PARTY. The obligations of each Party to effect the Merger and otherwise consummate the Contemplated Transactions to be consummated at the Closing are subject to the satisfaction or, to the extent permitted by applicable Law, the written waiver by each of the Parties, at or prior to the Closing Date, of each of the following conditions:
6.1No Restraints. No temporary restraining order, preliminary or permanent injunction or other order preventing the consummation of the Contemplated Transactions shall have been issued by any court of competent jurisdiction or other Governmental Body of competent jurisdiction and remain in effect and there shall not be any Law which has the effect of making the consummation of the Contemplated Transactions illegal.
6.2Certificate of Designation. Parent shall have filed the Certificate of Designation with the Secretary of State of the State of Delaware.
6.3Listing. The existing shares of Parent Common Stock shall have been continually listed on Nasdaq as of and from the date of this Agreement through the Closing Date, the approval of the listing of additional shares of Parent Common Stock on Nasdaq shall have been obtained and the shares of Parent Common Stock to be issued in the Merger pursuant to this Agreement shall have been approved for listing (subject to official notice of issuance) on Nasdaq as of the Closing.
6.4Qualified Financing. The Qualified Financing shall have been consummated.
7.ADDITIONAL CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent to effect the Merger and otherwise consummate the transactions to be consummated at the Closing are subject to the satisfaction or the written waiver by Parent, at or prior to the Closing, of each of the following conditions:
7.1Accuracy of Representations. The Company Fundamental Representations shall have been true and correct in all material respects as of the date of this Agreement and shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on and as of such date (except to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct in all material respects as of such date). The representations and warranties of the Company contained in this Agreement (other than the Company Fundamental Representations) shall have been true and correct as of the date of this Agreement and shall be true and correct on and as of the Closing Date with the same force and effect as if made on the Closing Date, except (a) in each case, or in the aggregate, where the failure to be true and correct would not reasonably be expected to have a Company Material Adverse Effect (without giving effect to any references therein to any Company Material Adverse Effect or other materiality qualifications), or (b) for those representations and warranties which address matters only as of a particular date (which representations shall have been true and correct, subject to the qualifications as set forth in the preceding clause (a), as of such particular date) (it being understood that, for purposes of determining the accuracy of such representations and warranties, any update of or modification to the Company Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded).
70
7.2Performance of Covenants. The Company shall have performed or complied with in all material respects all agreements and covenants required to be performed or complied with by it under this Agreement at or prior to the First Effective Time.
7.3Documents. Parent shall have received the following documents, each of which shall be in full force and effect:
(a)a certificate executed by the Chief Executive Officer or Chief Financial Officer of the Company certifying (i) that the conditions set forth in Sections 7.1, 7.2, 7.5, 7.7, and 7.9 have been duly satisfied and (ii) that the information set forth in the Allocation Certificate delivered by the Company in accordance with Section 5.14 is true and accurate in all respects as of the Closing Date;
(b)a written resignation, in a form reasonably satisfactory to Parent, dated as of the Closing Date and effective as of the Closing, executed by each of the directors of the Company who will not be a director of Parent or the Surviving Entity;
(c)the Company Cash Schedule and a certificate executed by the principal financial officer of the Company certifying that the information set forth in the Company Cash Schedule delivered by Company in accordance with Section 1.10 is true and accurate in all material respects as of the Anticipated Closing Date; and
(d)the Allocation Certificate.
7.4FIRPTA Certificate. Parent shall have received (i) an original signed statement from the Company that the Company is not, and has not been at any time during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code, a “United States real property holding corporation,” as defined in Section 897(c)(2) of the Code, conforming to the requirements of Treasury Regulations Section 1.1445-2(c)(3) and 1.897-2(h), and (ii) an original signed notice to be delivered to the IRS in accordance with the provisions of Treasury Regulations Section 1.897-2(h)(2), together with written authorization for Parent to deliver such notice to the IRS on behalf of the Company following the Closing, each dated as of the Closing Date, duly executed by an authorized officer of the Company, and in form and substance reasonably acceptable to Parent.
7.5No Company Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Company Material Adverse Effect.
7.6Qualified Financing. The Qualified Financing shall have been consummated.
7.7Termination of Investor Agreements. The Investor Agreements shall have been terminated.
7.8Company Lock-Up Agreements. Parent shall have received the Company Lock-Up Agreements duly executed by each of the Company Signatories and each executive officer and director of the Company who is elected or appointed, as applicable, as an executive officer and director of Parent as of immediately following the Closing, each of which shall be in full force and effect.
7.9Company Stockholder Written Consent. The Company Stockholder Written Consent evidencing the Required Company Stockholder Vote shall be in full force and effect.
71
7.10Convertible Note Conversion. The Company shall have effected the Convertible Note Conversion.
8.ADDITIONAL CONDITIONS PRECEDENT TO OBLIGATION OF THE COMPANY. The obligations of the Company to effect the Merger and otherwise consummate the transactions to be consummated at the Closing are subject to the satisfaction or the written waiver by the Company, at or prior to the Closing, of each of the following conditions:
8.1Accuracy of Representations. The Parent Fundamental Representations shall have been true and correct in all material respects as of the date of this Agreement and shall be true and correct in all material respects on and as of the Closing Date with the same force and effect as if made on and as of such date (except to the extent such representations and warranties are specifically made as of a particular date, in which case such representations and warranties shall be true and correct in all material respects as of such date). The representations and warranties of Parent and Merger Sub contained in this Agreement (other than the Parent Fundamental Representations) shall have been true and correct as of the date of this Agreement and shall be true and correct on and as of the Closing Date with the same force and effect as if made on the Closing Date except (a) in each case, or in the aggregate, where the failure to be true and correct would not reasonably be expected to have a Parent Material Adverse Effect (without giving effect to any references therein to any Parent Material Adverse Effect or other materiality qualifications), or (b) for those representations and warranties which address matters only as of a particular date (which representations shall have been true and correct, subject to the qualifications as set forth in the preceding clause (a), as of such particular date) (it being understood that, for purposes of determining the accuracy of such representations and warranties, any update of or modification to the Parent Disclosure Schedule made or purported to have been made after the date of this Agreement shall be disregarded).
8.2Performance of Covenants. Parent and Merger Sub shall have performed or complied with in all material respects all of their agreements and covenants required to be performed or complied with by each of them under this Agreement at or prior to the First Effective Time.
8.3Documents. The Company shall have received the following documents, each of which shall be in full force and effect:
(a)a certificate executed by the Chief Executive Officer of Parent confirming that the conditions set forth in Sections 8.1, 8.2, and 8.4 have been duly satisfied;
(b)the Parent Cash Schedule and a certificate executed by the principal financial officer of Parent certifying that the information set forth in the Parent Cash Schedule delivered by Parent in accordance with Section 1.10 is true and accurate in all material respects as of the Anticipated Closing Date;
(c)the Parent Outstanding Shares Certificate; and
(d)a written resignation, in a form reasonably satisfactory to the Company, dated as of the Closing Date and effective as of the Closing, executed by each of the directors of Parent who are not to continue as directors of Parent after the Closing.
8.4No Parent Material Adverse Effect. Since the date of this Agreement, there shall not have occurred any Parent Material Adverse Effect.
72
8.5Certificate of Designation. Parent shall have filed the Certificate of Designation with the Secretary of State of the State of Delaware.
8.6Parent Lock-Up Agreements. The Company shall have received the Parent Lock-Up Agreements duly executed by each of the Parent Signatories, each of which shall be in full force and effect.
8.7Board of Directors. Parent shall have taken all actions necessary to cause the Parent Board to be constituted as set forth in the first sentence of Section 5.11 of this Agreement effective as of the First Effective Time.
8.8Nasdaq. Parent shall not have received official notice from Nasdaq of the pending delisting of its common stock on the Nasdaq. The Parent Common Stock Payment Shares issuable in connection with the Merger shall have been approved for listing on Nasdaq, subject to official notice of issuance.
9.TERMINATION.
9.1Termination. This Agreement may be terminated prior to the First Effective Time:
(a)by mutual written consent of Parent and the Company;
(b)by either Parent or the Company if a court of competent jurisdiction or other Governmental Body shall have issued a final and nonappealable order, decree or ruling, or shall have taken any other action, having the effect of permanently restraining, enjoining or otherwise prohibiting the Contemplated Transactions;
(c)by Parent if (i) the Company is unable to obtain the Required Company Stockholder Vote within thirty (30) days of the date of this Agreement; (ii) the Company is unable to obtain consent from all of its noteholders within thirty (30) days of the date of this Agreement to effect the Convertible Note Conversion; or (iii) a registration statement is filed with respect to the Qualified Financing and such Qualified Financing is not consummated within 45 days of the Securities and Exchange Commission’s declaration of effectiveness of the related registration statement;
(d)by the Company if a Parent Triggering Event shall have occurred;
(e)by Parent if a Company Triggering Event shall have occurred;
(f)by the Company, upon a breach of any representation, warranty, covenant or agreement set forth in this Agreement by Parent or Merger Sub or if any representation or warranty of Parent or Merger Sub shall have become inaccurate, in either case, such that the conditions set forth in Section 8.1 or Section 8.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become inaccurate; provided that the Company is not then in material breach of any representation, warranty, covenant or agreement under this Agreement; provided, further, that if such inaccuracy in Parent’s or Merger Subs’ representations and warranties or breach by Parent or Merger Subs is curable by Parent or Merger Subs, then this Agreement shall not terminate pursuant to this Section 9.1(f) as a result of such particular breach or inaccuracy until the expiration of a fifteen (15)-day period commencing upon delivery of written notice from the Company to Parent or Merger Subs of such breach or inaccuracy and its intention to terminate pursuant to this Section 9.1(f) (it
73
being understood that this Agreement shall not terminate pursuant to this Section 9.1(f) as a result of such particular breach or inaccuracy if such breach by Parent or Merger Sub is cured prior to such termination becoming effective);
(g)by Parent, upon a breach of any representation, warranty, covenant or agreement set forth in this Agreement by the Company or if any representation or warranty of the Company shall have become inaccurate, in either case, such that the conditions set forth in Section 7.1 or Section 7.2 would not be satisfied as of the time of such breach or as of the time such representation or warranty shall have become inaccurate; provided that Parent is not then in material breach of any representation, warranty, covenant or agreement under this Agreement; provided, further, that if such inaccuracy in the Company’s representations and warranties or breach by the Company is curable by the Company then this Agreement shall not terminate pursuant to this Section 9.1(g) as a result of such particular breach or inaccuracy until the expiration of a fifteen (15)-day period commencing upon delivery of written notice from Parent to the Company of such breach or inaccuracy and its intention to terminate pursuant to this Section 9.1(g) (it being understood that this Agreement shall not terminate pursuant to this Section 9.1(g) as a result of such particular breach or inaccuracy if such breach by the Company is cured prior to such termination becoming effective); or
(h)by Parent, at any time, upon entering into a Permitted Alternative Agreement if (i) Parent has received a Superior Offer, (ii) Parent has complied with its obligations under Section 4.4 with respect to such Superior Offer, (iii) Parent enters into a Permitted Alternative Agreement with respect to such Superior Offer and (iv) within five (5) Business Days of such termination, Parent pays to the Company the Company Termination Fee in accordance with Section 10.
9.2Effect of Termination. In the event of the termination of this Agreement as provided in Section 9.1, this Agreement shall be of no further force or effect; provided, however, that (a) this Section 9.2, Section 9.3, and the definitions of the defined terms in such Sections shall survive the termination of this Agreement and shall remain in full force and effect, and (b) the termination of this Agreement and the provisions of Section 9.3 shall not relieve any Party of any liability for fraud or for any willful and material breach of any representation, warranty, covenant, obligation or other provision contained in this Agreement.
9.3Expenses; Termination Fees.
(a)Except as set forth in this Section 9.3, whether or not the Merger is consummated, (i) all Parent Transaction Expenses shall be paid by Parent (or on behalf of Parent) at or prior to the Closing and (ii) all Company Transaction Expenses shall be paid by the Company.
(b)If this Agreement is terminated by Parent pursuant to Section 9.1(h) or 9.1(d), then Parent shall pay to the Company a nonrefundable fee in an amount equal to $300,000 (the “Company Termination Fee”).
(c)If this Agreement is terminated by Parent pursuant to Section 9.1(c) or 9.1(e), then the Company shall pay to Parent a nonrefundable fee in an amount equal to $300,000 (the “Parent Termination Fee”).
(d)Any Company Termination Fee or Parent Termination Fee due under this Section 9.3 shall be paid by wire transfer of same day funds. If a Party fails to pay when due any amount payable by it under this Section 9.3, then such Party shall pay to the other Party interest on such overdue amount (for the period commencing as of the date such overdue amount was originally required to be paid
74
and ending on the date such overdue amount is actually paid to the other Party in full) at a rate per annum equal to the “prime rate” (as published in The Wall Street Journal or any successor thereto) in effect on the date such overdue amount was originally required to be paid.
(e)The Parties agree that, (i) subject to Section 9.2, payment of the Company Termination Fee shall, in the circumstances in which it is owed in accordance with the terms of this Agreement, constitute the sole and exclusive remedy of the Company following the termination of this Agreement, it being understood that in no event shall Parent be required to pay the amounts payable pursuant to this Section 9.3 on more than one occasion and (ii) following payment of the Company Termination Fee (A) Parent shall have no further liability to the Company in connection with or arising out of this Agreement or the termination thereof, any breach of this Agreement by Parent giving rise to such termination, or the failure of the Contemplated Transactions to be consummated, (B) neither the Company nor any of its Affiliates shall be entitled to bring or maintain any other claim, action or proceeding against Parent or Merger Sub or seek to obtain any recovery, judgment or damages of any kind against such Parties (or any partner, member, stockholder, director, officer, employee, Subsidiary, Affiliate, agent or other Representative of such Parties) in connection with or arising out of this Agreement or the termination thereof, any breach by any such Parties giving rise to such termination or the failure of the Contemplated Transactions to be consummated and (C) the Company and its Affiliates shall be precluded from any other remedy against Parent, Merger Sub and their respective Affiliates, at law or in equity or otherwise, in connection with or arising out of this Agreement or the termination thereof, any breach by such Party giving rise to such termination or the failure of the Contemplated Transactions to be consummated; provided, however, that nothing in this Section 9.3(e) shall limit the rights of the Company under Section 10.11 or with respect to claims of fraud or willful and material breach of this Agreement by either Party prior to the date of termination.
(f)The Parties agree that, (i) subject to Section 9.2, payment of the Parent Termination Fee shall, in the circumstances in which it is owed in accordance with the terms of this Agreement, constitute the sole and exclusive remedy of Parent following the termination of this Agreement, it being understood that in no event shall the Company be required to pay the amounts payable pursuant to this Section 9.3 on more than one occasion and (ii) following payment of the Parent Termination Fee (A) the Company shall have no further liability to Parent in connection with or arising out of this Agreement or the termination thereof, any breach of this Agreement by the Company giving rise to such termination, or the failure of the Contemplated Transactions to be consummated, (B) neither Parent nor any of its Affiliates shall be entitled to bring or maintain any other claim, action or proceeding against the Company or seek to obtain any recovery, judgment or damages of any kind against such Parties (or any partner, member, stockholder, director, officer, employee, Subsidiary, Affiliate, agent or other Representative of such Parties) in connection with or arising out of this Agreement or the termination thereof, any breach by any such Parties giving rise to such termination or the failure of the Contemplated Transactions to be consummated and (C) Parent and its Affiliates shall be precluded from any other remedy against the Company and its Affiliates, at law or in equity or otherwise, in connection with or arising out of this Agreement or the termination thereof, any breach by such Party giving rise to such termination or the failure of the Contemplated Transactions to be consummated; provided, however, that nothing in this Section 9.3(f) shall limit the rights of Parent and Merger Sub under Section 10 or with respect to claims of fraud or willful and material breach of this Agreement by either Party prior to the date of termination.
(g)Each of the Parties acknowledges that (i) the agreements contained in this Section 9.3 are an integral part of the Contemplated Transactions, (ii) without these agreements, the Parties would not enter into this Agreement and (iii) any amount payable pursuant to this Section 9.3 is
75
not a penalty, but rather is liquidated damages in a reasonable amount that will compensate the Party in the circumstances in which such amount is payable.
10.MISCELLANEOUS PROVISIONS.
10.1Non-Survival of Representations and Warranties. The representations and warranties of the Company, Parent and Merger Subs contained in this Agreement or any certificate or instrument delivered pursuant to this Agreement shall terminate at the First Effective Time, and only the covenants that by their terms survive the First Effective Time and this Section 10 shall survive the First Effective Time.
10.2Amendment. This Agreement may be amended with the approval of the respective boards of directors (or managers as applicable) of the Surviving Entity and Parent at any time; provided, however, that after any such approval of this Agreement by a Party’s stockholders, no amendment shall be made which by Law requires further approval of such stockholders without the further approval of such stockholders. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the Surviving Entity and Parent.
10.3Waiver.
(a)No failure on the part of any Party to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any Party in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy.
(b)No Party shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Party and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
10.4Entire Agreement; Counterparts; Exchanges by Electronic Transmission. This Agreement and the other schedules, exhibits, certificates, instruments and agreements referred to in this Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among or between any of the Parties with respect to the subject matter hereof and thereof; provided, however, that the Confidentiality Agreement shall not be superseded and shall remain in full force and effect in accordance with its terms. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. Counterparts may be delivered via electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
10.5Applicable Law; Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of laws. In any action or proceeding between any of the Parties arising out of or relating to this Agreement or any of the Contemplated Transactions, each of the Parties: (a) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the State of Delaware or, to the extent such court does not have
76
subject matter jurisdiction, the United States District Court for the District of Delaware or, to the extent that neither of the foregoing courts has jurisdiction, the Superior Court of the State of Delaware; (b) agrees that all claims in respect of such action or proceeding shall be heard and determined exclusively in accordance with clause (a) of this Section 10.5; (c) waives any objection to laying venue in any such action or proceeding in such courts; (d) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any Party; (e) agrees that service of process upon such Party in any such action or proceeding shall be effective if notice is given in accordance with Section 10.8 of this Agreement; and (f) irrevocably and unconditionally waives the right to trial by jury.
10.6Attorneys’ Fees. In any action at law or suit in equity to enforce this Agreement or the rights of any of the Parties, the prevailing Party in such action or suit (as determined by a court of competent jurisdiction) shall be entitled to recover its reasonable out-of-pocket attorneys’ fees and all other reasonable costs and expenses incurred in such action or suit.
10.7Assignability. This Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of, the Parties and their respective successors and permitted assigns; provided, however, that neither this Agreement nor any of a Party’s rights or obligations hereunder may be assigned or delegated by such Party without the prior written consent of the other Party, and any attempted assignment or delegation of this Agreement or any of such rights or obligations by such Party without the other Party’s prior written consent shall be void and of no effect.
10.8Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly delivered and received hereunder (a) one Business Day after being sent for next Business Day delivery, fees prepaid, via a reputable international overnight courier service, (b) upon delivery in the case of delivery by hand, or (c) on the date delivered in the place of delivery if sent by email (with a written or electronic confirmation of delivery) prior to 5:00 p.m. Pacific Time, otherwise on the next succeeding Business Day, in each case to the intended recipient as set forth below:
if to Parent or Merger Subs:
Salarius Pharmaceuticals, Inc.
2450 Holcombe Blvd.
Suite X
Houston, TX
Attention: David Arthur
Email Address: [email protected]
with a copy to (which shall not constitute notice):
Honigman LLP
2290 First National Building
660 Woodward Avenue
Detroit, MI 48226-3506
Attention: Phillip D. Torrence
Email: [email protected]
Attention: Jeff Kuras
Email: [email protected]
Attention: Emily J. Johns
Email: [email protected]
77
if to the Company:
Decoy Therapeutics Inc.
One Broadway, 14th Floor
Cambridge, MA 02142
Attention: Rick Pierce
Email Address: [email protected]
with a copy to (which shall not constitute notice):
Nason, Yeager, Gerson, Harris & Fumero, P.A.
3001 PGA Boulevard, Suite 305
Palm Beach Gardens, FL 33410
Attention: Brian S. Bernstein
Email Address: [email protected]
Attention: Brian A. Pearlman
Email Address: [email protected]
10.9Cooperation. Each Party agrees to cooperate fully with the other Party and to execute and deliver such further documents, certificates, agreements and instruments and to take such other actions as may be reasonably requested by the other Party to evidence or reflect the Contemplated Transactions and to carry out the intent and purposes of this Agreement.
10.10Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If a final judgment of a court of competent jurisdiction declares that any term or provision of this Agreement is invalid or unenforceable, the Parties agree that the court making such determination shall have the power to limit such term or provision, to delete specific words or phrases or to replace such term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be valid and enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the Parties agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term or provision.
10.11Other Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a Party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such Party, and the exercise by a Party of any one remedy will not preclude the exercise of any other remedy. The Parties agree that irreparable damage for which monetary damages, even if available, would not be an adequate remedy, would occur in the event that any Party does not perform the provisions of this Agreement (including failing to take such actions as are required of it hereunder to consummate this Agreement) in accordance with its specified terms or otherwise breaches such provisions. Accordingly, the Parties acknowledge and agree that the Parties shall be entitled to an injunction, specific performance and other equitable relief to
78
prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof, in addition to any other remedy to which they are entitled at law or in equity. Each of the Parties agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that any other Party has an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or in equity. Any Party seeking an injunction or injunctions to prevent breaches of this Agreement shall not be required to provide any bond or other security in connection with any such order or injunction.
10.12No Third-Party Beneficiaries. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (other than the Parties and the D&O Indemnified Parties to the extent of their respective rights pursuant to Section 5.6) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
10.13Construction.
(a)References to “cash,” “dollars” or “$” are to U.S. dollars.
(b)For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders.
(c)The Parties have participated jointly in the negotiating and drafting of this Agreement and agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting Party shall not be applied in the construction or interpretation of this Agreement, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any provision of this Agreement.
(d)As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”
(e)Except as otherwise indicated, all references in this Agreement to “Sections,” “Exhibits” and “Schedules” are intended to refer to Sections of this Agreement and Exhibits and Schedules to this Agreement, respectively.
(f)Any reference to legislation or to any provision of any legislation shall include any modification, amendment, re-enactment thereof, any legislative provision substituted therefore and all rules, regulations, and statutory instruments issued or related to such legislations.
(g)The bold-faced headings and table of contents contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.
(h)The inclusion of any information in the Company Disclosure Schedule or Parent Disclosure Schedule shall not be deemed an admission or acknowledgment to any third party, in and of itself and solely by virtue of the inclusion of such information in the Company Disclosure Schedule or Parent Disclosure Schedule, as applicable, that such information is required to be listed in the Company Disclosure Schedule or Parent Disclosure Schedule, as applicable, that such items are material to the Company and its Subsidiaries, taken as a whole, or Parent and its Subsidiaries, taken as a whole, as
79
the case may be, or that such items have resulted in a Company Material Adverse Effect or a Parent Material Adverse Effect. The Parties agree that each of the Company Disclosure Schedule and the Parent Disclosure Schedule shall be arranged in sections and subsections corresponding to the numbered and lettered sections and subsections contained in this Agreement. The disclosures in any section or subsection of the Company Disclosure Schedule or the Parent Disclosure Schedule shall qualify other sections and subsections in this Agreement to the extent it is readily apparent on its face from a reading of the disclosure that such disclosure is applicable to such other sections and subsections.
(i)Each of “delivered” or “made available” means, with respect to any documentation, that (i) prior to 11:59 p.m. (Pacific Time) on the date that is two Business Days prior to the date of this Agreement (A) a copy of such material has been posted to and made available by a Party to the other Party and its Representatives in the electronic data room maintained by such disclosing Party or (B) such material is disclosed in the Parent SEC Documents filed with the SEC prior to the date hereof and publicly made available on the SEC’s Electronic Data Gathering Analysis and Retrieval system or (ii) delivered by or on behalf of a Party or its Representatives via electronic mail or in hard copy form prior to the execution of this Agreement.
(j)Whenever the last day for the exercise of any privilege or the discharge of any duty hereunder shall fall upon a Saturday, Sunday, or any date on which banks in San Francisco, California, are authorized or obligated by Law to be closed, the Party having such privilege or duty may exercise such privilege or discharge such duty on the next succeeding day which is a regular Business Day.
10.14Expenses. Except as otherwise expressly provided in this Agreement, all expenses incurred in connection with this Agreement and the Contemplated Transactions will be paid by the Party incurring such expenses.
Signatures on the Following Page
80
In Witness Whereof, the Parties have caused this Agreement to be executed as of the date first above written.
PARENT: | |||||
Salarius Pharmaceuticals, Inc. By: /s/ David J. Arthur Name: David J. Arthur Title: President and Chief Executive Officer | |||||
THE FIRST MERGER SUB: | |||||
Decoy Therapeutics MergerSub I, Inc. By: /s/ David J. Arthur Name: David J. Arthur Title: Chief Executive Officer | |||||
THE SECOND MERGER SUB: | |||||
Decoy Therapeutics MergerSub II, LLC By: /s/ David J. Arthur Name: David J. Arthur Title: Chief Executive Officer | |||||
THE COMPANY: | |||||
Decoy Therapeutics Inc. By: /s/ Frederick Pierce II Name: Frederick Pierce II Title: Chief Executive Officer | |||||
Signature Page to
Agreement and Plan of Merger
Exhibit A
Certain Definitions
For purposes of this Agreement (including this Exhibit A):
“2025 Plan” has the meaning set forth in Section 5.1(a).
“Accounting Firm” has the meaning set forth in Section 1.10(e).
“ACT” has the meaning set forth in Section 4.18.
“Acquisition Inquiry” means, with respect to a Party, an inquiry, indication of interest or request for information (other than an inquiry, indication of interest or request for information made or submitted by the Company or any of its Affiliates, on the one hand, or Parent or any of its Affiliates, on the other hand, to the other Party) that could reasonably be expected to lead to an Acquisition Proposal.
“Acquisition Proposal” means, with respect to a Party, any offer or proposal, whether written or oral (other than an offer or proposal made or submitted by or on behalf of the Company or any of its Affiliates, on the one hand, or by or on behalf of Parent or any of its Affiliates, on the other hand, to the other Party) contemplating or otherwise relating to any Acquisition Transaction with such Party.
“Acquisition Transaction” means any transaction or series of related transactions involving:
(i) any merger, consolidation, amalgamation, share exchange, business combination, issuance of securities, acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or other similar transaction: (i) in which a Party is a constituent Entity; (ii) in which a Person or “group” (as defined in the Exchange Act and the rules promulgated thereunder) of Persons directly or indirectly acquires beneficial or record ownership of securities representing more than 20% of the outstanding securities of any class of voting securities of a Party or any of its Subsidiaries; or (iii) in which a Party or any of its Subsidiaries issues securities representing more than 20% of the outstanding securities of any class of voting securities of such Party or any of its Subsidiaries; provided, however, that, in the case of the Parent, to the extent that the Qualified Financing is effected in accordance with the terms and conditions of this Agreement, the Qualified Financing shall not constitute an Acquisition Transaction; or
(ii) any sale, lease, exchange, transfer, license, acquisition or disposition of any business or businesses or assets that constitute or account for 20% or more of the consolidated book value or the fair market value of the assets of a Party and its Subsidiaries, taken as a whole.
“Affiliate” of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by Contract or otherwise.
1
“Agreement” means the Agreement and Plan of Merger to which this Exhibit A is attached, as it may be amended from time to time.
“Allocation Certificate” has the meaning set forth in Section 5.15.
“Anti-Bribery Laws” has the meaning set forth in Section 2.22.
“Anticipated Closing Date” has the meaning set forth in Section 1.10.
“Book-Entry Shares” has the meaning set forth in Section 1.7.
“Business Day” means any day other than a Saturday, Sunday or other day on which banks in New York, New York, are authorized or obligated by Law to be closed.
“Cash Calculations” has the meaning set forth in Section 1.10(a).
“Cash Schedules” has the meaning set forth in Section 1.10(a).
“Certificate of Designation” means the Certificate of Designation of Preferences, Rights and Limitations of Parent Convertible Preferred Stock in the form attached hereto as Exhibit C.
“Certificates of Merger” has the meaning set forth in Section 1.3.
“Certifications” has the meaning set forth in Section 3.7(a).
“Charter Amendment Proposal” has the meaning set forth in Section 5.1(a)(iii).
“Closing” has the meaning set forth in Section 1.3.
“Closing Date” has the meaning set forth in Section 1.3.
“Code” means the Internal Revenue Code of 1986, as amended.
“Company” has the meaning set forth in the Preamble.
“Company Associate” means any current or former employee, independent contractor, officer or director of the Company.
“Company Benefit Plan” has the meaning set forth in Section 2.17(a).
“Company Board” means the board of directors of the Company.
“Company Cash Amount” (a) the sum of all Cash and Cash Equivalents, marketable securities, accrued investment interest receivable, and any prepaid refundable deposits listed in Section 1.10 of the Company Disclosure Schedule, in each case, of the Company as of the Determination Date, calculated in accordance with Section 1.10), minus (b) the Company’s accounts payable and accrued expenses listed in
2
Section 1.10(b) of the Company Disclosure Schedule (without duplication of any expenses accounted for below, and specifically excluding any fees related to the Qualified Financing), in each case as of such date and determined in a manner consistent with the manner in which such items were historically determined and in accordance with the Company’s audited financial statements and unaudited interim balance sheet, minus (c) any Company Transaction Expenses exceeding $200,000, minus (d) any bona fide current liabilities payable in cash, in each case to the extent not canceled at or prior to the Determination Date (without duplication of any of the items above), minus (e) the cash cost of change in control payments that are required to be paid by a party in connection with, or at the time of, the Closing and/or the termination of its employees (if any), minus (f) prepaid expenses, expenses paid, or liabilities incurred, prior to Closing, that are approved in writing to be covered under D&O insurance in excess of the deductible.
“Company Cash Calculation” has the meaning set forth in Section 1.10(a).
“Company Cash Schedule” has the meaning set forth in Section 1.10(a).
“Company Capital Stock” means the Company Common Stock and the Company Preferred Stock.
“Company Common Stock” means the common stock, $0.001 par value per share, of the Company.
“Company Contract” means any Contract: (a) to which the Company or any of its Subsidiaries is a Party; (b) by which the Company or any of its Subsidiaries or any Company IP or any other asset of the Company or its Subsidiaries is or may become bound or under which the Company or any of its Subsidiaries has, or may become subject to, any obligation; or (c) under which the Company or any of its Subsidiaries has or may acquire any right or interest.
“Company Convertible Notes” means the outstanding notes convertible into Company Common Stock set forth in Section 2.6 of the Company Disclosure Schedule.
“Company Data” means all data and information Processed by or for the Company or any of its Subsidiaries.
“Company Disclosure Schedule” has the meaning set forth in Section 2.
“Company ERISA Affiliate” means any corporation or trade or business (whether or not incorporated) which is (or at any relevant time was) treated with the Company as a single employer within the meaning of Section 414 of the Code.
“Company Financials” has the meaning set forth in Section 2.7(a).
“Company Fundamental Representations” means the representations and warranties of the Company set forth in Sections 2.1 (Due Organization; Subsidiaries), 2.3 (Authority; Binding Nature of Agreement), 2.6(a) and (c) (Capitalization) and 2.20 (No Financial Advisors).
3
“Company IP” means all Intellectual Property Rights that are owned or purported to be owned by, assigned to, or exclusively licensed by, the Company.
“Company In-bound License” has the meaning set forth in Section 2.12(d).
“Company Lock-Up Agreement” has the meaning set forth in the Recitals.
“Company Material Adverse Effect” means any Effect that, considered together with all other Effects that have occurred prior to the date of determination of the occurrence of a Company Material Adverse Effect, has or would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company, taken as a whole; provided, however, that Effects arising or resulting from the following shall not be taken into account in determining whether there has been a Company Material Adverse Effect: (a) general business or economic conditions affecting the industry in which the Company and its Subsidiaries operate, (b) acts of war, armed hostilities or terrorism, acts of God or comparable events, epidemic, pandemic or disease outbreak (including the COVID-19 virus) or any worsening of the foregoing, or any declaration of martial law, quarantine or similar directive, policy or guidance or Law or other action by any Governmental Body in response thereto, (c) changes in financial, banking or securities markets, (d) any change in, or any compliance with or action taken for the purpose of complying with, any Law or GAAP (or interpretations of any Law or GAAP), (e) resulting from the announcement of this Agreement or the pendency of the Contemplated Transactions; provided, that this clause (e) shall not apply to any representation or warranty (or condition to the consummation of the Mergers relating to such representation or warranty) to the extent the representation and warranty expressly addresses the consequences resulting from the execution and delivery of this Agreement or the consummation of the Contemplated Transactions, or (f) resulting from the taking of any action required to be taken by this Agreement; except in each case with respect to clauses (a) through (c), to the extent disproportionately affecting the Company, taken as a whole, relative to other similarly situated companies in the industries in which the Company operates.
“Company Material Contract(s)” has the meaning set forth in Section 2.13(a).
“Company Options” means options or other rights to purchase shares of Company Common Stock issued by the Company.
“Company Out-bound License” has the meaning set forth in Section 2.12(d).
“Company Permits” has the meaning set forth in Section 2.14(b).
“Company Plan” has the meaning set forth in Section 2.6(c).
“Company Preferred Stock” has the meaning set forth in Section 2.6(a).
“Company Products” means any drugs being developed by the Company that is intended to diagnose, cure, mitigate, treat, or prevent disease.
4
“Company Restricted Stock” means any restricted stock award granted pursuant to the Company Plan.
“Company Signatories” has the meaning set forth in the Recitals.
“Company Stock Certificate” has the meaning set forth in Section 1.7.
“Company Stockholder Matters” has the meaning set forth in Section 5.2.
“Company Stockholder Support Agreement” has the meaning set forth in the Recitals.
“Company Termination Fee” has the meaning set forth in Section 9.3(b).
“Company Transaction Expenses” means all fees and expenses incurred by the Company at or prior to the First Effective Time in connection with the Contemplated Transactions and this Agreement, including: (a) any fees and expenses of legal counsel and accountants, the maximum amount of fees and expenses payable to financial advisors, investment bankers, brokers, consultants, and other advisors of the Company; and (b) 50% of (i) any fees and expenses incurred by Parent’s transfer agent, (ii) the fees and expenses paid or payable to the Exchange Agent pursuant to the engagement agreement with the Exchange Agent; and (iii) the fees associated with the Nasdaq Listing Application.
“Company Triggering Event” shall be deemed to have occurred if: (a) the Company Board or any committee thereof shall have publicly approved, endorsed or recommended any Acquisition Proposal; (c) the Company shall have entered into any letter of intent or similar document relating to any Acquisition Proposal; or (d) the Company, or any director or officer of the Company, shall have willfully and intentionally breached the provisions set forth in Section 4.5.
“Company Warrants” means warrants to purchase capital stock of the Company listed in Section 2.6 of the Company Disclosure Schedule.
“Company Unaudited Interim Balance Sheet” means the unaudited balance sheet of the Company as of September 30, 2024 provided to Parent prior to the date of this Agreement.
“Confidentiality Agreement” means that certain mutual letter agreement, dated as of May 1, 2024, between the Company and Parent.
“Consent” means any approval, consent, ratification, permission, waiver or authorization (including any Governmental Authorization).
“Contemplated Transactions” means the Merger, the Nasdaq Reverse Split, Parent Stockholder Support Agreements and the other transactions and actions contemplated by this Agreement to be consummated at or prior to the Closing (but not, for the avoidance of doubt, the actions proposed to be taken as the Parent Stockholders’ Meeting following the Closing pursuant to Section 4.2).
“Continuing Employees” has the meaning set forth in Section 4.4(a).
5
“Contract” means, with respect to any Person, any written or oral agreement, contract, subcontract, lease (whether for real or personal property), mortgage, license, sublicense or other legally binding commitment or undertaking of any nature to which such Person is a party or by which such Person or any of its assets are bound or affected under applicable Law.
“Convertible Note Conversion” has the meaning set forth in Section 5.19.
“Data Processing Policy” means each policy, statement, representation, or notice of the Company, Parent or their respective Subsidiaries relating to the Processing of Company Data or Parent Data (as applicable), privacy, data protection, or security.
“DGCL” means the General Corporation Law of the State of Delaware.
“DLLCA” means the Delaware Limited Liability Company Act.
“D&O Indemnified Parties” has the meaning set forth in Section 4.5(a).
“Dispute Notice” has the meaning set forth in Section 1.10(b).
“Disputing Party” has the meaning set forth in Section 1.10(b).
“Dissenting Shares” has the meaning set forth in Section 1.9(a).
“Effect” means any effect, change, event, circumstance, or development.
“Encumbrance” means any lien, pledge, hypothecation, charge, mortgage, security interest, lease, license, option, easement, reservation, servitude, adverse title, claim, infringement, interference, option, right of first refusal, preemptive right, community property interest or restriction or encumbrance of any nature (including any restriction on the voting of any security, any restriction on the transfer of any security or other asset, any restriction on the receipt of any income derived from any asset, any restriction on the use of any asset and any restriction on the possession, exercise or transfer of any other attribute of ownership of any asset).
“Enforceability Exceptions” means the (a) Laws of general application relating to bankruptcy, insolvency and the relief of debtors; and (b) rules of law governing specific performance, injunctive relief and other equitable remedies.
“Entity” means any corporation (including any non-profit corporation), partnership (including any general partnership, limited partnership or limited liability partnership), joint venture, estate, trust, company (including any company limited by shares, limited liability company or joint stock company), firm, society or other enterprise, association, organization or entity, and each of its successors.
“Environmental Law” means any federal, state, local or foreign Law relating to pollution or protection of human health (as it relates to exposure to Hazardous Materials) or the environment (including ambient air, surface water, ground water, land surface or subsurface strata), including any Law
6
or regulation relating to emissions, discharges, releases or threatened releases of Hazardous Materials, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
“Exchange Act” means the Securities Exchange Act of 1934.
“Exchange Agent” has the meaning set forth in Section 1.8.
“Exchange Fund” has the meaning set forth in Section 1.8.
“Exchange Ratio” means, subject to Section 1.6, the following ratio (rounded to four decimal places): (i) the quotient obtained by dividing (a) the Company Merger Shares by (b) the Company Outstanding Shares, in which:
•“Aggregate Valuation” means the sum of (i) the Company Valuation, plus (ii) the Parent Valuation.
•“Company Allocation Percentage” means the quotient (expressed as a percentage with the percentage rounded to two decimal places) determined by dividing (i) the Company Valuation by (ii) the Aggregate Valuation.
•“Company Merger Shares” means (i) the product determined by multiplying (x) the Post-Closing Parent Shares by (y) the Company Allocation Percentage.
•“Company Outstanding Shares” means, subject to adjustment for any stock split, reclassification, or exchange, the total number of shares of Company Common Stock outstanding immediately prior to the First Effective Time expressed on a fully-diluted basis and as converted to Company Common Stock basis, calculated in accordance with the treasury method, and (i) assuming, without limitation or duplication, the settlement in shares of each in-the-money Company Option and in-the-money Company Warrant outstanding as of the First Effective Time pursuant to Section 5.3(a), (ii) the conversion of all Company Convertible Notes and other outstanding indebtedness, and (iii) the issuance of shares of Company Common Stock in respect of all other outstanding restricted stock awards or rights to receive such shares, whether conditional or unconditional, and including any outstanding options, restricted stock awards, warrants or rights triggered by or associated with the consummation of the Merger (but excluding any other shares of Company Common Stock reserved for issuance under the Company Plans). A Company Option or Company Warrant is out-of-the-money if its exercise price, as adjusted to give effect to the transactions contemplated herein, calculated in accordance with Schedule A of the Parent Disclosure Schedules, is equivalent to or greater than the closing price of
7
Company Common Stock on the last trading day prior to the Determination Date, and is in-the-money if its exercise price is less than such amount.
•“Company Valuation” means $28,000,000 (the “Company Base Valuation”), provided, however, to the extent that (i) the Company Cash Amount determined pursuant to Section 1.10 is less than $2.0 million, then the Company Base Valuation shall be reduced by $100,000 for each $100,000 that the Company Cash Amount as so determined in less than $0; and (ii) the Company Cash Amount determined pursuant to Section 1.10 is greater than $2.0 million, then the Company Base Valuation shall be increased by $100,000 for each $100,000 that the Company Cash Amount as so determined is greater than $2.0 million.
•“Parent Allocation Percentage” means the quotient (expressed as a percentage, with the percentage rounded to two decimal places) determined by dividing (i) the Parent Valuation by (ii) the Aggregate Valuation, but in no case less than 10.00%
•“Parent Outstanding Shares” means, subject to adjustment for any stock split, reclassification, or exchange, the total number of shares of Parent Common Stock outstanding immediately prior to the First Effective Time expressed on a fully-diluted basis and as converted to Parent Common Stock basis, calculated in accordance with the treasury method, minus the shares issued in the Qualified Financing, and (i) assuming, without limitation or duplication, the settlement in shares of each in-the-money Parent Option and in-the-money Parent Warrant outstanding as of the First Effective Time pursuant to Section 5.3(a) , and (ii) the issuance of shares of Company Common Stock in respect of all other outstanding restricted stock units or rights to receive such shares, whether conditional or unconditional, and including any outstanding options, restricted stock awards, warrants or rights triggered by or associated with the consummation of the Merger. A Parent Option or Parent Warrant is out-of-the-money if its exercise price is equivalent to or greater than the closing price of Company Common Stock on the last trading day prior to the Determination Date, and is in-the-money if its exercise price is less than such amount.
•“Parent Valuation” means $4,600,000 (the “Parent Base Valuation”); provided, however, to the extent that (i) the Parent Cash Amount determined pursuant to Section 1.10 is less than $0, then the Parent Base Valuation shall be reduced by $100,000 for each $100,000 that the Parent Cash Amount as so determined in less than $0; and (ii) the Parent Cash Amount determined pursuant to Section 1.10 is greater than $0, then the Parent Base Valuation shall be increased by $100,000 for each $100,000 that the Parent Cash Amount as so determined is greater than $0.
•“Post-Closing Parent Shares” means the quotient determined by dividing (i) the Parent Outstanding Shares by (ii) the Parent Allocation Percentage.
“Existing Severance Plan” has the meaning set forth in Section 4.4(b).
8
“First Certificate of Merger” has the meaning set forth in Section 1.3.
“First Effective Time” has the meaning set forth in Section 1.3.
“First Merger” has the meaning set forth in the Recitals.
“First Merger Sub” has the meaning set forth in the Preamble.
“First Merger Sub Board” means the board of directors of First Merger Sub.
“First Step Surviving Corporation” has the meaning set forth in Section 1.1.
“FLSA” has the meaning set forth in Section 2.17(m).
“GAAP” means generally accepted accounting principles and practices in effect from time to time within the United States applied consistently throughout the period involved.
“Governmental Authorization” means any: (a) permit, license, certificate, franchise, permission, variance, exception, approval, exemption, order, clearance, registration, qualification or authorization issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Law; or (b) right under any Contract with any Governmental Body.
“Governmental Body” means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, local, municipal, foreign or other government; (c) governmental or quasi-governmental authority of any nature (including any governmental division, department, agency, commission, bureau, instrumentality, official, ministry, fund, foundation, center, organization, unit, body or Entity and any court or other tribunal, and for the avoidance of doubt, any taxing authority); or (d) self-regulatory organization (including Nasdaq).
“Hazardous Materials” means any pollutant, chemical, substance and any toxic, infectious, carcinogenic, reactive, corrosive, ignitable or flammable chemical, or chemical compound, or hazardous substance, material or waste, whether solid, liquid or gas, that is subject to regulation, control or remediation under any Environmental Law, including without limitation, crude oil or any fraction thereof, and petroleum products or byproducts.
“Information Statement” has the meaning set forth in Section 5.2.
“Intellectual Property Rights” means and includes all intellectual property or other proprietary rights under the laws of any jurisdiction in the world, including, without limitation: (a) rights associated with works of authorship, including exclusive exploitation rights, copyrights, moral rights, software, databases, and mask works; (b) trademarks, service marks, trade dress, logos, trade names and other source identifiers, domain names and URLs and similar rights and any goodwill associated therewith; (c) rights associated with trade secrets, know how, inventions, invention disclosures, methods, processes, protocols, specifications, techniques and other forms of technology; (d) patents and industrial property rights; (e) other similar proprietary rights in intellectual property of every kind and nature; (f) rights of
9
privacy and publicity; and (g) all registrations, renewals, extensions, statutory invention registrations, provisionals, continuations, continuations-in-part, divisions, or reissues of, and applications for, any of the rights referred to in clauses (a) through (f) above (whether or not in tangible form and including all tangible embodiments of any of the foregoing, such as samples, studies and summaries), along with all rights to prosecute and perfect the same through administrative prosecution, registration, recordation or other administrative proceeding, and all causes of action and rights to sue or seek other remedies arising from or relating to the foregoing, including for past, present or future infringement of any of the foregoing.
“Intended Tax Treatment” has the meaning set forth in Section 5.9(a).
“Investor Agreements” has the meaning set forth in Section 2.21(b).
“IRS” means the United States Internal Revenue Service.
“Knowledge” means, with respect to an individual, that such individual is actually aware of the relevant fact or such individual would reasonably be expected to know such fact in the ordinary course of the performance of such individual’s employment responsibilities. Any Person that is an Entity shall have Knowledge if any officer or director of such Person as of the date such knowledge is imputed has Knowledge of such fact or other matter.
“Law” means any federal, state, national, foreign, material local or municipal or other law, statute, constitution, principle of common law, resolution, ordinance, code, edict, decree, rule, regulation, ruling or requirement issued, enacted, adopted, promulgated, implemented or otherwise put into effect by or under the authority of any Governmental Body (including under the authority of Nasdaq or the Financial Industry Regulatory Authority).
“Legal Proceeding” means any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving, any court or other Governmental Body or any arbitrator or arbitration panel.
“Liability” has the meaning set forth in Section 2.9.
“Lock-Up Agreement” has the meaning set forth in the Recitals.
“Merger” has the meaning set forth in the Recitals.
“Merger Consideration” has the meaning set forth in Section 1.5.
“Merger Subs” has the meaning set forth in the Preamble.
“Nasdaq” means the Nasdaq Stock Market, including the Nasdaq Global Select Market or such other Nasdaq market on which shares of Parent Common Stock are then listed.
10
“Nasdaq Listing Application” has the meaning set forth in Section 5.8.
“Nasdaq Reverse Split” means a reverse stock split of all outstanding shares of Parent Common Stock at a reverse stock split ratio to be reasonably determined by Parent for the purpose of maintaining compliance with Nasdaq listing standards.
“Ordinary Course of Business” means, in the case of each of the Company and Parent, such actions taken in the ordinary course of its normal operations and consistent with its past practices.
“Organizational Documents” means, with respect to any Person (other than an individual), (a) the certificate or articles of association or incorporation or organization or limited partnership or limited liability company, and any joint venture, limited liability company, operating or partnership agreement and other similar documents adopted or filed in connection with the creation, formation or organization of such Person and (b) all bylaws, regulations and similar documents or agreements relating to the organization or governance of such Person, in each case, as amended or supplemented.
“Parent” has the meaning set forth in the Preamble.
“Parent Associate” means any current or former employee, independent contractor, officer or director of Parent.
“Parent Balance Sheet” means the unaudited balance sheet of Parent as of September 30, 2024 (the “Parent Balance Sheet Date”) provided to the Company prior to the date of this Agreement.
“Parent Benefit Plan” has the meaning set forth in Section 3.17(a).
“Parent Board” means the board of directors of Parent.
“Parent Cash Amount” (a) the sum of all Cash and Cash Equivalents, marketable securities, accrued investment interest receivable, and any prepaid refundable deposits listed in Section 1.10(a) of the Parent Disclosure Schedule, in each case, of Parent as of the Determination Date, calculated in accordance with Section 1.10), minus (b) Parent’s accounts payable and accrued expenses listed in Section 1.10(b) of the Parent Disclosure Schedule (without duplication of any expenses accounted for below, and specifically excluding any fees related to the Qualified Financing), in each case as of such date and determined in a manner consistent with the manner in which such items were historically determined and in accordance with Parent’s audited financial statements and unaudited interim balance sheet, minus (c) any Parent Transaction Expenses exceeding $200,000, minus (d) any bona fide current liabilities payable in cash, in each case to the extent not canceled at or prior to the Determination Date (without duplication of any of the items above), minus (e) the cash cost of change in control payments that are required to be paid by a party in connection with, or at the time of, the Closing and/or the termination of its employees (if any), minus (f) prepaid expenses, expenses paid, or liabilities incurred, prior to Closing, that are approved in writing to be covered under D&O insurance in excess of the deductible, plus (g) any proceeds raised from the Parent ELOC and/or Parent ATM Program, plus (h) $350,000.
11
“Parent Cash Calculation” has the meaning set forth in Section 1.10(a).
“Parent Cash Schedule” has the meaning set forth in Section 1.10(a).
“Parent Common Stock Consideration Cap” has the meaning set forth in Section 1.5.
“Parent Common Stock Payment Shares” has the meaning set forth in Section 1.5.
“Parent Contract” means any Contract: (a) to which Parent or any of its Subsidiaries is a party; (b) by which Parent or any of its Subsidiaries or any Parent IP or any other asset of Parent or any of its Subsidiaries is or may become bound or under which Parent or any of its Subsidiaries has, or may become subject to, any obligation; or (c) under which Parent or any of its Subsidiaries has or may acquire any right or interest.
“Parent Convertible Preferred Stock” means Parent’s non-voting convertible preferred stock, par value $0.0001 per share, with the rights, preferences, powers and privileges specified in the Certificate of Designation.
“Parent Covered Person” means, with respect to Parent as an “issuer” for purposes of Rule 506 promulgated under the Securities Act, any Person listed in the first paragraph of Rule 506(d)(1).
“Parent Data” means all data and information Processed by or for Parent or any of its Subsidiaries.
“Parent Disclosure Schedule” has the meaning set forth in Section 3.
“Parent ATM Program” means that certain At the Market Offering Agreement, dated February 5, 2021 between Salarius Pharmaceuticals, inc. and Ladenburg Thalmann & Co., Inc.
“Parent ELOC” means that certain equity line of credit pursuant to the Securities Purchase Agreement, dated as of December 12, 2024 by and between Parent and C/M Capital Master Fund, LP.
“Parent ERISA Affiliate” means any corporation or trade or business (whether or not incorporated) which is (or at any relevant time was) treated with Parent or any of its Subsidiaries as a single employer within the meaning of Section 414 of the Code.
“Parent Foreign Plan” has the meaning set forth in Section 3.17(l).
“Parent Fundamental Representations” means the representations and warranties of Parent and Merger Subs set forth in Sections 3.1(a) and (b) (Due Organization; Subsidiaries), 3.3 (Authority; Binding Nature of Agreement), 3.6(a) and (c) (Capitalization) and 3.22 (No Financial Advisors).
“Parent In-bound License” has the meaning set forth in Section 3.12(d).
12
“Parent IP” means all Intellectual Property Rights that are owned or purported to be owned by, assigned to, or exclusively licensed by, Parent or its Subsidiaries.
“Parent Lock-Up Agreement” has the meaning set forth in the Recitals.
“Parent Material Adverse Effect” means any Effect that, considered together with all other Effects that have occurred prior to the date of determination of the occurrence of a Parent Material Adverse Effect, has or would reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, liabilities or results of operations of Parent; provided, however, that Effects arising or resulting from the following shall not be taken into account in determining whether there has been a Parent Material Adverse Effect: (a) general business or economic conditions affecting the industry in which Parent operates, (b) acts of war, armed hostilities or terrorism, acts of God or comparable events, epidemic, pandemic or disease outbreak (including the COVID-19 virus) or any worsening of the foregoing, or any declaration of martial law, quarantine or similar directive, policy or guidance or Law or other action by any Governmental Body in response thereto, (c) changes in financial, banking or securities markets, (d) the taking of any action required to be taken by this Agreement, (e) any change in the stock price or trading volume of Parent Common Stock (it being understood, however, that any Effect causing or contributing to any change in stock price or trading volume of Parent Common Stock may be taken into account in determining whether a Parent Material Adverse Effect has occurred, unless such Effects are otherwise excepted from this definition); (f) any change in, or any compliance with or action taken for the purpose of complying with, any Law or GAAP (or interpretations of any Law or GAAP); (g) resulting from the announcement of this Agreement or the pendency of the Contemplated Transactions; provided, that this clause (e) shall not apply to any representation or warranty (or condition to the consummation of the Mergers relating to such representation or warranty) to the extent the representation and warranty expressly addresses the consequences resulting from the execution and delivery of this Agreement or the consummation of the Contemplated Transactions; or (h) resulting from the taking of any action or the failure to take any action, by Parent that is required to be taken by this Agreement, except in each case with respect to clauses (a) through (c), to the extent disproportionately affecting Parent relative to other similarly situated companies in the industries in which Parent operates.
“Parent Material Contract(s)” has the meaning set forth in Section 3.13(a).
“Parent Options” means options or other rights to purchase shares of Parent Common Stock issued by Parent.
“Parent Out-bound License” has the meaning set forth in Section 3.12(d).
“Parent Outstanding Shares Certificate” has the meaning set forth in Section 5.15(b).
“Parent Permits” has the meaning set forth in Section 3.14(b).
“Parent Preferred Stock Payment Shares” has the meaning set forth in Section 1.5.
“Parent Real Estate Leases” has the meaning set forth in Section 3.11.
13
“Parent RSUs” means any restricted stock unit award granted pursuant to the Parent Stock Plans.
“Parent SEC Documents” has the meaning set forth in Section 3.7(a).
“Parent Signatories” has the meaning set forth in the Recitals.
“Parent Stock Plans” means collectively, Parent’s 2015 Equity Incentive Plan.
“Parent Stockholder Matters” has the meaning set forth in Section 4.2(a)(iii).
“Parent Stockholders’ Meeting” has the meaning set forth in Section 4.2(a)(iii).
“Parent Support Agreement” has the meaning set forth in the Recitals.
“Parent Termination Fee” has the meaning set forth in Section 9.3(c).
“Parent Transaction Expenses” means all fees and expenses incurred by the Parent at or prior to the First Effective Time in connection with the Contemplated Transactions and this Agreement, including: (a) any fees and expenses of legal counsel, accountants, financial advisors, investment bankers, brokers, consultants, and other advisors of Parent related to the Merger (but specifically excluding (i) any fees related to the solicitation of the Required Parent Stockholder Vote and (ii) any fees related to the resale registration statement filed with respect to the Parent Common Stock Payment Shares or shares of common stock underlying the Parent Preferred Stock Payment Shares); and (b) 50% of (i) any fees and expenses incurred by Parent’s transfer agent and (ii) the fees and expenses paid or payable to the Exchange Agent pursuant to the engagement agreement with the Exchange Agent.
“Parent Triggering Event” shall be deemed to have occurred if: (a) the Parent Board or any committee thereof shall have publicly approved, endorsed or recommended any Acquisition Proposal; (c) Parent shall have entered into any letter of intent or similar document relating to any Acquisition Proposal (other than a confidentiality agreement permitted pursuant to Section 4.4); or (d) Parent, or any director or officer of Parent, shall have willfully and intentionally breached the provisions set forth in Section 4.4.
“Parent Warrants” means warrants to purchase capital stock of Parent listed in Section 3.6(d) of the Parent Disclosure Schedule.
“Party” or “Parties” means the Company, First Merger Sub, Second Merger Sub and Parent.
“Permitted Alternative Agreement” means a definitive agreement that contemplates or otherwise relates to an Acquisition Transaction that constitutes a Superior Offer.
“Permitted Encumbrance” means: (a) any Encumbrance for current Taxes not yet due and payable or for Taxes that are being contested in good faith and, in each case, for which adequate reserves have been made on the Company Unaudited Interim Balance Sheet or the Parent Balance Sheet, as applicable, in accordance with GAAP; (b) minor liens that have arisen in the Ordinary Course of Business and that do not (in any case or in the aggregate) materially detract from the value of the assets or
14
properties subject thereto or materially impair the operations of the Company or any of its Subsidiaries or Parent, as applicable; (c) liens to secure obligations to landlords, lessors or renters under leases or rental agreements; (d) deposits or pledges made in connection with, or to secure payment of, workers’ compensation, unemployment insurance or similar programs mandated by Law; (e) non-exclusive licenses of Intellectual Property Rights granted by the Company or any of its Subsidiaries or Parent, as applicable, in the Ordinary Course of Business and that do not (in any case or in the aggregate) materially detract from the value of the Intellectual Property Rights subject thereto; and (f) statutory liens in favor of carriers, warehousemen, mechanics and materialmen, to secure claims for labor, materials or supplies the payment for which is not delinquent.
“Person” means any individual, Entity or Governmental Body.
“Post-Closing Plans” has the meaning set forth in Section 4.4(a).
“Pre-Closing Period” has the meaning set forth in Section 1.4(a).
“Preferred Stock Conversion Proposal” has the meaning set forth in Section 1.5.
“Privacy and Data Processing Requirements” means any applicable (i) Law relating to privacy, data protection, or security, (ii) Data Processing Policy, or (iii) requirement of any self-regulatory organization, industry standard (including, as applicable, the Payment Card Industry Data Security Standard), or Contract by which the Company, Parent or their respective Subsidiaries are bound relating to the Processing of Company Data or Parent Data (as applicable), privacy, data protection, or security, including, in each case of (i) through (iii), in connection with direct marketing or the initiation, transmission, monitoring, interception, recording, or receipt of communications.
“Process” means, with respect to any data, information, or information technology system, any operation or set of operations performed thereon, whether or not by automated means, including access, adaptation, alignment, alteration, collection, combination, compilation, consultation, creation, derivation, destruction, disclosure, disposal, dissemination, erasure, interception, maintenance, making available, organization, recording, restriction, retention, retrieval, storage, structuring, transmission, and use, and security measures with respect thereto.
“Qualified Financing” has the meaning set forth in the Recitals.
“Reference Date” means December 9, 2024.
“Registered IP” means all Intellectual Property Rights that are registered or issued under the authority of, with or by any Governmental Body, including all patents, registered copyrights, registered mask works, and registered trademarks, service marks and trade dress, and all applications for any of the foregoing.
“Representatives” means directors, officers, employees, agents, attorneys, accountants, investment bankers, advisors and representatives.
15
“Required Company Stockholder Vote” has the meaning set forth in Section 2.4.
“Required Parent Stockholder Vote” has the meaning set forth in Section 3.4.
“Response Date” has the meaning set forth in Section 1.10(b).
“Sarbanes-Oxley Act” means the Sarbanes-Oxley Act of 2002.
“SEC” means the United States Securities and Exchange Commission.
“Second Certificate of Merger” has the meaning set forth in Section 1.3.
“Second Effective Time” has the meaning set forth in Section 1.3.
“Second Merger” has the meaning set forth in the Recitals.
“Second Merger Sub” has the meaning set forth in the Preamble.
“Second Merger Sub Board” means the board of managers of Second Merger Sub.
“Securities Act” means the Securities Act of 1933, as amended.
“Stockholder Notice” has the meaning set forth in Section 5.2(c).
“Stockholder Written Consent” has the meaning set forth in the Recitals.
“Subsidiary” An entity shall be deemed to be a ‘subsidiary’ of a Person if such Person directly or indirectly owns or purports to own, beneficially or of record, (a) an amount of voting securities or other interests in such entity that is sufficient to enable such Person to elect at least a majority of the members of such entity’s board of directors or other governing body, or (b) at least 50% of the outstanding equity, voting, beneficial or financial interests in such Entity.
“Superior Offer” means an unsolicited bona fide written Acquisition Proposal (with all references to 20% in the definition of Acquisition Transaction being treated as references to greater than 50% for these purposes) that: (a) was not obtained or made as a direct or indirect result of a breach of (or in violation of) this Agreement; and (b) is on terms and conditions that the Parent Board or the Company Board, as applicable, determines in good faith, based on such matters that it deems relevant (including the likelihood of consummation thereof), as well as any written offer by the other Party to amend the terms of this Agreement, and following consultation with its outside legal counsel and outside financial advisors, if any, are more favorable, from a financial point of view, to Parent’s stockholders or the Company’s stockholders, as applicable, than the terms of the Contemplated Transactions.
“Surviving Entity” has the meaning set forth in Section 1.1.
“Synergistic Opportunities” has the meaning set forth in Section 5.14.
16
“Takeover Statute” means any “fair price,” “moratorium,” “control share acquisition” or other similar anti-takeover Law.
“Tax” means any (i) federal, state, local, foreign or other tax, including any income, capital gain, gross receipts, capital stock, profits, transfer, estimated, registration, stamp, premium, escheat, unclaimed property, customs duty, ad valorem, occupancy, occupation, alternative, add-on, windfall profits, value added, severance, property, business, production, sales, use, license, excise, franchise, employment, payroll, social security, disability, unemployment, workers’ compensation, national health insurance, withholding or other taxes, duties, fees, assessments or governmental charges, surtaxes or deficiencies thereof in the nature of a tax, however denominated (whether imposed directly or through withholding and whether or not disputed), and including any fine, penalty, addition to tax, or interest or additional amount imposed by a Governmental Body with respect thereto (or attributable to the nonpayment thereof) and (ii) any liability for payment of amounts described in clause (i) whether as a result of transferee or successor liability, of being a member of an affiliated, consolidated, combined or unitary group for any period, pursuant to a Contract, through operation of Law or otherwise.
“Tax Return” means any return (including any information return), report, statement, declaration, claim for refund, estimate, schedule, notice, notification, form, election, certificate or other document, and any amendment or supplement to any of the foregoing, filed with or submitted to, or required to be filed with or submitted to, any Governmental Body (or provided to a payee) in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Law relating to any Tax.
“Treasury Regulations” means the United States Treasury regulations promulgated under the Code.
“WARN Act” means the Worker Adjustment Retraining and Notification Act of 1988, as amended, or any similar state or local plant closing mass layoff statute, rule or regulation.
“Withholding Agent” has the meaning set forth in Section 1.12.
17
Exhibit B
Form of Lock-Up Agreement
Form of Lock-Up Agreement
[●], 2025
[address]
Ladies and Gentlemen:
The undersigned signatory of this lock-up agreement (this “Lock-Up Agreement”) understands that Salarius Pharmaceuticals, Inc., a Delaware corporation (including any successor thereto, “Parent”), has entered into an Agreement and Plan of Merger, dated as of [●], 2025 (as the same may be amended from time to time, the “Merger Agreement”) with Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Parent, Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent, and Decoy Therapeutics Inc, a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Merger Agreement.
1.As a condition and material inducement to each of the parties to enter into the Merger Agreement and to consummate the Contemplated Transactions, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned hereby irrevocably agrees that, subject to the exceptions set forth herein, without the prior written consent of Parent and, solely prior to the Closing, the Company, the undersigned will not, during the period commencing upon the Closing and ending on the date that is 180 days after the Closing Date (the “Restricted Period”):
(a)offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock (including without limitation, Parent Common Stock or such other securities which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the SEC and securities of Parent which may be issued upon exercise of Parent Options or settlement of Parent RSUs) that are currently or hereafter owned by the undersigned (collectively, the “Undersigned’s Shares”);
(b)enter into any swap, short sale, hedge or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Shares regardless of whether any such transaction described in clause (i) above or this clause (ii) is to be settled by delivery of Parent Common Stock, Parent Convertible Preferred Stock or other securities, in cash or otherwise;
(c)make any demand for, or exercise any right with respect to, the registration of any shares of Parent Common Stock, Parent Convertible Preferred Stock or any security convertible into or exercisable or exchangeable for Parent Common Stock (other than such rights set forth in the Merger Agreement); or
(d)publicly disclose the intention to do any of the foregoing.
1
2.The restrictions and obligations contemplated by this Lock-Up Agreement shall not apply to:
(a)transfers of the Undersigned’s Shares:
(i)if the undersigned is a natural person, (A) to any person related to the undersigned (or to an ultimate beneficial owner of the undersigned) by blood or adoption who is an immediate family member of the undersigned, or by marriage or domestic partnership (a “Family Member”), or to a trust formed for the benefit of the undersigned or any of the undersigned’s Family Members, (B) to the undersigned’s estate, following the death of the undersigned, by will, intestacy or other operation of Law, (C) as a bona fide charitable gift or contribution, (D) by operation of Law pursuant to a qualified domestic order or in connection with a divorce settlement or (E) to any partnership, corporation or limited liability company which is controlled by or under common control with the undersigned and/or by any such Family Member(s);
(ii)if the undersigned is a corporation, partnership or other Entity, (A) to another corporation, partnership, or other Entity that is an affiliate (as defined under Rule 12b-2 of the Exchange Act) of the undersigned, including investment funds or other entities under common control or management with the undersigned, (B) as a distribution or dividend to equity holders, current or former general or limited partners, members or managers (or to the estates of any of the foregoing), as applicable, of the undersigned (including upon the liquidation and dissolution of the undersigned pursuant to a plan of liquidation approved by the undersigned’s equity holders), (C) as a bona fide charitable gift or contribution or otherwise to a trust or other entity for the direct or indirect benefit of an immediate family member of a beneficial owner (as defined in Rule 13d-3 of the Exchange Act) of the Undersigned’s Shares or (D) transfers or dispositions not involving a change in beneficial ownership; or
(iii)if the undersigned is a trust, to any grantors or beneficiaries of the trust;
provided that, in the case of any transfer or distribution pursuant to this clause (a), such transfer is not for value and each donee, heir, beneficiary or other transferee or distributee shall sign and deliver to Parent a lock-up agreement in the form of this Lock-Up Agreement with respect to the shares of Parent Common Stock, Parent Convertible Preferred Stock or such other securities that have been so transferred or distributed;
(b)the exercise of Parent Options (including a net or cashless exercise of a Parent Option), and any related transfer of shares of Parent Common Stock to Parent for the purpose of paying the exercise price of such options or for paying taxes (including estimated taxes) due as a result of the exercise of such options; provided that, for the avoidance of doubt, the underlying shares of Parent Common Stock shall continue to be subject to the restrictions on transfer set forth in this Lock-Up Agreement;
(c)the disposition (including a forfeiture or repurchase) to Parent of any shares of restricted stock granted pursuant to the terms of any employee benefit plan or restricted stock purchase agreement;
(d)transfers to Parent in connection with the net settlement of any Parent RSU or other equity award that represents the right to receive in the future shares of Parent Common Stock settled in Parent Common Stock to pay any tax withholding obligations; provided that, for the avoidance of doubt, the underlying shares of Parent Common Stock shall continue to be subject to the restrictions on transfer set forth in this Lock-Up Agreement;
2
(e)the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Parent Common Stock; provided that such plan does not provide for any transfers of Parent Common Stock during the Restricted Period;
(f)transfers by the undersigned of shares of Parent Common Stock purchased by the undersigned on the open market or in a public offering by Parent, in each case following the Closing Date;
(g)pursuant to a bona-fide third party tender offer, merger, consolidation or other similar transaction made to all holders of Parent’s capital stock involving a change of control of Parent, provided that in the event that such tender offer, merger, consolidation or other such transaction is not completed, the Undersigned’s Shares shall remain subject to the restrictions contained in this Lock-Up Agreement; or
(h)pursuant to an order of a court or regulatory agency;
and provided, further, that, with respect to each of (a), (b), (c), (d) and (e) above, no filing by any party (including any donor, donee, transferor, transferee, distributor or distributee) under Section 16 of the Exchange Act or other public announcement shall be required or shall be made voluntarily in connection with such transfer or disposition during the Restricted Period (other than (i) any exit filings or public announcements that may be required under applicable federal and state securities Laws or (ii) in respect of a required filing under the Exchange Act in connection with the exercise of an option to purchase Parent Common Stock or in connection with the net settlement of any RSU or other equity award that represents the right to receive in the future shares of Parent Common Stock settled in Parent Common Stock that would otherwise expire during the Restricted Period, provided that (i) reasonable notice shall be provided to Parent prior to any such filing) and (ii) such filing, report or announcement shall clearly indicate in the footnotes therein, in reasonable detail, a description of the circumstances of the transfer and that the shares remain subject to the lock-up agreement.
For purposes of this Lock-Up Agreement, “change of control” shall mean the transfer (whether by tender offer, merger, consolidation or other similar transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons, of Parent’s voting securities if, after such transfer, Parent’s stockholders as of immediately prior to such transfer do not hold a majority of the outstanding voting securities of Parent (or the surviving entity) other than the Contemplated Transactions.
3.Any attempted transfer in violation of this Lock-Up Agreement will be of no effect and null and void, regardless of whether the purported transferee has any actual or constructive knowledge of the transfer restrictions set forth in this Lock-Up Agreement, and will not be recorded on the share register of Parent. In furtherance of the foregoing, the undersigned agrees that Parent and any duly appointed transfer agent for the registration or transfer of the securities described herein are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Agreement. Parent may cause the legend set forth below, or a legend substantially equivalent thereto, to be placed upon any certificate(s) or other documents, ledgers or instruments evidencing the undersigned’s ownership of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock:
3
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND MAY ONLY BE TRANSFERRED IN COMPLIANCE WITH A LOCK-UP AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
4.The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.
5.The undersigned understands that if the Merger Agreement is terminated for any reason, the undersigned shall be released from all obligations under this Lock-Up Agreement. The undersigned understands that Parent and the Company are proceeding with the Contemplated Transactions in reliance upon this Lock-Up Agreement.
6.Any and all remedies herein expressly conferred upon Parent or the Company will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by Law or equity, and the exercise by Parent or the Company of any one remedy will not preclude the exercise of any other remedy. The undersigned agrees that irreparable damage for which monetary damages, even if available, would not be an adequate remedy, would occur to Parent and/or the Company in the event that any provision of this Lock-Up Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that Parent and the Company shall be entitled to an injunction or injunctions to prevent breaches of this Lock-Up Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which Parent or the Company is entitled at Law or in equity, and the undersigned waives any bond, surety or other security that might be required of Parent or the Company with respect thereto. Each of the parties further agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that any other party has an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or in equity.
7.In the event that any holder of securities of Parent that are subject to a substantially similar agreement entered into by such holder, other than the undersigned, is permitted by Parent to sell or otherwise transfer or dispose of shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock for value other than as permitted by this or a substantially similar agreement entered into by such holder (whether in one or multiple releases or waivers), the same percentage of shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock held by the undersigned on the date of such release or waiver as the percentage of the total number of outstanding shares of such securities held by such holder on the date of such release or waiver that are the subject of such release or waiver shall be immediately and fully released on the same terms from any remaining restrictions set forth herein (the “Pro Rata Release”); provided, however, that such Pro Rata Release shall not be applied unless and until permission has been granted by Parent to an equity holder or equity holders to sell or otherwise transfer or dispose of all or a portion of such equity holders shares of Parent Common Stock in an aggregate amount in excess of 1% of the number of shares of Parent Common Stock originally subject to a substantially similar agreement. In the event of any Pro-Rata Release, the Company shall promptly (and in any event within two (2) business days of such release) inform each relevant holder of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock of the terms of such Pro-Rata Release.
4
8.Upon the release of any of the Undersigned’s Shares from this Lock-Up Agreement, Parent will cooperate with the undersigned to facilitate the timely preparation and delivery of certificates or the establishment of book-entry positions at Parent’s transfer agent representing the Undersigned’s Shares without the restrictive legend above or the withdrawal of any stop transfer instructions.
9.The undersigned understands that this Lock-Up Agreement is irrevocable and is binding upon the undersigned’s heirs, legal representatives, successors and assigns.
10.This Lock-Up Agreement shall be governed by, and construed in accordance with, the Laws of the state of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of Laws. In any action or Legal Proceeding between any of the parties arising out of or relating to this Lock-Up Agreement, each of the parties: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the state of Delaware or to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware, (ii) agrees that all claims in respect of such action or Legal Proceeding shall be heard and determined exclusively in accordance with clause (i) of this Section 10, (iii) waives any objection to laying venue in any such action or Legal Proceeding in such courts, (iv) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (v) agrees that service of process upon such party in any such action or Legal Proceeding shall be effective if notice is given in accordance with Section 11 of this Lock-Up Agreement. This Lock-Up Agreement constitutes the entire agreement between the parties to this Lock-Up Agreement and supersedes all other prior agreements, arrangements and understandings, both written and oral, among the parties with respect to the subject matter hereof.
THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR LEGAL PROCEEDING RELATED TO OR ARISING OUT OF THIS LOCK-UP AGREEMENT, ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH AND THE MATTERS CONTEMPLATED HEREBY AND THEREBY.
11.All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery), by electronic transmission (providing confirmation of transmission) to the Company or Parent, as the case may be, in accordance with Section 10.8 of the Merger Agreement and to the undersigned at his, her or its address or email address (providing confirmation of transmission) set forth on the signature page hereto (or at such other address for a party as shall be specified by like notice).
12.This Lock-Up Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Lock-Up Agreement (in counterparts or otherwise) by Parent, the Company and the undersigned by electronic transmission in .pdf format shall be sufficient to bind such parties to the terms and conditions of this Lock-Up Agreement.
Signatures on the Following Page
5
In Witness Whereof, the parties have caused this Lock-Up Agreement to be executed as of the date first above written.
Very truly yours,
[●]
Signature (for individuals):
Email:
Address:
Print Name of Stockholder
Signature (for entities):
By:
Name:
Title:
Email:
Address:
Accepted and Agreed:
Signature Page to Lock-Up Agreement
PARENT: | |||||
Salarius Pharmaceuticals, Inc. By: Name: Title: | |||||
THE COMPANY: | |||||
Decoy Therapeutics Inc. By: Name: Title: | |||||
Signature Page to Lock-Up Agreement
Signature Page to Lock-Up Agreement
Exhibit C
Form of Certificate of Designation
Form of Certificate of Designation
1
Exhibit D
Form of Parent/Company Support Agreement
Form of Parent/Company Support Agreement
1
Exhibit 4.1
Salarius Pharmaceuticals, Inc.
Certificate of Designation of Preferences, Rights and Limitations
of
Series A Non-Voting Convertible Preferred Stock
PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW
The undersigned, Mark J. Rosenblum, does hereby certify that:
1. He is the Executive Vice President Finance and Chief Financial Officer, of Salarius Pharmaceuticals, Inc., a Delaware corporation (the “Corporation”).
2. The Corporation is authorized to issue 10,000,000 shares of preferred stock, none of which are issued and outstanding.
3. The following resolutions were duly adopted by the board of directors of the Corporation (the “Board of Directors”):
Whereas, the certificate of incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, consisting of 10,000,000 shares, $0.0001 par value per share, issuable from time to time in one or more series;
Whereas, the Board of Directors is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any series and the designation thereof, of any of them; and
Whereas, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a new series of the preferred stock, which shall consist of up to [___] shares of the preferred stock which the Corporation has the authority to issue, as follows:
Now, Therefore, Be It Resolved, that the Board of Directors does hereby provide for the issuance of a new series of preferred stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:
TERMS OF SERIES A PREFERRED STOCK
Section 1.Definitions. For the purposes hereof, the following terms shall have the following meanings:
1
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.
“Alternate Consideration” shall have the meaning set forth in Section 7(d).
“Automatic Conversion” shall have the meaning set forth in Section 6(c).
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Commission” means the United States Securities and Exchange Commission.
“Common Stock” means the Corporation’s common stock, par value $0.0001 per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Corporation or the Subsidiaries which would entitle the holder thereof to acquire at any time shares of the Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Conversion Ratio” shall have the meaning set forth in Section 6(b).
“Conversion Restriction” shall have the meaning set forth in Section 6(d).
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of the Preferred Stock in accordance with the terms hereof.
“Fundamental Transaction” shall have the meaning set forth in Section 7(d).
“Holder” shall have the meaning given such term in Section 2.
“Junior Securities” means collectively, the Common Stock and each other class or series of capital stock now existing or hereafter authorized, classified or reclassified, the terms of which do not expressly provide that such class or series ranks on a parity basis with or senior to the Series A Preferred Stock as to dividend rights and rights on the distribution of assets on any Liquidation.
“Liquidation” shall have the meaning set forth in Section 5.
“Merger Agreement” means that certain Agreement and Plan of Merger, dated January [ ], 2025, by and among Salarius Pharmaceuticals, Inc., Decoy Therapeutics MergerSub I, Inc., Decoy Therapeutics MergerSub II, LLC and Decoy Therapeutics, Inc.
2
“Original Issuance Date” means the date of the “Closing” as defined in the Merger Agreement.
“Parity Securities” means any class or series of capital stock, the terms of which expressly provide that such class ranks pari passu with the Series A Preferred Stock as to dividend rights and rights on the distribution of assets on any Liquidation.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Registration Statement” means a registration statement that registers the resale of the Conversion Shares of the Holders, who shall be named as “selling stockholders” therein.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Series A Preferred Stock” shall have the meaning set forth in Section 2.
“Share Cap” means zero (0) shares of Common Stock.
“Stockholder Approval” means the stockholder approval contemplated by Nasdaq listing rule 5635 (or its successor) with respect to the issuance of shares of Conversion Shares in excess of the limitations imposed by such rule.
“Subsidiary” means any direct or indirect subsidiary of the Corporation formed or acquired before or after the date of the Merger Agreement.
“Successor Entity” shall have the meaning set forth in Section 7(d).
“Trading Day” means a day on which the principal Trading Market is open for business.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, an OTC market place or the OTC Markets (or any successors to any of the foregoing).
“Transaction Documents” means the Merger Agreement, this Certificate of Designation and all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“Transfer Agent” means American Stock Transfer and Trust Company, LLC, the current transfer agent for the Common Stock, and any successor transfer agent of the Corporation.
Section 2.Designation, Amount and Par Value. The series of preferred stock of the Corporation shall be designated as the Series A Non-Voting Convertible Preferred Stock (the
3
“Series A Preferred Stock”) and the number of shares so designated shall be up to [____] (which shall not be subject to increase without the written consent of the holders (each, a “Holder” and collectively, the “Holders”) of a majority of the then outstanding shares of the Series A Preferred Stock). Each share of the Series A Preferred Stock shall have a par value of $0.0001 per share.
Section 3.Dividends. Holders shall be entitled to receive, and the Corporation shall pay, dividends on shares of the Series A Preferred Stock equal (on an as-if-converted-to-Common-Stock basis) to and in the same form as dividends (other than dividends in the form of Common Stock) actually paid on shares of the Common Stock when, as and if such dividends (other than dividends in the form of shares of the Common Stock) are paid on shares of the Common Stock. Other than as set forth in the previous sentence, no other dividends shall be paid on shares of the Series A Preferred Stock; and the Corporation shall pay no dividends (other than dividends in the form of the Common Stock) on shares of the Common Stock unless it simultaneously complies with the previous sentence.
Section 4.Voting Rights. Except as otherwise provided herein or as otherwise required by the Delaware General Corporation Law, the Series A Preferred Stock shall have no voting rights. However, as long as any shares of the Series A Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Series A Preferred Stock, (a) (i) alter, amend or modify the preferences, privileges or rights given to the Series A Preferred Stock, (ii) alter or amend this Certificate of Designation, or (iii) amend or repeal any provision of, or add any provision to, the certificate of incorporation or bylaws of the Corporation, or file any certificate of amendment or certificate of designations of preferences, limitations and relative rights of any series of the Series A Preferred Stock, if such action would adversely alter or change the powers, preferences or rights of the Series A Preferred Stock in a manner materially different than the effect of such actions on the Common Stock (regardless, in the case of clause (i), (ii) or (iii), of whether any of the foregoing actions shall be by means of amendment to the certificate of incorporation of the Corporation or by merger, consolidation or otherwise), (b) issue further shares of the Series A Preferred Stock or increase or decrease (other than by conversion) the number of authorized shares of the Series A Preferred Stock; (c) authorize, create or issue classes or series of equity securities other than Junior Securities; (d) authorize, create and/or issue any funded indebtedness (other than indebtedness already incurred); (e) sell or transfer, other than in the ordinary course of its business, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of the Corporation’s assets or (f) enter into any agreement with respect to any of the foregoing.
Section 5.Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), after the satisfaction in full of the debts of the Corporation and the payment of any liquidation preference owed to the holders of shares of capital stock of the Corporation ranking senior to the Series A Preferred Stock upon liquidation, pari passu with the holders of any Parity Securities by reason of their ownership thereof, but before any distribution or payment out of the assets of the Corporation shall be made to the holders of Junior Securities by reason of their ownership thereof, an amount in cash per share equal to the amount per share in cash payable to the Holder if the shares of Series A
4
Preferred Stock were converted immediately prior to the Liquidation into shares of Common Stock.
Section 6.Conversion.
(a)No Optional Conversion for Conversion Shares. The Series A Preferred Stock shall only be convertible for Conversion Shares upon receipt of the Stockholder Approval pursuant to an Automatic Conversion (as defined below). Except pursuant to Section 6(d) hereof, the Series A Preferred Stock shall not be convertible at the option of the Holder. Shares of the Series A Preferred Stock converted into shares of the Common Stock in accordance with the terms hereof shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series A Convertible Preferred Stock.
(b)Conversion Ratio. The “Conversion Ratio” for each share of Series A Preferred stock shall be 1,000 shares of Common Stock issuable upon the Conversion of each share of Series A Preferred Stock (corresponding to a ratio of 1,000:1), subject to adjustment as provided herein.
(c)Automatic Conversion. Notwithstanding anything herein to the contrary, on the first Trading Day after the Corporation obtains the Stockholder Approval, all outstanding shares of the Series A Preferred Stock shall, without any further action by Holders and whether or not any certificates representing such shares are surrendered to the Corporation or the Transfer Agent, automatically be converted into such number of shares of Common Stock as determined by the Conversion Ratio, subject to the Beneficial Ownership Limitation (the “Automatic Conversion”). On the date of such Automatic Conversion, the Holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, notwithstanding that any certificates representing such shares of the Series A Preferred Stock shall not have been surrendered at the office of the Corporation or that any such certificates evidencing such Conversion Shares shall not then be actually delivered to such Holder. Provided the Transfer Agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program (and subject to Section 6(e)(i)), the Holder may provide written notice to the Corporation that the applicable Conversion Shares be credited to the account of the Holder’s prime broker with DTC through its Deposit Withdrawal Agent Commission system (a “DWAC Delivery”).
(d)Conversion and Issuance Limitations. Unless and until the Stockholder Approval (to the extent and only to the extent required under Nasdaq listing rules) is obtained, the Holder shall not have the right to acquire shares of Common Stock issuable upon conversion of the Series A Preferred Stock, and the Corporation shall not be required to issue shares of Common Stock issuable upon conversion of the Series A Preferred Stock in excess of the Share Cap (the “Conversion Restriction”). Any purported delivery of shares of Common Stock upon conversion of any Series A Preferred Stock will be void and have no effect to the extent, and
5
only to the extent, that such delivery would result in issuance of shares of Common Stock in violation of the listing rules of Nasdaq.
(e)Mechanics of Automatic Conversion.
(i)Delivery of Book-Entry Statement Upon Automatic Conversion. Not later than three (3) Trading Days after the date of the Automatic Conversion, the Corporation shall (A) deliver, or cause to be delivered, to the converting Holder a book-entry statement evidencing the number of Conversion Shares being acquired upon the Automatic Conversion or (B) in the case of an election for DWAC Delivery (which shall be available if, and only if, on the date of the Automatic Conversion neither restrictive legends nor trading restrictions are then required by the Merger Agreement or applicable law), electronically transfer such Conversion Shares by crediting the account of the Holder’s prime broker with DTC through its DWAC system.
(ii)Reservation of Shares Issuable Upon Conversion. The Corporation covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock for the sole purpose of issuance upon conversion of the Series A Preferred Stock and payment of dividends on the Series A Preferred Stock, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Series A Preferred Stock), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Merger Agreement) be issuable (taking into account the adjustments and restrictions of Section 7) upon the conversion of the then outstanding shares of the Series A Preferred Stock and payment of dividends hereunder. The Corporation covenants that all shares of the Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable and, if the Registration Statement is then effective under the Securities Act, shall be registered for public resale in accordance with such Registration Statement.
(iii)Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Series A Preferred Stock. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
(iv)Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of shares of the Series A Preferred Stock shall be made without charge to any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holders of such shares of the Series A Preferred Stock and the Corporation shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance
6
thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.
(f)Conversion and Issuance Limitations. Notwithstanding anything herein to the contrary, the Corporation shall not effect any conversion of the Series A Preferred Stock, and a Holder shall not have the right to convert any portion of the Series A Preferred Stock, to the extent that, after giving effect to a conversion, such Holder (together with any other Person whose beneficial ownership of Common Stock would be aggregated with the Holder’s for purposes of Section 13(d) or Section 16 of the Exchange Act and the applicable regulations of the Commission, including any “group” of which the Holder is a member (the foregoing, “Attribution Parties”)) would beneficially own a number of shares of Common Stock in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Attribution Parties shall include the number of shares of Common Stock issuable upon conversion of the Series A Preferred Stock subject to the conversion with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (A) conversion of the remaining, unconverted Series A Preferred Stock beneficially owned by such Holder or any of its Attribution Parties, and (B) exercise or conversion of the unexercised or unconverted portion of any other securities of the Corporation (including any warrants) beneficially owned by such Holder or any of its Attribution Parties that are subject to a limitation on conversion or exercise similar to the limitation contained herein. For purposes of this section, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the applicable regulations of the Commission. In addition, for purposes hereof, “group” has the meaning set forth in Section 13(d) of the Exchange Act and the applicable regulations of the Commission. For purposes of this Section 6(f), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (A) the Corporation’s most recent periodic or annual filing with the Commission, as the case may be, (B) a more recent public announcement by the Corporation that is filed with the Commission, or (C) a more recent notice by the Corporation or the Corporation’s transfer agent to the Holder setting forth the number of shares of Common Stock then outstanding. Upon the written request of a Holder (which may be by email), the Corporation shall, within three Trading Days thereof, confirm in writing to such Holder (which may be via email) the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to any actual conversion or exercise of securities of the Corporation, including shares of Series A Preferred Stock, by such Holder or its Attribution Parties since the date as of which such number of outstanding shares of Common Stock was last publicly reported or confirmed to the Holder. The “Beneficial Ownership Limitation” shall initially be set at 4.99% of the then issued and outstanding shares of the Common Stock after giving effect to the issuance of shares of Common Stock (to the extent permitted pursuant to this section). Provided that, the Holder may increase the Beneficial Ownership Limitation up to 9.99% at its sole discretion upon 61 days’ prior written notice to the Corporation; provided, that for the avoidance of doubt, the Beneficial Ownership Limitation in no event will exceed 19.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the
7
issuance of shares of Common Stock and the provisions of this Section 6(f) shall continue to apply.
Section 7.Certain Adjustments.
(a)Stock Dividends and Stock Splits. If the Corporation, at any time while shares of the Series A Preferred Stock are outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of the Common Stock on shares of the Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of the Common Stock issued by the Corporation upon conversion of, or payment of a dividend on, shares of the Series A Preferred Stock), (ii) subdivides outstanding shares of the Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of the Common Stock into a smaller number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of the Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
(b)Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 7(a) above, if at any time the Corporation grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of the Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of the Common Stock acquirable upon complete conversion of such Holder’s shares of the Series A Preferred Stock (without regard to any limitations on exercise hereof) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of the Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.
(c)Pro Rata Distributions. During such time as shares of the Series A Preferred Stock are outstanding, if the Corporation declares or makes any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of the Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of shares of the Series A Preferred Stock, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent
8
that the Holder would have participated therein if the Holder had held the number of shares of the Common Stock acquirable upon complete conversion of shares of the Series A Preferred Stock (without regard to any limitations on conversion hereof) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of the Common Stock are to be determined for the participation in such Distribution.
(d)Fundamental Transaction. If, at any time while shares of the Series A Preferred Stock are outstanding, (i) the Corporation, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Corporation with or into another Person, (ii) the Corporation, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Corporation or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Corporation, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Corporation, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of the Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination and not including any of the transactions contemplated by the Merger Agreement) (each a “Fundamental Transaction”), then, upon any subsequent conversion of shares of the Series A Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, the number of shares of Common Stock of the successor or acquiring corporation or of the Corporation, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of the Common Stock for which shares of the Series A Preferred Stock is convertible immediately prior to such Fundamental Transaction. For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of the Common Stock in such Fundamental Transaction, and the Corporation shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of the Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of shares of the Series A Preferred Stock following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Corporation or surviving
9
entity in such Fundamental Transaction shall file a new Certificate of Designation with the same terms and conditions and issue to the Holders new Series A Preferred Stock consistent with the foregoing provisions and evidencing the Holders’ right to convert such Series A Preferred Stock into Alternate Consideration. The Corporation shall cause any successor entity in a Fundamental Transaction in which the Corporation is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents in accordance with the provisions of this Section 7(d) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for shares of the Series A Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to shares of the Series A Preferred Stock which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of the Common Stock acquirable and receivable upon conversion of shares of the Series A Preferred Stock prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of the Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of shares of the Series A Preferred Stock immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designation and the other Transaction Documents referring to the “Corporation” shall refer instead to the Successor Entity), and may exercise every right and power of the Corporation and shall assume all of the obligations of the Corporation under this Certificate of Designation and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Corporation herein.
(e)Calculations. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 7, the number of shares of the Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of the Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.
10
Section 8.Miscellaneous.
(a)Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder shall be in writing and delivered personally or sent by a nationally recognized overnight courier service, addressed to the Corporation, at 2450 Holcombe Blvd., Suite X, Houston, Texas 77021, Attention: Chief Financial Officer, or such other address as the Corporation may specify for such purposes by notice to the Holders delivered in accordance with this Section 8. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by email, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the email address, facsimile number or address of such Holder appearing on the books of the Corporation, or if no such email address, facsimile number or address appears on the books of the Corporation, at the principal place of business of such Holder, as set forth in the Merger Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via email to the email address referred to in this Section, (ii) the date of transmission, if such notice or communication is delivered via facsimile to the facsimile number set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (iii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile to the facsimile number set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iv) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (v) upon actual receipt by the party to whom such notice is required to be given.
(b)Book-Entry; Certificates. The Series A Preferred Stock will be issued in book-entry form; provided that, if a Holder requests that such Holder’s shares of the Series A Preferred Stock be issued in certificated form, the Corporation will instead issue a stock certificate to such Holder representing such Holder’s shares of the Series A Preferred Stock. To the extent that any shares of the Series A Preferred Stock are issued in book-entry form, references herein to “certificates” shall instead refer to the book-entry notation relating to such shares.
(c)Lost or Mutilated Series A Preferred Stock Certificate. If a Holder’s Series A Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of the Series A Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.
(d)Governing Law.
(i)All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and construed and
11
enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof. Each of the Corporation and each Holder agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by this Certificate of Designation (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in Court of Chancery of the State of Delaware. Each of the Corporation and each Holder hereby irrevocably submits to the exclusive jurisdiction of the Court of Chancery of the State of Delaware for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such Delaware Chancery Courts, or such Delaware Chancery Courts are improper or inconvenient venue for such proceeding. Each of the Corporation and each Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law.
(ii)Each of the Corporation and each Holder hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designation or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
(e)Waiver. Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designation or a waiver by any other Holders. The failure of the Corporation or a Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion. Any waiver by the Corporation or a Holder must be in writing.
(f)Severability. If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the
12
applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.
(g)Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
(h)Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or affect any of the provisions hereof.
(i)Status of Converted or Redeemed Series A Preferred Stock. Shares of the Series A Preferred Stock may only be issued pursuant to the Merger Agreement. If any shares of the Series A Preferred Stock shall be converted or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Series A Convertible Preferred Stock.
(j)Redemption. The Series A Preferred Stock is not redeemable.
(k)Trading Market Compliance. Notwithstanding any other provision of this Certificate of Designation, the Corporation will not take any action or be required to take any action contemplated by the terms and conditions set forth in this Certificate of Designation that would violate applicable rules and regulations of the Trading Market on which the Corporation’s securities are listed.
Section 9.Fractional Shares. Series A Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder’s fractional shares, to receive dividends, participate in distributions and to have the benefit of all other rights of holders of the Series A Preferred Stock.
*********************
13
Resolved, Further, that the Chairman, the president or any vice-president of the Corporation be and hereby is authorized and directed to prepare and file this Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock in accordance with the foregoing resolution and the provisions of Delaware law.
In Witness Whereof, the undersigned have executed this Certificate of Designation this [th] day of , 2025.
Name: Mark J. Rosenblum
Title: Executive Vice President Finance and Chief Financial Officer
14
Exhibit 10.1
FORM OF PARENT STOCKHOLDER SUPPORT AGREEMENT
SALARIUS PHARMACEUTICALS, INC.
SUPPORT AGREEMENT
SALARIUS PHARMACEUTICALS, INC.
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (this “Agreement”), dated as of January [ ], 2025, is made by and among Salarius Pharmaceuticals, Inc., a Delaware corporation (“Parent”), Decoy Therapeutics Inc., a Delaware corporation (the “Company”), and the undersigned holder (“Stockholder”) of shares of capital stock (the “Shares”) of Parent.
WHEREAS, Parent, Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“First Merger Sub”), Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent (“Second Merger Sub”), and the Company, have entered into an Agreement and Plan of Merger, dated of even date herewith (the “Merger Agreement”), providing for the merger of First Merger Sub with and into the Company (the “First Merger”) and the merger of the Company with and into Second Merger Sub (the “Second Merger” and, together with the First Merger, the “Merger”);
WHEREAS, Stockholder beneficially owns and has sole or shared voting power with respect to the number of Shares, and holds options to purchase shares of Parent Common Stock (“Parent Options”) and/or restricted stock units to acquire shares of Parent Common Stock (“Parent Restricted Stock Units”), in each case in the number of Shares indicated opposite Stockholder’s name on Schedule 1 attached hereto;
WHEREAS, as an inducement and a condition to the willingness of Parent, First Merger Sub, Second Merger Sub and the Company to enter into the Merger Agreement, and in consideration of the substantial expenses incurred and to be incurred by them in connection therewith, Stockholder has agreed to enter into and perform this Agreement; and
WHEREAS, all capitalized terms used in this Agreement without definition herein shall have the meanings ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of, and as a condition to, Parent, First Merger Sub, Second Merger Sub and the Company’s entering into the Merger Agreement and proceeding with the transactions contemplated thereby, and in consideration of the substantial expenses incurred and to be incurred by them in connection therewith, Stockholder, Parent and the Company agree as follows:
1) Agreement to Vote Shares. Stockholder agrees that, prior to the Expiration Date (as defined in Section 2 below), at any meeting of the stockholders of Parent or any adjournment or postponement thereof, or in connection with any written consent of the stockholders of Parent, with respect to the Parent Stockholder Matters, Stockholder shall, or shall cause the holder of record on any applicable record date to:
a) appear at such meeting or otherwise cause the Shares and any New Shares (as defined in Section 3 below) to be counted as present thereat (in person or by proxy) for purposes of calculating a quorum;
b) from and after the date hereof until the Expiration Date, vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Shares and any
New Shares that Stockholder shall be entitled to so vote: (i) in favor of the Parent Stockholder Matters and any matter that could reasonably be expected to facilitate the Parent Stockholder Matters; and (ii) to approve any proposal to adjourn or postpone the meeting to a later date, if there are not sufficient votes for the approval of the Parent Stockholder Matters on the date on which such meeting is held. Stockholder shall not take or commit or agree to take any action inconsistent with the foregoing.
2) Expiration Date. As used in this Agreement, the term “Expiration Date” shall mean the earlier to occur of (a) the effective time of the approval of the Parent Stockholder Matters or (b) upon mutual written agreement of the Company, the Parent and Stockholder to terminate this Agreement.
3) Additional Purchases. Stockholder agrees that any shares of capital stock or other equity securities of Parent that Stockholder purchases or with respect to which Stockholder otherwise acquires sole or shared voting power (including any proxy) after the execution of this Agreement and prior to the Expiration Date, whether by the exercise of any Parent Options, settlement of Parent Restricted Stock Units or otherwise, including, without limitation, by gift, succession, in the event of a stock split or as a dividend or distribution of any Shares (“New Shares”), shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted the Shares.
4) Share Transfers. From and after the date hereof until the Expiration Date, Stockholder shall not, directly or indirectly, (a) sell, assign, transfer, tender, or otherwise dispose of (including, without limitation, by the creation of any Liens (as defined in Section 5(c) below)) any Shares or any New Shares acquired, (b) deposit any Shares or New Shares into a voting trust or enter into a voting agreement or similar arrangement with respect to such Shares or New Shares or grant any proxy or power of attorney with respect thereto (other than this Agreement), (c) enter into any Contract, option, commitment or other arrangement or understanding with respect to the direct or indirect sale, transfer, assignment or other disposition of (including, without limitation, by the creation of any Liens) any Shares or New Shares, or (d) take any action that would make any representation or warranty of Stockholder contained herein untrue or incorrect or have the effect of preventing or disabling Stockholder from performing Stockholder’s obligations under this Agreement. Notwithstanding the foregoing, Stockholder may make (1) transfers by will or by operation of Law or other transfers for estate-planning purposes, in which case this Agreement shall bind the transferee, (2) with respect to Stockholder’s Parent Options which expire on or prior to the Expiration Date, transfers, sale, or other disposition of Shares or New Shares to Parent as payment for the (i) exercise price of Stockholder’s Parent Options and (ii) taxes applicable to the exercise of Stockholder’s Parent Options, (3) with respect to Stockholder’s Parent Restricted Stock Units, (i) transfers for the net settlement of Stockholder’s Parent Restricted Stock Units settled in Shares or New Shares (to pay any tax withholding obligations) or (ii) transfers for receipt upon settlement of Stockholder’s Parent Restricted Stock Units, and the sale of a sufficient number of such Shares acquired upon settlement of such securities as would generate sales proceeds sufficient to pay the aggregate taxes payable by Stockholder as a result of such settlement, (4) if Stockholder is a partnership or limited liability company, a transfer to one or more partners or members of Stockholder or to an Affiliated corporation, trust or other Entity under common control with Stockholder, or if Stockholder is a trust, a transfer to a beneficiary, provided that, in each such case the applicable transferee has signed a voting agreement in substantially the form hereof, (5) transfers to another holder of the capital stock of the Company that has signed a voting agreement in substantially the form hereof, and (6) transfers, sales or other dispositions as the Company may otherwise agree in writing in its sole discretion. If any voluntary or involuntary transfer of any Shares or New Shares covered hereby shall occur (including a transfer or disposition permitted by Section 4(1) through Section 4(6), sale by a Stockholder’s trustee in bankruptcy, or a sale to a purchaser at any creditor’s or court sale), (x) the transferee (which term, as used herein, shall include any and all transferees and subsequent transferees of the initial transferee) shall take
and hold such Shares or New Shares subject to all of the restrictions, Liabilities and rights under this Agreement, which shall continue in full force and effect, and the transferee shall agree in writing to be bound by the terms and conditions of this Agreement and either the Stockholder or the transferee provides the Company with a copy of such agreement promptly upon consummation of any such transfer.
5) Representations and Warranties of Stockholder. Stockholder hereby represents and warrants to Parent and the Company as follows:
a) If Stockholder is an Entity: (i) Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, organized or constituted, (ii) Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform Stockholder’s obligations hereunder and to consummate the transactions contemplated hereby, and (iii) the execution and delivery of this Agreement, performance of Stockholder’s obligations hereunder and the consummation of the transactions contemplated hereby by Stockholder have been duly authorized by all necessary action on the part of Stockholder and no other proceedings on the part of Stockholder are necessary to authorize this Agreement, or to consummate the transactions contemplated hereby. If Stockholder is an individual, Stockholder has the legal capacity to execute and deliver this Agreement, to perform Stockholder’s obligations hereunder and to consummate the transactions contemplated hereby;
b) this Agreement has been duly executed and delivered by or on behalf of Stockholder and, assuming this Agreement constitutes a valid and binding agreement of the Company and Parent, constitutes a valid and binding agreement with respect to Stockholder, enforceable against Stockholder in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of Law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally;
c) Stockholder beneficially owns the number of Shares indicated opposite Stockholder’s name on Schedule 1, and will own any New Shares, free and clear of any liens, claims, charges or other encumbrances or restrictions of any kind whatsoever (“Liens”), and has sole or shared, and otherwise unrestricted, voting power with respect to such Shares or New Shares and none of the Shares or New Shares is subject to any voting trust or other agreement, arrangement or restriction with respect to the voting of the Shares or the New Shares, except as contemplated by this Agreement;
d) the execution and delivery of this Agreement by Stockholder does not, and the performance by Stockholder of his, her or its obligations hereunder and the compliance by Stockholder with any provisions hereof will not, violate or conflict with, result in a material breach of or constitute a default (or an event that with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Liens on any Shares or New Shares pursuant to, any agreement, instrument, note, bond, mortgage, Contract, lease, license, permit or other obligation or any order, arbitration award, judgment or decree to which Stockholder is a party or by which Stockholder is bound, or any Law, statute, rule or regulation to which Stockholder is subject or, in the event that Stockholder is a corporation, partnership, trust or other Entity, any bylaw or other Organizational Document of Stockholder; except for any of the foregoing as would not reasonably be expected to prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect;
e) the execution and delivery of this Agreement by Stockholder does not, and the performance of this Agreement by Stockholder does not and will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Body or regulatory
authority by Stockholder except for applicable requirements, if any, of the Exchange Act, and except where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect;
f) no investment banker, broker, finder or other intermediary is entitled to a fee or commission from Parent or the Company in respect of this Agreement based upon any Contract made by or on behalf of Stockholder; and
g) as of the date of this Agreement, there is no Legal Proceeding pending or, to the knowledge of Stockholder, threatened against Stockholder that would reasonably be expected to prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect.
6) Irrevocable Proxy. Subject to the final sentence of this Section 6, by execution of this Agreement, Stockholder does hereby appoint the Company and any of its designees with full power of substitution and resubstitution, as Stockholder’s true and lawful attorney and irrevocable proxy, to the fullest extent of Stockholder’s rights with respect to the Shares or New Shares, to vote and exercise all voting and related rights, including the right to sign Stockholder’s name (solely in its capacity as a stockholder) to any stockholder consent, if Stockholder is unable to perform or otherwise does not perform his, her or its obligations under this Agreement, with respect to such Shares solely with respect to the matters set forth in Section 1 hereof. Stockholder intends this proxy to be irrevocable and coupled with an interest hereunder until the Expiration Date, hereby revokes any proxy previously granted by Stockholder with respect to the Shares or New Shares and represents that none of such previously-granted proxies are irrevocable. The irrevocable proxy and power of attorney granted herein shall survive the death or incapacity of Stockholder and the obligations of Stockholder shall be binding on Stockholder’s heirs, personal representatives, successors, transferees and assigns. Stockholder hereby agrees not to grant any subsequent powers of attorney or proxies with respect to any Shares or New Shares with respect to the matters set forth in Section 1 until after the Expiration Date. The Stockholder hereby affirms that the proxy set forth in this Section 6 is given in connection with and granted in consideration of and as an inducement to the Company, Parent, First Merger Sub and Second Merger Sub to enter into the Merger Agreement and that such proxy is given to secure the obligations of the Stockholder under Section 1. Notwithstanding anything contained herein to the contrary, this irrevocable proxy shall automatically terminate upon the Expiration Date.
7) Other Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with, and not exclusive of, any other remedy conferred hereby, or by Law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof without the need of posting bond in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at Law or in equity.
8) Directors and Officers. This Agreement shall apply to Stockholder solely in Stockholder’s capacity as a stockholder of Parent and/or holder of Parent Options and/or Parent Restricted Stock Units and not in Stockholder’s capacity as a director, officer or employee of Parent or any of its
Subsidiaries or in Stockholder’s capacity as a trustee or fiduciary of any employee benefit plan or trust. Notwithstanding any provision of this Agreement to the contrary, nothing in this Agreement shall (or require Stockholder to attempt to) limit or restrict a director and/or officer of Parent in the exercise of his or her fiduciary duties as a director and/or officer of Parent or in his or her capacity as a trustee or fiduciary of any employee benefit plan or trust or prevent or be construed to create any obligation on the part of any director and/or officer of Parent or any trustee or fiduciary of any employee benefit plan or trust from taking any action in his or her capacity as such director, officer, trustee and/or fiduciary.
9) No Ownership Interest. Nothing contained in this Agreement shall be deemed to vest in the Company any direct or indirect ownership or incidence of ownership of or with respect to any Shares or New Shares. All rights, ownership and economic benefits of and relating to the Shares or New Shares shall remain vested in and belong to Stockholder, and the Company does not have authority to manage, direct, superintend, restrict, regulate, govern, or administer any of the policies or operations of Parent or exercise any power or authority to direct Stockholder in the voting of any of the Shares or New Shares, except as otherwise provided herein.
10) Termination. This Agreement shall terminate and shall have no further force or effect as of the Expiration Date. Notwithstanding the foregoing, upon termination or expiration of this Agreement, no party shall have any further obligations or liabilities under this Agreement; provided, however, nothing set forth in this Section 10 or elsewhere in this Agreement shall relieve any party from liability for any fraud or for any willful and material breach of this Agreement prior to termination hereof.
11) Further Assurances. Stockholder shall, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as the Company or Parent may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and the Contemplated Transactions.
12) Disclosure. Stockholder hereby agrees that Parent and the Company may publish and disclose in any registration statement, any prospectus filed with any regulatory authority in connection with the Contemplated Transactions and any related documents filed with such regulatory authority and as otherwise required by Law, Stockholder’s identity and ownership of Shares and the nature of Stockholder’s commitments, arrangements and understandings under this Agreement and may further file this Agreement as an exhibit to any registration statement or prospectus or in any other filing made by Parent or the Company as required by Law or the terms of the Merger Agreement, including with the SEC or other regulatory authority, relating to the Contemplated Transactions, all subject to prior review and an opportunity to comment by Stockholder’s counsel. Prior to the Closing, Stockholder shall not, and shall use its reasonable best efforts to cause its representatives not to, directly or indirectly, make any press release, public announcement or other public communication that criticizes or disparages this Agreement or the Merger Agreement or any of the Contemplated Transactions, without the prior written consent of Parent and the Company, provided that, the foregoing shall not limit or affect any actions taken by Stockholder (or any affiliated officer or director of Stockholder) that would be permitted to be taken by Stockholder, Parent or the Company pursuant to the Merger Agreement; provided, further, that the foregoing shall not effect any actions of Stockholder the prohibition of which would be prohibited under applicable Law.
13) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery), by electronic transmission (providing confirmation of transmission) to the Company or Parent, as the case may be, in accordance with Section 8.8 of the Merger Agreement and to Stockholder at his, her or its
address or email address (providing confirmation of transmission) set forth on Schedule 1 attached hereto (or at such other address for a party as shall be specified by like notice).
14) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If a final judgment of a court of competent jurisdiction declares that any term or provision of this Agreement is invalid or unenforceable, the parties hereto agree that the court making such determination shall have the power to limit such term or provision, to delete specific words or phrases or to replace such term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be valid and enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term or provision.
15) Assignability. This Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of, the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of a party’s rights or obligations hereunder may be assigned or delegated by such party without the prior written consent of the other parties hereto, and any attempted assignment or delegation of this Agreement or any of such rights or obligations by such party without the other party’s prior written consent shall be void and of no effect. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (other than the parties hereto) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
16) No Waivers. No waivers of any breach of this Agreement extended by the Company or Parent to Stockholder shall be construed as a waiver of any rights or remedies of the Company or Parent, as applicable, with respect to any other stockholder of Parent who has executed an agreement substantially in the form of this Agreement with respect to Shares or New Shares held or subsequently held by such stockholder or with respect to any subsequent breach of Stockholder or any other stockholder of Parent. No waiver of any provisions hereof by any party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party.
17) Applicable Law; Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the Laws of the state of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of Laws. In any action or Legal Proceeding between any of the parties arising out of or relating to this Agreement, each of the parties: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the state of Delaware or to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware, (ii) agrees that all claims in respect of such action or Legal Proceeding shall be heard and determined exclusively in accordance with clause (i) of this Section 17, (iii) waives any objection to laying venue in any such action or Legal Proceeding in such courts, (iv) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (v) agrees that service of process upon such party in any such action or Legal Proceeding shall be effective if notice is given in accordance with Section 13 of this Agreement.
18) Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR LEGAL PROCEEDING RELATED TO OR ARISING OUT OF THIS AGREEMENT, ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH AND THE MATTERS CONTEMPLATED HEREBY AND THEREBY.
19) No Agreement Until Executed. Irrespective of negotiations among the parties or the exchanging of drafts of this Agreement, this Agreement shall not constitute or be deemed to evidence a Contract, agreement, arrangement or understanding between the parties hereto unless and until (a) the Parent Board has approved, for purposes of any applicable anti-takeover Laws and regulations and any applicable provision of the certificate of incorporation of Parent, the Merger Agreement and the Contemplated Transactions, (b) the Merger Agreement is executed by all parties thereto, and (c) this Agreement is executed by all parties hereto.
20) Entire Agreement; Counterparts; Exchanges by Electronic Transmission. This Agreement and the other agreements referred to in this Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Agreement (in counterparts or otherwise) by all parties by electronic transmission via “.pdf” shall be sufficient to bind the parties to the terms and conditions of this Agreement.
21) Amendment. This Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument in writing signed on behalf of each party hereto; provided, however, that the rights or obligations of any Stockholder may be waived, amended or otherwise modified in a writing signed by Parent, the Company and Stockholder.
22) Fees and Expenses. Except as otherwise specifically provided herein, the Merger Agreement or any other agreement contemplated by the Merger Agreement to which a party hereto is a party, each party hereto shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby.
23) Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the parties. Each of the parties hereby acknowledges, represents and warrants that (i) it has read and fully understood this Agreement and the implications and consequences thereof; (ii) it has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of its own choice, or it has made a voluntary and informed decision to decline to seek such counsel; and (iii) it is fully aware of the legal and binding effect of this Agreement.
24) Construction.
a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders.
b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement.
c) As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”
d) Except as otherwise indicated, all references in this Agreement to “Sections,” and “Schedules” are intended to refer to Sections of this Agreement and Schedules to this Agreement, respectively.
e) The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.
[Remainder of Page has Intentionally Been Left Blank]
EXECUTED as of the date first above written.
| [STOCKHOLDER] | ||
Signature: | ||
[Signature Page to Support Agreement]
EXECUTED as of the date first above written.
| SALARIUS PHARMACEUTICALS, INC. | ||||||||
| By: | ||||||||
| Name: | David J. Arthur | |||||||
| Title: | President and Chief Executive Officer | |||||||
[Signature Page to Support Agreement]
EXECUTED as of the date first above written.
| DECOY THERAPEUTICS, INC. | ||||||||
| By: | ||||||||
| Name: | Frederick Pierce | |||||||
| Title: | Chief Executive Officer | |||||||
[Signature Page to Support Agreement]
SCHEDULE 1
| Name, Address and Email Address of Stockholder | Shares of Parent Common Stock | Parent Options | Parent Restricted Stock Units | |||||||||||||||||
Exhibit 10.2
FORM OF COMPANY STOCKHOLDER SUPPORT AGREEMENT
DECOY THERAPEUTICS, INC.
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT (this “Agreement”) dated as of January __, 2025, is made by and among Decoy Therapeutics, Inc., a Delaware corporation (the “Company”), Salarius Pharmaceuticals, Inc., a Delaware corporation (“Parent”), and the undersigned holder ( “Stockholder”) of shares of capital stock (the “Shares”) of the Company.
WHEREAS, Parent, Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“First Merger Sub”), Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent (“Second Merger Sub”), and the Company, have entered into an Agreement and Plan of Merger, dated of even date herewith (the “Merger Agreement”), providing for the merger of First Merger Sub with and into the Company (the “First Merger”) and the merger of the Company with and into Second Merger Sub (the “Second Merger” and, together with the First Merger, the “Merger”);
WHEREAS, Stockholder beneficially owns and has sole or shared voting power with respect to the number of Shares, and holds options to purchase shares of Parent Common Stock (“Parent Options”) and/or restricted stock units to acquire shares of Parent Common Stock (“Parent Restricted Stock Units”), in each case in the number of Shares indicated opposite Stockholder’s name on Schedule 1 attached hereto;
WHEREAS, as an inducement and a condition to the willingness of Parent, First Merger Sub, Second Merger Sub and the Company to enter into the Merger Agreement, and in consideration of the substantial expenses incurred and to be incurred by them in connection therewith, Stockholder has agreed to enter into and perform this Agreement; and
WHEREAS, all capitalized terms used in this Agreement without definition herein shall have the meanings ascribed to them in the Merger Agreement.
NOW, THEREFORE, in consideration of, and as a condition to, Parent, First Merger Sub, Second Merger Sub and the Company’s entering into the Merger Agreement and proceeding with the transactions contemplated thereby, and in consideration of the substantial expenses incurred and to be incurred by them in connection therewith, Stockholder, Parent and the Company agree as follows:
1) Agreement to Vote Shares. Stockholder agrees that, prior to the Expiration Date (as defined in Section 2 below), at any meeting of the stockholders of Company or any adjournment or postponement thereof, or in connection with any written consent of the stockholders of Parent, with respect to the Company Stockholder Matters, Stockholder shall, or shall cause the holder of record on any applicable record date to:
a) appear at such meeting or otherwise cause the Shares and any New Shares (as defined in Section 3 below) to be counted as present thereat (in person or by proxy) for purposes of calculating a quorum;
b) from and after the date hereof until the Expiration Date, vote (or cause to be voted), or deliver a written consent (or cause a written consent to be delivered) covering all of the Shares and any New Shares that Stockholder shall be entitled to so vote: (i) in favor of the Company Stockholder Matters and any matter that could reasonably be expected to facilitate the Company Stockholder Matters; and (ii) to approve any proposal to adjourn or postpone the meeting to a later date, if there are not sufficient votes
for the approval of the Company Stockholder Matters on the date on which such meeting is held. Stockholder shall not take or commit or agree to take any action inconsistent with the foregoing.
2) Expiration Date. As used in this Agreement, the term “Expiration Date” shall mean the earlier to occur of (a) the effective time of the approval of the Company Stockholder Matters, (b) upon mutual written agreement of the Company, the Parent and Stockholder to terminate this Agreement or (c) two (2) months following the date of this Agreement.
3) Additional Purchases. Stockholder agrees that any shares of capital stock or other equity securities of the Company that Stockholder purchases or with respect to which Stockholder otherwise acquires sole or shared voting power (including any proxy) after the execution of this Agreement and prior to the Expiration Date, whether by the exercise of any Company Options, settlement of Company Restricted Stock Units or otherwise, including, without limitation, by gift, succession, in the event of a stock split or as a dividend or distribution of any Shares (“New Shares”), shall be subject to the terms and conditions of this Agreement to the same extent as if they constituted the Shares.
4) Share Transfers. From and after the date hereof until the Expiration Date, Stockholder shall not, directly or indirectly, (a) sell, assign, transfer, tender, or otherwise dispose of (including, without limitation, by the creation of any Liens (as defined in Section 5(c) below)) any Shares or any New Shares acquired, (b) deposit any Shares or New Shares into a voting trust or enter into a voting agreement or similar arrangement with respect to such Shares or New Shares or grant any proxy or power of attorney with respect thereto (other than this Agreement), (c) enter into any Contract, option, commitment or other arrangement or understanding with respect to the direct or indirect sale, transfer, assignment or other disposition of (including, without limitation, by the creation of any Liens) any Shares or New Shares, or (d) take any action that would make any representation or warranty of Stockholder contained herein untrue or incorrect or have the effect of preventing or disabling Stockholder from performing Stockholder’s obligations under this Agreement. Notwithstanding the foregoing, Stockholder may make (1) transfers by will or by operation of Law or other transfers for estate-planning purposes, in which case this Agreement shall bind the transferee, (2) with respect to Stockholder’s Company Options which expire on or prior to the Expiration Date, transfers, sale, or other disposition of Shares or New Shares to the Company as payment for the (i) exercise price of Stockholder’s Company Options and (ii) taxes applicable to the exercise of Stockholder’s Company Options, (3) with respect to Stockholder’s Company Restricted Stock Units, (i) transfers for the net settlement of Stockholder’s Company Restricted Stock Units settled in Shares or New Shares (to pay any tax withholding obligations) or (ii) transfers for receipt upon settlement of Stockholder’s Company Restricted Stock Units, and the sale of a sufficient number of such Shares acquired upon settlement of such securities as would generate sales proceeds sufficient to pay the aggregate taxes payable by Stockholder as a result of such settlement, (4) if Stockholder is a partnership or limited liability company, a transfer to one or more partners or members of Stockholder or to an Affiliated corporation, trust or other Entity under common control with Stockholder, or if Stockholder is a trust, a transfer to a beneficiary, provided that, in each such case the applicable transferee has signed a voting agreement in substantially the form hereof, (5) transfers to another holder of the capital stock of the Company that has signed a voting agreement in substantially the form hereof, and (6) transfers, sales or other dispositions as Parent may otherwise agree in writing in its sole discretion. If any voluntary or involuntary transfer of any Shares or New Shares covered hereby shall occur (including a transfer or disposition permitted by Section 4(1) through Section 4(6), sale by a Stockholder’s trustee in bankruptcy, or a sale to a purchaser at any creditor’s or court sale), (x) the transferee (which term, as used herein, shall include any and all transferees and subsequent transferees of the initial transferee) shall take and hold such Shares or New Shares subject to all of the restrictions, Liabilities and rights under this Agreement, which shall continue in full force and effect, and the transferee shall agree in writing to be bound by the terms and conditions of this Agreement and either the
Stockholder or the transferee provides Parent with a copy of such agreement promptly upon consummation of any such transfer.
5) Representations and Warranties of Stockholder. Stockholder hereby represents and warrants to Parent and the Company as follows:
a) If Stockholder is an Entity: (i) Stockholder is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated, organized or constituted, (ii) Stockholder has all necessary power and authority to execute and deliver this Agreement, to perform Stockholder’s obligations hereunder and to consummate the transactions contemplated hereby, and (iii) the execution and delivery of this Agreement, performance of Stockholder’s obligations hereunder and the consummation of the transactions contemplated hereby by Stockholder have been duly authorized by all necessary action on the part of Stockholder and no other proceedings on the part of Stockholder are necessary to authorize this Agreement, or to consummate the transactions contemplated hereby. If Stockholder is an individual, Stockholder has the legal capacity to execute and deliver this Agreement, to perform Stockholder’s obligations hereunder and to consummate the transactions contemplated hereby;
b) this Agreement has been duly executed and delivered by or on behalf of Stockholder and, assuming this Agreement constitutes a valid and binding agreement of the Company and Parent, constitutes a valid and binding agreement with respect to Stockholder, enforceable against Stockholder in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of Law or a court of equity and by bankruptcy, insolvency and similar Laws affecting creditors’ rights and remedies generally;
c) Stockholder beneficially owns the number of Shares indicated opposite Stockholder’s name on Schedule 1, and will own any New Shares, free and clear of any liens, claims, charges or other encumbrances or restrictions of any kind whatsoever (“Liens”), and has sole or shared, and otherwise unrestricted, voting power with respect to such Shares or New Shares and none of the Shares or New Shares is subject to any voting trust or other agreement, arrangement or restriction with respect to the voting of the Shares or the New Shares, except as contemplated by this Agreement;
d) the execution and delivery of this Agreement by Stockholder does not, and the performance by Stockholder of his, her or its obligations hereunder and the compliance by Stockholder with any provisions hereof will not, violate or conflict with, result in a material breach of or constitute a default (or an event that with notice or lapse of time or both would become a material default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of any Liens on any Shares or New Shares pursuant to, any agreement, instrument, note, bond, mortgage, Contract, lease, license, permit or other obligation or any order, arbitration award, judgment or decree to which Stockholder is a party or by which Stockholder is bound, or any Law, statute, rule or regulation to which Stockholder is subject or, in the event that Stockholder is a corporation, partnership, trust or other Entity, any bylaw or other Organizational Document of Stockholder; except for any of the foregoing as would not reasonably be expected to prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect;
e) the execution and delivery of this Agreement by Stockholder does not, and the performance of this Agreement by Stockholder does not and will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Body or regulatory authority by Stockholder except for applicable requirements, if any, of the Exchange Act, and except where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect;
f) no investment banker, broker, finder or other intermediary is entitled to a fee or commission from Parent or the Company in respect of this Agreement based upon any Contract made by or on behalf of Stockholder; and
g) as of the date of this Agreement, there is no Legal Proceeding pending or, to the knowledge of Stockholder, threatened against Stockholder that would reasonably be expected to prevent or delay the performance by Stockholder of his, her or its obligations under this Agreement in any material respect.
6) Irrevocable Proxy. Subject to the final sentence of this Section 6, by execution of this Agreement, Stockholder does hereby appoint Parent and any of its designees with full power of substitution and resubstitution, as Stockholder’s true and lawful attorney and irrevocable proxy, to the fullest extent of Stockholder’s rights with respect to the Shares or New Shares, to vote and exercise all voting and related rights, including the right to sign Stockholder’s name (solely in its capacity as a stockholder) to any stockholder consent, if Stockholder is unable to perform or otherwise does not perform his, her or its obligations under this Agreement, with respect to such Shares solely with respect to the matters set forth in Section 1 hereof. Stockholder intends this proxy to be irrevocable and coupled with an interest hereunder until the Expiration Date, hereby revokes any proxy previously granted by Stockholder with respect to the Shares or New Shares and represents that none of such previously-granted proxies are irrevocable. The irrevocable proxy and power of attorney granted herein shall survive the death or incapacity of Stockholder and the obligations of Stockholder shall be binding on Stockholder’s heirs, personal representatives, successors, transferees and assigns. Stockholder hereby agrees not to grant any subsequent powers of attorney or proxies with respect to any Shares or New Shares with respect to the matters set forth in Section 1 until after the Expiration Date. The Stockholder hereby affirms that the proxy set forth in this Section 6 is given in connection with and granted in consideration of and as an inducement to the Company, Parent, First Merger Sub and Second Merger Sub to enter into the Merger Agreement and that such proxy is given to secure the obligations of the Stockholder under Section 1. Notwithstanding anything contained herein to the contrary, this irrevocable proxy shall automatically terminate upon the Expiration Date.
7) Other Remedies; Specific Performance. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with, and not exclusive of, any other remedy conferred hereby, or by Law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof without the need of posting bond in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which they are entitled at Law or in equity.
8) Directors and Officers. This Agreement shall apply to Stockholder solely in Stockholder’s capacity as a stockholder of Company and/or holder of Company Options and/or Company Restricted Stock Units and not in Stockholder’s capacity as a director, officer or employee of Company or any of its Subsidiaries or in Stockholder’s capacity as a trustee or fiduciary of any employee benefit plan or trust. Notwithstanding any provision of this Agreement to the contrary, nothing in this Agreement shall (or require Stockholder to attempt to) limit or restrict a director and/or officer of Company in the exercise of his or her fiduciary duties as a director and/or officer of Company or in his or her capacity as a trustee or fiduciary of any employee benefit plan or trust or prevent or be construed to create any obligation on the part of any director and/or officer of Company or any trustee or fiduciary of any employee benefit
plan or trust from taking any action in his or her capacity as such director, officer, trustee and/or fiduciary.
9) No Ownership Interest. Nothing contained in this Agreement shall be deemed to vest in the Company any direct or indirect ownership or incidence of ownership of or with respect to any Shares or New Shares. All rights, ownership and economic benefits of and relating to the Shares or New Shares shall remain vested in and belong to Stockholder, and Parent does not have authority to manage, direct, superintend, restrict, regulate, govern, or administer any of the policies or operations of Parent or exercise any power or authority to direct Stockholder in the voting of any of the Shares or New Shares, except as otherwise provided herein.
10) Termination. This Agreement shall terminate and shall have no further force or effect as of the Expiration Date. Notwithstanding the foregoing, upon termination or expiration of this Agreement, no party shall have any further obligations or liabilities under this Agreement; provided, however, nothing set forth in this Section 10 or elsewhere in this Agreement shall relieve any party from liability for any fraud or for any willful and material breach of this Agreement prior to termination hereof.
11) Further Assurances. Stockholder shall, from time to time, execute and deliver, or cause to be executed and delivered, such additional or further consents, documents and other instruments as the Company or Parent may reasonably request for the purpose of effectively carrying out the transactions contemplated by this Agreement and the Contemplated Transactions.
12) Disclosure. Stockholder hereby agrees that Parent and the Company may publish and disclose in any registration statement, any prospectus filed with any regulatory authority in connection with the Contemplated Transactions and any related documents filed with such regulatory authority and as otherwise required by Law, Stockholder’s identity and ownership of Shares and the nature of Stockholder’s commitments, arrangements and understandings under this Agreement and may further file this Agreement as an exhibit to any registration statement or prospectus or in any other filing made by Parent or the Company as required by Law or the terms of the Merger Agreement, including with the SEC or other regulatory authority, relating to the Contemplated Transactions, all subject to prior review and an opportunity to comment by Stockholder’s counsel. Prior to the Closing, Stockholder shall not, and shall use its reasonable best efforts to cause its representatives not to, directly or indirectly, make any press release, public announcement or other public communication that criticizes or disparages this Agreement or the Merger Agreement or any of the Contemplated Transactions, without the prior written consent of Parent and the Company, provided that, the foregoing shall not limit or affect any actions taken by Stockholder (or any affiliated officer or director of Stockholder) that would be permitted to be taken by Stockholder, Parent or the Company pursuant to the Merger Agreement; provided, further, that the foregoing shall not effect any actions of Stockholder the prohibition of which would be prohibited under applicable Law.
13) Notice. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery), by electronic transmission (providing confirmation of transmission) to the Company or Parent, as the case may be, in accordance with Section 8.8 of the Merger Agreement and to Stockholder at his, her or its address or email address (providing confirmation of transmission) set forth on Schedule 1 attached hereto (or at such other address for a party as shall be specified by like notice).
14) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If a final judgment of a court of competent jurisdiction declares that any term or provision of this Agreement is invalid or unenforceable, the parties hereto agree that the
court making such determination shall have the power to limit such term or provision, to delete specific words or phrases or to replace such term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be valid and enforceable as so modified. In the event such court does not exercise the power granted to it in the prior sentence, the parties hereto agree to replace such invalid or unenforceable term or provision with a valid and enforceable term or provision that will achieve, to the extent possible, the economic, business and other purposes of such invalid or unenforceable term or provision.
15) Assignability. This Agreement shall be binding upon, and shall be enforceable by and inure solely to the benefit of, the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of a party’s rights or obligations hereunder may be assigned or delegated by such party without the prior written consent of the other parties hereto, and any attempted assignment or delegation of this Agreement or any of such rights or obligations by such party without the other party’s prior written consent shall be void and of no effect. Nothing in this Agreement, express or implied, is intended to or shall confer upon any Person (other than the parties hereto) any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement.
16) No Waivers. No waivers of any breach of this Agreement extended by the Company or Parent to Stockholder shall be construed as a waiver of any rights or remedies of the Company or Parent, as applicable, with respect to any other stockholder of the Company who has executed an agreement substantially in the form of this Agreement with respect to Shares or New Shares held or subsequently held by such stockholder or with respect to any subsequent breach of Stockholder or any other stockholder of the Company. No waiver of any provisions hereof by any party shall be deemed a waiver of any other provisions hereof by any such party, nor shall any such waiver be deemed a continuing waiver of any provision hereof by such party.
17) Applicable Law; Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the Laws of the state of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of Laws. In any action or Legal Proceeding between any of the parties arising out of or relating to this Agreement, each of the parties: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the state of Delaware or to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the United States District Court for the District of Delaware, (ii) agrees that all claims in respect of such action or Legal Proceeding shall be heard and determined exclusively in accordance with clause (i) of this Section 17, (iii) waives any objection to laying venue in any such action or Legal Proceeding in such courts, (iv) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (v) agrees that service of process upon such party in any such action or Legal Proceeding shall be effective if notice is given in accordance with Section 13 of this Agreement.
18) Waiver of Jury Trial. THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR LEGAL PROCEEDING RELATED TO OR ARISING OUT OF THIS AGREEMENT, ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH AND THE MATTERS CONTEMPLATED HEREBY AND THEREBY.
19) No Agreement Until Executed. Irrespective of negotiations among the parties or the exchanging of drafts of this Agreement, this Agreement shall not constitute or be deemed to evidence a Contract, agreement, arrangement or understanding between the parties hereto unless and until (a) the Company Board has approved, for purposes of any applicable anti-takeover Laws and regulations and any applicable provision of the certificate of incorporation of the Company, the Merger Agreement and the
Contemplated Transactions, (b) the Merger Agreement is executed by all parties thereto, and (c) this Agreement is executed by all parties hereto.
20) Entire Agreement; Counterparts; Exchanges by Electronic Transmission. This Agreement and the other agreements referred to in this Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among or between any of the parties with respect to the subject matter hereof and thereof. This Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Agreement (in counterparts or otherwise) by all parties by electronic transmission via “.pdf” shall be sufficient to bind the parties to the terms and conditions of this Agreement.
21) Amendment. This Agreement may not be amended, supplemented or modified, and no provisions hereof may be modified or waived, except by an instrument in writing signed on behalf of each party hereto; provided, however, that the rights or obligations of any Stockholder may be waived, amended or otherwise modified in a writing signed by Parent, the Company and Stockholder.
22) Fees and Expenses. Except as otherwise specifically provided herein, the Merger Agreement or any other agreement contemplated by the Merger Agreement to which a party hereto is a party, each party hereto shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby.
23) Voluntary Execution of Agreement. This Agreement is executed voluntarily and without any duress or undue influence on the part or behalf of the parties. Each of the parties hereby acknowledges, represents and warrants that (i) it has read and fully understood this Agreement and the implications and consequences thereof; (ii) it has been represented in the preparation, negotiation, and execution of this Agreement by legal counsel of its own choice, or it has made a voluntary and informed decision to decline to seek such counsel; and (iii) it is fully aware of the legal and binding effect of this Agreement.
24) Construction.
a) For purposes of this Agreement, whenever the context requires: the singular number shall include the plural, and vice versa; the masculine gender shall include the feminine and neuter genders; the feminine gender shall include the masculine and neuter genders; and the neuter gender shall include masculine and feminine genders.
b) The parties hereto agree that any rule of construction to the effect that ambiguities are to be resolved against the drafting party shall not be applied in the construction or interpretation of this Agreement.
c) As used in this Agreement, the words “include” and “including,” and variations thereof, shall not be deemed to be terms of limitation, but rather shall be deemed to be followed by the words “without limitation.”
d) Except as otherwise indicated, all references in this Agreement to “Sections,” and “Schedules” are intended to refer to Sections of this Agreement and Schedules to this Agreement, respectively.
e) The underlined headings contained in this Agreement are for convenience of reference only, shall not be deemed to be a part of this Agreement and shall not be referred to in connection with the construction or interpretation of this Agreement.
[Remainder of Page has Intentionally Been Left Blank]
EXECUTED as of the date first above written.
| [STOCKHOLDER] | ||
Signature: | ||
| Name (if an Entity): | ||
| Title (if an Entity): | ||
[Signature Page to Support Agreement]
EXECUTED as of the date first above written.
| SALARIUS PHARMACEUTICALS, INC. | ||||||||
| By: | ||||||||
| Name: | David J. Arthur | |||||||
| Title: | President and Chief Executive Officer | |||||||
[Signature Page to Support Agreement]
EXECUTED as of the date first above written.
| DECOY THERAPEUTICS, INC. | ||||||||
| By: | ||||||||
| Name: | Frederick Pierce | |||||||
| Title: | Chief Executive Officer | |||||||
[Signature Page to Support Agreement]
SCHEDULE 1
| Name, Address and Email Address of Stockholder | Shares of Company Common Stock | Company Options | Company Restricted Stock Units | |||||||||||||||||
Exhibit 10.3
Form of Lock-Up Agreement
[●], 2025
Ladies and Gentlemen:
The undersigned signatory of this lock-up agreement (this “Lock-Up Agreement”) understands that Salarius Pharmaceuticals, Inc., a Delaware corporation (including any successor thereto, “Parent”), has entered into an Agreement and Plan of Merger, dated as of [●], 2025 (as the same may be amended from time to time, the “Merger Agreement”) with Decoy Therapeutics, MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Parent, Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and a wholly owned subsidiary of Parent, and Decoy Therapeutics Inc, a Delaware corporation (the “Company”). Capitalized terms used but not otherwise defined herein shall have the respective meanings ascribed to such terms in the Merger Agreement.
As a condition and material inducement to each of the parties to enter into the Merger Agreement and to consummate the Contemplated Transactions, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned hereby irrevocably agrees that, subject to the exceptions set forth herein, without the prior written consent of Parent and, solely prior to the Closing, the Company, the undersigned will not, during the period commencing upon the Closing and ending on the date that is 180 days after the Closing Date (the “Restricted Period”):
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock (including without limitation, Parent Common Stock or such other securities which may be deemed to be beneficially owned by the undersigned in accordance with the rules and regulations of the SEC and securities of Parent which may be issued upon exercise of Parent Options or settlement of Parent RSUs) that are currently or hereafter owned by the undersigned (collectively, the “Undersigned’s Shares”);
enter into any swap, short sale, hedge or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the Undersigned’s Shares regardless of whether any such transaction described in clause (i) above or this clause (ii) is to be settled by delivery of Parent Common Stock, Parent Convertible Preferred Stock or other securities, in cash or otherwise;
make any demand for, or exercise any right with respect to, the registration of any shares of Parent Common Stock, Parent Convertible Preferred Stock or any security convertible into or exercisable or exchangeable for Parent Common Stock (other than such rights set forth in the Merger Agreement); or
publicly disclose the intention to do any of the foregoing.
The restrictions and obligations contemplated by this Lock-Up Agreement shall not apply to:
transfers of the Undersigned’s Shares:
if the undersigned is a natural person, (A) to any person related to the undersigned (or to an ultimate beneficial owner of the undersigned) by blood or adoption who is an immediate family member of the undersigned, or by marriage or domestic partnership (a “Family
Member”), or to a trust formed for the benefit of the undersigned or any of the undersigned’s Family Members, (B) to the undersigned’s estate, following the death of the undersigned, by will, intestacy or other operation of Law, (C) as a bona fide charitable gift or contribution, (D) by operation of Law pursuant to a qualified domestic order or in connection with a divorce settlement or (E) to any partnership, corporation or limited liability company which is controlled by or under common control with the undersigned and/or by any such Family Member(s);
if the undersigned is a corporation, partnership or other Entity, (A) to another corporation, partnership, or other Entity that is an affiliate (as defined under Rule 12b-2 of the Exchange Act) of the undersigned, including investment funds or other entities under common control or management with the undersigned, (B) as a distribution or dividend to equity holders, current or former general or limited partners, members or managers (or to the estates of any of the foregoing), as applicable, of the undersigned (including upon the liquidation and dissolution of the undersigned pursuant to a plan of liquidation approved by the undersigned’s equity holders), (C) as a bona fide charitable gift or contribution or otherwise to a trust or other entity for the direct or indirect benefit of an immediate family member of a beneficial owner (as defined in Rule 13d-3 of the Exchange Act) of the Undersigned’s Shares or (D) transfers or dispositions not involving a change in beneficial ownership; or
if the undersigned is a trust, to any grantors or beneficiaries of the trust;
provided that, in the case of any transfer or distribution pursuant to this clause (a), such transfer is not for value and each donee, heir, beneficiary or other transferee or distributee shall sign and deliver to Parent a lock-up agreement in the form of this Lock-Up Agreement with respect to the shares of Parent Common Stock, Parent Convertible Preferred Stock or such other securities that have been so transferred or distributed;
the exercise of Parent Options (including a net or cashless exercise of a Parent Option), and any related transfer of shares of Parent Common Stock to Parent for the purpose of paying the exercise price of such options or for paying taxes (including estimated taxes) due as a result of the exercise of such options; provided that, for the avoidance of doubt, the underlying shares of Parent Common Stock shall continue to be subject to the restrictions on transfer set forth in this Lock-Up Agreement;
the disposition (including a forfeiture or repurchase) to Parent of any shares of restricted stock granted pursuant to the terms of any employee benefit plan or restricted stock purchase agreement;
transfers to Parent in connection with the net settlement of any Parent RSU or other equity award that represents the right to receive in the future shares of Parent Common Stock settled in Parent Common Stock to pay any tax withholding obligations; provided that, for the avoidance of doubt, the underlying shares of Parent Common Stock shall continue to be subject to the restrictions on transfer set forth in this Lock-Up Agreement;
the establishment of a trading plan pursuant to Rule 10b5-1 under the Exchange Act for the transfer of Parent Common Stock; provided that such plan does not provide for any transfers of Parent Common Stock during the Restricted Period;
transfers by the undersigned of shares of Parent Common Stock purchased by the undersigned on the open market or in a public offering by Parent, in each case following the Closing Date;
pursuant to a bona-fide third party tender offer, merger, consolidation or other similar transaction made to all holders of Parent’s capital stock involving a change of control of Parent, provided that in the event that such tender offer, merger, consolidation or other such transaction is not completed, the Undersigned’s Shares shall remain subject to the restrictions contained in this Lock-Up Agreement; or
pursuant to an order of a court or regulatory agency;
and provided, further, that, with respect to each of (a), (b), (c), (d) and (e) above, no filing by any party (including any donor, donee, transferor, transferee, distributor or distributee) under Section 16 of the Exchange Act or other public announcement shall be required or shall be made voluntarily in connection with such transfer or disposition during the Restricted Period (other than (i) any exit filings or public announcements that may be required under applicable federal and state securities Laws or (ii) in respect of a required filing under the Exchange Act in connection with the exercise of an option to purchase Parent Common Stock or in connection with the net settlement of any RSU or other equity award that represents the right to receive in the future shares of Parent Common Stock settled in Parent Common Stock that would otherwise expire during the Restricted Period, provided that (i) reasonable notice shall be provided to Parent prior to any such filing) and (ii) such filing, report or announcement shall clearly indicate in the footnotes therein, in reasonable detail, a description of the circumstances of the transfer and that the shares remain subject to the lock-up agreement.
For purposes of this Lock-Up Agreement, “change of control” shall mean the transfer (whether by tender offer, merger, consolidation or other similar transaction), in one transaction or a series of related transactions, to a person or group of affiliated persons, of Parent’s voting securities if, after such transfer, Parent’s stockholders as of immediately prior to such transfer do not hold a majority of the outstanding voting securities of Parent (or the surviving entity) other than the Contemplated Transactions.
Any attempted transfer in violation of this Lock-Up Agreement will be of no effect and null and void, regardless of whether the purported transferee has any actual or constructive knowledge of the transfer restrictions set forth in this Lock-Up Agreement, and will not be recorded on the share register of Parent. In furtherance of the foregoing, the undersigned agrees that Parent and any duly appointed transfer agent for the registration or transfer of the securities described herein are hereby authorized to decline to make any transfer of securities if such transfer would constitute a violation or breach of this Lock-Up Agreement. Parent may cause the legend set forth below, or a legend substantially equivalent thereto, to be placed upon any certificate(s) or other documents, ledgers or instruments evidencing the undersigned’s ownership of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO AND MAY ONLY BE TRANSFERRED IN COMPLIANCE WITH A LOCK-UP AGREEMENT, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this Lock-Up Agreement. All authority herein conferred or agreed to be conferred and any obligations of the undersigned shall be binding upon the successors, assigns, heirs or personal representatives of the undersigned.
The undersigned understands that if the Merger Agreement is terminated for any reason, the undersigned shall be released from all obligations under this Lock-Up Agreement. The undersigned understands that Parent and the Company are proceeding with the Contemplated Transactions in reliance upon this Lock-Up Agreement.
Any and all remedies herein expressly conferred upon Parent or the Company will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by Law or equity, and the exercise by Parent or the Company of any one remedy will not preclude the exercise of any other remedy. The undersigned agrees that irreparable damage for which monetary damages, even if available, would not be an adequate remedy, would occur to Parent and/or the Company in the event that any provision of this Lock-Up Agreement were not performed in accordance with its specific terms or were otherwise breached. It is accordingly agreed that Parent and the Company shall be entitled to an injunction or injunctions to prevent breaches of this Lock-Up Agreement and to enforce specifically the terms and provisions hereof in any court of the United States or any state having jurisdiction, this being in addition to any other remedy to which Parent or the Company is entitled at Law or in equity, and the undersigned waives any bond, surety or other security that might be required of Parent or the Company with respect thereto. Each of the parties further agrees that it will not oppose the granting of an injunction, specific performance or other equitable relief on the basis that any other party has an adequate remedy at law or that any award of specific performance is not an appropriate remedy for any reason at law or in equity.
In the event that any holder of securities of Parent that are subject to a substantially similar agreement entered into by such holder, other than the undersigned, is permitted by Parent to sell or otherwise transfer or dispose of shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock for value other than as permitted by this or a substantially similar agreement entered into by such holder (whether in one or multiple releases or waivers), the same percentage of shares of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock held by the undersigned on the date of such release or waiver as the percentage of the total number of outstanding shares of such securities held by such holder on the date of such release or waiver that are the subject of such release or waiver shall be immediately and fully released on the same terms from any remaining restrictions set forth herein (the “Pro Rata Release”); provided, however, that such Pro Rata Release shall not be applied unless and until permission has been granted by Parent to an equity holder or equity holders to sell or otherwise transfer or dispose of all or a portion of such equity holders shares of Parent Common Stock in an aggregate amount in excess of 1% of the number of shares of Parent Common Stock originally subject to a substantially similar agreement. In the event of any Pro-Rata Release, the Company shall promptly (and in any event within two (2) business days of such release) inform each relevant holder of Parent Common Stock, Parent Convertible Preferred Stock or any securities convertible into or exercisable or exchangeable for Parent Common Stock of the terms of such Pro-Rata Release.
Upon the release of any of the Undersigned’s Shares from this Lock-Up Agreement, Parent will cooperate with the undersigned to facilitate the timely preparation and delivery of certificates or the establishment of book-entry positions at Parent’s transfer agent representing the Undersigned’s Shares without the restrictive legend above or the withdrawal of any stop transfer instructions.
The undersigned understands that this Lock-Up Agreement is irrevocable and is binding upon the undersigned’s heirs, legal representatives, successors and assigns.
This Lock-Up Agreement shall be governed by, and construed in accordance with, the Laws of the state of Delaware, regardless of the Laws that might otherwise govern under applicable principles of conflicts of Laws. In any action or Legal Proceeding between any of the parties arising out of or relating to this Lock-Up Agreement, each of the parties: (i) irrevocably and unconditionally consents and submits to the exclusive jurisdiction and venue of the Court of Chancery of the state of Delaware or to the extent such court does not have subject matter jurisdiction, the Superior Court of the State of Delaware or the
United States District Court for the District of Delaware, (ii) agrees that all claims in respect of such action or Legal Proceeding shall be heard and determined exclusively in accordance with clause (i) of this Section 10, (iii) waives any objection to laying venue in any such action or Legal Proceeding in such courts, (iv) waives any objection that such courts are an inconvenient forum or do not have jurisdiction over any party, and (v) agrees that service of process upon such party in any such action or Legal Proceeding shall be effective if notice is given in accordance with Section 11 of this Lock-Up Agreement. This Lock-Up Agreement constitutes the entire agreement between the parties to this Lock-Up Agreement and supersedes all other prior agreements, arrangements and understandings, both written and oral, among the parties with respect to the subject matter hereof.
THE PARTIES HERETO HEREBY WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY ACTION OR LEGAL PROCEEDING RELATED TO OR ARISING OUT OF THIS LOCK-UP AGREEMENT, ANY DOCUMENT EXECUTED IN CONNECTION HEREWITH AND THE MATTERS CONTEMPLATED HEREBY AND THEREBY.
All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or sent by overnight courier (providing proof of delivery), by electronic transmission (providing confirmation of transmission) to the Company or Parent, as the case may be, in accordance with Section 10.8 of the Merger Agreement and to the undersigned at his, her or its address or email address (providing confirmation of transmission) set forth on the signature page hereto (or at such other address for a party as shall be specified by like notice).
This Lock-Up Agreement may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument. The exchange of a fully executed Lock-Up Agreement (in counterparts or otherwise) by Parent, the Company and the undersigned by electronic transmission in .pdf format shall be sufficient to bind such parties to the terms and conditions of this Lock-Up Agreement.
Signatures on the Following Page
In Witness Whereof, the parties have caused this Lock-Up Agreement to be executed as of the date first above written.
Very truly yours,
[●]
Signature (for individuals):
Email:
Address:
Print Name of Stockholder
Signature (for entities):
By:
Name:
Title:
Email:
Address:
Signature Page To Lock-Up Agreement
Accepted and Agreed:
| PARENT: | |||||
Salarius Pharmaceuticals, Inc. By: Name: Title: | |||||
| THE COMPANY: | |||||
Decoy Therapeutics Inc. By: Name: Title: | |||||
Signature Page To Lock-Up Agreement
Exhibit 10.4
Warrant Cancellation Agreement
This Warrant Cancellation Agreement (the “Agreement”) is made and entered into as of January 10, 2025, by and between Salarius Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and the undersigned holder of the Existing Warrants (as defined below) (the “Holder”).
Recitals
A.The Holder previously acquired those certain Common Stock Purchase Warrants currently exercisable into such aggregate number of shares of common stock, par value $0.0001 per share, of the Company (the “Common Stock”), as set forth on Schedule A attached hereto (the “Existing Warrants”).
B.The Company intends to enter into an Agreement and Plan of Merger with a third party on or about the date hereof (the “Merger Agreement”).
C.In connection with the Company’s entry into the Merger Agreement, the Company has duly authorized a cash payment to the Holder for the exchange, termination and cancellation of the Existing Warrants.
D.Each of the Company and the Holder desire to effectuate such transactions on the basis and subject to the terms and conditions set forth in this Agreement.
Agreement
The parties to this Agreement, intending to be legally bound, agree as follows:
1.Exchange and Cancellation of Existing Warrants. The Holder hereby conveys, assigns, transfers and surrenders the Existing Warrants to the Company and, in exchange, the Company shall pay an aggregate amount of Three Hundred Fifty Thousand Dollars ($350,000) (the “Cash Payment”) to the Holder . Effective immediately, the Holder hereby relinquishes all rights, title and interest in the Existing Warrants (including any claims the Holder may have against the Company related thereto) and assigns the same to the Company. Within two (2) trading days of the execution and delivery of this Agreement, the Holder shall surrender to the Company at the address set forth on the Company’s signature page hereto the original versions of the Existing Warrants or, if the original versions of the Existing Warrants have been lost, mutilated or destroyed, an affidavit to such effect and indemnity reasonably acceptable to the Company. The Existing Warrants are hereby deemed cancelled and of no further force and effect, effective immediately, and shall hereafter represent only the right to receive the Cash Payment.
2.Cash Payment. On the date hereof, the Company shall deliver the Cash Payment to the Holder via wire transfer of immediately available, same day funds to the Holder pursuant to written instructions provided to the Company.
3.Representations and Warranties of the Holder.
(a)The Holder is duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is organized.
(b)The Holder has all requisite power, authority and capacity to enter into this Agreement and consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby by the Holder, have been duly authorized by all necessary action on the part of the Holder, and no other proceedings on the part of the Holder are necessary to authorize the execution, delivery or performance of this Agreement or the consummation of any of the transactions contemplated hereby.
(c)This Agreement has been duly executed and delivered by the Holder, and, assuming due execution and delivery by the Company, constitutes or will constitute the legal, valid and binding obligation of the Holder, enforceable against the Holder in accordance with its terms, subject to limitations on enforcement by general principles of equity and by bankruptcy or other laws affecting the enforcement of creditors’ rights generally.
(d)The Holder owns and holds, beneficially and of record, the entire right, title, and interest in and to the Existing Warrants free and clear of all Liens (as defined below). The Holder has the full power and authority to transfer and dispose of the Existing Warrants free and clear of any Lien other than restrictions under the Securities Act of 1933, as amended (the “Securities Act”) and applicable state securities laws. Other than the transactions contemplated by this Agreement, there is no outstanding vote, plan, pending proposal, or other right of any person to acquire all or any portion of the Existing Warrants. As used herein, “Liens” shall mean any security or other property interest or right, claim, lien, pledge, option, charge, security interest, contingent or conditional sale, or other title claim or retention agreement, interest or other right or claim of third parties, whether perfected or not perfected, voluntarily incurred or arising by operation of law, and including any agreement (other than this Agreement) to grant or submit to any of the foregoing in the future.
(e)The execution, delivery and performance by the Holder of this Agreement, and the consummation by the Holder of the transactions contemplated hereby, will not (i) result in a violation of the organizational documents of the Holder, (ii) conflict with or result in a breach of or default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Holder is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Holder, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Holder to perform its obligations hereunder.
(f)The Holder is not (i) an “affiliate” of the Company (as defined in Rule 144 under the Securities Act (“Rule 144”)) or (ii) the “beneficial owner” (as that term is defined under the Exchange Act) of more than 5% of the Company’s outstanding Common Stock assuming that the Company’s outstanding shares of common stock are as set forth on the cover page of its most recent Quarterly Report on Form 10-Q.
(g)The Holder has been given full and adequate access to information relating to the Company, including its business, finances and operations as the Holder has deemed necessary or advisable in connection with the Holder’s evaluation of the transactions contemplated by this Agreement. The Holder has not relied upon any representations or statements made by the Company or its agents, officers, directors, employees or stockholders in regard to this Agreement or the basis thereof. The Holder has had the opportunity to review the Company’s filings with the Securities and Exchange Commission. The Holder and its advisors, if any, have been afforded the opportunity to ask questions of the Company. The Holder is relying solely on its own accounting, legal and tax advisors, and not on any statements of the Company or any of its agents or representatives, for such accounting, legal and tax advice with respect to the transactions contemplated by this Agreement.
(h)The Holder acknowledges that the terms of this Agreement have been established by negotiation between the Company and the Holder. The Holder acknowledges that the Company has not made any representation to the Holder about the advisability of this decision or the potential future value of any of the Existing Warrants. THE HOLDER ACKNOWLEDGES THAT, BY EXCHANGING THE EXISTING WARRANTS FOR THE CASH PAYMENT PURSUANT TO THIS AGREEMENT, THE HOLDER WILL NOT BENEFIT FROM (I) ANY FUTURE APPRECIATION IN THE MARKET VALUE OF THE EXISTING WARRANTS OR (II) ANY RIGHTS AS A HOLDER OF THE EXISTING WARRANTS IN CONNECTION WITH ANY BUSINESS COMBINATION TRANSACTIONS, INCLUDING WITHOUT LIMITATION, ANY RIGHTS TO RECEIVE CASH PAYMENTS PURSUANT TO SECTION 3(C) OF THE EXISTING WARRANTS.
4.Representations and Warranties of the Company.
2
(a)The Company is duly incorporated, validly existing and in good standing under the laws of the State of Delaware.
(b)The Company has all requisite power, authority and capacity to enter into this Agreement and consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby by the Company, have been duly authorized by all necessary action on the part of the Company and its board of directors (or a duly authorized committee thereof), and no other proceedings on the part of the Company are necessary to authorize the execution, delivery or performance of this Agreement or the consummation of any of the transactions contemplated hereby.
(c)This Agreement has been duly executed and delivered by the Company, and, assuming due execution and delivery by the Holder, constitutes or will constitute the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, subject to limitations on enforcement by general principles of equity and by bankruptcy or other laws affecting the enforcement of creditors’ rights generally.
(d)The execution, delivery and performance by the Company of this Agreement, and the consummation by the Company of the transactions contemplated hereby, will not (i) result in a violation of the organizational documents of the Company, (ii) conflict with or result in a breach of or default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws) applicable to the Company, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Company to perform its obligations hereunder.
5.Issuance of Form 8-K. On or before 9:15 a.m. (New York City time) on January 13, 2025, the Company shall file a Current Report on Form 8-K with the Securities and Exchange Commission disclosing all material terms of the transaction contemplated hereunder (“8-K Filing”). From and after the issuance of the 8-K Filing, the Company represents to the Holder that it shall not be in possession of any material, nonpublic information received from the Company or any of its officers, directors, employees or agents, that is not disclosed in the 8-K Filing. In addition, effective upon the filing of the 8-K Filing, the Company acknowledges and agrees that any and all confidentiality or similar obligations under any agreement, whether written or oral, between the Company or any of its officers, directors, employees or agents, on the one hand, and the Holder or any of its affiliates, on the other hand, related to the transactions contemplated hereby or with respect to information shared in connection herewith shall terminate.
6.Miscellaneous.
(a)Entire Agreement. This Agreement sets forth the entire understanding of the parties hereto relating to the subject matter hereof and supersedes all prior agreements and understandings among or between any of the parties relating to the subject matter hereof.
(b)Survival of Warranties. The representations and warranties of the parties contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement.
(c)Governing Law; Consent to Jurisdiction. This Agreement, and any action, arbitration, suit or other legal proceeding arising out of or relating to this Agreement (including the enforcement of any provision of this Agreement), any of the transactions contemplated by this Agreement or the legal relationship of the parties to this Agreement (whether at law or in equity, whether in contract or in tort or otherwise), shall be governed by and construed and interpreted in accordance with the laws of the State of Delaware irrespective of the choice of laws principles of the State of Delaware, as to all matters, including matters of validity, construction, effect, enforceability, performance and remedies and in respect of the statute of limitations or any other limitations period
3
applicable to any claim, controversy or dispute. Each of the parties hereto irrevocably consents to the exclusive jurisdiction and venue of the Delaware Court of Chancery in connection with any matter based upon or arising out of this Agreement.
(d)Amendments. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of the Company and the Holder.
(e)Waiver. No failure on the part of any person to exercise any power, right, privilege or remedy under this Agreement, and no delay on the part of any person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
(f)Counterparts and Exchanges by Electronic Transmission or Facsimile. This Agreement may be executed in several counterparts, each of which shall constitute an original and all of which, when taken together, shall constitute one agreement. The exchange of a fully executed Agreement (in counterparts or otherwise) by electronic transmission in .PDF format shall be sufficient to bind the parties to the terms of this Agreement.
(g)Severability. In the event that any provision of this Agreement, or the application of any such provision to any person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by applicable law.
(h)Successors and Assigns. This Agreement shall be binding upon each of the parties hereto and each of their respective heirs, executors, personal representatives, successors and permitted assigns, if any. This Agreement shall inure to the benefit of the Company and the Holder and the respective successors and permitted assigns of the foregoing (if any). Neither party shall be permitted to assign any of such party’s rights or delegate any of such party’s obligations under this Agreement without the other party’s prior written consent. Any attempted assignment or delegation by a party in violation of this Section 6(h) shall be null and void.
(i)No Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.
(j)Further Assurances. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as any other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.
(k)Fees and Expenses. Each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement.
[Remainder of page intentionally left blank.]
4
The parties hereto have caused this Agreement to be executed and delivered as of the date first written above.
SALARIUS PHARMACEUTICALS, INC.
By: /s/ Mark J. Rosenblum
Name: Mark J. Rosenblum
Title: Executive Vice President and Chief Financial Officer
Address for Return of Existing Warrants:
Salarius Pharmaceuticals, Inc.
2450 Holcombe Blvd., Suite X
Houston, Texas 77021
Attention: Executive Vice President and Chief Financial Officer
2450 Holcombe Blvd., Suite X
Houston, Texas 77021
Attention: Executive Vice President and Chief Financial Officer
[Signature Page to Warrant Cancellation Agreement]
The parties hereto have caused this Agreement to be executed and delivered as of the date first written above.
Armistice Capital Master Fund Ltd.
By: /s/ Steven Boyd
Name: Steven Boyd
Title: CIO of Armistice Capital, LLC, the Investment Manager
[Signature Page to Warrant Cancellation Agreement]
SCHEDULE A
EXISTING WARRANTS | ||||||||||||||
Warrant | Date of Original Issuance | Shares of Common Stock Issuable Upon Exercise | Exercise Price | Expiration Date | ||||||||||
Series A-1 Common Stock Purchase Warrant | May 16, 2023 | 454,546 | $11.20 | November 16, 2028 | ||||||||||
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
We consent to the incorporation by reference in:
(1) Registration Statement (Form S-8 No. 333-201816) pertaining to the 2014 Equity Incentive Plan, 2015 Equity Incentive Plan and 2015 Employee Stock Purchase Plan of Salarius Pharmaceuticals, Inc. (formerly known as Flex Pharma, Inc.);
(2) Registration Statement (Form S-8 Nos. 333-210283, 333-216534, 333-223499, 333-230104, 333-246310, 333-262896, and 333-269801) pertaining to the 2015 Equity Incentive Plan and 2015 Employee Stock Purchase Plan of Salarius Pharmaceuticals, Inc.;
(3) Registration Statement (Form S-3 No. 333-252169) of Salarius Pharmaceuticals, Inc.;
(4) Registration Statement (Form S-1 No. 333-235879) of Salarius Pharmaceuticals, Inc.;
(5) Registration Statement (Form S-1MEF No. 333-236306) of Salarius Pharmaceuticals, Inc.;
(6) Registration Statement (Form S-3 No. 333-265535) of Salarius Pharmaceuticals, Inc.;
(7) Registration Statement (Form S-3 No. 333-266589) of Salarius Pharmaceuticals, Inc.;
(8) Registration Statement (Form S-3 No. 333-272249) of Salarius Pharmaceuticals, Inc.; and
(9) Registration Statement (Form S-1 No. 333-283828) of Salarius Pharmaceuticals, Inc.
of our audit report dated November 26, 2024, with respect to the consolidated financial statements of Decoy Therapeutics, Inc. included in this Current Report on Form 8-K for the years ended December 31, 2023 and 2022.
Our report relating to those financial statements includes an emphasis of matter paragraph regarding substantial doubt as to the Company’s ability to continue as a going concern.
Spokane, Washington
January 13, 2025
Consolidated Financial Statements Years Ended December 31, 2023 and 2022
DECOY THERAPEUTICS, INC. Contents Page Reports of Independent Registered Public Accounting Firm F-1 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2023 and December 31, 2022 F-2 Consolidated Statements of Operations for the years ended December 31, 2023 and 2022 F-3 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2023 and 2022 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-5 Notes to consolidated financial statements F-6 – F-25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Decoy Therapeutics, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Decoy Therapeutics, Inc. (“the Company”) as of December 31, 2023 and 2022, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has generated an accumulated deficit of $15.1 million since its inception. Until the Company is successful in gaining regulatory approvals, it is unable to sell the Company’s product in any market. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Grant Income
As stated in Note 3 in financial statements, the Company has received grants from two funding sources. The grant amounts are considered significant to the overall financial statements and requires auditor subjectivity and judgment to assess the appropriate guidance to which these transactions apply, as well as significant auditor effort to test the appropriateness of deferred grant income released to income during the periods. How the Critical Audit Matter Was Addressed in the Audit Our principal audit procedures to evaluate management’s analysis of revenue recognition on grants consisted of the following, among others: 1. Obtained and analyzed grant agreements and other supporting documents to identify potential provisions that would significantly impact the manner in which the related income could be recognized. 2. Performed GAAP analysis to determine grant related income was being recognized pursuant to the appropriate guidance. 3. Tested selections of expenses asserted to be related to specific grants to determine that deferred grant funds released to income were appropriately recorded. Fruci & Associates II, PLLC – PCAOB ID #05525 We have served as the Company’s auditor since 2024. Spokane, Washington November 26, 2024
DECOY THERAPEUTICS, INC. F-2 Consolidated Balance Sheets December 31, December 31, 2023 2022 ASSETS Current assets: Cash and cash equivalents 4,156,433$ 1,624,242$ Prepaid expenses and other current assets 194,664 65,864 Total current assets 4,351,097 1,690,106$ Fixed assets, net of depreciation 105,450 140,758 Other assets - long term 41,000 40,280 Total assets 4,497,547$ 1,871,144$ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 400,495$ 434,462$ Accrued expenses 185,024 59,501 Accrued interest and financing expense 1,541,863 408,257 Deferred income - grants 4,077,453 143,654 Promissory note 1,425,939 - Convertible note - seed tranche A 4,122,000 1,381,000 Convertible note - seed 1,073,000 749,000 Convertible note - senior 6,523,556 4,038,000 Total current liabilities 19,349,330 7,213,874 Warrants 131,000 382,000 Total liabilities 19,480,330$ 7,595,874$ Commitments and contingencies - - Shareholders' equity: - - 1,288 1,288 Additional paid in capital 74,512 4,026 Accumulated deficit (15,058,583) (5,730,044) Total shareholders' equity (deficit) (14,982,783)$ (5,724,730)$ Total liabilities and shareholders' equity 4,497,547$ 1,871,144$ Common stock; par value $.001 per share; 6,000,000 shares authorized (includes 1,000,000 non-voting shares) at December 31, 2023 and 2022; 1,287,930 shares issued and outstanding at December 31, 2023 and 2022. Preferred stock; par value $0.001 par value – 2,000,000 shares authorized -0- shares issued and outstanding at December 31, 2023 and 2022. The accompanying footnotes are an integral part of these consolidated financial statements
DECOY THERAPEUTICS, INC. F-3 Consolidated Statements of Operations 2023 2022 Operating expenses General and administrative 1,065,022$ 1,024,835$ Research and development 2,384,897 2,265,601 Total operating expenses 3,449,919$ 3,290,436$ Other (income) and expenses Grant income (666,201)$ (738,990)$ Fair value adjustment to convertible notes payable 5,643,000 703,000 Warrant liability (income) expense (251,000) 108,000 Financing expense 52,556 22,500 Unrealized loss (gain) - (315) Interest and financing expense 1,100,265 331,011 Total other (income) expense 5,878,620 425,206 Net loss (9,328,539)$ (3,715,643)$ Net loss attributable to shareholders - per share Basic (7.24)$ (2.56)$ Fully-diluted (7.24)$ (2.56)$ Weighted average number of common shares Basic 1,287,930 1,449,292 Fully-diluted 1,287,930 1,449,292 Years Ended December 31, The accompanying footnotes are an integral part of these consolidated financial statements
DECOY THERAPEUTICS, INC. F-4 Consolidated Statements of Shareholders’ Equity Years Ended December 31, 2023 and 2022 Shares Amount Shares Amount Additional Paid in Accumulated Deficit Total Balance at December 31, 2021 - -$ 1,500,000 1,500$ 3,659$ (2,014,402)$ (2,009,243)$ Sale of common stock - - 3,930 4 47 - 51 Purchase of common stock - - (216,000) (216) - - (216) Stock based compensation - - - - 320 - 320 Net loss - - - - - (3,715,643) (3,715,643) Balance at December 31, 2022 - -$ 1,287,930 1,288$ 4,026$ (5,730,045)$ (5,724,731)$ Stock based compensation - - - - 70,486 - 70,486 Net loss - - - - - (9,328,539) (9,328,539) Balance at December 31, 2023 - -$ 1,287,930 1,288$ 74,512$ (15,058,584)$ (14,982,784)$ Common Shares Preferred Shares The accompanying footnotes are an integral part of these consolidated financial statements
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-5 Consolidated Statements of Cash Flows Years Ended December 31, 2023 2022 Cash flow s used in operating activities: Net loss (9,328,539)$ (3,715,643)$ Depreciation and amorization 96,533 39,840 Fair value adjustment to convertible notes payable 5,643,000 703,000 Change in fair value of w arrant liability (251,000) 108,000 Stock based compensation 70,486 320 Non-cash interest expense related to notes 1,133,605 366,011 Changes in assets and liabilities: Increase in prepaid expenses & other assets (129,520) (98,045) Increase in accounts payable and accrued expenses 91,556 203,699 Increase (decrease) in deferred revenue - grants 3,933,799 (314,746) Net cash used in operating activities 1,259,921$ (2,707,565)$ Cash f low s provided by (used in) investing activities: Purchase of property, plant and equiptment (8,669)$ (158,098)$ Net cash provided by (used in) investing activities (8,669)$ (158,098)$ Cash f low s provided by f inancing activities: Proceeds from notes, (net) 1,280,939$ 2,250,000$ Payment of notes - (250,000) Net (purchases) and sales of common stock - (165) Net cash provided by f inancing activities 1,280,939$ 1,999,835$ Net change in cash and cash equivalents: 2,532,191 (865,828) Cash and cash equivalents - beginning of year 1,624,242 2,490,070 Cash and cash equivalents - end of year 4,156,433$ 1,624,242$ Supplemental cash f low disclousres: Income taxes paid 726$ 5,020$ Interest paid -$ 25,000$ The accompanying footnotes are an integral part of these consolidated financial statements
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-6 NOTE 1 – ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION Decoy Therapeutics, Inc. (the “Company”) is a development stage biopharmaceutical company with a mission to revolutionize the design, development, and commercialization of peptide-conjugate therapeutics. The Company believes that its evolving, proprietary Immediate Peptide/PPMO/PNA Alpha-helical Conjugate Technology (IMP3ACT) platform represents a fundamental revolution in peptide-conjugate drug discovery by substantially accelerating the time to design and validate new lead quality drug candidates from years to months or even weeks. The Company’s IMP3ACT platform tames the complexity of the peptide-conjugate modality by using machine learning (ML) and artificial intelligence (AI), coupled with world-leading high-speed synthesis of peptide-conjugates and a strong understanding of target biology, to rapidly interrogate and reengineer naturally existing peptides that bind to disease mediating targets. The Company employs a multi-parameter approach to design and optimization, simultaneously focusing on a broad set of characteristics that will be important through the development and commercialization of the drug, such as chemical affinity, agonist/antagonist activity, enzymatic resistance for enhanced pharmacokinetics, formulation, and manufacturing. The Company believes its approach will significantly decrease timelines, risk, and expense downstream in the therapeutic development process, and can still be executed quickly by the IMP3ACT platform during the design and lead optimization phase. The Company plans to deploy the IMP3ACT platform in two major target areas: (a) antiviral fusion inhibitors and (b) G-Protein Coupled Receptors (GPCRs). In both target areas there is strong evidence that single peptide-conjugates can be designed to affect multiple disease states, creating the potential for multi-indication therapeutics with broad activity from a single drug. The Company believes both target areas also offer substantial commercial opportunities to address significant unmet medical needs. The Company was incorporated in Delaware on April 17, 2020 and has a principal place of business in Cambridge, Massachusetts. The Company has a wholly-owned Canadian subsidiary, Decoy Drug Discovery Canada, which was incorporated on July 8, 2021. The Company’s Canadian subsidiary’s primary activities have been related to sponsored research activities at the University of Toronto and The University of Waterloo. The Company is devoting substantially all of its efforts to product research and development, initial market development, and raising capital. The Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of risks similar to those of other early stage life science companies, including dependence on key individuals, competition from other companies, the need for development of commercially viable products, and the need to obtain adequate additional financing to fund the development of its product candidates. The Company is also subject to a number of risks similar to other companies in the industry, including rapid technological change, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulations, protection of proprietary technology, dependence on third parties, product liability, and dependence on key individuals. Going Concern Evaluation: As of December 31, 2023, the Company’s primary source of liquidity is its cash and cash equivalent balances. Until the Company is successful in gaining regulatory approvals, it is unable to sell the Company’s product in any market. Without revenues, the Company is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-7 The Company has generated an accumulated deficit of $15.1 million since its inception and will require substantial additional capital to fund its research and development and ongoing operating expenses. It is subject to risks common to companies in the biotechnology industry, including, but not limited to, development by the Company or its competitors of technological innovations, risks of failure of clinical studies, dependence on key personnel, protection of proprietary technology and compliance with government regulations. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the foregoing. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES The Company has incurred net losses every year since inception and has an accumulated deficit of approximately $15.1 million at December 31, 2023. The Company has historically funded its operations through debt and equity financings. At December 31, 2023, the Company had cash balances totaling $4.2 million. The Company will need to arrange additional financing in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations for a period of one year from the date these financial statements are available to be issued. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. Other risks and uncertainties: The Company is subject to risks common to development stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical trial outcome risks, regulatory approval risks, uncertainty of market acceptance and additional financing requirements. The Company’s products require approval or clearance from the FDA prior to commencing commercial sales in the United States. There can be no assurance that the Company’s products will receive all of the required approvals or clearances. Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products. There can be no assurance that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), which have been consistently applied, reflecting the operations of Decoy Therapeutics Inc. since inception. All intercompany accounts and transactions have been eliminated in consolidation.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-8 Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Decoy Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions and balances are eliminated in consolidation. The functional currency of Decoy Drug Discovery Canada, Inc., a wholly-owned subsidiary of the Company, is the U.S. dollar. Consolidated balance sheet accounts of the Company’s subsidiary are remeasured into U.S. dollars using the exchange rate in effect at the consolidated balance sheet date while expenses are remeasured using the average exchange rate in effect during the period. Gains and losses arising from remeasurement of the wholly owned subsidiary’s financial statements are included in the determination of net loss. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known. Cash and cash equivalents: The Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. From time to time during the periods presented, the Company has had bank account balances in excess of federally insured limits where substantially all cash is held in the United States. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Fair value of financial instruments: The Company considers its cash and cash equivalents, accounts payable, accrued expenses to meet the definition of financial instruments. The carrying amounts of these financial instruments approximated their fair values due to the short maturities. The Company measures fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is 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 (see Note 5). Property and equipment: Property and equipment are recorded at cost and are depreciated when placed in service using the straight-line method based on their estimated useful lives as follows: Estimated Useful Life Laboratory equipment 5 years Computer equipment and software 3 years Office furniture and equipment 5 years
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-9 For the years ended December 31, 2023 and 2022, the Company's had property and equipment depreciation expense of $43,977 and $17,340, respectfully. Impairment of long-lived assets: The Company reviews long-lived assets when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of the book values of the assets to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded during the years ended December 31, 2023 and 2022. Warrants: The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net- share settlement), provided that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (a) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (b) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets, liabilities and equity is required. The Company evaluated its issued and outstanding warrants to assess their proper classification using the applicable criteria enumerated under U.S. GAAP and determined that such warrants meet the criteria for liability classification in the accompanying consolidated balance sheets as of December 31, 2023 and December 31, 2022, respectively. Grant income: The Company has received grants from two funding sources, including a private not-for-profit organization and a federal agency. Grant income consists of income earned from grants to conduct development research. Funds received in advance of services being performed are recorded as deferred income. Income under the not-for-profit and federal agency grants is recognized as labor and material costs are incurred. Labor costs are recognized based on actual salary costs incurred related to the projects, and material costs are recognized based on actual expenditures. As of December 31, 2023 and December 31, 2022, the Company has recognized a total of $0.67 million and $0.74 million of income related to these grants, and has received a total of $1.1 million and $424,000 in cash receipts. Research and development: Research and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues costs incurred by external service providers, based on its estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid expenses that will be recognized as expenses in future periods as the related services are rendered.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-10 Key Relationships & Licenses: In June 2020, the Company entered into a one-year, non-exclusive licensing agreement with the Massachusetts Institute of Technology (“MIT”) related to developing potential treatments for Covid-19 using a variety available resources, services and technologies from MIT. Additionally, in July 2020, the Company entered into a Sponsored Research Agreement and option agreement with Columbia University to evaluate a molecule to block the transmission of Covid-19, Neither collaboration remains active. The Company has attracted non-dilutive investments from the European Union’s IMI-CARE Consortium, The Bill & Melinda Gates Foundation (“BMGF”), The U.S. Government’s Biological Research and Development Authority (“BARDA”) and Johnson & Johnson through the U.S. Government’s Blue Knight Blue Knight Program. Income taxes: The Company accounts for its income taxes using the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company maintains a full valuation allowance on its existing deferred tax assets. The Company also accounts for uncertain tax positions using the more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the Company’s income tax returns. As of December 31, 2023 and 2022, the Company had no uncertain tax positions which affected its financial position and its results of operations or its cash flows. The Company will continue to evaluate for uncertain tax positions in the future. If at any time the Company should record interest and penalties in connection with income taxes, the interest and the penalties will be expensed within the interest and general and administrative expenses, respectively. Stock based compensation: The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees, non- employees and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Company utilizes the simplified method to estimate the expected term. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield was assumed to be zero as the Company has not paid and dividends since its inception and does not anticipate paying dividends in the foreseeable future. Earnings (loss) per share: The Company reports loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to shareholders by the weighted average shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-11 calculation of diluted net earnings (loss) per share gives effect to ordinary shares equivalents; however, potential shares are excluded if their effect is anti-dilutive. For the year ended December 31, 2023, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 232,092 shares, 886,439 shares from the conversion of outstanding convertible notes and outstanding stock options to purchase 469,350. For the year ended December 31, 2022, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 232,092 shares, 783,776 in shares from the conversion of outstanding convertible notes and outstanding stock options to purchase 237,850. The inclusion of these warrants, shares from convertible notes and stock options for both 2023 and 2022 in the denominator would be anti-dilutive. NOTE 4 – NOTES Unsecured Promissory Note In October 20, 2021, the Company issued an unsecured promissory note (the “2021 Promissory Note”) in exchange for cash proceeds of $250,000. The term of the 2021 Promissory Note is nine months unless earlier settled upon an automatic payment condition, as further described below. The specific terms and conditions are as follows: 1. Interest: Interest of $25,000 shall accrue on the outstanding principal amount for the first 90 days of the loan and thereafter interest shall accrue on $275,000 at a rate per annum equal to 5% compounded each month thereafter until paid. 2. Automatic Payment: If at any time during the term of the 2021 Promissory Note the Company had issued and sold $650,000 or more in additional capital exclusive of the 2021 Promissory Note and via the sale of the Company’s common stock, $0.001 par value per share (the “Common Stock”) or any securities convertible into Common Stock (such event being an “Automatic Payment Date”), then the Company would be required to pay the holder the entire outstanding principal amount within fifteen days after the closing of the relevant transactions. If the Automatic Payment Date occurred before 90 days from the date of the 2021 Promissory Note, then interest of $25,000 would immediately accrue on the outstanding principal amount on the Automatic Payment Date. No such Automatic Payment Date occurred during the term of the 2021 Promissory Note. 3. Issuance of Company Equity Securities: Within 90 days from the date of the Promissory Note, the Company issued 3,930 shares of Common Stock to the holder at a price of $0.013 (representing current fair market value based on the Company’s most recent 409A valuation at that time) as additional consideration for extending the loan evidenced by the 2021 Promissory Note. On January 5, 2022, the Company repaid the 2021 Promissory Note in full, including the $25,000 interest specified above. The 2021 Promissory Note was considered settled at that time. Accounting Guidance The 2021 Promissory Note is considered an obligation (or liability) of the Company as prescribed by Accounting Standards Codification (“ASC”) 470-10. The Company has elected the fair value option under ASC 825 and ASC 825-10-15-4(a) for the 2021 Promissory Note and will measure the 2021 Promissory Note, as a whole, at fair value, with changes in fair value reported in earnings. As neither ASC 815 nor ASC 825 prescribes the location in which the Company should report fair value changes in the income statement, the Company will elect a policy to present all changes in fair value of the 2021 Promissory Note as a component of interest expense.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-12 The embedded forward found in the 2021 Promissory Note requiring the Company to issue 3,930 shares of its Common Stock does not represent an embedded derivative. Since the contract itself does not permit/require net settlement, the contract cannot be traded on active markets, and the shares underlying the forward are not readily convertible to cash, a separate instrument with the same terms as the embedded forward would not meet the definition of a derivative. This means that the embedded forward does not meet the condition in ASC 815-15-25-1(c) and does not need to be bifurcated from the 2021 Promissory Note. Upon issuance of the shares underlying the forward, the Company will record the cash proceeds received, Common Stock (at par), and additional paid in capital. SEED Tranche A Convertible Promissory Note On November 4, 2020, the Company entered into a Convertible Promissory Note (“Tranche A Note”) in exchange for $250,000 cash proceeds. The Tranche A Note bears interest at 5% per annum computed on a 356-day year. The stated maturity date of the Tranche A Note is December 31, 2021, though this was subsequently amended on February 28, 2022 to extend the maturity date through April 12, 2023, and again amended on November 13, 2023 to extend the maturity date through June 30, 2024. The Tranche A Note contains a variety of variable share settlement provisions, as indicated below: Elective Conversion. In the event that the Company issues and sells shares of its equity securities to investors (a “Subsequent Financing"), then the holder of the Tranche A Note shall have the rights and option to convert the outstanding principal amount of the Tranche A Note and any unpaid accrued interest in whole into the equity securities sold in the Subsequent Financing at a conversion price equal to the lowest of the following: (i) the cash price paid per share for equity securities by the investors in the Subsequent Financing; (ii) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Common Stock between the date of the Tranche A Note and the date of such conversion); and (iii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock-based equity award under the Company's stock-based awards (the "Stock Plan"). The issuance of equity securities pursuant to the conversion of this Tranche A Note shall otherwise be upon and subject to the same terms and conditions applicable to equity securities sold in the Subsequent Financing. Automatic Conversion upon a Qualified Financing. In the event that the Company issues and sells shares of its equity securities to investors while the Tranche A Note remains outstanding in an equity financing with total proceeds to the Company of not less than $5,000,000, excluding the conversion of the Tranche A Note or other convertible securities issued for capital raising purposes (a “Qualified Financing”), then the outstanding principal amount of the Tranche A Note and any unpaid accrued interest shall automatically convert in whole without any further action by the holder into equity securities sold in the Qualified Financing at a conversion price equal to the lowest of the following: (i) the cash price paid per share for equity securities by the investors in the Qualified Financing; (ii) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Company’s Common Stock between the date of the Tranche A Note and the date of such conversion); and (iii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock- based equity award under the Company's Stock Plan, in each case granted to any of the current four stockholders of the Company between the date of the Tranche A Note and the date of such conversion (as equitably adjusted as provided in clause (ii) above). The issuance of equity securities pursuant to the conversion of this Tranche A Note shall otherwise be upon and subject to the same terms and conditions applicable to equity securities sold in the Qualified Financing. Change of Control. If the Company consummates a change of control (as further defined below) while the Tranche A Note remains outstanding, the Company shall repay the holder in cash in an amount equal to the outstanding principal amount of this Tranche A Note plus any unpaid accrued interest on the original principal; provided, however, that upon the written election of the holder made not less than five days prior to such change of control, the Company shall
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-13 convert the outstanding principal balance of this Tranche A Note and any unpaid accrued interest into shares of Common Stock at a conversion price equal to the lower of the following: (i) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Common Stock between the date hereof and the date of such conversion); and (ii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock-based equity award under the Company's Stock Plan, in each case granted to any of the current four stockholders of the Company between the date hereof and the date of such conversion (as equitably adjusted as provided in clause (i) above). For purposes of the Tranche A Note, a change of control means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company's voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company's assets, or the exclusive license of all or substantially all of the Company's material intellectual property; provided that a change of control shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor, indebtedness of the Company is cancelled or converted or a combination thereof. Neither party has the ability to redeem the Tranche A Note prior to the stated maturity date and there are no other provisions requiring accounting analysis. The Tranche A Note is considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). ). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Tranche A Note and will instead measure each Tranche A Note, as a whole, at fair value, with changes in fair value reported in earnings. The Company will present all changes in fair value of the Tranche A Note as a component of interest expense. For the years ended December 31, 2023 and 2022, the Company recorded approximately $13,000 and $13,000 respectively, of accrued interest related to the Tranche A Note. For the years ended December 31, 2023 and 2022, the Company recorded income (expense) approximately of ($2,741,000) and ($278,000), respectively, as a change in the fair value of debt in the statement of operations. SEED Convertible Promissory Notes On March 25, 2021, April 12, 2021, and April 5, 2022, the Company entered into three separate Convertible Promissory Notes (the “Seed Notes”) in exchange for $650,000 total cash proceeds. The Seed Notes bear interest at 8% per annum computed on a 365-day year. The stated maturity date of each Seed Note is two years (24 months) after the Issuance Date. The maturity date of the April 5, 2022 Seed Note has been extended to December 31, 2024. The maturity dates of the March 25, 2021 and April 12, 2021 Seed Notes have been extended to June 30, 2024. At the time of issuance of these financials, the Company is in process of further extending the maturity dates for the March 25, 2021 and April 12, 2021 Seed Notes. The Seed Notes are considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Seed Note and will instead measure each Seed Note, as a whole, at fair value, with changes in fair value reported in earnings. The Seed Notes are convertible at the option of the Holder subject to the following conditions which are identical across the three Seed Notes: Conversion upon a Qualified Financing. In the event that the Company issues and sells shares of its equity securities to investors while the Seed Notes remain outstanding in an equity financing with total proceeds to the Company of not less than $5,000,000 (excluding the conversion of the Seed Notes or other convertible securities issued for capital raising purposes (a “Seed Note Qualified Financing”), then the outstanding principal amount of the Seed Notes and any unpaid accrued interest shall automatically convert in whole without any further action by the holders into equity securities sold in the Seed Note Qualified Financing at a conversion price equal to the lesser of (i) the cash price paid
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-14 per share for equity securities by the investors in the Seed Notes Qualified Financing multiplied by 0.80, and (ii) the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock of the Company immediately prior to the Seed Note Qualified Financing (assuming conversion of all securities convertible into Common Stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of Seed Notes or other convertible securities issued for capital raising purposes. The issuance of equity securities pursuant to the conversion of the Seed Notes shall be upon and subject to the same terms and conditions applicable to equity securities sold in the Seed Note Qualified Financing. If the conversion price of the Seed Notes is less than the price per share at which equity securities are issued in the Seed Note Qualified Financing, the Company may, solely at its option, elect to convert the Seed Notes into shares of a newly created series of preferred stock having the identical rights, privileges, preferences and restrictions as the equity securities issued in the Seed Note Qualified Financing, and otherwise on the same terms and conditions, other than with respect to: (i) the per share liquidation preference and the conversion price for purposes of price-based anti- dilution protection, which will equal the conversion price; and (ii) the per share dividend, which will be the same percentage of the conversion price as applied to determine the per share dividends of the investors in the Seed Note Qualified Financing relative to the purchase price paid by the investors. Optional Conversion at non-Qualified Financing. In the event the Company consummates, while this Seed Notes remain outstanding, an equity financing pursuant to which the Company sells shares of preferred stock in a transaction that does not constitute a Seed Note Qualified Financing, then the Seed Note holders shall have the option to treat such equity financing as a Seed Note Qualified Financing on the same terms set forth herein. Maturity Date Conversion. In the event that the Seed Notes remain outstanding on the maturity sate, then the outstanding principal balance of the Seed Notes and any unpaid accrued interest shall automatically without any further action by the holders convert as of the maturity date into shares of Common Stock at a conversion price equal to the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock as of the maturity date assuming conversion of all securities convertible into Common Stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of the Seed Notes or other convertible securities issued for capital raising purposes. Change of Control. If the Company consummates a change of control (as further defined below) while the Seed Notes remain outstanding, the Company shall repay the holders in cash in an amount equal to the outstanding principal amount of the Seed Notes plus any unpaid accrued interest on the original principal; provided, however, that upon the written election of the holders made not less than five days prior to the change of control, the Company shall convert the outstanding principal balance of the Seed Notes and any unpaid accrued interest into shares of Common Stock at a conversion price equal to the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock of the Company immediately prior to the change of control. For purposes of the Seed Notes, a change of control means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially all of the Company’s material intellectual property. The Seed Notes contain as side letter that contains participation and put rights. Aside from the conditions noted in the side letter, neither party has the ability to redeem the loan prior to the stated maturity date and there are no other provisions requiring accounting analysis. For the year ended December 31, 2023 and 2022 the Company recorded approximately $52,000 and $46,000 of accrued interest. For the year ended December 31, 2023 and 2022 the Company recorded income (expense) related
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-15 to the Seed Notes of approximately of ($324,000) and ($98,000), respectively as a change in the fair value of debt in the Statement of Operations. Senior Secured Convertible Promissory Notes On December 22, 2021, and December 23, 2021, the Company entered into two separate Senior Secured Convertible Promissory Notes (the “Senior Notes”) in exchange for up to a combined $4M total cash proceeds. The stated maturity date for each Senior Note is March 22, 2023, and March 23, 2023, respectively. Per an amendment dated March 22, 2023, the Company elected to extend the maturity date for an additional six months for both Senior Notes. The Company subsequently extended the maturity date for both Senior Notes to June 30, 2024. At the time of issuance of these financials, the Company is working on an updated extension to these Senior Notes. The Senior Notes are considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Senior Note and will instead measure each Senior Note, as a whole, at fair value, with changes in fair value reported in earnings. The Senior Notes contain an option to extend the maturity date by an additional six months for an extension premium of 110% which is exercisable by the issuer. The Senior Notes bear interest at 12% per annum computed on a 360-day year and contain the following conversion and redemption features: At any time after the issuance sate of the Senior Notes, the Senior Notes shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock issuable upon conversion of any conversion amount, including all accrued and unpaid interest with respect to such portion of the principal amount, divided by the conversion amount. The conversion amount attributable to the first disbursement conversion price (initially $10.47). If a subsequent disbursement is made in a six month period following the issuance date, initially 110% of the first disbursement conversion price, or if a subsequent disbursement is made after the six month period following the issuance date but prior to the date that is one year from the issuance date, initially 125% of the first disbursement conversion price. From and after a date upon which the Company becomes a publicly traded entity (as defined in the Senior Note), the Company shall not implement the conversion of any portion of the Senior Notes, and the holders shall not have the right to convert any portion of the Senior Notes. The Company issued the Senior Notes together with detachable warrants (the “Warrants”) to purchase shares of the Company’s Common Stock pursuant to a warrant purchase agreement. The Warrants were issued after each scheduled disbursement. The Company believes that the Warrants issued in connection with the Senior Notes are liability- classified under ASC 480-10-25-8, because the Company could be required to repurchase the Warrants under the terms thereof for reasons outside the control of the Company, including in the event of default (as defined in the Warrants). Even if the Warrants were not liability-classified under ASC 480, they would be classified as liabilities under ASC 815 because the Warrants meet the definition of a derivative under ASC 815-10-15-8. Because the Warrants are liability-classified, they will be initially and subsequently measured at fair value until settlement or expiry, with changes in fair value reported in the Statement of Income. The Company will also be measuring the related Senior Notes issued in conjunction with the Warrants at fair value. To the extent that the proceeds received from investors are less than the combined fair values of the Senior Notes and Warrants, the difference will be reported as an immediately loss in the statement of operations. For the years ended December 31, 2023 and 2022 the Company recorded income (expense) approximately of $251,000 and ($108,000) as a change in the fair value of warrant in the Statement of Operations. Finally, in connection with the issuance of the Senior Notes, the Company also entered into a Registration Rights Agreement (the “RRA”) that outlines the actions the Company will take to register the securities underlying the Senior Notes and Warrants with the U.S, Securities and Exchange Commission. If the Company does not comply with the registration requirements under the RRA, the holders are entitled to receive payments if the Company is unable to
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-16 comply with the promises in the RRA. The Company shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such holder pursuant to the purchase agreement for the Senior Notes. The Company analyzed ASC 825-20-25-1 for the accounting treatment for registration agreements related to financing arrangements. The Company determined the existence of the registration payment arrangement does not affect the accounting for the Senior Notes and the registration payment arrangement should not be recognized at this time under ASC Subtopic 450-20. ASC 450-20-25-1, requires contingent obligations to be recorded when a loss is probable of occurrence and reasonably estimable. As of December 31, 2023, it is not probable that the Company will be subject to penalties related to the RRA. The Company will reassess this conclusion each reporting period. For the year ended December 31, 2023 and 2022 the Company recorded approximately $480,000 and $307,000 of accrued interest related to the SSCPN. For the year ended December 31, 2023 and 2022 the Company recorded income (expense) approximately of $2,578,000 and $327,000 as a change in the fair value of debt in the Statement of Operations. At origination the Company incurred $45,000 of dept issuance cost related to these SSCPN, during the years ended December 31, 2023 and 2022 the company amortized $22,000 and $22,500 of these costs. Bridge Notes During the year ended December 31, 2023, the Company entered into a series of Promissory Notes (“Bridge Notes”) in exchange for notional proceeds totaling $1,448,899. The terms and conditions of each Bridge Note are identical except for the proceeds invested by each investor and the maturity date of each Bridge Note. The stated maturity date for these Bridge Notes is twelve months from the date of issuance. At the time of issuance of these financials, the Company is working on an updated extensions to these Bridge Notes. Each of the Bridge Notes was issued at an original issue discount with principal and accrued interest due and payable on the earlier of one year from issuance date, or the date of the closing of an initial public offering of the Company (“IPO”). The Company also has the option to repay the loan before the stated maturity date without penalty. The securities purchase agreement pursuant to which the Bridge Notes were sold requires that, in addition to repayment of principal and interest, shares of the Company’s Common Stock be issued to the holder according to the following conditions: 100% of the principal value of the note divided by (A) the Company’s IPO price or (B) if the Company fails to complete an IPO before maturity, the number of shares calculated using a $40 million pre-money valuation for the Company and the number of the Company’s shares outstanding at maturity. Interest shall accrue to the holders on the aggregate then outstanding principal amount of the Bridge Notes at the rate of 10% per annum, calculated on the basis of a 360-day year and shall accrue daily commencing on the original issue date of the Bridge Notes until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. The Bridge Notes are obligations of the Company that could be settled in cash (traditional debt under ASC 470) and a variable number of shares as per ASC 480-10-25-14(a). Under either ASC Topic, pursuant to U.S. GAAP the Bridge Notes would be presented the balance sheet as a liability at amortized cost. The Bridge Notes contain a number of embedded features that should be evaluated for bifurcation. The Company will elect the fair value option to account for each of the Bridge Notes, as permitted by ASC 825-10-15 and ASC 815-15- 25. Based on the Company’s analysis, all three conditions under ASC 815-15-25-1 are met and the embedded share settlement feature would ordinarily require bifurcation as an embedded derivative. Based on the conditions in ASC 825-10-15 and ASC 815-15-25, the Company elected to apply the fair value option for each of the Bridge Notes and will not be required to bifurcate any embedded features. Neither ASC 825 nor ASC 815 prescribes the location in
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-17 which the Company should report fair value changes in the income statement, the Company will elect a policy to present all changes in fair value of the Bridge Notes as a component of interest expense in the Statement of Income. For the year ended December 31, 2023 the Company recorded approximately $21,000 of accrued interest related to these Bridge Notes. At origination during the year ended December 31, 2023 the Company incurred $145,000 of dept issuance cost related to these Bridge Notes, during the year ended December 31, 2023 the company amortized $30,556 of these costs. Demand Notes On June 13, 2023, the Company issued three separate notes (“Demand Notes”) in exchange for gross cash proceeds totaling $150,000, prior to the payment of offering costs. The terms and conditions of each Demand Note are identical. Each Demand Note was issued at a discount and must be repaid upon the earlier of the maturity date or within 5 days of the demand by the holder. The specific terms of the Demand Notes are as follows: In exchange for receipt of Demand Notes, the Company promises to pay the holders, the principal sum of $166,665 together with interest thereon from the date hereof, at 10% per annum, with interest and principal being immediately payable on the earlier of (i) the maturity date and (ii) five days from the date that the Holder demands repayment. The maturity date shall be 90 days from the issuance date of each Demand Note. At maturity on August 12, 2023 two of these three Demand Notes were repaid in full, the one remaining note is outstanding to an employee/founder of the Company – See related party (Note 9) The Demand Notes are obligations of the Company that will be settled in cash and therefore represent traditional debt. Traditional debt is accounted for under ASC 470 and requires presentation on the balance sheet as a liability at amortized cost. The Demand Notes contain an embedded written put right. Specifically, the investors of each Demand Note have the right to demand repayment with five days’ notice. The Demand Notes were evaluated to determine whether the embedded features should be bifurcated, or detached from the note and accounted for separately if it meets the criteria in ASC 815-15-25-1. As neither ASC 825 nor ASC 815 prescribes the location in which the Company should report fair value changes in the income statement, the Company elected a policy to present all changes in fair value of the Demand Notes as a component of interest expense in the Statement of Operations. For the years ended December 31, 2023 the Company recorded approximately $3,000 of accrued interest related to these Demand Notes. Below is a schedule of note balances as of the years ended December 31, 2023 and 2022: Senior Secured Promissory Seed Convertible Notes Tranche A Seed Note Beginning Balance December 31, 2021 -$ 400,000$ 250,000$ 2,000,000$ Change in principal balance - 250,000 - 2,000,000 Beginning Balance December 31, 2022 -$ 650,000$ 250,000$ 4,000,000$ Change in principal balance 1,544,444 - - - Ending Balance December 31, 2023 1,544,444$ 650,000$ 250,000$ 4,000,000$
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-18 NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. For certain instruments, including cash and cash equivalents, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. Fair value is estimated using various valuation models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or liability. The inputs and assumptions used in valuation models are classified in the fair value hierarchy as follows: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Quoted market prices for similar instruments in an active market; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations inputs of which are observable and can be corroborated by market data. Level 3: Unobservable inputs and assumptions that are supported by little or no market activity and that are significant to the fair value of the asset and liability. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining the appropriate hierarchy levels, the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-19 The following table presents the Company’s liabilities that are measured at fair value on a recurring basis by fair value hierarchy at December 31, 2023 and 2022: December 31, 2023 Level 1 Level 2 Level 3 Total Promissory note - - 1,425,939$ 1,425,939$ Seed Tranche A - - 4,122,000 4,122,000 Seed - - 1,073,000 1,073,000 Senior Secured Convertible Note - - 6,523,556 6,523,556 SSCPN Warrant - - 131,000 131,000 Total -$ -$ 13,275,495$ 13,275,495$ December 31, 2022 Level 1 Level 2 Level 3 Total Seed Tranche A -$ -$ 1,381,000$ 1,381,000$ Seed - - 749,000 749,000 Senior Secured Convertible Note - - 4,038,000 4,038,000 SSCPN Warrant - - 382,000 382,000 Total -$ -$ 6,550,000$ 6,550,000$ The following shows the movement of the warrant and note liability balances during the years ended December 31, 2023 and 2022. The following shows the movement of the warrant liability balance during 2021 and the year ended December 31 Senior Secured SSCPN Seed Convertible Warrants Tranche A Seed Note Beginning Balance December 31, 2021 274,000$ 1,103,000$ 401,000$ 1,733,000$ Change in principal balance - - - 2,000,000 Change in Fair value 108,000 278,000 348,000 305,000 Beginning Balance December 31, 2022 382,000$ 1,381,000$ 749,000$ 4,038,000$ Change in Fair value (251,000) 2,741,000 324,000 2,485,556 Ending Balance December 31, 2023 131,000$ 4,122,000$ 1,073,000$ 6,523,556$ Warrants issued to the Senior Note holders (Note 4) were classified as a liability on issuance. NOTE 6 – STOCK BASED COMPENSATION In May 2020, the Company adopted the Decoy Equity Incentive Plan (the “Plan”), pursuant to which the Company may grant incentive stock options (“ISOs”), non-qualified stock options, restricted stock, and stock grants to purchase up to 1,800,000 shares of Common Stock. In December 2023, the Company amended the Plan to increase the number of shares available under the Plan to 2,250,000 shares of Common Stock. Under the Plan, ISOs may not be granted with an exercise price less than fair value of the Company’s Common Stock on the date of the grant, and all options generally vest over a four-year period. These options expire ten years after the grant date. Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the Plan. Options granted by the Company typically vest over a four year period. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. The options are
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-20 exercisable from the date of grant for a period of ten years. For options granted to date, the exercise price equaled the estimated fair value of the Common Stock as determined by the board of directors on the date of grant. The following table summarizes stock-based activities under the Amended Plan: Options Weighted Average Exercise Price Weighted Average Contractual Terms Outstanding at December 31, 2021 64,500 0.01$ 9.16 Granted 174,600 0.72 Forfeited/Cancelled (1,250) 0.01 Outstanding at December 31, 2022 237,850 0.53$ 9.08 Granted 231,500 3.56 Forfeited/Cancelled - - Outstanding at December 31, 2023 469,350 2.03$ 8.96 Exercisable options at December 31, 2023 209,094 0.50$ 8.05 The intrinsic value of outstanding options at December 31, 2023 was approximately $704,000. Stock options granted during the year ended December 31, 2023, were valued using the Black-Scholes option-pricing model with the following weighted average assumptions: December 31, 2023 December 31, 2022 Expected volatility 97.9% 103.1% Risk-free interest rate 3.9% 3.0% Expected dividend yield 0.0% 0.0% Expected life of options in years 5.5 5.5 Exercise Price 3.56$ 0.72$ Fair value of common stock 2.61$ 0.01$ Estimate fair value of option -$ -$ Stock based compensation expense was $70,486 ($45,767 included in research and development expense and $24,719 included in general and administrative expenses) in the year ended December 31, 2023. Stock based compensation expense was $320 ($203 included in research and development expense and $117 included in general and administrative expenses) in the year ended December 31, 2022. At December 31, 2023, the total unrecognized compensation expense related to non-vested options was approximately $534,000 and is expected to be recognized over the remaining weighted average service period of approximately 1.9 years.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-21 NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are as follows: December 31, December 31, 2023 2022 Prepaid R&D costs $ 95,360 $ 17,001 Prepaid rent 16,023 15,436 Prepaid software subscriptions 49,828 22,267 Prepaid professional fees 20,000 - Prepaid other 13,453 11,160 Total $ 194,664 $ 65,864 NOTE 8 – ACCRUED EXPENSES Accrued expenses are as follows: December 31, December 31, 2023 2022 Payroll $ 72,039 $ 50,143 Professional fees 103,071 - Other expenses 9,914 9,358 Total $ 185,024 $ 59,501 NOTE 9 – RELATED PARTY TRANSACTIONS Due to Officers/Founders: As of December 31, 2023, one officer/founder of the Company had an outstanding Demand Note (See Note 4) in the principal amount of $55,555, plus accrued interest of $2,968. This note accrues interest at 10% and has a maturity date of December 28, 2024. NOTE 10 – LICENSE AGREEMENTS AND GRANTS The Company has received significant grants are from The Bill and Melinda Gates Foundation, Johnson & Johnson through the U.S. government’s Blue Knight Program, the European Union’s IMI.CARE.EU Consortium, the Canadian government’s National Research Council, and GOOGLE’s AI Startup Program. Key Relationships, Licenses and Grants The Company received a foundation grant from the Bill and Melinda Foundation for the development of a nasally inhaled, low cost, peptide conjugate pan-Coronavirus antiviral inhibitor. The initial award in September 6, 2021 provided up to a total of approximately $904,000 and expired on February 28, 2023. The Company initially recorded the proceeds in Deferred income. As work was commenced under the grant the company recognizes income from deferred income.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-22 In 2023 the Company entered into a supplemental grant with the Bill and Melinda Foundation for an additional $4,084,500 for continued work on the nasally inhaled, low cost, peptide conjugate pan-Coronavirus antiviral inhibitor reference above. The Company received payment of $3,500,000 in September 28, 2023, the remaining $584,500 will be received after the completion of certain milestones . The Company recognized income of approximately $235,000 and $739,000 in the years ended December 31, 2023 and 2022, respectively. The Company had approximately $3,408,000 and $144,000 in deferred income balances related to this grant for the years ended December 31, 2023 and 2022, respectably. Johnson and Johnson Quickfire Grants The Company received a grant from the Johnson and Johnson through the U.S. government’s Blue Knight Program (Quickfire Grant) for experiments relating to the pharmacokinetics and tolerability of the aforementioned pan- Coronavirus inhibitor in the Human Airway Epithelium (HAE) model. The initial award to the Company in January 31, 2023 provided for $100,000. The Company initially recorded the proceeds in deferred income. As work was commenced under the grant the company recognizes income from deferred income. In September 22, 2023 the Company received the first $500,000 of an additional Quickfire grant for $1,000,000 for work to investigate the potential for broader therapeutic use of the aforementioned pan-Coronavirus inhibitor. The Company initially recorded the proceeds in deferred revenue. As work was commenced under the grant the company recognizes income from deferred income. In December 1, 2023 the Company received an the second $500,000 of the Quickfire grant mentioned above. The Company initially recorded the proceeds in deferred income. As work was commenced under the grant the company recognizes income from deferred income. The Company recognized income of approximately $431,000 and $0 in the years ended December 31, 2023 and 2022, respectively. The Company had approximately $669,000 and $0 in deferred income balances related to these grants for the years ended December 31, 2023 and 2022, respectably. NOTE 11 – SHAREHOLDERS’ EQUITY (DEFICIT) As of December 31, 2023, the total authorized capital stock of the Company was 8,000,000 shares, which consisted of 5,000,000 shares of Common Stock, $0.001 par value per share; 1,000,000 shares of Nonvoting Common Stock $0.001 par value per share; 2,000,000 shares of Preferred Stock, $0.001 par value per share. Common stock At December 31, 2023 and 2022, the Company has authorized 5,000,000 shares of Common Stock, par value $0.001 per share, of which, 1,287,930 were issued. General The voting, dividend and liquidation rights of the holders of shares of Common Stock are subject to and qualified by the rights, powers and preferences of the holders of shares of preferred stock. The Common Stock has the following characteristics:
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-23 Voting The holders of shares of Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders and written actions in lieu of meetings. Dividends The holders of shares of Common Stock are entitled to receive dividends, if and when declared by the board of directors. Cash dividends may not be declared or paid to holders of shares of Common Stock until paid on each series of outstanding preferred stock in accordance with their respective terms. As of December 31, 2023, no dividends have been declared or paid since the Company’s inception. Liquidation After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the Common Stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event. Preferred stock At December 31, 2023 and 2022, the Company authorized 2,000,000 shares of $0.001 per share par value preferred stock, of which none have been issued. Nonvoting Common stock At December 31, 2023 and 2022, the Company authorized 1,000,000 shares of $0.001 per share par value Nonvoting Common Stock, of which, none have been issued. General The voting, dividend and liquidation rights of the holders of shares of Nonvoting Common Stock are subject to and qualified by the rights, powers and preferences of the holders of shares of preferred stock. The Nonvoting Common Stock has the following characteristics: Voting The holders of shares of Nonvoting Common Stock are not entitled to vote. Only in special and limited case where mandated by Delaware law, Nonvoting shareholders shall be entitled to one half ( ½) vote for each share of Nonvoting Common Stock. Dividends The holders of shares of Nonvoting Common Stock are entitled to receive dividends on a one for one basis, if and when declared by the board of directors on Common Stock. Cash dividends may not be declared or paid to holders of shares of Nonvoting Common Stock until paid on each series of outstanding preferred stock in accordance with their respective terms. For the years ended December 31, 2023 and 2022, no dividends have been declared or paid since the Company’s inception. Liquidation
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-24 After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the Nonvoting Common Stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event. Warrants As noted in Note 4, Senior Secured Convertible Promissory Notes, the Company issued an additional 88,826 warrant shares during the year ended December 31, 2022. As of December 31, 2023 these warrants have not been exercised and remain outstanding. Warrants Weighted Average Exercise Price Weighted Average Contractual Terms Outstanding at December 31, 2021 143,266 10.47$ 5.50 Granted 88,826 10.47 Forfeited/Cancelled - - Outstanding at December 31, 2022 232,092 10.47$ 4.50 Granted - - Forfeited/Cancelled - - Outstanding at December 31, 2023 232,092 10.47$ 3.50 As of December 31, 2023, outstanding warrants expire in June 19, 2027, and have a fair value of $382,000. NOTE 12 – INCOME TAXES Significant components of the Company’s deferred tax assets and liabilities at December 31, 2023 and December 31, 2022 are as follows: (table in thousands) 2023 2022 Net operating losses 1,116,404$ 729,814$ Accrued Expenses and Other 31,582 13,699 R&D Credit Carryforward 20,004 10,001 R&D Capitalization 710,455 370,551 Nondeductible Interest Expense 433,989 111,199 Other (11,897) (38,694) Total gross deferred tax assets/(liabilities) 2,300,537$ 1,196,570$ Less valuation allowance (2,300,537) (1,196,570) Net deferred tax assets/(liabilities) -$ -$ The income tax benefit for the years ended December 31, 2023 and December 31, 2022 differed from the amounts computed by applying the U.S. federal income tax rate of 21% to loss before tax benefit as a result of nondeductible expenses, tax credits generated, utilization of net operating loss carryforwards, and increases in the Company’s valuation allowance.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-25 (table in thousands) 2023 2022 Federal Statutory Rate (1,958,993)$ (780,285)$ State Income Tax, Net of Federal Benefit (992) (992) Permanent Differences 1,150,417 197,715 Stock Based Compensation 14,802 67 Research and Development (571,473) (350,803) Change in Valuation Allowance 1,366,239 934,298 Effective Tax -$ -$ A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company determined that valuation allowances of $2,300,537 and $1,196,570 at December 31, 2023 and December 31, 2022 were necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. At December 31, 2023 and 2022, the Company had gross U.S. Federal income tax net operating loss ("NOL") carryforward of approximately $2,067,595 and $883,348, respectively that may be used to offset future taxable income. The NOL was generated after 2017 and can be carried forward indefinitely under the Tax Cuts and Jobs Act. The company also had gross $2,052,767 of state net operating losses that will begin to expire in 2038. At December 31, 2023, the Company had approximately $12,662 of federal Research and Development (R&D) tax credit carry- forwards. If not utilized, the federal R&D credits will begin to expire in 2042. The Internal Revenue Code (the "IRC") contains limitations on the use of net operating loss carryforwards after the occurrence of a substantial ownership change as defined by IRC Section 382. The Company has not performed a detailed analysis, however utilization of such net operating loss carryforwards will likely be significantly limited due to the shares issued in the Primary Financing and the Merger. The income tax benefit for the years ended December 31, 2023 and 2022 differed from the amounts computed by applying the US federal income tax rate of 21% primarily because of the increase in the valuation allowance and the tax impact of other permanent items, which resulted in an effective tax rate of zero for both years. The Tax Cuts and Jobs Act of 2017 (TCJA) has modified the IRC 174 expenses related to research and development for the tax years beginning after December 31, 2021. Under the TCJA, the Company must now capitalize the expenditures related to research and development activities and amortize over five years for U.S. activities and 15 years for non-U.S. activities using a mid-year convention. Therefore, the capitalization of research and development costs in accordance with IRC 174 resulted in a gross deferred tax asset of $3,206,283. NOTE 13 - CONTINGENCIES From time to time, the Company may become involved in various legal matters arising in the ordinary course of business. Management is unaware of any matters requiring accrual for related losses in the financial statements. NOTE 14 - SUBSEQUENT EVENTS Management has evaluated subsequent events through November 26, 2024, which is the date the financial statements were available to be issued. Other than disclosed below, there were no subsequent events that require adjustment or disclosure in the consolidated financial statements.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements December 31, 2023 and 2022 F-26 Between May 2024 and September 2024, the Company issued $655,555 of notional principal of promissory notes with an original issue discount of 10%, an annual interest rate of 10%, and a maturity date of 180-days from issuance to a series of investors. In connection with the issuance of these notes, the Company issued to the holders of the notes an aggregate of 89,000 warrants to purchase shares of the Company’s Common Stock at a price of $16.00 per share, with a term of 5 years from the date of issue. Additionally, as compensation for investment banking services the company issued 45,542 warrants to purchase shares of the Company’s Common Stock to Sutter Securities and related parties at a range of prices with a weighted average purchase price of $11.61. On October 30, 2024, the Company issued convertible notes with principal amount of $250,000, with a Company option to call an additional $250,000 under equivalent terms. These notes will convert into shares of the Company’s Common Stock at a price of $5.23 per share in a manner substantially similar to the conversion rights under the Senior Secured Convertible Notes described above, have an annual interest rate of 10%, and a maturity date 180 days from the date of issuance. During the second half of 2024, founders of the Company loaned the Company approximately $100,000 through non- interest bearing, open-ended maturity notes.
Consolidated Financial Statements Nine months ended September 30, 2024 and 2023
F-2 DECOY THERAPEUTICS, INC. Contents Page Consolidated Financial Statements Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023 F-3 Consolidated Statements of Operations for the nine months ended September 30, 2024 and 2023 F-4 Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2024 and 2023 F-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023 F-6 Notes to consolidated financial statements F-7 – F-25
DECOY THERAPEUTICS, INC. F-3 Consolidated Balance Sheets September 30, December 31, 2024 2023 (Unaudited) ASSETS Current assets: Cash and cash equivalents 3,198,684$ 4,156,433$ Prepaid expenses and other current assets 182,171 194,664 Total current assets 3,380,855 4,351,097 Fixed assets, net of depreciation 71,239 105,450 Other assets - long term 40,000 41,000 Total assets 3,492,094$ 4,497,547$ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 837,234$ 400,495$ Accrued expenses 307,890 185,024 Accrued interest and financing expense 2,377,217 1,541,863 Deferred income - grants 3,192,636 4,077,453 Shareholder note 117,873 - Promissory note 2,150,568 1,425,939 Convertible note - seed tranche A 4,382,000 4,122,000 Convertible note - seed 1,093,000 1,073,000 Convertible note - senior 6,746,562 6,523,556 Total current liabilities 21,204,980 19,349,330 Warrants 305,465 131,000 Total liabilities 21,510,445$ 19,480,330$ Commitments and contingencies - - Shareholders' equity: - 1,288 1,288 Additional paid in capital 292,772 74,512 Accumulated deficit (18,312,411) (15,058,583) Total shareholders' equity (deficit) (18,018,351)$ (14,982,783)$ Total liabilities and shareholders' equity 3,492,094$ 4,497,547$ Preferred stock; par value $0.001 par value – 2,000,000 shares authorized -0- shares issued and outstanding at September 30, 2024 and December 31, 2023. Common stock; par value $.001 per share; 6,000,000 shares authorized (includes 1,000,000 non-voting shares) at September 30, 2024 and December 31, 2023; 1,287,930 shares issued and outstanding at September 30, 2024 and December 31, 2023. The accompanying footnotes are an integral part of these consolidated financial statements
DECOY THERAPEUTICS, INC. F-4 Consolidated Statements of Operations (Unaudited) 2024 2023 Operating expenses General and administrative 872,415$ 710,971$ Research and development 1,925,148 1,662,456 Total operating expenses 2,797,563$ 2,373,427$ Other (income) and expenses Grant income (1,134,817)$ (307,997)$ Fair value adjustment to convertible notes payable 406,000 2,604,000 Warrant liability (income) expense 174,465 - Financing expense 97,007 28,993 Unrealized loss (gain) 517 - Interest expense 913,093 1,231,402 Total other (income) expense 456,265 3,556,399 Net loss (3,253,828)$ (5,929,826)$ Net loss attributable to shareholders - per share Basic (2.53)$ (4.60)$ Fully-diluted (2.53)$ (4.60)$ Weighted average number of common shares Basic 1,287,930 1,287,930 Fully-diluted 1,287,930 1,287,930 Nine months ended September 30, The accompanying footnotes are an integral part of these consolidated financial statements
DECOY THERAPEUTICS, INC. F-5 Consolidated Statements of Shareholders’ Equity (Unaudited) Nine months ended September 30, 2023 Shares Amount Shares Amount Additional Paid in Accumulated Deficit Total Balance at December 31, 2022 - -$ 1,287,930 1,288$ 4,026$ (5,730,044)$ (5,724,730)$ Stock based compensation - - - - 448 - 448 Net loss - - - - - (5,929,826) (5,929,826) Balance at September 30, 2023 - -$ 1,287,930 1,288$ 4,474$ (11,659,870)$ (11,654,108)$ Preferred Shares Common Shares Nine months ended September 30, 2024 Shares Amount Shares Amount Additional Paid in Accumulated Deficit Total Balance at December 31, 2023 - -$ 1,287,930 1,288$ 74,512$ (15,058,583)$ (14,982,783)$ Stock based compensation - - - - 218,260 - 218,260 Net loss - - - - - (3,253,828) (3,253,828) Balance at September 30, 2024 - -$ 1,287,930 1,288$ 292,772$ (18,312,411)$ (18,018,351)$ Preferred Shares Common Shares The accompanying footnotes are an integral part of these consolidated financial statements
DECOY THERAPEUTICS, INC. F-6 Consolidated Statements of Cash Flows (Unaudited) 2024 2023 Cash flow s (used in) provided by operating activities: Net loss (3,253,828)$ (5,929,825)$ Depreciation and amorization 131,217 61,637 Fair value adjustment to convertible notes payable 406,000 2,604,000 Change in fair value of w arrant liability 174,465 - Stock based compensation 218,260 448 Non-cash interest expense related to notes 1,010,100 1,260,455 Changes in assets and liabilities: Increase in prepaid expenses & other assets 13,493 (21,611) Increase in accounts payable and accrued expenses 571,806 (41,678) Increase (decrease) in deferred revenue - grants (884,817) 3,792,002 Net cash (used in) provided by operating activities (1,613,304)$ 1,725,428$ Cash f low s provided by (used in) investing activities: Purchase of property, plant and equiptment -$ (4,473)$ Net cash provided by (used in) investing activities -$ (4,473)$ Cash f low s provided by f inancing activities: Proceeds from notes, (net) 537,682$ 666,324$ Increase in due to off icers 117,873 - Net cash provided by f inancing activities 655,555$ 666,324$ Net change in cash and cash equivalents: (957,749) 2,387,278 Cash and cash equivalents - beginning of year 4,156,433 1,624,242 Cash and cash equivalents - end of year 3,198,684$ 4,011,520$ Supplemental cash f low disclousres: Income taxes paid 6,400$ 220$ Nine months ended September 30, The accompanying footnotes are an integral part of these consolidated financial statements
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-7 NOTE 1 – ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION Decoy Therapeutics, Inc. (the “Company”) is a development stage biopharmaceutical company with a mission to revolutionize the design, development, and commercialization of peptide-conjugate therapeutics. The Company believes that its evolving, proprietary Immediate Peptide/PPMO/PNA Alpha-helical Conjugate Technology (IMP3ACT) platform represents a fundamental revolution in peptide-conjugate drug discovery by substantially accelerating the time to design and validate new lead quality drug candidates from years to months or even weeks. The Company’s IMP3ACT platform tames the complexity of the peptide-conjugate modality by using machine learning (ML) and artificial intelligence (AI), coupled with world-leading high-speed synthesis of peptide-conjugates and a strong understanding of target biology, to rapidly interrogate and reengineer naturally existing peptides that bind to disease mediating targets. The Company employs a multi-parameter approach to design and optimization, simultaneously focusing on a broad set of characteristics that will be important through the development and commercialization of the drug, such as chemical affinity, agonist/antagonist activity, enzymatic resistance for enhanced pharmacokinetics, formulation, and manufacturing. The Company believes its approach will significantly decrease timelines, risk, and expense downstream in the therapeutic development process, and can still be executed quickly by the IMP3ACT platform during the design and lead optimization phase. The Company plans to deploy the IMP3ACT platform in two major target areas: (a) antiviral fusion inhibitors and (b) G-Protein Coupled Receptors (GPCRs). In both target areas there is strong evidence that single peptide-conjugates can be designed to affect multiple disease states, creating the potential for multi-indication therapeutics with broad activity from a single drug. The Company believes both target areas also offer substantial commercial opportunities to address significant unmet medical needs. The Company was incorporated in Delaware on April 17, 2020 and has a principal place of business in Cambridge, Massachusetts. The Company has a wholly-owned Canadian subsidiary, Decoy Drug Discovery Canada, which was incorporated on July 8, 2021. The Company’s Canadian subsidiary’s primary activities have been related to sponsored research activities at the University of Toronto and The University of Waterloo. The Company is devoting substantially all of its efforts to product research and development, initial market development, and raising capital. The Company has not generated any product revenue related to its primary business purpose to date and is subject to a number of risks similar to those of other early stage life science companies, including dependence on key individuals, competition from other companies, the need for development of commercially viable products, and the need to obtain adequate additional financing to fund the development of its product candidates. The Company is also subject to a number of risks similar to other companies in the industry, including rapid technological change, regulatory approval of products, uncertainty of market acceptance of products, competition from substitute products and larger companies, the need to obtain additional financing, compliance with government regulations, protection of proprietary technology, dependence on third parties, product liability, and dependence on key individuals. Going Concern Evaluation: As of September 30, 2024, the Company’s primary source of liquidity is its cash and cash equivalent balances. Until the Company is successful in gaining regulatory approvals, it is unable to sell the Company’s product in any market. Without revenues, the Company is reliant on funding obtained from investment in the Company to maintain business operations until the Company can generate positive cash flows from operations. The Company cannot predict the extent of future operating losses and accumulated deficit, and it may never generate sufficient revenues to achieve or sustain profitability.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-8 The Company has generated an accumulated deficit of $18.3 million since its inception and will require substantial additional capital to fund its research and development and ongoing operating expenses. It is subject to risks common to companies in the biotechnology industry, including, but not limited to, development by the Company or its competitors of technological innovations, risks of failure of clinical studies, dependence on key personnel, protection of proprietary technology and compliance with government regulations. If access to capital is not achieved in the near term, it will materially harm the Company’s business, financial condition and results of operations to the extent that the Company may be required to cease operations altogether, file for bankruptcy, or undertake any combination of the foregoing. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these consolidated financial statements are issued. NOTE 2 - LIQUIDITY RISKS AND OTHER UNCERTAINTIES The unaudited consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”). The Company has incurred net losses every year since inception and has an accumulated deficit of approximately $18.3 million at September 30, 2024. The Company has historically funded its operations through debt and equity financings. At September 30, 2024, the Company had cash balances totaling $3.2 million. The Company will need to arrange additional financing in order to continue to pursue its current business objectives as planned and to continue to fund its operations. The Company is looking to raise additional funds through any combination of additional equity and debt financings or from other sources, however, the Company has no guaranteed source of capital that will sustain operations for a period of one year from the date these financial statements are available to be issued. There can be no assurance that any such potential financing opportunities will be available on acceptable terms, if at all. Other risks and uncertainties: The Company is subject to risks common to development stage biopharmaceutical companies including, but not limited to, new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, pre-clinical and clinical trial outcome risks, regulatory approval risks, uncertainty of market acceptance and additional financing requirements. The Company’s products require approval or clearance from the FDA prior to commencing commercial sales in the United States. There can be no assurance that the Company’s products will receive all of the required approvals or clearances. Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products. There can be no assurance that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the unaudited consolidated financial statements of the Company as of September 30, 2024 and for the nine months then ended. The
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-9 results of operations for the nine months ended September 30, 2024 are not necessarily indicative of the operating results for the year or any other period. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related disclosures as of December 31, 2023 and for the year then ended. Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Decoy Therapeutics, Inc. and its wholly owned subsidiary. All intercompany transactions and balances are eliminated in consolidation. The functional currency of Decoy Drug Discovery Canada, Inc., a wholly-owned subsidiary of the Company, is the U.S. dollar. Consolidated balance sheet accounts of the Company’s subsidiary are remeasured into U.S. dollars using the exchange rate in effect at the consolidated balance sheet date while expenses are remeasured using the average exchange rate in effect during the period. Gains and losses arising from remeasurement of the wholly owned subsidiary’s financial statements are included in the determination of net loss. Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Changes in estimates are reflected in reported results in the period in which they become known. Cash and cash equivalents: The Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. From time to time during the periods presented, the Company has had bank account balances in excess of federally insured limits where substantially all cash is held in the United States. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Fair value of financial instruments: The Company considers its cash and cash equivalents, accounts payable, accrued expenses to meet the definition of financial instruments. The carrying amounts of these financial instruments approximated their fair values due to the short maturities. The Company measures fair value as required by ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”). ASC Topic 820 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. ASC Topic 820 clarifies that fair value is 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 (see Note 5). Property and equipment: Property and equipment are recorded at cost and are depreciated when placed in service using the straight-line method based on their estimated useful lives as follows:
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-10 Estimated Useful Life Laboratory equipment 5 years Computer equipment and software 3 years Office furniture and equipment 5 years For the nine months ended September 30, 2024 and 2023, the Company's had property and equipment depreciation expense of approximately $34,000 and $33,000, respectfully. Impairment of long-lived assets: The Company reviews long-lived assets when events or changes in circumstances indicate the carrying value of the assets may not be recoverable. Recoverability is measured by comparison of the book values of the assets to future net undiscounted cash flows that the assets are expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the assets exceed their fair value, which is measured based on the projected discounted future net cash flows arising from the assets. No impairment losses have been recorded during the nine months ended September 30, 2024 and 2023. Warrants: The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net- share settlement), provided that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that (a) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (b) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between assets, liabilities and equity is required. The Company evaluated its issued and outstanding warrants to assess their proper classification using the applicable criteria enumerated under U.S. GAAP and determined that such warrants meet the criteria for liability classification in the accompanying consolidated balance sheets as of September 30, 2024 and December 31, 2023, respectively. Grant income: The Company has received grants from two funding sources, including a private not-for-profit organization and a federal agency. Grant income consists of income earned from grants to conduct development research. Funds received in advance of services being performed are recorded as deferred income. Income under the not-for-profit and federal agency grants is recognized as labor and material costs are incurred. Labor costs are recognized based on actual salary costs incurred related to the projects, and material costs are recognized based on actual expenditures. As of September 30, 2024 and 2023, the Company has recognized an approximate total of $2.6 million and $1.1 million of income related to these grants, and has received a total of $5.8 million and $5.0 million in cash receipts. Research and development: Research and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and development activities, including third-party contractors to perform research, conduct clinical trials and manufacture drug supplies and materials. The Company accrues costs incurred by external service providers, based on its estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, administrative costs incurred by third parties, and other indicators of the services
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-11 completed. Based on the timing of amounts invoiced by service providers, the Company may also record payments made to those providers as prepaid expenses that will be recognized as expenses in future periods as the related services are rendered. Key Relationships & Licenses: In June 2020, the Company entered into a one-year, non-exclusive licensing agreement with the Massachusetts Institute of Technology (“MIT”) related to developing potential treatments for Covid-19 using a variety available resources, services and technologies from MIT. Additionally, in July 2020, the Company entered into a Sponsored Research Agreement and option agreement with Columbia University to evaluate a molecule to block the transmission of Covid-19, Neither collaboration remains active. The Company has attracted non-dilutive investments from the European Union’s IMI-CARE Consortium, The Bill & Melinda Gates Foundation (“BMGF”), The U.S. Government’s Biological Research and Development Authority (“BARDA”) and Johnson & Johnson through the U.S. Government’s Blue Knight Blue Knight Program. Stock based compensation: The Company recognizes compensation costs resulting from the issuance of stock-based awards to employees, non- employees and directors as an expense in the consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock-based award. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model, net of actual forfeitures. The fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally the vesting period. The Company utilizes the simplified method to estimate the expected term. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. The expected dividend yield was assumed to be zero as the Company has not paid and dividends since its inception and does not anticipate paying dividends in the foreseeable future. Earnings (loss) per share: The Company reports loss per share in accordance with ASC 260-10, Earnings Per Share, which provides for calculation of “basic” and “diluted” earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to shareholders by the weighted average shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to ordinary shares equivalents; however, potential shares are excluded if their effect is anti-dilutive. For the nine months September 30, 2024, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 355,263 shares, 1,042,518 shares from the conversion of outstanding convertible notes and outstanding stock options to purchase 266,950 shares. For the nine months ended September 30, 2023, the number of shares excluded from the diluted net earnings (loss) per share included outstanding warrants to purchase 232,092 shares, 942,263 shares from the conversion of outstanding convertible notes and outstanding stock options to purchase 268,200 shares. The inclusion of these warrants, shares from convertible notes and stock options for both the nine months ended September 30, 2024 and 2023 in the denominator would be anti-dilutive.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-12 NOTE 4 – NOTES Unsecured Promissory Note In October 20, 2021, the Company issued an unsecured promissory note (the “2021 Promissory Note”) in exchange for cash proceeds of $250,000. The term of the 2021 Promissory Note is nine months unless earlier settled upon an automatic payment condition, as further described below. The specific terms and conditions are as follows: 1. Interest: Interest of $25,000 shall accrue on the outstanding principal amount for the first 90 days of the loan and thereafter interest shall accrue on $275,000 at a rate per annum equal to 5% compounded each month thereafter until paid. 2. Automatic Payment: If at any time during the term of the 2021 Promissory Note the Company had issued and sold $650,000 or more in additional capital exclusive of the 2021 Promissory Note and via the sale of the Company’s common stock, $0.001 par value per share (the “Common Stock”) or any securities convertible into Common Stock (such event being an “Automatic Payment Date”), then the Company would be required to pay the holder the entire outstanding principal amount within fifteen days after the closing of the relevant transactions. If the Automatic Payment Date occurred before 90 days from the date of the 2021 Promissory Note, then interest of $25,000 would immediately accrue on the outstanding principal amount on the Automatic Payment Date. No such Automatic Payment Date occurred during the term of the 2021 Promissory Note. 3. Issuance of Company Equity Securities: Within 90 days from the date of the Promissory Note, the Company issued 3,930 shares of Common Stock to the holder at a price of $0.013 (representing current fair market value based on the Company’s most recent 409A valuation at that time) as additional consideration for extending the loan evidenced by the 2021 Promissory Note. On January 5, 2022, the Company repaid the 2021 Promissory Note in full, including the $25,000 interest specified above. The 2021 Promissory Note was considered settled at that time. Accounting Guidance The 2021 Promissory Note is considered an obligation (or liability) of the Company as prescribed by Accounting Standards Codification (“ASC”) 470-10. The Company has elected the fair value option under ASC 825 and ASC 825-10-15-4(a) for the 2021 Promissory Note and will measure the 2021 Promissory Note, as a whole, at fair value, with changes in fair value reported in earnings. As neither ASC 815 nor ASC 825 prescribes the location in which the Company should report fair value changes in the income statement, the Company will elect a policy to present all changes in fair value of the 2021 Promissory Note as a component of interest expense. The embedded forward found in the 2021 Promissory Note requiring the Company to issue 3,930 shares of its Common Stock does not represent an embedded derivative. Since the contract itself does not permit/require net settlement, the contract cannot be traded on active markets, and the shares underlying the forward are not readily convertible to cash, a separate instrument with the same terms as the embedded forward would not meet the definition of a derivative. This means that the embedded forward does not meet the condition in ASC 815-15-25-1(c) and does not need to be bifurcated from the 2021 Promissory Note. Upon issuance of the shares underlying the forward, the Company will record the cash proceeds received, Common Stock (at par), and additional paid in capital.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-13 SEED Tranche A Convertible Promissory Note On November 4, 2020, the Company entered into a Convertible Promissory Note (“Tranche A Note”) in exchange for $250,000 cash proceeds. The Tranche A Note bears interest at 5% per annum computed on a 356-day year. The stated maturity date of the Tranche A Note is December 31, 2021, though this was subsequently amended on February 28, 2022 to extend the maturity date through April 12, 2023, and again amended on November 13, 2023 to extend the maturity date through June 30, 2024. The Tranche A Note contains a variety of variable share settlement provisions, as indicated below: Elective Conversion. In the event that the Company issues and sells shares of its equity securities to investors (a “Subsequent Financing"), then the holder of the Tranche A Note shall have the rights and option to convert the outstanding principal amount of the Tranche A Note and any unpaid accrued interest in whole into the equity securities sold in the Subsequent Financing at a conversion price equal to the lowest of the following: (i) the cash price paid per share for equity securities by the investors in the Subsequent Financing; (ii) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Common Stock between the date of the Tranche A Note and the date of such conversion); and (iii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock-based equity award under the Company's stock-based awards (the "Stock Plan"). The issuance of equity securities pursuant to the conversion of this Tranche A Note shall otherwise be upon and subject to the same terms and conditions applicable to equity securities sold in the Subsequent Financing. Automatic Conversion upon a Qualified Financing. In the event that the Company issues and sells shares of its equity securities to investors while the Tranche A Note remains outstanding in an equity financing with total proceeds to the Company of not less than $5,000,000, excluding the conversion of the Tranche A Note or other convertible securities issued for capital raising purposes (a “Qualified Financing”), then the outstanding principal amount of the Tranche A Note and any unpaid accrued interest shall automatically convert in whole without any further action by the holder into equity securities sold in the Qualified Financing at a conversion price equal to the lowest of the following: (i) the cash price paid per share for equity securities by the investors in the Qualified Financing; (ii) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Company’s Common Stock between the date of the Tranche A Note and the date of such conversion); and (iii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock- based equity award under the Company's Stock Plan, in each case granted to any of the current four stockholders of the Company between the date of the Tranche A Note and the date of such conversion (as equitably adjusted as provided in clause (ii) above). The issuance of equity securities pursuant to the conversion of this Tranche A Note shall otherwise be upon and subject to the same terms and conditions applicable to equity securities sold in the Qualified Financing. Change of Control. If the Company consummates a change of control (as further defined below) while the Tranche A Note remains outstanding, the Company shall repay the holder in cash in an amount equal to the outstanding principal amount of this Tranche A Note plus any unpaid accrued interest on the original principal; provided, however, that upon the written election of the holder made not less than five days prior to such change of control, the Company shall convert the outstanding principal balance of this Tranche A Note and any unpaid accrued interest into shares of Common Stock at a conversion price equal to the lower of the following: (i) $0.8333334 per share (equitably adjusted to account for stock splits, stock dividends and similar events with respect to the Common Stock between the date hereof and the date of such conversion); and (ii) the lowest exercise or conversion price per share of Common Stock underlying any stock option, stock appreciation right, or other stock-based equity award under the Company's Stock Plan, in each case granted to any of the current four stockholders of the Company between the date hereof and the date of such conversion (as equitably adjusted as provided in clause (i) above). For purposes of the Tranche A Note, a change of control means (i) a consolidation or merger of the Company with or into any other corporation or other
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-14 entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company's voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company's assets, or the exclusive license of all or substantially all of the Company's material intellectual property; provided that a change of control shall not include any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor, indebtedness of the Company is cancelled or converted or a combination thereof. Neither party has the ability to redeem the Tranche A Note prior to the stated maturity date and there are no other provisions requiring accounting analysis. The Tranche A Note is considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). ). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Tranche A Note and will instead measure each Tranche A Note, as a whole, at fair value, with changes in fair value reported in earnings. The Company will present all changes in fair value of the Tranche A Note as a component of interest expense. For the nine months ended September 30, 2024 and 2023, the Company recorded approximately $9,300 and $9,300 respectively, of accrued interest related to the Tranche A Note. For the nine months ended September 30, 2024 and 2023, the Company recorded income (expense) approximately of ($260,000) and ($1,927,000), respectively, as a change in the fair value of debt in the statement of operations. SEED Convertible Promissory Notes On March 25, 2021, April 12, 2021, and April 5, 2022, the Company entered into three separate Convertible Promissory Notes (the “Seed Notes”) in exchange for $650,000 total cash proceeds. The Seed Notes bear interest at 8% per annum computed on a 365-day year. The stated maturity date of each Seed Note is two years (24 months) after the Issuance Date. The maturity date of the April 5, 2022 Seed Note has been extended to December 31, 2024. The maturity dates of the March 25, 2021 and April 12, 2021 Seed Notes have been extended to June 30, 2024. At the time of issuance of these financials, the Company is in process of further extending the maturity dates for the March 25, 2021 and April 12, 2021 Seed Notes. The Seed Notes are considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Seed Note and will instead measure each Seed Note, as a whole, at fair value, with changes in fair value reported in earnings. The Seed Notes are convertible at the option of the Holder subject to the following conditions which are identical across the three Seed Notes: Conversion upon a Qualified Financing. In the event that the Company issues and sells shares of its equity securities to investors while the Seed Notes remain outstanding in an equity financing with total proceeds to the Company of not less than $5,000,000 (excluding the conversion of the Seed Notes or other convertible securities issued for capital raising purposes (a “Seed Note Qualified Financing”), then the outstanding principal amount of the Seed Notes and any unpaid accrued interest shall automatically convert in whole without any further action by the holders into equity securities sold in the Seed Note Qualified Financing at a conversion price equal to the lesser of (i) the cash price paid per share for equity securities by the investors in the Seed Notes Qualified Financing multiplied by 0.80, and (ii) the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock of the Company immediately prior to the Seed Note Qualified Financing (assuming conversion of all securities convertible into Common Stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of Seed Notes or other convertible securities issued for capital raising purposes. The issuance of equity securities pursuant to the conversion of the Seed Notes shall be upon and subject to the same terms and conditions applicable to equity securities sold in the Seed Note Qualified Financing. If the conversion price of the Seed Notes is less than the price per share at which equity securities are issued in the Seed
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-15 Note Qualified Financing, the Company may, solely at its option, elect to convert the Seed Notes into shares of a newly created series of preferred stock having the identical rights, privileges, preferences and restrictions as the equity securities issued in the Seed Note Qualified Financing, and otherwise on the same terms and conditions, other than with respect to: (i) the per share liquidation preference and the conversion price for purposes of price-based anti- dilution protection, which will equal the conversion price; and (ii) the per share dividend, which will be the same percentage of the conversion price as applied to determine the per share dividends of the investors in the Seed Note Qualified Financing relative to the purchase price paid by the investors. Optional Conversion at non-Qualified Financing. In the event the Company consummates, while this Seed Notes remain outstanding, an equity financing pursuant to which the Company sells shares of preferred stock in a transaction that does not constitute a Seed Note Qualified Financing, then the Seed Note holders shall have the option to treat such equity financing as a Seed Note Qualified Financing on the same terms set forth herein. Maturity Date Conversion. In the event that the Seed Notes remain outstanding on the maturity sate, then the outstanding principal balance of the Seed Notes and any unpaid accrued interest shall automatically without any further action by the holders convert as of the maturity date into shares of Common Stock at a conversion price equal to the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock as of the maturity date assuming conversion of all securities convertible into Common Stock and exercise of all outstanding options and warrants, but excluding the shares of equity securities of the Company issuable upon the conversion of the Seed Notes or other convertible securities issued for capital raising purposes. Change of Control. If the Company consummates a change of control (as further defined below) while the Seed Notes remain outstanding, the Company shall repay the holders in cash in an amount equal to the outstanding principal amount of the Seed Notes plus any unpaid accrued interest on the original principal; provided, however, that upon the written election of the holders made not less than five days prior to the change of control, the Company shall convert the outstanding principal balance of the Seed Notes and any unpaid accrued interest into shares of Common Stock at a conversion price equal to the quotient resulting from dividing $20,000,000 by the number of outstanding shares of Common Stock of the Company immediately prior to the change of control. For purposes of the Seed Notes, a change of control means (i) a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, other than any such consolidation, merger or reorganization in which the shares of capital stock of the Company immediately prior to such consolidation, merger or reorganization continue to represent a majority of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; (ii) any transaction or series of related transactions to which the Company is a party in which in excess of 50% of the Company’s voting power is transferred; or (iii) the sale or transfer of all or substantially all of the Company’s assets, or the exclusive license of all or substantially all of the Company’s material intellectual property. The Seed Notes contain as side letter that contains participation and put rights. Aside from the conditions noted in the side letter, neither party has the ability to redeem the loan prior to the stated maturity date and there are no other provisions requiring accounting analysis. For the nine months ended September 30, 2024 and 2023 the Company recorded approximately $39,000 and $39,000 of accrued interest. For the nine months ended September 30, 2024 and 2023 the Company recorded income (expense) related to the Seed Notes of approximately of ($20,000) and ($218,000), respectively as a change in the fair value of debt in the Statement of Operations. Senior Secured Convertible Promissory Notes On December 22, 2021, and December 23, 2021, the Company entered into two separate Senior Secured Convertible Promissory Notes (the “Senior Notes”) in exchange for up to a combined $4M total cash proceeds. The stated maturity date for each Senior Note is March 22, 2023, and March 23, 2023, respectively. Per an amendment dated March 22,
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-16 2023, the Company elected to extend the maturity date for an additional six months for both Senior Notes. The Company subsequently extended the maturity date for both Senior Notes to June 30, 2024. At the time of issuance of these financials, the Company is working on an updated extension to these Senior Notes. The Senior Notes are considered an obligation (or liability) of the Company as prescribed by ASC 470-10 and/or 480-10-25-14(a). The Company has elected the fair value option under ASC 825-10-15-4(a) and paragraphs 4-5 of ASC 815-15-25 for each Senior Note and will instead measure each Senior Note, as a whole, at fair value, with changes in fair value reported in earnings. The Senior Notes contain an option to extend the maturity date by an additional six months for an extension premium of 110% which is exercisable by the issuer. The Senior Notes bear interest at 12% per annum computed on a 360-day year and contain the following conversion and redemption features: At any time after the issuance sate of the Senior Notes, the Senior Notes shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock issuable upon conversion of any conversion amount, including all accrued and unpaid interest with respect to such portion of the principal amount, divided by the conversion amount. The conversion amount attributable to the first disbursement conversion price (initially $10.47). If a subsequent disbursement is made in a six month period following the issuance date, initially 110% of the first disbursement conversion price, or if a subsequent disbursement is made after the six month period following the issuance date but prior to the date that is one year from the issuance date, initially 125% of the first disbursement conversion price. From and after a date upon which the Company becomes a publicly traded entity (as defined in the Senior Note), the Company shall not implement the conversion of any portion of the Senior Notes, and the holders shall not have the right to convert any portion of the Senior Notes. The Company issued the Senior Notes together with detachable warrants (the “Warrants”) to purchase shares of the Company’s Common Stock pursuant to a warrant purchase agreement. The Warrants were issued after each scheduled disbursement. The Company believes that the Warrants issued in connection with the Senior Notes are liability- classified under ASC 480-10-25-8, because the Company could be required to repurchase the Warrants under the terms thereof for reasons outside the control of the Company, including in the event of default (as defined in the Warrants). Even if the Warrants were not liability-classified under ASC 480, they would be classified as liabilities under ASC 815 because the Warrants meet the definition of a derivative under ASC 815-10-15-8. Because the Warrants are liability-classified, they will be initially and subsequently measured at fair value until settlement or expiry, with changes in fair value reported in the Statement of Income. The Company will also be measuring the related Senior Notes issued in conjunction with the Warrants at fair value. To the extent that the proceeds received from investors are less than the combined fair values of the Senior Notes and Warrants, the difference will be reported as an immediately loss in the statement of operations. For the nine months ended September 30, 2024 and 2023 the Company recorded income (expense) approximately of ($174,000) and $0 as a change in the fair value of warrant in the Statement of Operations. Finally, in connection with the issuance of the Senior Notes, the Company also entered into a Registration Rights Agreement (the “RRA”) that outlines the actions the Company will take to register the securities underlying the Senior Notes and Warrants with the U.S, Securities and Exchange Commission. If the Company does not comply with the registration requirements under the RRA, the holders are entitled to receive payments if the Company is unable to comply with the promises in the RRA. The Company shall pay to each holder an amount in cash, as partial liquidated damages and not as a penalty, equal to 1% of the purchase price paid by such holder pursuant to the purchase agreement for the Senior Notes. The Company analyzed ASC 825-20-25-1 for the accounting treatment for registration agreements related to financing arrangements. The Company determined the existence of the registration payment arrangement does not affect the accounting for the Senior Notes and the registration payment arrangement should not be recognized at this time under ASC Subtopic 450-20. ASC 450-20-25-1, requires contingent obligations to be recorded when a loss is probable of occurrence and reasonably estimable. As of December 31, 2023, it is not probable
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-17 that the Company will be subject to penalties related to the RRA. The Company will reassess this conclusion each reporting period. For the nine months ended September 30, 2024 and 2023 the Company recorded approximately $655,000 and $360,000 of accrued interest related to the SSCPN. For the nine months September 30, 2024 and 2023 the Company recorded income (expense) approximately of ($201,000) and ($476,000) as a change in the fair value of debt in the Statement of Operations. At origination the Company incurred $45,000 of dept issuance cost related to these SSCPN, during the nine months ended September 30, 2024 and 2023 the company amortized $0 and $16,875 of these costs. Bridge Notes During the year ended December 31, 2023, the Company entered into a series of Promissory Notes (“Bridge Notes”) in exchange for notional proceeds totaling $1,448,899. The terms and conditions of each Bridge Note are identical except for the proceeds invested by each investor and the maturity date of each Bridge Note. The stated maturity date for these Bridge Notes is twelve months from the date of issuance. At the time of issuance of these financials, the Company is working on an updated extensions to these Bridge Notes. Each of the Bridge Notes was issued at an original issue discount with principal and accrued interest due and payable on the earlier of one year from issuance date, or the date of the closing of an initial public offering of the Company (“IPO”). The Company also has the option to repay the loan before the stated maturity date without penalty. The securities purchase agreement pursuant to which the Bridge Notes were sold requires that, in addition to repayment of principal and interest, shares of the Company’s Common Stock be issued to the holder according to the following conditions: 100% of the principal value of the note divided by (A) the Company’s IPO price or (B) if the Company fails to complete an IPO before maturity, the number of shares calculated using a $40 million pre-money valuation for the Company and the number of the Company’s shares outstanding at maturity. Interest shall accrue to the holders on the aggregate then outstanding principal amount of the Bridge Notes at the rate of 10% per annum, calculated on the basis of a 360-day year and shall accrue daily commencing on the original issue date of the Bridge Notes until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. The Bridge Notes are obligations of the Company that could be settled in cash (traditional debt under ASC 470) and a variable number of shares as per ASC 480-10-25-14(a). Under either ASC Topic, pursuant to U.S. GAAP the Bridge Notes would be presented the balance sheet as a liability at amortized cost. The Bridge Notes contain a number of embedded features that should be evaluated for bifurcation. The Company will elect the fair value option to account for each of the Bridge Notes, as permitted by ASC 825-10-15 and ASC 815-15- 25. Based on the Company’s analysis, all three conditions under ASC 815-15-25-1 are met and the embedded share settlement feature would ordinarily require bifurcation as an embedded derivative. Based on the conditions in ASC 825-10-15 and ASC 815-15-25, the Company elected to apply the fair value option for each of the Bridge Notes and will not be required to bifurcate any embedded features. Neither ASC 825 nor ASC 815 prescribes the location in which the Company should report fair value changes in the income statement, the Company will elect a policy to present all changes in fair value of the Bridge Notes as a component of interest expense in the Statement of Income. For the nine months ended September 30, 2024 and 2023 the Company recorded approximately $112,000 and $11,000 of accrued interest related to these Bridge Notes. At origination during the year ended December 31, 2023 the Company incurred $145,000 of dept issuance cost related to these Bridge Notes, during the nine months ended September 30, 2024 the company amortized approximately $97,000 of these costs.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-18 Demand Notes On June 13, 2023, the Company issued three separate notes (“Demand Notes”) in exchange for gross cash proceeds totaling $150,000, prior to the payment of offering costs. The terms and conditions of each Demand Note are identical. Each Demand Note was issued at a discount and must be repaid upon the earlier of the maturity date or within 5 days of the demand by the holder. The specific terms of the Demand Notes are as follows: In exchange for receipt of Demand Notes, the Company promises to pay the holders, the principal sum of $166,665 together with interest thereon from the date hereof, at 10% per annum, with interest and principal being immediately payable on the earlier of (i) the maturity date and (ii) five days from the date that the Holder demands repayment. The maturity date shall be 90 days from the issuance date of each Demand Note. At maturity on August 12, 2023 two of these three Demand Notes were repaid in full, the one remaining note is outstanding to an employee/founder of the Company – See related party (Note 9) The Demand Notes are obligations of the Company that will be settled in cash and therefore represent traditional debt. Traditional debt is accounted for under ASC 470 and requires presentation on the balance sheet as a liability at amortized cost. The Demand Notes contain an embedded written put right. Specifically, the investors of each Demand Note have the right to demand repayment with five days’ notice. The Demand Notes were evaluated to determine whether the embedded features should be bifurcated, or detached from the note and accounted for separately if it meets the criteria in ASC 815-15-25-1. As neither ASC 825 nor ASC 815 prescribes the location in which the Company should report fair value changes in the income statement, the Company elected a policy to present all changes in fair value of the Demand Notes as a component of interest expense in the Statement of Operations. For the nine months ended September 30, 2024 and 2023 the Company recorded approximately $4,100 and $1,600 of accrued interest related to these Demand Notes. 180 Day Promissory Notes Between May 2024 and September 2024, the Company issued $655,555 of notional principal of promissory notes with an original issue discount of 10%, an annual interest rate of 10%, and a maturity date of 180-days from issuance to a series of investors. In connection with the issuance of these notes, the Company issued to the holders of the notes an aggregate of 89,000 warrants to purchase shares of the Company’s Common Stock at a price of $16.00 per share, with a term of 5 years from the date of issue. Additionally, as compensation for investment banking services the company issued 45,542 warrants to purchase shares of the Company’s Common Stock to Sutter Securities and related parties at a range of prices with a weighted average purchase price of $11.61. For the nine months ended September 30, 2024 the Company recorded approximately $17,000 of accrued interest related to these notes. Below is a schedule of note balances as of the nine months ended September 30, 2024: 180 Day Secured Promissory Promissory Seed Convertible Notes Notes Tranche A Seed Note Beginning Balance December 31, 2023 -$ 1,544,444$ 250,000$ 650,000$ 4,000,000$ Change in principal balance 655,555 - - - - Ending Balance September 30, 2024 655,555$ 1,544,444$ 250,000$ 650,000$ 4,000,000$
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-19 NOTE 5 - FAIR VALUE OF FINANCIAL INSTRUMENTS The Company applies fair value accounting for all assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk. For certain instruments, including cash and cash equivalents, accounts payable, and accrued expenses, it was estimated that the carrying amount approximated fair value because of the short maturities of these instruments. Fair value is estimated using various valuation models, which utilize certain inputs and assumptions that market participants would use in pricing the asset or liability. The inputs and assumptions used in valuation models are classified in the fair value hierarchy as follows: Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level 2: Quoted market prices for similar instruments in an active market; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations inputs of which are observable and can be corroborated by market data. Level 3: Unobservable inputs and assumptions that are supported by little or no market activity and that are significant to the fair value of the asset and liability. The fair value hierarchy gives the lowest priority to Level 3 inputs. In determining the appropriate hierarchy levels, the Company analyzes the assets and liabilities that are subject to fair value disclosure. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-20 The following table presents the Company’s liabilities that are measured at fair value on a recurring basis by fair value hierarchy at September 30, 2024 and December 31, 2023: September 30, 2024 Level 1 Level 2 Level 3 Total Promissory note - - 2,150,568$ 2,150,568$ Seed Tranche A - - 4,382,000 4,382,000 Seed - - 1,093,000 1,093,000 Senior Secured Convertible Note - - 6,746,562 6,746,562 SSCPN Warrant - - 305,465 305,465 Total -$ -$ 14,677,595$ 14,677,595$ December 31, 2023 Level 1 Level 2 Level 3 Total Promissory note - - 1,425,939$ 1,425,939$ Seed Tranche A - - 4,122,000 4,122,000 Seed - - 1,073,000 1,073,000 Senior Secured Convertible Note - - 6,523,556 6,523,556 SSCPN Warrant - - 131,000 131,000 Total -$ -$ 13,275,495$ 13,275,495$ The following shows the movement of the warrant and note liability balances during the year ended December 31, 2023 and the nine months ended September 30, 2024: Senior Secured SSCPN Seed Convertible Warrants Tranche A Seed Note Beginning Balance December 31, 2023 131,000$ 4,122,000$ 1,073,000$ 6,523,556$ Change in principal balance - - - - Change in Fair value 174,465 260,000 20,000 223,006 Ending Balance September 30, 2024 305,465$ 4,382,000$ 1,093,000$ 6,746,562$ Warrants issued to the Senior Note holders (Note 4) were classified as a liability on issuance. NOTE 6 – STOCK BASED COMPENSATION In May 2020, the Company adopted the Decoy Equity Incentive Plan (the “Plan”), pursuant to which the Company may grant incentive stock options (“ISOs”), non-qualified stock options, restricted stock, and stock grants to purchase up to 1,800,000 shares of Common Stock. In December 2023, the Company amended the Plan to increase the number of shares available under the Plan to 2,250,000 shares of Common Stock. Under the Plan, ISOs may not be granted with an exercise price less than fair value of the Company’s Common Stock on the date of the grant, and all options generally vest over a four-year period. These options expire ten years after the grant date. Terms of stock award agreements, including vesting requirements, are determined by the board of directors, subject to the provisions of the Plan. Options granted by the Company typically vest over a four year period. Certain of the options are subject to acceleration of vesting in the event of certain change of control transactions. The options are exercisable from the date of grant for a period of ten years. For options granted to date, the exercise price equaled the estimated fair value of the Common Stock as determined by the board of directors on the date of grant. The following table summarizes stock-based activities under the Amended Plan:
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-21 Options Weighted Average Exercise Price Weighted Average Contractual Terms Outstanding at December 31, 2023 469,350 2.03$ 8.96 Granted 5,000 9.95 Outstanding at September 30, 2024 474,350 2.11$ 8.22 Exercisable options at September 30, 2024 345,267 1.43$ 7.88 The intrinsic value of outstanding options at September 30, 2024 was approximately $893,000. Stock options granted during the nine months ended September 30, 2024 and the year ended December 31, 2023, were valued using the Black-Scholes option-pricing model with the following weighted average assumptions: September 30, 2024 December 31, 2023 Expected volatility 95.1% 97.9% Risk-free interest rate 4.6% 3.9% Expected dividend yield 0.0% 0.0% Expected life of options in years 5.2 5.5 Exercise Price 9.95$ 3.56$ Fair value of common stock 2.40$ 2.61$ Estimate fair value of option -$ -$ Stock based compensation expense was $218,260 ($130,258 included in research and development expense and $88,002 included in general and administrative expenses) in the nine months ended September 30, 2024. Stock based compensation expense was $448 ($126 included in research and development expense and $322 included in general and administrative expenses) in the nine months ended September 30, 2023. At September 30, 2024, the total unrecognized compensation expense related to non-vested options was approximately $328,000 and is expected to be recognized over the remaining weighted average service period of approximately 1.54 years.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-22 NOTE 7 – PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets are as follows: September 30, December 31, 2024 2023 Prepaid R&D costs $ 86,000 $ 95,360 Prepaid rent 20,446 16,023 Prepaid software subscriptions 16,249 49,828 Prepaid professional fees 51,110 20,000 Prepaid other 8,367 13,453 Total $ 182,172 $ 194,664 NOTE 8 – ACCRUED EXPENSES Accrued expenses are as follows: September 30, December 31, 2024 2023 Payroll $ 183,867 $ 72,039 Professional fees 86,425 103,071 Other expenses 37,598 9,914 Total $ 307,890 $ 185,024 NOTE 9 – RELATED PARTY TRANSACTIONS Due to Officers/Founders: As of September 30, 2024, one officer/founder of the Company had an outstanding Demand Note (See Note 4) in the principal amount of $55,555, plus accrued interest of $7,078. This note accrues interest at 10% and has a maturity date of December 28, 2024. During the second half of 2024, shareholder/founders of the Company loaned the Company approximately $118,000 through non- interest bearing, open-ended maturity notes. NOTE 10 – LICENSE AGREEMENTS AND GRANTS The Company has received significant grants are from The Bill and Melinda Gates Foundation, Johnson & Johnson through the U.S. government’s Blue Knight Program, the European Union’s IMI.CARE.EU Consortium, the Canadian government’s National Research Council, and GOOGLE’s AI Startup Program. Key Relationships, Licenses and Grants The Company received a foundation grant from the Bill and Melinda Foundation for the development of a nasally inhaled, low cost, peptide conjugate pan-Coronavirus antiviral inhibitor. The initial award in September 6, 2021 provided up to a total of approximately $904,000 and expired on February 28, 2023. The Company initially recorded the proceeds in Deferred income. As work was commenced under the grant the company recognizes income from deferred income.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-23 In 2023 the Company entered into a supplemental grant with the Bill and Melinda Foundation for an additional $4,084,500 for continued work on the nasally inhaled, low cost, peptide conjugate pan-Coronavirus antiviral inhibitor reference above. The Company received payment of $3,500,000 in September 28, 2023, the remaining $584,500 will be received after the completion of certain milestones . The Company recognized income of approximately $371,000 and $166,000 in the nine months ended September 30, 2024 and 2023, respectively. The Company had approximately $3,037,000 and $3,477,000 in deferred income balances related to this grant for the nine months ended September 30, 2024 and the year ended December 31, 2023, respectably. Johnson and Johnson Quickfire Grants The Company received a grant from the Johnson and Johnson through the U.S. government’s Blue Knight Program (Quickfire Grant) for experiments relating to the pharmacokinetics and tolerability of the aforementioned pan- Coronavirus inhibitor in the Human Airway Epithelium (HAE) model. The initial award to the Company in January 31, 2023 provided for $100,000. The Company initially recorded the proceeds in deferred income. As work was commenced under the grant the company recognizes income from deferred income. In September 22, 2023 the Company received the first $500,000 of an additional Quickfire grant for $1,000,000 for work to investigate the potential for broader therapeutic use of the aforementioned pan-Coronavirus inhibitor. The Company initially recorded the proceeds in deferred revenue. As work was commenced under the grant the company recognizes income from deferred income. In December 1, 2023 the Company received an the second $500,000 of the Quickfire grant mentioned above. The Company initially recorded the proceeds in deferred income. As work was commenced under the grant the company recognizes income from deferred income. The Company recognized income of approximately $763,000 and $141,000 in the nine months ended September 30, 2024 and 2023, respectively. The Company had approximately $155,000 and $458,000 in deferred income balances related to these grants for the nine months ended September 30, 2024 and the year ended December 31, 2023, respectably. NOTE 11 – SHAREHOLDERS’ EQUITY (DEFICIT) As of September 30, 2024, the total authorized capital stock of the Company was 8,000,000 shares, which consisted of 5,000,000 shares of Common Stock, $0.001 par value per share; 1,000,000 shares of Nonvoting Common Stock $0.001 par value per share; 2,000,000 shares of Preferred Stock, $0.001 par value per share. Common stock At September 30, 2024 and December 31, 2023, the Company has authorized 5,000,000 shares of Common Stock, par value $0.001 per share, of which, 1,287,930 were issued. General The voting, dividend and liquidation rights of the holders of shares of Common Stock are subject to and qualified by the rights, powers and preferences of the holders of shares of preferred stock. The Common Stock has the following characteristics:
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-24 Voting The holders of shares of Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders and written actions in lieu of meetings. Dividends The holders of shares of Common Stock are entitled to receive dividends, if and when declared by the board of directors. Cash dividends may not be declared or paid to holders of shares of Common Stock until paid on each series of outstanding preferred stock in accordance with their respective terms. As of September 30, 2024, no dividends have been declared or paid since the Company’s inception. Liquidation After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the Common Stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event. Preferred stock At September 30, 2024 and December 31, 2023, the Company authorized 2,000,000 shares of $0.001 per share par value preferred stock, of which none have been issued. Nonvoting Common stock At September 30, 2024 and December 31, 2023, the Company authorized 1,000,000 shares of $0.001 per share par value Nonvoting Common Stock, of which, none have been issued. General The voting, dividend and liquidation rights of the holders of shares of Nonvoting Common Stock are subject to and qualified by the rights, powers and preferences of the holders of shares of preferred stock. The Nonvoting Common Stock has the following characteristics: Voting The holders of shares of Nonvoting Common Stock are not entitled to vote. Only in special and limited case where mandated by Delaware law, Nonvoting shareholders shall be entitled to one half ( ½) vote for each share of Nonvoting Common Stock. Dividends The holders of shares of Nonvoting Common Stock are entitled to receive dividends on a one for one basis, if and when declared by the board of directors on Common Stock. Cash dividends may not be declared or paid to holders of shares of Nonvoting Common Stock until paid on each series of outstanding preferred stock in accordance with their respective terms. For the nine months ended September 30, 2024 and 2023, no dividends have been declared or paid since the Company’s inception.
Table of Contents DECOY THERAPEUTICS, INC. Notes to Consolidated Financial Statements September 30, 2024 and 2023 F-25 Liquidation After payment to the holders of shares of preferred stock of their liquidation preferences, the holders of the Nonvoting Common Stock are entitled to share ratably in the Company’s assets available for distribution to stockholders, in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or upon the occurrence of a deemed liquidation event. Warrants As noted in Note 4, Senior Secured Convertible Promissory Notes, the Company issued an additional 123,171 warrant shares during the nine months ended September 30, 2024. As of September 30, 2024 these warrants have not been exercised and remain outstanding. Warrants Weighted Average Exercise Price Weighted Average Contractual Terms Outstanding at December 31, 2023 232,092 10.47$ 3.50 Granted 123,171 14.78 Forfeited/Cancelled - - Outstanding at September 30, 2024 355,263 11.96$ 3.63 As of September 30, 2024, outstanding warrants expire in with dates between June 19, 2027 and September 11, 2029, and have a fair value of $305,465. NOTE 12 - CONTINGENCIES From time to time, the Company may become involved in various legal matters arising in the ordinary course of business. Management is unaware of any matters requiring accrual for related losses in the financial statements. NOTE 13 - SUBSEQUENT EVENTS Management has evaluated subsequent events through January 8, 2025, which is the date the financial statements were available to be issued. Other than disclosed below, there were no subsequent events that require adjustment or disclosure in the consolidated financial statements. On October 30, 2024, the Company issued convertible notes with principal amount of $250,000, with a Company option to call an additional $250,000 under equivalent terms. These notes will convert into shares of the Company’s Common Stock at a price of $5.23 per share in a manner substantially similar to the conversion rights under the Senior Secured Convertible Notes described above, have an annual interest rate of 10%, and a maturity date 180 days from the date of issuance. In December 2024, the Company issued three convertible notes with principal amount of $375,000. These notes will convert into shares of the Company’s Common Stock at a price of $5.23 per share in a manner substantially similar to the conversion rights under the Senior Secured Convertible Notes described above, have an annual interest rate of 10%, and a maturity date 180 days from the date of issuance.
Exhibit 99.3
UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma consolidated combined financial information is provided to aid you in your analysis of the financial aspects of the Merger and Financing Transactions and presents the combination of the financial information of Salarius and Decoy adjusted to give effect to the Merger and Financing Transaction, or collectively, the Pro Forma Adjustments. Capitalized terms included but not defined below have the same meaning as defined elsewhere in this filing
On January 10, 2025, Salarius entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Salarius, Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Salarius (“First Merger Sub”), Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and wholly owned subsidiary of Salarius (“Second Merger Sub”), and Decoy. Pursuant to the Merger Agreement, Salarius will merge with Decoy (the “Merger”) by causing First Merger Sub to be merged with and into Decoy, with Decoy surviving the merger as a wholly-owned subsidiary of Salarius (the “First Merger”). Immediately following the First Merger, Decoy will merge with and into Second Merger Sub, with Second Merger Sub being the surviving entity. Closing is conditioned upon, among other things, minimum proceeds from an offering of at least $6.0 million (the “Qualified Financing” or “Financing Transaction”).
The Merger is structured as a stock-for-stock transaction pursuant to which all of Decoy’s outstanding equity interests will be exchanged based on an exchange ratio for consideration of a combination of (a) shares of Salarius’ common stock in an amount up to (i) 19.9% of Salarius’ total shares outstanding as of January 10, 2025 minus (ii) any shares of Salarius common stock issued in any private placement between January 10, 2025 and the effective time of the First Merger, and (b) shares of Series A preferred stock, which is a newly designated series of preferred stock (“Series A Preferred Stock”) that is intended to have economic rights equivalent to the common stock, but with only limited voting rights. The number of shares of common stock to be issued at the closing of the Merger (“Closing”) and the number of shares of common stock underlying the Series A Preferred Stock to be issued at Closing is based on an exchange ratio which assumes a base value of $28.0 million for Decoy and $4.6 million for Salarius, subject in each case to adjustment based on the “Parent Cash Amount” and “Company Cash Amount” (each as defined in the Merger Agreement) on the anticipated closing date (which excludes any proceeds raised in in the Qualified Financing).
If the Parent Cash Amount is $0 and the Company Cash Amount is $2.0 million, stockholders of Salarius would own approximately 14.1% of the fully diluted common stock, and stockholders of Decoy would own, or hold rights to acquire, approximately 85.9% of Salarius common stock, in each case calculated on a fully-diluted basis for in-the-money options and warrants (and in each case, prior to taking into account any dilution from the Qualified Financing). The calculation of the exchange ratio under the Merger Agreement and post-closing ownership of Salarius stockholders are subject to adjustment based on an assumed value of Salarius at Closing based on the Parent Cash Amount and Company Cash Amount as of the anticipated closing date. To the extent the Parent Cash Amount falls below $0, Salarius’ assumed value would be reduced or increased by $100,000 for every $100,000 below the threshold. To the extent the Company Cash Amount falls below $2.0 million, Decoy’s assumed value would be reduced by $100,000 for every $100,00 below the threshold.
The Company has preliminarily determined that the merger will be accounted for as a reverse asset acquisition with Decoy considered the accounting acquirer. This determination is subject to a number of significant judgment and estimates, including that Decoy is not a variable interest entity due to the preliminary expectation that Decoy will have sufficient equity at risk based on the assumed equity at risk at closing. This conclusion is subject to change based on the actual equity at risk at closing. The determination that Decoy is considered the accounting acquirer is based on the expectations that, (i) immediately following the merger, Decoy’s senior management will hold key positions in senior management of the combined organization; and (ii) following subsequent shareholder approval (A) Decoy stockholders will own a substantial majority of the voting rights of the combined organization and (B) Decoy will designate a majority of the members of the board of directors of the combined organization. The transaction is expected to be accounted for as a reverse asset acquisition as Salarius does not meet the definition of a business because at the time of the closing of the acquisition, Salarius is not anticipated to have processes or an organized workforce that significantly contribute to its ability to create outputs, and its fair value is concentrated in IPR&D. Accordingly, for accounting purposes: (i) the merger will be treated as the equivalent of Decoy issuing stock to acquire the net assets of Salarius, (ii) the net assets of Salarius will be allocated a portion of the transaction price and recorded based upon their relative fair values in the financial statements at the time of closing, (iii) the reported historical operating results of the combined company prior to the merger will be those of Decoy and (iv) for periods prior to the transaction, shareholders’ equity of the combined company is presented based on the historical equity structure of Salarius.
The following unaudited pro forma consolidated combined balance sheet as of September 30, 2024 combines the historical consolidated balance sheet of Salarius as of September 30, 2024 with the historical balance sheet of Decoy as of September 30, 2024 giving further effect to the Pro Forma Adjustments, as if they had been consummated as of September 30, 2024.
The following unaudited pro forma consolidated combined statements of operations for the year ended December 31, 2023 combine the historical consolidated statement of operations of Salarius for the year ended December 31, 2023 and the historical statements of operations of Decoy for the year ended December 31, 2023, giving effect to the Pro Forma Adjustments as if they had been consummated on January 1, 2023, the beginning of the earliest period presented.
The following unaudited pro forma consolidated combined statements of operations for the nine months ended September 30, 2024 combine the historical consolidated statement of operations of Salarius for the nine months ended September 30, 2024 and the historical statements of operations of Decoy for the nine months ended September 30, 2024, giving effect to the Pro Forma Adjustments as if they had been consummated on January 1, 2023, the beginning of the earliest period presented.
The unaudited pro forma consolidated combined financial statements have been derived from and should be read in connection with:
•the accompanying notes to the unaudited pro forma consolidated combined financial statements;
•the historical unaudited consolidated financial statements of Salarius as of and for the nine months ended September 30, 2024 and the related notes included in the Quarterly Report on Form 10-Q filed by Salarius on November 14, 2024;
•the historical unaudited financial statements of Decoy as of and for the nine months ended September 30, 2024 and the related notes included in the Current Report on Form 8-K filed by Salarius on the date hereof;
•the historical audited consolidated financial statements of Salarius as of and for the year ended December 31, 2023 and the related notes included in the Annual Report on Form 10-Kfiled by Salarius on March 26, 2024, as amended on April 2, 2024;
•the historical audited financial statements of Decoy as of and for the year ended December 31, 2023 and the related notes included in the Current Report on Form 8-K filed by Salarius on the date hereof;
•the sections entitled “Salarius Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Decoy Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other financial information relating to Salarius and Decoy.
The unaudited pro forma consolidated combined financial information is based on the assumptions and adjustments that are described in the accompanying notes. The accounting for the Merger requires the financial calculation of Salarius’ net cash. Accordingly, the pro forma adjustments are preliminary, subject to further revision as additional information becomes available and additional analyses are performed, and have been made solely for the purpose of providing unaudited pro forma consolidated combined financial information. Differences between these preliminary estimates and the final accounting, expected to be completed after the closing of the Merger, will occur and these differences could have a material impact on the accompanying unaudited pro forma consolidated combined financial information and the combined company’s future results of operations and financial position.
The unaudited pro forma combined consolidated financial information does not give effect to the potential impact of current financial conditions, regulatory matters, operating efficiencies or other savings or expenses that may be associated with the integration of the two companies. The unaudited pro forma consolidated combined financial information is not necessarily indicative of the financial position or results of operations in the future periods or the result that actually would have been realized had Salarius and Decoy been a combined organization during the specified periods. The actual results reported in periods following the Merger may differ significantly from those reflected in the unaudited consolidated combined pro forma financial information presented herein for a number of reasons, including, but not limited to, differences in the assumptions used to prepare this unaudited pro forma consolidated combined financial information.
UNAUDITED PRO FORMA CONSOLIDATED COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 2024
(in thousands)
Historical | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decoy | Salarius | Financing Transaction Adjustments | Note 4 | Transaction Accounting Adjustments | Note 4 | Pro Forma Combined Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current assets: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | 3,199 | 3,284 | 5700 | (a) | (1,729) | (b) (f) | 10,454 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Prepaid expenses and other current assets | 182 | 539 | - | - | 721 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Current Assets | 3,381 | 3,823 | 5,700 | (1,729) | 11,175 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fixed asset, net | 71 | - | - | - | 71 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other assets | 40 | 36 | - | - | 76 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total assets | 3,492 | 3,859 | $ 5,700 | (1,729) | 11,322 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities, convertible preferred stock and stockholders’ equity (deficit) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Payable | 837 | 166 | $ | - | $ | - | 1,003 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued expenses and other current liabilities | 308 | 440 | - | 156 | (c) | 904 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Notes payable | - | 329 | - | - | 329 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued interest and financing expense | 2,377 | - | - | (2,377) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income - grants | 3,193 | - | - | - | 3,193 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholder notes payable | 118 | - | - | (118) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Promissory notes payable | 2,151 | - | - | (2,151) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible note – seed Tranche A | 4,382 | - | - | (4,382) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible note - seed | 1,093 | - | - | (1,093) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Convertible note - senior | 6,746 | - | - | (6,746) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Current Liabilities | 21,205 | 935 | - | (16,711) | 5,429 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrants | 305 | - | - | (305) | (d) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities | 21,510 | 935 | - | (17,016) | 5,429 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stockholders’ equity (deficit): | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Salarius preferred stock; $0.0001 par value; | - | - | 1 | - | (e) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Decoy common stock, $0.00001 par value | 1 | - | - | (1) | (e) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Salarius common stock | - | - | - | 1 | (d) (e) | 1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Additional paid-in capital | 293 | 83,384 | 5,699 | (a) | (63,967) | (d) (e) (f) | 25,411 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated deficit | (18,312) | (80,460) | - | 79,255 | (b) (c) (f) | (19,517) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Total stockholders’ equity (deficit) | (18,018) | 2,924 | 5,700 | 15,288 | 5,893 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total liabilities, convertible preferred stock and stockholders’ equity | 3,492 | 3,859 | $ | 5,700 | (1,729) | 11,322 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited pro forma combined financial statements
UNAUDITED PRO FORMA CONSOLIDATED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2024
(in thousands, except share and per share data)
Historical | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decoy | Salarius | Financing Transaction Adjustments | Note 4 | Transaction Accounting Adjustments | Note 4 | Pro Forma Combined Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 1,925 | 595 | - | - | 2,520 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 872 | 3,651 | - | - | 4,523 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 2,797 | 4,246 | - | - | 7,043 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating loss | (2,797) | (4,246) | - | - | (7,043) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expense), net: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income (expense) | (1,010) | 134 | - | 1,010 | (g) | 134 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Grant income | 1,135 | - | - | - | 1,135 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value adjustments on convertible notes payable | (406) | - | - | 406 | (g) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant liability expense | (175) | - | 175 | (g) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss | (1) | - | - | - | (1) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other income (expense), net | (457) | 134 | - | 1,591 | 1,268 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (loss) | $ (3,254) | $ (4,112) | $ | - | 1,591 | $ (5,775) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net profit (loss) per share | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ (2.53) | $ | (5.13) | $ (0.51) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | $ (2.53) | $ | (5.13) | $ (0.51) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 1,287,930 | 801,395 | (k) | 11,230,430 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 1,287,930 | 801,395 | (k) | 11,230,430 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited pro forma combined financial statements
UNAUDITED PRO FORMA CONSOLIDATED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2023
(in thousands, except share and per share data)
Historical | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decoy | Salarius | Financing Transaction Adjustments | Note 4 | Transaction Accounting Adjustments | Note 4 | Pro Forma Combined Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Research and development | 1,065 | 7,174 | - | - | 8,239 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | 2,385 | 5,721 | - | 1,335 | (h) | 9,441 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impairment of IPR&D | - | - | - | 1,205 | (i) | 1,205 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 3,450 | 12,895 | - | $ 2,540 | 18,885 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Operating loss | (3,450) | (12,895) | - | (2,540) | (18,885) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other income (expense), net: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Interest income (expense) | (1,153) | 352 | - | 1,153 | (g) | 352 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Grant income | 666 | - | - | - | 666 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Fair value adjustments on convertible notes payable | (5,643) | - | 5,643 | (g) | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Warrant liability income | 251 | - | - | (251) | (g) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total other income (expense), net | (5,879) | 352 | - | 6,545 | 1,018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Income (loss) | (9329) | $ (12,543) | $ | - | $ 4005 | $ (17,867) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net profit (loss) per share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ (7.24) | $ (30.74) | (1.65) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | $ (7.24) | $ (30.74) | (1.65) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | 1,287,930 | 408,078 | (j) | 10,837,112 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | 1,287,930 | 408,078 | (j) | 10,837,112 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited pro forma combined financial statements
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED COMBINED FINANCIAL INFORMATION
1.Description of the Transactions
The Merger
On January 10, 2025, Salarius entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among Salarius, Decoy Therapeutics MergerSub I, Inc., a Delaware corporation and a wholly owned subsidiary of Salarius (“First Merger Sub”), Decoy Therapeutics MergerSub II, LLC, a Delaware limited liability company and wholly owned subsidiary of Salarius (“Second Merger Sub”), and Decoy. Pursuant to the Merger Agreement, Salarius will merge with Decoy (the “Merger”) by causing First Merger Sub to be merged with and into Decoy, with Decoy surviving the merger as a wholly-owned subsidiary of Salarius (the “First Merger”). Immediately following the First Merger, Decoy will merge with and into Second Merger Sub, with Second Merger Sub being the surviving entity. Closing is conditioned upon, among other things, minimum proceeds from an offering of at least $6.0 million (the “Qualified Financing”).
The Merger is structured as a stock-for-stock transaction pursuant to which all of Decoy’s outstanding equity interests will be exchanged based on an exchange ratio for consideration of a combination of (a) shares of Salarius’ common stock in an amount up to (i) 19.9% of Salarius’ total shares outstanding as of January 10, 2025 minus (ii) any shares of Salarius common stock issued in any private placement between January 10, 2025 and the effective time of the First Merger, and (b) shares of Series A preferred stock, which is a newly designated series of preferred stock (“Series A Preferred Stock”) that is intended to have economic rights equivalent to the common stock, but with only limited voting rights. The number of shares of common stock to be issued at the closing of the Merger (“Closing”) and the number of shares of common stock underlying the Series A Preferred Stock to be issued at Closing is based on an exchange ratio which assumes a base value of $28.0 million for Decoy and $4.6 million for Salarius, subject in each case to adjustment based on the “Parent Cash Amount” and “Company Cash Amount” (each as defined in the Merger Agreement) on the anticipated closing date (which excludes any proceeds raised in in the Qualified Financing).
If the Parent Cash Amount is $0 and the Company Cash Amount is $2.0 million, stockholders of Salarius would own approximately 14.1% of the fully diluted common stock, and stockholders of Decoy would own, or hold rights to acquire, approximately 85.9% of Salarius common stock, in each case calculated on a fully-diluted basis for in-the-money options and warrants (and in each case, prior to taking into account any dilution from the Qualified Financing). The calculation of the exchange ratio under the Merger Agreement and post-closing ownership of Salarius stockholders are subject to adjustment based on an assumed value of Salarius at Closing based on the Parent Cash Amount and Company Cash Amount as of the anticipated closing date. To the extent the Parent Cash Amount falls below $0, Salarius’ assumed value would be reduced or increased by $100,000 for every $100,000 below the threshold. To the extent the Company Cash Amount falls below $2.0 million, Decoy’s assumed value would be reduced by $100,000 for every $100,00 below the threshold.
The Company has preliminarily determined that the merger will be accounted for as a reverse asset acquisition with Decoy considered the accounting acquirer. This determination is subject to a number of significant judgment and estimates, including that Decoy is not a variable interest entity due to the preliminary expectation that Decoy will have sufficient equity at risk based on the assumed equity at risk at closing. This conclusion is subject to change based on the actual equity at risk at closing. The determination that Decoy is considered the accounting acquirer is based on the expectations that, (i) immediately following the merger, Decoy’s senior management will hold key positions in senior management of the combined organization; and (ii) following subsequent shareholder approval (A) Decoy stockholders will own a substantial majority of the voting rights of the combined organization and (B) Decoy will designate a majority of the members of the board of directors of the combined organization. The transaction is expected to be accounted for as a reverse asset acquisition as Salarius does not meet the definition of a business because at the time of the closing of the acquisition, Salarius is not anticipated to have processes or an organized workforce that significantly contribute to its ability to create outputs, and its fair value is concentrated in IPR&D. Accordingly, for accounting purposes: (i) the merger will be treated as the equivalent of Decoy issuing stock to acquire the net assets of Salarius, (ii) the net assets of Salarius will be allocated a portion of the transaction price and recorded based upon their relative fair values in the financial statements at the time of closing, (iii) the reported historical operating results of the combined company prior to the merger will be those of Decoy and (iv) for periods prior to the transaction, shareholders’ equity of the combined company is presented based on the historical equity structure of Salarius.
2.Basis of Pro Forma Presentation
The unaudited pro forma consolidated combined financial information was prepared pursuant to the rules and regulations of Article 11 of Regulation S-X. The unaudited pro forma consolidated combined balance sheet as of September 30, 2024 was prepared using the historical balance sheets of Salarius and Decoy as of September 30, 2024, and gives effect to the Merger and the Financing Transaction as if they occurred on September 30, 2024. The unaudited pro forma consolidated combined statement of operations for the nine months ended September 30, 2024, and for the year ended December 31, 2023, were prepared using the historical statements of operations of Salarius and Decoy for the nine months ended September 30, 2024 and for the year ended December 31, 2023, respectively, and gives effect to the Merger and the Financing Transaction as if they occurred on January 1, 2023.
The merger is expected to be accounted for as a reverse asset acquisition in accordance with GAAP. Decoy will be deemed to be the accounting acquirer for financial reporting purposes. Accordingly, for accounting purposes: (i) the merger will be treated as the equivalent of Decoy issuing stock to
acquire the net assets of Salarius, (ii) the net assets of Salarius will be allocated a portion of the transaction price and recorded based upon their relative fair values in the financial statements at the time of closing, (iii) the reported historical operating results of the combined company prior to the merger will be those of Decoy and (iv) for periods prior to the transaction, shareholders’ equity of the combined company is presented based on the historical equity structure of Salarius.
Accounting rules require evaluation of certain assumptions, estimates, or determination of financial statement classifications. During preparation of the unaudited pro forma consolidated combined financial information, management has performed a preliminary analysis and is not aware of any material differences, and accordingly, this unaudited pro forma combined financial information assumes no material differences in accounting policies. Following the Merger and the Financing Transactions, management will conduct a final review of Salarius accounting policies in order to determine if differences in accounting policies require adjustment or reclassification of Salarius results of operations or reclassification of assets or liabilities to conform to Decoy’s accounting policies and classifications. As a result of this review, management may identify differences that, when conformed, could have a material impact on this unaudited pro forma consolidated combined financial information.
Decoy and Salarius may incur significant costs associated with integrating their operations after the Merger is completed. The unaudited pro forma combined financial information does not reflect the costs of any integration activities or benefits that may result from realization of future cost savings from operating efficiencies, which may result from the Merger.
To the extent that there are significant changes to the business following completion of the Merger, the assumptions and estimates set forth in the unaudited pro forma consolidated financial information could change significantly. Accordingly, the pro forma adjustments are subject to further adjustments as additional information becomes available and as additional analyses are conducted following the completion of the Merger. There can be no assurances that these additional analyses will not result in material changes to the estimates of fair value.
Additionally, as described in Note 1, the Pro Forma Assumptions include assumed terms for each of the Financing Transactions that may vary significantly from the actual terms of each.
3.Preliminary Estimated Purchase Price
For purposes of these unaudited pro forma combined financial information, the total estimated purchase price is summarized as
Follows:
Shares | |||||
Estimated number of common shares of the combined company to be owned by Salarius stockholders (1) | 1,441,288 | ||||
Multiplied by the fair value per share of Decoy common stock (2) | $ 1.80 | ||||
Estimated fair value per share of Salarius common stock | 2,594,583 | ||||
Estimated Decoy transaction costs (3) | 200,000 | ||||
Estimated purchase price | 2,794,583 | ||||
(1)The final purchase price will be determined based on the number of Salarius common shares outstanding as of the closing date of the Merger. For purposes of this unaudited pro forma consolidated combined financial information, the estimated number of shares is based on the sum of the 1,441,157 shares of Salarius common stock outstanding as of September 30, 2024 and the 131 restricted stock units expected to convert to common shares as a result of the Merger.
(2)The estimated purchase price was based on the closing price of Salarius common stock as reported on the Nasdaq Capital Market on January 6, 2025. The fair value of the consideration given based on Salarius’ stock price is more clearly evident, and thus, more reliably measurable, than the fair value of the net assets acquired, as Salarius’ stock price is measured using Level 1 fair value inputs. The alternative treatment under US GAAP of measuring the purchase consideration using the fair value of the net assets acquired would require using a combination of Level 1, 2 and 3 fair value inputs and is not more clearly evident and more reliably measurable.
(3)The estimated transaction costs incurred by Decoy is based on estimates as of January 6, 2025. As indicated in ASC 805-50 regarding asset acquisitions, the accounting acquirer’s transaction costs incurred directly related to the asset purchase should be included in the consideration to acquire the assets.
The net assets of Salarius as of September 30, 2024 are $2.9 million. After giving effect to the estimated transaction costs expected to be incurred by Salarius of $1.3 million, the net assets prior to allocation of the purchase price to the assets acquired will be $1.6 million. The excess of the purchase price of $2.8 million over the $1.6 million of net assets at close of $1.2 million will be allocated to IPR&D, which will be expensed immediately following the closing of the Merger.
The estimated purchase consideration reflected in this unaudited pro forma combined financial information does not purport to represent what the actual purchase consideration will be when the merger is completed. A 10% increase or decrease in the stock price would change the purchase price by approximately $0.3 million and result in a related change to the amount of IPR&D expensed in the merger. The actual purchase price will fluctuate until the effective time of the merger.
4.Shares of Salarius Common Stock Issued to Decoy’s Stockholders Upon Closing of the Merger
At the effective time of the Merger, based on (i) the assumed exchange ratio of 2.2853 shares of Salarius common stock for each share of Decoy common stock, (ii) capitalization as of September 30, 2024, and (iii) assumptions for the Financing Transaction set forth in Note 1 above, Salarius would expect to issue 286,790 shares of common stock and the remaining 6,808,781 equivalent shares in the form of 6,809 shares of Series A preferred stock to the stockholders of Decoy in the Merger, determined as follows:
Shares | |||||
Decoy shares of common stock outstanding | 1,287,930 | ||||
Decoy convertible notes equivalent shares | 1,816,945 | ||||
Total Decoy common stock equivalent shares | 3,104,875 | ||||
Exchange ratio | 2.2853 | ||||
Estimated total shares of Salarius common stock and common stock-equivalent preferred stock shares to be issued to Decoy stockholders upon closing of the Merger | 7,095,571 | ||||
5.Pro Forma Adjustments
Adjustments included in the column under the heading “Transaction Accounting Adjustments” are primarily based on information contained within the Merger Agreement. Adjustments included in the column under the heading “Financing Adjustments” are primarily based on assumptions associated with the Qualified Financing. Further analysis will be performed upon completion of the Merger to confirm these estimates.
Based on a review of Salarius’ summary of significant accounting policies, the nature and amount of any adjustments to the historical consolidated financial statements of Salarius to conform to the accounting policies of Decoy are not expected to be significant.
Both Decoy and Salarius have a history of generating net operating losses and maintain a full valuation allowance against their net deferred tax assets. As a result, both entities have not reflected an income tax benefit or expense within the historical financial statement periods presented.
Management has not identified any changes to the income tax positions due to the Merger that would result in an incremental tax expense or benefit. Accordingly, no tax-related adjustments have been reflected for the pro forma adjustments.
The pro forma adjustments, based on preliminary estimates that may change significantly as additional information is obtained, are as follows:
(a)To reflect $5.7 million in net proceeds to be received pursuant to the Qualified Financing ($6.0 million) in exchange for the issuance of 3,333,333 shares of Salarius common stock, offset by $0.3 million in transaction costs associated with the Qualified Financing.
(b)To reflect the estimated payment of $1.2 million in transaction costs to be incurred by Salarius, $0.2 million in transaction costs to be incurred by Decoy, and the redemption of the Salarius equity-classified warrants for $0.4 million in connection with the Merger. The $1.2 million in transaction costs to be incurred by Salarius is reflected as an offset to accumulated deficit, the $0.2 million in transaction costs to be incurred by Decoy will be capitalized into the acquired IPR&D asset and then expensed and offset to accumulated deficit due to the IPR&D asset having no alternative future use, and the $0.4 million paid to redeem the Salarius equity-classified warrants will be offset against additional paid-in capital.
(c)To reflect the Salarius’ estimated compensation expense of $0.2 million related to transaction bonuses negotiated as a result of the impending Merger. As such, the transaction bonuses will be accrued and recorded as general and administrative expense in the pro forma statement of operations for the year ended December 31, 2023 and as an offset to accumulated deficit within the unaudited pro forma combined balance sheet as of September 30, 2024.
(d)To reflect the exchange of the Decoy warrants, shareholder notes, promissory notes, convertible notes, and their associated accrued interest into 1,815,945 shares of Decoy common stock which will then be converted into shares of Salarius common stock and common stock-equivalent Salarius Series A preferred stock shares based on the exchange ratio.
(e)To reflect the exchange of 3,104,875 shares of Decoy common stock for shares of Salarius common stock and common stock-equivalent Salarius Series A preferred stock shares.
(f)To reflect the reclassification of historical accumulated deficit of Salarius into additional paid-in capital, offset by the write-off of the IPR&D asset acquired in the Merger of $1.2 million, the $1.2 million of estimated Salarius transaction costs, and the $0.2 million of transaction bonuses.
(g)See table below for total equity impact.
(h)To reflect the reversal of interest expense and fair value adjustments associated with the warrants, shareholder notes, promissory notes, and convertible notes during the periods ended September 30, 2024 and December 31, 2024 that will be converted to shares of Salarius common stock upon closing of the Merger.
(i)To reflect the recognition of non-recurring general and administrative expense associated with the $1.2 million of transaction costs to be incurred by Salarius and the $0.2 million of transaction bonuses to be recorded in the pro forma statement of operations for the year ended December 31, 2023.
(j)To reflect the recognition of the non-recurring impairment of the $1.2 million IPR&D asset acquired as part of the reverse asset acquisition because it has no alternative future use in the pro forma statement of operations for the year ended December 31, 2023.
(j)The pro forma combined basic and diluted earnings per share have been adjusted to reflect the pro forma net income (loss) for the nine months ended September 30, 2024, and the year ended December 31, 2023. In addition, the number of shares used to calculate the pro forma combined basic and diluted net income (loss) per share has been adjusted to reflect the estimated total number of shares of common stock of the combined company that would be outstanding as of the Merger closing date, including the shares to be issued in the Qualified Financing, as if they have been outstanding for the entirety of the periods presented. For the nine months ended September 30, 2024, and the year ended December 31, 2023, the pro forma weighted average shares outstanding has been calculated as follows:
September 30, 2024 | December 31, 2023 | ||||||||||
Weighted-average Decoy common shares outstanding – basic and diluted | 1,287,930 | 1,287,930 | |||||||||
Decoy convertible notes equivalent shares | 1,816,945 | 1,816,945 | |||||||||
Total | 3,104,875 | 3,104,875 | |||||||||
Application of exchange ratio | 2.2853 | 2.2853 | |||||||||
Adjusted Weighted-average Decoy common shares equivalents outstanding – basic and diluted | 7,095,571 | 7,095,571 | |||||||||
$6.0 million of Qualified Financing | 3,333,333 | 3,333,333 | |||||||||
Weighted-average Salarius common shares outstanding | 801,395 | 408,078 | |||||||||
Conversion of Salarius RSUs to Salarius common shares | 131 | 131 | |||||||||
Pro forma combined weighted average number of shares of common stock – basic and diluted | 11,230,430 | 10,837,113 | |||||||||
(g)The total impact to equity for the above adjustments are reflected in the table below:
Exhibit 99.4
Salarius Pharmaceuticals and Decoy Therapeutics Announce Definitive Merger Agreement
Decoy’s proprietary IMP3ACT™ peptide conjugate drug design and manufacturing platform leverages machine learning (ML) and artificial intelligence (AI) tools
Decoy is leveraging non-dilutive funding and equivalents from federal governments, corporations and The Bill & Melinda Gates Foundation totaling approximately $7 million
Combined company expects to accelerate clinical development of novel peptide conjugate therapeutics for the treatment of respiratory viruses and cancer
HOUSTON and CAMBRIDGE, Mass. (January 13, 2025) – Salarius Pharmaceuticals, Inc. (NASDAQ: SLRX), a clinical-stage biopharmaceutical company developing therapies for patients with cancer in need of new treatment options, and Decoy Therapeutics, Inc., a privately held preclinical biopharmaceutical company engineering the next generation of peptide conjugate therapeutics, announce the signing of a definitive agreement under which Decoy Therapeutics will merge with a wholly-owned subsidiary of Salarius Pharmaceuticals, subject to the closing conditions set forth in the definitive agreement. The newly formed company will be named Decoy Therapeutics.
This proposed transaction is expected to facilitate multiple value-creating inflection points with Decoy’s pipeline of peptide conjugate therapeutics engineered by its IMP3ACT platform, which allows for the rapid computational design and manufacturing of innovative peptide conjugate therapeutics including rapid response to novel viral pathogens such as avian H5N1 flu. Decoy’s product pipeline targets unmet needs in respiratory infectious diseases and gastroenterology (GI) oncology indications.
In addition, the combined company intends to incorporate Salarius’ oral small molecule protein degrader SP-3164 into a highly targeted peptide-based proteolysis targeting chimeras (PROTACS) drug candidate. The ongoing development of Salarius’ seclidemstat for hematologic cancers in an investigator-initiated Phase 1/2 clinical trial at MD Anderson Cancer Center (MDACC) will be supported while the company evaluates strategic alternatives for seclidemstat.
Executive Leadership and Management Commentary
The combined company will be led by Decoy’s Co-founders, Chief Executive Officer Frederick “Rick” Pierce and Chief Scientific Officer Barbara Hibner, by Decoy’s Chief Business Officer Peter Marschel, Chief Technology Officer Mike Lipp and acting Chief Medical Officer and Scientific Advisory Board Chair Shahin Gharakhanian, M.D., and by Salarius’ Chief Financial Officer Mark Rosenblum. The two companies have further agreed that upon closing of the merger and a post-closing shareholder vote approving the conversion of the preferred stock issued at closing, the newly merged company’s Board of Directors will be comprised of Rick Pierce and Barbara Hibner, and three independent Directors, two appointed by Decoy’s Board and one by Salarius’ Board.
Rick Pierce is a life sciences executive with more than 25 years of senior management experience across private and public companies. Previously he served as Vice President of Corporate Development and Investor Relations at Javelin Pharmaceuticals, a publicly traded company that developed Dyloject™ through EMEA approval, launch and NDA submission, at which time it was acquired by Hospira, Inc., now a subsidiary of Pfizer. Earlier in his career, Mr. Pierce spent 15 years in investment banking at bulge bracket Wall Street firms primarily focused on corporate finance, institutional sales and trading in healthcare, biotechnology and technology, ultra-high-net worth individuals and family offices.
Mr. Pierce commented, “Peptide conjugates have become one of the most important drug classes as measured by prescription rates and revenue growth. Our highly experienced team is excited to be able to unlock significant shareholder value from our IMP3ACT platform, which can rapidly design new peptide conjugate drugs by applying ML and AI tools. Having access to capital and the visibility afforded by a public listing are significant corporate milestones that further enable Decoy to advance our expanded preclinical and clinical candidates to address important unmet patient needs.”
"After undertaking a comprehensive strategic review process, we believe that the proposed transaction with Decoy Therapeutics offers the best opportunity to create significant near- and long-term value,” stated David Arthur, President, CEO and Director of Salarius Pharmaceuticals. “The compelling science supporting Decoy’s peptide conjugate technology and the company’s management team are truly impressive. Based on our diligence, we believe Decoy is poised to advance multiple drug candidates that address significant unmet needs in numerous therapeutic areas. The Board of Salarius and I would like to thank our stockholders for their support during this review process, and to reiterate the team’s commitment to enhancing shareholder value with this transaction and beyond.”
Upcoming Milestones
During the next 12 months, Decoy expects to advance its lead asset, a pan-coronavirus antiviral, to the filing of an Investigational New Drug (IND) application with the U.S. Food and Drug Administration (FDA), and to make progress with its other programs including a broad-acting antiviral against flu, COVID-19 and respiratory syncytial virus (RSV), and a peptide drug conjugate targeting GI cancers.
Also during this time data may be reported from the ongoing MDACC clinical trial in myelodysplastic syndrome (MDS) and chronic myelomonocytic leukemia (CMML) patients who previously failed or relapsed after hypomethylating agent therapy.
About the Proposed Transaction
Definitive agreements were executed with unanimous approvals by the Boards of Directors of Salarius Pharmaceuticals and Decoy Therapeutics. The closing consideration will consist primarily of nonvoting preferred stock of Salarius, and it is expected that following closing and a post-closing stockholder vote to approve the conversion of the preferred shares into common stock, Decoy investors would own approximately 86% of the outstanding shares of the merged company and Salarius stockholders would own approximately 14% of the outstanding shares, subject to adjustment, in each case exclusive of any shares issued in any subsequent financing. For further details on the transaction and conditions for closing of the merger, please refer to the Form 8-K Salarius Pharmaceuticals filed with the U.S. Securities and Exchange Commission (SEC) in conjunction with this press release at www.sec.gov.
Canaccord Genuity is serving as exclusive strategic advisor to Salarius, and Hogan Lovells US LLP and Honigman LLP are serving as legal counsel. Ladenburg Thalmann is serving as financial advisor to Decoy, and Nason, Yeager, Gerson, Harris & Fumero, P.A. is serving as legal counsel.
About Decoy Therapeutics, Inc.
Decoy Therapeutics is a preclinical-stage biotechnology company that is leveraging machine learning and artificial intelligence tools alongside high-speed synthesis techniques to rapidly design, engineer and manufacture peptide conjugate drug candidates that target serious unmet medical needs. The company’s initial pipeline is focused on respiratory viruses and GI cancers. Decoy has attracted financing from institutional investors as well as significant non-dilutive capital from the Bill & Melinda Gates Foundation, the Massachusetts Life Sciences Seed Fund, the Google AI startup program and the NVIDIA
Inception program. The company has also received QuickFire Challenge award funding provided by BARDA through BLUE KNIGHT™, a collaboration between Johnson & Johnson Innovation – JLABS and the Biomedical Advanced Research and Development Authority within the Administration for Strategic Preparedness and Response. For more information, please visit www.DecoyTx.com.
About Salarius Pharmaceuticals, Inc.
Salarius Pharmaceuticals is a clinical-stage biopharmaceutical company with two drug candidates for patients with cancer in need of new treatment options. Salarius’ product portfolio includes seclidemstat, the company’s lead candidate, which is being studied in an investigator-initiated Phase 1/2 clinical study in hematologic cancers underway at MD Anderson Cancer Center as a potential treatment for MDS and CML in patients with limited treatment options. SP-3164, the company’s IND-stage second asset, is an oral small molecule protein degrader. Salarius previously received financial support for seclidemstat for the treatment of Ewing sarcoma from the National Pediatric Cancer Foundation and was a recipient of a Product Development Award from the Cancer Prevention and Research Institute of Texas (CPRIT). For more information, please visit www.salariuspharma.com.
Non-Solicitation
This communication shall not constitute an offer to sell or the solicitation of an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No public offer of securities in connection with the merger shall be made except by means of a prospectus meeting the requirements of Section 10 of the Securities Act of 1933, as amended.
Forward-Looking Statements
This press release contains forward-looking statements regarding Salarius, Decoy, the proposed merger and other matters, including without limitation, statements relating to the expected ownership percentages of the combined company and plans and expectations relating to the business, products including expected achievement of milestones for its lead asset and future prospects of Decoy and the combined company. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of Salarius, as well as assumptions made by, and information currently available to, management. Forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “may,” “will,” “should,” “would,” “expect,” “anticipate,” “plan,” “likely,” “believe,” “estimate,” “project,” “intend,” and other similar expressions. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties and are not guarantees of future performance. Actual results could differ materially from those contained in any forward-looking statement as a result of various factors, including, without limitation: the risk that the conditions to the Closing are not satisfied, including uncertainties as to the timing of the consummation of the proposed merger; the ability of each of Salarius and Decoy to consummate the merger; risks related to Salarius’ ability to estimate and manage its operating expenses and its expenses associated with the proposed merger pending the closing; risks that the combined company will not achieve the synergies expected from the proposed merger; risks that Salarius and the combined company will not obtain sufficient financing to execute on their business plans and risks related to Decoy’s products and development plans including unanticipated issues with any IND application process. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the SEC, including the risk factors contained in Salarius’ Current Report on Form 8-K filed on January 13, 2025 which attempt to advise interested parties of the risks and factors that may affect the merger, and the prospects, financial condition, results of operation and cash flows of
each of Salarius, Decoy and the combined company. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.
CONTACTS:
Salarius Pharmaceuticals, Inc.
Alliance Advisors IR
Jody Cain
310-691-7100
Decoy Therapeutics, Inc.
Investors and Media:
Rick Pierce, CEO
617-447-8299
Business Development:
Peter Marschel, CBO
617-943-6305
# # #