Valion Bio, Inc S-1, filed Aug 3, 2021
Valion Bio, Inc. (VBIO)
As filed with the Securities and Exchange Commission on August 3, 2021
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TIVIC HEALTH SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 3845 | 81-4016391 | ||
|
(State or Other Jurisdiction of |
(Primary Standard Industrial |
(I.R.S. Employer |
39899 Balentine Drive, Suite 200
Newark, CA 94560
(888) 276-6888
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Jennifer Ernst
Chief Executive Officer
Tivic Health Systems, Inc.
750 Menlo Avenue, Suite 200
Menlo Park, CA 94025
(888) 276-6888
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
|
Roger C. Rappoport, Esq. |
Leslie Marlow, Esq. |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. x
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | x | Smaller reporting company | x | |||
| Emerging growth company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ¨
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Securities to Be Registered | Proposed Maximum Aggregate Offering Price(1) | Amount
of Registration Fee | ||||||
| Common Stock, par value $0.0001 per share(2)(3) | $ | 14,950,000 | $ | 1,631.04 | ||||
| Representative’s Warrants(4) | - | - | ||||||
| Common Stock issuable upon exercise of the Representative’s Warrants(5) | $ | 934,375 | $ | 101.95 | ||||
| Total | $ | 15,884,375 | $ | 1,732.99 |
| (1) | Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”). |
| (2) | Pursuant to Rule 416 under the Securities Act, the shares registered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of stock splits, distributions, recapitalizations or other similar transactions. |
| (3) | Includes the offering price of shares of common stock that the representative of the underwriter has the option to purchase to cover over-allotments, if any. |
| (4) | No fee required pursuant to Rule 457(g) under the Securities Act. |
| (5) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. The representative’s warrants are exercisable at a per share exercise price equal to 125% of the public offering price. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act, the proposed maximum aggregate offering price of the representative’s warrants is $934,375, which is equal to 125% of $747,500 (which is 5% of $14,950,000). |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information contained in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS |
SUBJECT TO COMPLETION | DATED , 2021 |
Shares
Common Stock
Tivic Health Systems, Inc.
This is a firm commitment initial public offering of shares of common stock of Tivic Health Systems, Inc. We anticipate that the initial public offering price of our shares will be between $ and $ .
Prior to this offering, there has been no public market for our common stock. We have applied to have our common stock listed on under the symbol “TIVC.” No assurance can be given that our application will be approved. The closing of this offering is contingent upon the successful listing of our common stock on or another national securities exchange.
We are an “emerging growth company” and a “smaller reporting company,” each as defined under the federal securities laws and, as such, have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings. See the section of this prospectus entitled “Implications of Being an Emerging Growth Company and a Smaller Reporting Company.” Investing in our common stock is involves a high degree of risk. See “Risk Factors” beginning on page 13.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
| Per Share | Total | |||||||
| Initial public offering price | $ | $ | ||||||
| Underwriting discounts and commissions(1) | $ | $ | ||||||
| Proceeds to us, before expenses | $ | $ |
(1) Underwriting discounts and commissions do not include a non-accountable expense allowance equal to 1.0% of the initial public offering price payable to the underwriters. The registration statement, of which this prospectus is a part, also registers for sale those shares of common stock issuable upon exercise of warrants to purchase shares of our common stock to be issued to the representative of the underwriters in connection with this offering. We have agreed to issue the warrants to the representative of the underwriters as a portion of the underwriting compensation payable to the underwriters in connection with this offering. See “Underwriting” for a description of compensation payable to the underwriters.
We have granted a 45-day option to the representative of the underwriters to purchase up to additional shares of common stock solely to cover over-allotments, if any, at the public offering price, less underwriting discounts and commissions.
The underwriters expect to deliver the shares of our common stock to purchasers on or about , 2021, subject to customary closing conditions.
ThinkEquity
a division of Fordham Financial Management, Inc.
The date of this prospectus is , 2021
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest in our securities, you should not rely upon any information other than the information in this prospectus or in any free writing prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful.
For investors outside the United States: We have not taken any action that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the securities covered hereby and the distribution of this prospectus outside the United States.
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause our future performance to differ materially from our assumptions and estimates. See “Risk Factors” and “Cautionary Statement on Forward-Looking Statements.”
We further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the date when made. Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.
Tivic Health Systems, Inc., the Tivic Health Systems logo, and other trademarks or service marks of Tivic Health Systems appearing in this prospectus are the property of Tivic Health Systems, Inc. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations. Solely for convenience, trademarks and tradenames referred to in this prospectus appear without the ® and ™ symbols, but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and tradenames.
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The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision in our common stock. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As used in this prospectus, unless the context otherwise requires, references to “we,” “us,” “our,” “Company,” and “Tivic Health” refer to Tivic Health Systems Inc.
Tivic Health Systems, Inc. is a commercial-phase bioelectronic medicine company focused on inflammation. Our first product, ClearUP™ Sinus Relief (“ClearUP”), is a patented handheld device that uses ultra-low current electrical waves to relieve symptoms of sinus and nasal inflammation. ClearUP is a US FDA Class II and EU Class IIa medical device that has received three regulatory clearances: (US FDA 510(k) number K182025, US FDA De Novo number DEN200006 and EU CE Mark Certificate number CE 704687). ClearUP consistently gets high ratings from consumers across multiple sales platforms.
McKinsey & Co estimates that bioelectronic medicine “represents a multibillion dollar opportunity even with modest penetration.” Bioelectronic medicine treats disease and conditions by modulating the electrical signals carried along various nerve pathways. The field grew out of the multi-billion-dollar neuromodulation industry and relied, historically, on implantable devices (e.g. pacemakers, spinal implants, deep brain stimulators). We have shown that ClearUP, a non-invasive bioelectronic therapy, can safely and comfortably deliver therapeutic benefits with a favorable safety profile.
We have brought bioelectronic medicine to the home treatment market for nasal allergies, sinus infections, chronic sinusitis, cold and flu. This $9.9 billion U.S. market is dominated by pharmaceuticals. However, through a market research study commissioned by the Company, in which 600 individuals who reported ongoing sinus conditions were electronically surveyed, we discovered that:
| · | 70% of sufferers are not completely satisfied with current over the counter treatment options; | |
| · | 90% are interested in treatments that reduce use of medications; and | |
| · | 66% are concerned about side effects. |
We conducted two published clinical studies with leading research institutions. The first clinical study was a randomized controlled double-blind trial conducted by the Standard University Sinus Center consisting of 71 subjects suffering from sinus pain and congestion, each of whom used either ClearUP or a sham device. The second clinical study was a 30-person study on the use of ClearUP over a period of four weeks conducted by the Allergy and Asthma Associates of Santa Clara Valley Research Center. These studies demonstrated that ClearUP is highly effective at relieving sinus pain from allergic rhinitis and moderate to severe congestion with no substantive side effects. ClearUP has received customer validation with over 450 4- and 5-star reviews across multiple sales platforms.
We are currently preparing a second-generation version of ClearUP (“ClearUP Gen 2”) for market. Covered by the same patents, our ClearUP Gen 2 version of ClearUP is designed to lower cost for high-volume manufacturing and distribution. Based on our analysis of regulatory guidance and approval by our designated EU Notified Body (an organization designated by an EU member state to assess the conformity of certain products prior to their release in the EU market), we have determined that ClearUP Gen 2 is covered by the same regulatory clearances as ClearUP, and therefore will not require separate approvals from the U.S. Food and Drug Administration (“FDA”) prior to commercialization. However, it is possible the FDA could determine that ClearUP Gen 2 is not covered by the same regulatory clearances as our existing ClearUP device. If the FDA were to make such a determination, we could be forced to cease distribution of ClearUP Gen 2 until we obtain regulatory clearance or approval, and we could be subject to additional enforcement action by the FDA.
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Our Innovation
We combine proprietary algorithms, programmable stimulation parameters, and a patented monopolar delivery mechanism to modulate the nerve signals that control inflammation-driven symptoms like pain and congestion. This design has proven effective in treating sinus and nasal inflammatory conditions and we are researching the clinical utility of this stimulation approach for other clinical conditions. This platform has the potential to accelerate new product development by: (i) extending the existing device platform to other clinical areas, thereby reducing research and development time, and (ii) continuing to benefit from low risk non-invasive device designations and regulatory pathways by the FDA, which typically result in shorter time to approval when compared with invasive devices or new drugs. While it is our intention to bring new products to market, medical device development is inherently uncertain and there is no guarantee that our research and development efforts will lead to approved products for other clinical indications.
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We completed a ten-person pilot study with the U.S. Institute for Advanced Sinus Care and Research (Cleveland, OH) to evaluate a new device for the treatment of postoperative pain after sinus surgery. Of the ten individuals who participated in the study, only nine successfully completed it. Outcomes included a decrease in the numeric rating scale for pain reported by participants, indicating pain relief; a decrease in the amount of opioid medication used by participants, as quantified in the participants’ medication diaries; and feasibility for at-home use of the device, as reported by the participants in user feedback questionnaires completed by the participants. The pilot study was conducted to establish clinical feasibility and identify trends and was, therefore, not designed (powered) to establish conclusive, statistically significant results. The trends observed, while not statistically significant, indicated further investigation is warranted. We are developing a controlled clinical study with a top tier academic collaborator to further test the clinical merit of a product candidate in this area.
Numerous inflammatory conditions are associated with peripheral nerve activity of the face, including:
| · | chronic quality-of-life conditions such as migraines (39 million U.S.), temporomandibular joint disorder (31 million U.S.), and tinnitus (50 million U.S.); | |
| · | severe, life-altering conditions such as trigeminal neuralgia (150,000 U.S., severe condition); and | |
| · | acute conditions such as ear infections (50% of children) and pain and swelling from facial and sinus surgeries (600,000 functional endoscopic surgeries annually, U.S.). |
Each of these applications would involve regulation of pain and inflammation-related mediators like those seen in sinus and nasal inflammation.
Market Opportunity and Regulatory Clearances
The FDA first provided clearance of ClearUP in 2019 as a treatment for sinus pain from allergic rhinitis, a condition impacting an estimated 45 million U.S. adults.
In early 2021, the FDA granted our De Novo request to expand the label of ClearUP to treat moderate to severe congestion. The expanded label is not limited to any single cause of congestion, making it possible to market ClearUP for allergies, sinusitis, cold, flu or any other inflammatory condition impacting the sinus and nasal mucosa. With this clearance, the estimated available market for ClearUP expands to over 200 million U.S. adults.
Additionally, we have received a CE Mark for ClearUP that broadly covers sinus pain, pressure and congestion. The CE Mark allows us to market ClearUP in the European Union, United Kingdom, Australia, New Zealand and numerous other countries that recognize the CE Mark.
Additional product development activities are ongoing for two product candidates: (i) npdPP, an at home-use device for treating postoperative pain after sinus surgery, and (ii) npdMI, an at home-use device for treating migraine headaches. These product candidates are still in early stages of development, and will require additional studies and regulatory clearances prior to bringing them to market.
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Competition
Sinus pain and congestion are typically managed with over the counter pharmaceuticals and saline irrigation of the sinus and nasal cavities. Analgesic medications (e.g., ibuprofen/Advil, acetaminophen/Tylenol, naproxen sodium/Aleve) are used to treat sinus pain. Congestion is often managed with antihistamines (e.g., loratadine/Claritin), oral (e.g., phenylephrine/Sudafed) and intranasal (e.g., oxymetazoline/Afrin) decongestants, and intranasal glucocorticoids (e.g., fluticasone propionate/Flonase).
Over the counter pharmaceuticals have historically had the greatest market share for sinus pain and congestion treatments; however, according to Mintel Group Ltd.’s 2020 report on Cough, Cold, Flu, and Allergy Remedies, there is increasing interest among consumers to reduce reliance on drugs and to find non-drug solutions. Non-drug competitors for sinus pain and congestion treatment include nasal irrigation products such as Sinus Rinse and Navage Nasal Care. We believe that other companies selling non-pharmaceutical treatments, specifically nasal irrigation products, represent our closest competitors. ClearUP is an emerging new product offering, and currently has a small market share.
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Barriers to Entry
As a commercial-stage company that has invested our energy into patent protection and regulatory clearances, we believe we have built competitive advantages that include:
| · | Four issued U.S. patents and 18 additional international and U.S. patents pending; | |
| · | Three regulatory clearances: (US FDA 510(k) number K182025, US FDA De Novo number DEN200006 and EU CE Mark Certificate number CE 704687) for use of ClearUP to treat sinus pain, pressure and congestion; | |
| · | Two published, peer-reviewed studies in high-impact academic journals; and | |
| · | Over 450 4- and 5-star reviews. |
Growth Strategy
Our objective is to become the leading provider of non-invasive bioelectronic treatments for inflammation. With one product in market, the ClearUP Gen 2 version in development, and plans to continue research and development of additional product candidates, the key elements of our growth strategy currently include the following:
Expanded Advertising and Channel Expansion. Our existing ClearUP product is currently commercially available and we intend to invest in expanded advertising to reach a larger consumer market as well as seek out larger channel partners to increase revenues. We recently obtained approval to begin selling ClearUP on Walmart.com’s seller-managed platform, and implementation is in process.
Expanded Product Offering. We plan to expand our product offerings, first with ClearUP Gen 2, which is a design modification of the ClearUP device. ClearUP Gen 2 has a replaceable battery and is optimized for volume manufacturing and reduced cost of production. Given that ClearUP Gen 2 is a line extension of the ClearUP device, and based on the approval by our designated EU Notified Body (an organization designated by an EU member state to assess the conformity of certain products prior to their release in the EU market) and our assessment of relevant FDA guidance (Guidance for Industry and Food and Drug Administration Staff “Deciding When to Submit a 510(k) for a Change to and Existing Device” October 25, 2017), we have determined that the Gen 2 device is covered under the same regulatory clearances as ClearUP. If the FDA were to determine that ClearUP Gen 2 is not covered by the same regulatory clearances as our existing ClearUP device, we could be forced to cease distribution of ClearUP Gen 2 until we obtain regulatory clearance or approval, and we could be subject to additional enforcement action by the FDA, which would likely delay our ability to bring our ClearUP Gen 2 device to market. We also intend to continue to develop our platform for additional indications and product candidates.
Additional Research and Development. In order to aid the expansion of our product portfolio, we anticipate continued investment into further clinical research for new product candidates, continued patent protection of our proprietary technologies and additional regulatory clearances if and when they become viable.
Government Regulation
Our products are subject to extensive and rigorous regulation by the FDA and other federal, state and local authorities, as well as foreign regulatory authorities. The FDA regulates, among other things, the research, development, testing, design, manufacturing, approval, labeling, storage, recordkeeping, advertising, promotion and marketing, distribution, post approval monitoring and reporting and import and export of medical devices in the United States to assure the safety and effectiveness of medical devices for their intended use. The Federal Trade Commission (“FTC”) also regulates the advertising and labeling of our device in the United States. Further, we are subject to laws directed at preventing fraud and abuse, which subject our sales and marketing, training and other practices to government scrutiny.
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Risks Associated with our Business
An investment in our common stock involves a high degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. These risks include, but are not limited to, the following:
| · | our limited operating history; |
| · | the volatility of our operating results; |
| · | our ability to manage growth as the business scales; |
| · | our history of net losses; |
| · | our ability to generate revenues sufficient to achieve profitability and positive cash flow; |
| · | competition in our industry and our ability to compete effectively; |
| · | our ability to attract, recruit, retain and develop key personnel and qualified employees; |
| · | the effect of the COVID-19 pandemic on our business and operations and the market generally; |
| · | risks related to laws, regulations and industry standards; |
| · | risks related to the medical device industry; |
| · | reliance on significant third-party service providers; |
| · | reliance on our chief executive and management team; and |
| · | the other factors described in “Risk Factors.” |
Implications of Being an Emerging Growth Company and a Smaller Reporting Company
We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies. As a result:
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| · | we are required to have only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operation in this prospectus; |
| · | we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or the PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and financial statements (i.e., an auditor discussion and analysis) compliance with new or revised accounting standards until they are made applicable to private companies; |
| · | we are not required to engage an auditor to provide an attestation to report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002; |
| · | we are not required to comply with certain disclosure requirements related to executive compensation, such as the requirement to disclose the correlation between executive compensation and performance and the requirement to present a comparison of our Chief Executive Officer’s compensation to our median employee compensation; and |
| · | we are not required to submit certain executive compensation matters to stockholder advisory votes, such as “say on pay,” “say on frequency” and “say on golden parachute arrangements.” |
We may take advantage of these reduced reporting and other requirements until the earlier of (i) the last day of the first fiscal year following the fifth anniversary of the completion of this offering; (ii) the last day of the first fiscal year in which we have total annual gross revenue of at least $1.07 billion; (iii) the last day of the fiscal year in which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such fiscal year; or (iv) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period.
We have elected to take advantage of certain of the reduced disclosure obligations in this prospectus and the registration statement of which this prospectus is a part, and we may elect to take advantage of other reduced reporting requirements in the future. As a result, the information that we provide to our stockholders may be different than, and not comparable to, information presented by other public reporting companies.
We are also a “smaller reporting company” as defined in the Exchange Act and have elected to take advantage of certain of the scaled disclosures available to smaller reporting companies. We may be a smaller reporting company even after we are no longer an emerging growth company.
Corporate Information
We were incorporated on September 22, 2016, as a California corporation. Effective as of June 7, 2021, we reincorporated as a Delaware corporation. Our principal executive office is located in Newark, California at 39899 Balentine Drive, Suite 200, Newark, California 94560. Our telephone number is (888) 276-6888 and our corporate website is www.tivichealth.com. Unless expressly noted, none of the information on our corporate website is part of this prospectus or any prospectus supplement. We have applied to list our common stock on under the ticker symbol “TIVC.” No assurance can be given that our application will be approved.
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| Common stock offered by us | shares. |
| Common stock outstanding before this offering | shares. |
| Common stock to be outstanding after this offering | shares (or shares if the underwriters exercise their option to purchase additional shares in full). |
| Representative of the underwriter’s option to purchase additional shares of our common stock | shares (which may be purchased from us for 45 days from the date of this prospectus to cover over-allotments, if any). |
| Use of proceeds |
We estimate that the net proceeds from this offering will be approximately $ million (or approximately $ million if the underwriters exercise in full their option to purchase up to additional shares of common stock), based on an assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets for us and our stockholders. As of the date of this prospectus, we do not have a specific plan for the net proceeds to us from this offering. However, we intend to use the net proceeds from this offering to support our organic growth, to expand our sales and marketing, including through advertising, of ClearUP and its related products, to conduct research and development activities to generate, test, and/or further advance new product candidates, and to identify potential investments and acquisitions complementary to and consistent with our growth strategy, and for other general corporate purposes. We will have broad discretion in the way that we use the net proceeds of this offering. Although we may, from time to time, evaluate potential strategic investments and acquisitions, we do not have any definitive agreements in place to make any such acquisitions at this current time.
For additional information please refer to the section entitled “Use of Proceeds” on page 32 of this prospectus. |
| Representative’s Warrants | The registration statement of which this prospectus is a part also registers for sale warrants to purchase shares of our common stock which we will issue to the representative of the underwriters as a portion of the underwriting compensation payable to the underwriters in connection with this offering. The warrants will be exercisable for a four-and-one-half year period commencing 180 days following the commencement of sales in this offering at an exercise price equal to 125% of the initial public offering price of the common stock. Please see “Underwriting – Representative’s Warrants” for a description of these warrants. |
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| Risk factors | You should read the “Risk Factors” section of this prospectus and the other information in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock. |
| Market Symbol and trading | We have applied to list our common stock on the under the ticker symbol “TIVC.” No assurance can be given that our application will be approved. |
You should carefully read the “Risk Factors” section of this prospectus for a discussion of factors that you should consider before deciding to invest in our common stock.
The number of shares of our common stock to be outstanding after this offering is based on (i) 9,947,916 shares of our common stock outstanding as of August 1, 2021, (ii) 8,908,600 shares of common stock issuable upon conversion of 8,908,600 shares of our outstanding preferred stock immediately prior to the completion of this offering, and (iii) shares of common stock issuable upon conversion of outstanding convertible notes in the aggregate principal amount of $ , and excludes the following:
| · | 3,055,167 shares of common stock issuable upon exercise of options to purchase shares of common stock outstanding as of August 1, 2021, with a weighted-average exercise price of approximately $0.13 per share; | |
| · | 200,000 shares of common stock issuable upon exercise of warrants to purchase shares of common stock outstanding as of August 1, 2021, with an exercise price of approximately $0.26 per share; | |
| · | 121,990 shares of common stock reserved for future issuance under our 2017 Equity Incentive Plan (“2017 Plan”), as of August 1, 2021; and | |
| · | shares of common stock to be reserved for future issuance under our 2021 Equity Incentive Plan (“2021 Plan”), which will be effective upon the completion of this offering. | |
Unless otherwise indicated, this prospectus reflects and assumes the following:
| · | the conversion of all of our outstanding shares of convertible preferred stock into 8,908,600 shares of common stock immediately prior to the completion of this offering; | |
| · | the conversion and settlement of the aggregate outstanding principal amount plus accrued interest under our outstanding convertible promissory notes into shares of our common stock; | |
| · | no exercise of outstanding options or warrants; | |
| · | no exercise by the underwriters of their option to purchase up to additional shares of our common stock from us to cover over-allotments, if any; | |
| · | no exercise of the representative’s warrants to be issued upon consummation of this offering at an exercise price equal to 125% of the initial offering price of the common stock; | |
| · | the filing and effectiveness of our amended and restated certificate of incorporation and the effectiveness of our amended and restated bylaws, which will occur immediately prior to the completion of this offering; | |
| · | an initial public offering price of $ per share, which is the midpoint of the estimate of the price range set forth on the cover page of this prospectus; and | |
| · | a one-for- reverse stock split of our common stock effected on , 2021. |
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The following tables summarize our financial data for the periods ended on and as of the dates indicated. We have derived the statements of operations data for the years ended December 31, 2020 and 2019 from our audited financial statements and related notes included elsewhere in this prospectus. We have derived the unaudited financial data for the three months ended March 31, 2021 and 2020 and as of March 31, 2021 from our unaudited condensed financial statements included elsewhere in this prospectus, which have been prepared in accordance with generally accepted accounting principles in the United States of America on the same basis as the annual audited financial statements and, in the opinion of management, the unaudited data reflects all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial information in those statements. Our historical results are not necessarily indicative of results that may be expected in the future, and results for the period ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year ending December 31, 2021. You should read the following summary financial data together with our financial statements and the related notes appearing elsewhere in this prospectus, as well as with the information in the section of this prospectus entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
| Year ended | Three Months Ended | |||||||||||||||
| (in thousands, except per share data) | December 31, | March 31, | ||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Total revenue | $ | 860 | $ | 420 | $ | 298 | $ | 122 | ||||||||
| Cost of sales | $ | 1,085 | $ | 709 | $ | 301 | $ | 156 | ||||||||
| Operating expenses | ||||||||||||||||
| Research and development | $ | 659 | $ | 990 | $ | 178 | $ | 226 | ||||||||
| Sales and marketing | $ | 1,306 | $ | 1,191 | $ | 274 | $ | 385 | ||||||||
| General and administrative | $ | 1,014 | $ | 1,173 | $ | 536 | $ | 361 | ||||||||
| Total operating expenses | $ | 2,979 | $ | 3,354 | $ | 988 | $ | 972 | ||||||||
| Interest expense | $ | (423 | ) | $ | (443 | ) | $ | (274 | ) | $ | - | |||||
| Change in fair value of derivative liabilities | $ | (27 | ) | $ | (75 | ) | $ | (27 | ) | $ | - | |||||
| Other income | $ | 15 | $ | 15 | $ | 2 | $ | 4 | ||||||||
| Provision for income taxes | $ | - | $ | 2 | $ | 1 | $ | - | ||||||||
| Net loss | $ | (3,639 | ) | $ | (4,148 | ) | $ | (1,291 | ) | $ | (1,002 | ) | ||||
| Net loss per share – basic and diluted | $ | (0.40 | ) | $ | (0.45 | ) | $ | (0.14 | ) | $ | (0.11 | ) | ||||
| (in thousands) | As of March 31, 2021 | |||||||||||
| Actual | Pro Forma (1) | Pro Forma As Adjusted (2) | ||||||||||
| (unaudited) | (unaudited) | (unaudited) | ||||||||||
| Balance Sheet Data: | ||||||||||||
| Cash and cash equivalents | $ | 600 | $ | 2,913 | ||||||||
| Working capital (deficit) | $ | (629 | ) | $ | 1,684 | |||||||
| Total assets | $ | 1,233 | $ | 3,546 | ||||||||
| Notes payable | $ | 164 | $ | 164 | ||||||||
| Convertible notes payable | $ | 1,726 | $ | 4,039 | ||||||||
| Total liabilities | $ | 3,685 | $ | 5,998 | ||||||||
| Accumulated deficit | $ | (12,343 | ) | $ | (12,343 | ) | ||||||
| Total stockholders' deficit | $ | (2,452 | ) | $ | (2,452 | ) | ||||||
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| (1) | The pro forma figures give effect to the sale by the Company of certain convertible notes payable (collectively, the “Notes”) in the aggregate principal amount of $2,557,221, which sales occurred during April 2021 through June 2021. After recording $244,069 of original issue discount, the Company received net cash proceeds in the aggregate amount of $2,313,152 for the Notes. The original issue discount is recorded as a contra liability and will be amortized over the life of the Notes. Three of such Notes, in the aggregate principal amount of $787,256, have an original issue discount of ten percent (10%), and two of such Notes, in the aggregate principal amount of $1,322,500, have an original issue discount of fifteen percent (15%). All Notes bear interest at a rate of three percent (3%) per annum, and mature on June 1, 2023. |
| (2) | Pro forma as adjusted balance sheet data reflects the items described in footnote 1 and our sale of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the estimate of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Pro forma as adjusted balance sheet data is illustrative only and will change based on the actual public offering price and other terms of this offering determined at pricing. Each $0.25 increase (decrease) in the assumed initial public offering price per share of common stock would increase (decrease) the amount of cash and cash equivalents, working capital, total assets, and total stockholders’ equity by approximately $ , assuming the number of shares of common stock offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions, estimated offering expenses payable by us. We may also increase or decrease the number of common stock to be issued in this offering. Each increase (decrease) of 1.0 million shares of common stock offered by us would increase (decrease) the as adjusted amount of cash and cash equivalents, working capital, total assets and total stockholders’ deficit by approximately $ , assuming the assumed initial public offering price per share of common stock remains the same, and after deducting underwriting discounts and commissions, and estimated offering expenses payable by us. |
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Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other information in this prospectus, including our financial statements and the related notes and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The occurrence of any of the events or developments described below could harm our business, financial condition, operating results, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
Risk Factor Summary
Below is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below and should be carefully considered, together with other information included in this prospectus.
| · | We have a relatively limited operating history and may not be able to execute on our business strategy. |
| · | Our operating results will likely be volatile and may not be a reliable indicator of our future performance. |
| · | If we fail to manage our growth effectively, including with respect to potential acquisitions of other companies, our business could be materially and adversely affected. |
| · | We have a history of net losses, we may not achieve or maintain profitability in the future, and there is substantial doubt about our ability to continue as a going concern. |
| · | We have identified a material weakness in our internal control over financial reporting. |
| · | We expect that we will need additional capital, which, if obtainable, could dilute the ownership interest of investors. |
| · | Our business plan depends heavily on revenues from our core technology, the clinical and consumer acceptance of which is at this time unproven. |
| · | We depend on our senior management team, and the loss of one or more key personnel or an inability to attract and retain highly skilled personnel may impair our ability to grow our business. |
| · | The product guarantees and warranties we provide on our products could have a material adverse effect on our business, financial condition and results of operations. |
| · | Our markets are undergoing continuous change, and our future success will depend on our ability to meet the changing needs of our customers. |
| · | Developing medical technology entails significant technical, regulatory and business risks. |
| · | We may face risks associated with expanding to international markets, including trade disputes that could materially impact our business. |
| · | The size and expected growth of our available market has not been established with precision and may be smaller than we estimate. |
| · | Our insurance may not adequately cover our operating risk. |
| · | Our business could be disrupted by catastrophic occurrences and similar events, including COVID-19. |
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| · | We rely on third parties for sales, marketing, distribution, and other business operations. We also rely on third parties to supply and manufacture our devices, which could be stopped, delayed or made less profitable if any of these third parties fail to provide us with sufficient quantities at acceptable quality levels or prices, or fail to maintain or achieve satisfactory regulatory compliance. |
| · | Changes in the regulatory landscape for our products could render our business model contrary to applicable regulatory requirements, and we may be required to seek additional clearance or approval for our products. |
| · | We are subject to consumer protection laws that regulate our marketing practices and prohibit unfair or deceptive acts or practices. Our actual or perceived failure to comply with such obligations could harm our business, and changes in such regulations or laws could require us to modify our products or marketing or advertising efforts. |
| · | Our reliance on vendors in foreign countries, including China, subjects us to risks and uncertainties relating to foreign laws and regulations and changes in relations between the United States and such foreign countries. |
| · | We are highly dependent on our intellectual property (“IP”) and our methods of protecting our IP may not be adequate or could be costly. In addition, we may face risks of claims for IP infringement. We may be unable to enforce our intellectual property rights throughout the world. |
| · | We expect that our stock price may fluctuate significantly, and investors may not be able to resell their shares at or above the initial public offering price. An active trading market for our common stock may never develop. |
| · | We do not expect to pay any cash dividends for the foreseeable future. |
| · | Future issuances of stock or other securities could dilute the holdings of our stockholders and could materially affect the price of the shares of common stock being issued in connection with this offering. |
| · | We are an “emerging growth company” and a “smaller reporting company,” and the reduced public company reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors. |
| · | If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline. |
| · | A significant portion of our total outstanding shares are restricted from immediate resale, but such shares may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well. |
| · | If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline. |
| · | Actual or perceived failures to comply with applicable data privacy and security laws, regulations, policies, standards, contractual obligations and other requirements related to data privacy and security and changes to such laws, regulations, standards, policies and contractual obligations could adversely affect our business, financial condition and results of operations. |
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Risks Related to Our Financial Condition and Business Model
We have a relatively limited operating history and may not be able to execute on our business strategy.
We were originally incorporated in 2016 and began selling our first product in 2019. Accordingly, we have a limited operating history, which makes an evaluation of our future prospects and execution ability difficult. Our revenue and income-producing potential is unproven, and our business model and strategy may continue to evolve. Future revenues are contingent upon several factors, including, without limitation, our ability to successfully develop and commercialize ClearUp Gen 2, our ability to develop relationships with channel partners and customers, as well as the clinical and market acceptance of our technology. We may need to make business decisions that could adversely affect our operating results, such as modifications to our pricing strategy, business structure or operations.
Our operating results will likely be volatile and may not be a reliable indicator of our future performance.
Our future expenses, revenues and operating results may vary significantly from quarter to quarter due to a number of factors, including, without limitation:
| · | receptiveness of the market to a fundamentally new way of treating target conditions; |
| · | intrinsic variability in spending patterns associated with the conduct of clinical trials; |
| · | fluctuations in demand for our technology, including seasonal variations; and |
| · | delays in introducing new technology to market, including product design, manufacturing, marketing cycles, sales and distribution related delays. |
We expect that our revenues may be volatile as we develop new technology and obtain new customers and channel partners in the future. The volume and timing of commercial outcomes are difficult to estimate, as the adoption of bioelectronic treatments is immature, and the sales cycle may vary substantially from forecasts.
If we fail to manage our growth effectively, our business could be materially and adversely affected.
We will not be successful unless we are able to generate additional revenues and grow our business, which will likely require us to hire additional employees and expand our technology, product, development and sales and marketing divisions in order to achieve our business plan. Our management systems are emergent. The continued growth of our business may place demands on our management, financial, operational, technological and other resources, and we expect that our growth will require us to continue developing and improving our operational, financial and other internal controls. We may not be able to address these challenges in a cost-effective manner, or at all. If we do not effectively manage our growth, we may not be able to execute on our business plan, respond to competitive pressures, take advantage of market opportunities, satisfy customer requirements or maintain high-quality product offerings, which could have a material adverse effect on our business, financial condition and results of operations.
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We have a history of net losses, we may not achieve or maintain profitability in the future, and there is substantial doubt about our ability to continue as a going concern.
We have incurred net losses since inception. For the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019, we incurred net losses of $1,291,000, $3,639,000 and $4,148,000, respectively, and at March 31, 2021, we had a working capital deficit of $629,000 an accumulated deficit of $12,343,000. Since inception through March 31, 2021, we have spent approximately $9,807,000 on organizational and start-up activities, to recruit key managers and employees, to develop our products, to develop our manufacturing know-how and customer support resources and for research and development. The net losses we incur may fluctuate significantly from quarter to quarter and may increase as a result of a continuation of the COVID-19 pandemic. Additionally, future costs relating to product development and operating activities may be significantly higher than our historical costs.
Our long-term success is dependent upon our ability to successfully develop, commercialize and market our products, earn revenue, obtain additional capital when needed and, ultimately, to achieve profitable operations. We will need to generate significant additional revenue to achieve profitability. Future products may require substantially higher levels of investment than initial products, including investments in research, development, regulatory and/or marketing and sales. It is possible that we will not achieve profitability or that, even if we do achieve profitability, we may not maintain or increase profitability in the future. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
As a result of the above, management has concluded that there is substantial doubt about our ability to continue as a going concern. Management’s plans to address this uncertainty are discussed in Note 2 to our consolidated financial statements, which are included elsewhere in this prospectus. The report of our independent registered public accountant on our financial statements as of and for the years ended December 31, 2020 and December 31, 2019 also includes explanatory language describing the existence of substantial doubt about our ability to continue as a going concern. There have been no adjustments to the accompanying financial statements to reflect this uncertainty.
We have identified a material weakness in our internal control over financial reporting.
Prior to this initial public offering, we were a private company and had limited accounting and financial reporting personnel and other resources with which to address our internal controls and related procedures. In connection with the audit of our consolidated financial statements for the years ended December 31, 2020 and 2019, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness in our case arose from an accumulation of significant deficiencies, which amounted to a material weakness in internal controls. Such significant deficiencies identified included insufficient accounting and financial reporting personnel, inadequate segregation of duties, and inadequate application of inventory cost accounting procedures. If we are unable to remedy our material weakness, or if we generally fail to establish and maintain effective internal controls appropriate for a public company, we may be unable to produce timely and accurate financial statements, and we may conclude that our internal control over financial reporting is not effective, which could adversely impact our investors’ confidence and our stock price.
We expect that we will need additional capital, which, if obtainable, could dilute the ownership interest of investors.
We anticipate we will need additional capital to market our products, develop additional products and fund our operations. To the extent that cash from operations and the proceeds from this offering are insufficient to fund our operations, we may need to raise additional funds through the issuance of equity, equity-related or convertible debt, or other securities. We cannot be certain that additional financing will be available to us on acceptable terms when required, or at all.
If we issue additional equity securities or securities convertible into equity securities, our existing stockholders will be subject to dilution. Additionally, sales of substantial amounts of our equity securities could have an adverse effect on the value of our equity and our ability to raise additional capital through future capital increases.
Our business plan depends heavily on revenues from our initial products, the clinical and consumer acceptance of which is unproven at this time.
Our future growth depends on the commercial success of our technology and initial products. It is not certain that our target customers will choose our technology for technical, cost, support or commercial reasons. If our target customers do not widely adopt and purchase our technology, our future growth will be limited. Further, our resources and investments may not be adequate to achieve the targeted level of manufacturing and sales set out in our business plan.
We depend on our senior management team and the loss of one or more key personnel or an inability to attract and retain highly skilled personnel may impair our ability to grow our business.
Our future success depends heavily upon the continued services of our executive officers and key personnel, including Jennifer Ernst, our Chief Executive Officer and founder, and Briana Benz, our Chief Financial Officer. We have not entered into employment agreements with most of our executive officers or other key personnel that require them to continue to work for us for any specified period and, therefore, they may terminate employment with us at any time, for any reason and with no advance notice. The replacement of members of our senior management team or other key personnel would likely involve significant time and costs, and the loss of these employees may significantly delay or prevent the achievement of our business objectives.
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In addition, our ability to recruit and retain talent in all areas of the business, including but not limited to skilled hires in marketing, product development, regulatory, clinical, quality, logistics, and finance, faces significant competition. We may not be able to hire or retain the type and number of managerial, sales and technical personnel necessary for future success. We will need to devote considerable resources to ensure that we retain our employees in the face of a highly competitive market for talented personnel. If we fail to attract and retain the skilled employees required, this could harm our business and hamper future expansion of our sales and support operations.
We rely on third parties for sales, marketing, manufacturing, distribution, and other business operations.
For us to be successful, third parties providing us with sales, marketing, manufacturing, distribution and other business operations services must be able to provide us with such services in compliance with regulatory requirements, in accordance with agreed upon specifications, at acceptable costs, and on a timely basis. While our service providers have generally met our expectations in the past, their ability and willingness to continue to do so going forward, and the ability and willingness of any new service provider to meet our expectations in the future, may be limited for several reasons, including our relative importance as a customer or disruptions caused by the COVID-19 pandemic. Additionally, we rely on third-party platforms such as Amazon.com, Walgreens.com, BestBuy.com, Walmart.com, FSAStore.com and other specialty online retailers, to distribute our products. We do not have long term agreements in place with certain of our distributors. There is no guarantee that such third parties will continue to allow us to distribute our products through their platforms. Accordingly, we may be exposed to disruptions or reduced qualify of services, including access to distribution channels, due to factors beyond our direct control, which may impact our ability to operate successfully.
We may not be able to successfully identify, consummate or integrate acquisitions or to successfully manage the impacts of such transactions on our operations.
Part of our business strategy includes investigating growth through acquisitions. We may expand our business by making strategic acquisitions and seeking suitable acquisition targets to enhance our growth. Material acquisitions, dispositions and other strategic transactions involve a number of risks, including: (i) the potential disruption of our ongoing business; (ii) the distraction of management away from the ongoing oversight of our existing business activities; (iii) incurring additional indebtedness; (iv) the anticipated benefits and cost savings of those transactions not being realized fully, or at all, or taking longer to realize than anticipated; (v) an increase in the scope and complexity of our operations; and (vi) the loss or reduction of control over certain of our assets.
The pursuit of acquisitions may pose certain risks to us. We may not be able to identify acquisition candidates that fit our criteria for growth and profitability. Even if we are able to identify such candidates, we may not be able to acquire them on terms or financing satisfactory to us. We may incur expenses and dedicate attention and resources associated with the review of acquisition opportunities, whether or not we consummate such acquisitions, which may divert management’s attention from our day-to-day business.
Additionally, even if we are able to acquire suitable targets on agreeable terms, we may not be able to successfully integrate their operations with ours. Achieving the anticipated benefits of any acquisition will depend in significant part upon whether we integrate such acquired businesses in an efficient and effective manner. We may not be able to achieve the anticipated operating and cost synergies or long-term strategic benefits of our acquisitions within the anticipated timing, or at all. The benefits from any acquisition will be offset by the costs incurred in integrating the businesses and operations. We may also assume liabilities in connection with acquisitions to which we would not otherwise be exposed. An inability to realize any or all of the anticipated synergies or other benefits of an acquisition as well as any delays that may be encountered in the integration process, which may delay the timing of such synergies or other benefits, could have an adverse effect on our business, results of operations and financial condition.
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The product guarantees and warranties we provide on our products could have a material adverse effect on our business, financial condition and results of operations.
We provide product guarantees to our customers, pursuant to which we allow for the return of products from customers within 60 days after the original sale. We also provide a one-year warranty for any defective product. Existing and future product guarantees and warranties place us at the risk of incurring future returns and repair and/or replacement costs. While we engage in product quality programs and processes, including monitoring and evaluating the quality of our components sourced from our suppliers, our guaranty and warranty obligation is affected by actual product defect rates, parts and equipment costs and service labor costs incurred in correcting a product defect. Our reserves set aside to cover warranty returns and customer returns may be inadequate due to an unanticipated number of customer returns, undetected product defects, unanticipated component failures or changes in estimates for material, labor and other costs we may incur to replace projected product defects. As a result, if actual customer returns, product defect rates, parts and equipment costs or service labor costs exceed our estimates, it could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Business and Markets
Our ability to compete in the sinus, cold and allergy market is unproven.
We compete in the sinus, cold and allergy market segment, a segment with large, entrenched players. We expect to experience competition from current and potential new competitors, some of which may be better established and have significantly greater financial, technical, marketing and distribution resources. We encounter competition from larger, well-established and well-financed entities that may continue to acquire, invest in, or form joint ventures with producers of alternate sinus care technologies.
Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can. Our market position could erode rapidly as a result of the development of new, superior products and technology by competitors. In addition, current and potential competitors may have greater name recognition, broader physician reach and more extensive customer bases. Increased competition could result in price reductions, lower volume sales, and reduced gross margins. There can be no assurance that we will be able to compete successfully against our current or future competitors or that competitive pressures will not have a material adverse effect on our business, financial condition and results of operations.
Our markets are undergoing continuous change, and our future success will depend on our ability to meet the changing needs of our customers.
For our business to survive and grow, we must continue to enhance and improve our products and technology to address a broader range of customers’ needs. If new clinical standards and practices emerge, our existing technology may become obsolete. Our future success will depend upon, among other things, our ability to:
| · | develop and license new technologies that address the increasingly sophisticated and varied needs of prospective customers; |
| · | respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis; and |
| · | respond to shifts in the competitive landscape. |
Developing medical technology entails significant technical, regulatory and business risks.
We may fail to adapt our technology to user requirements or emerging treatment standards. Microcurrent and other neuromodulation therapies are not currently considered standard of care for inflammation and may not ever be considered standard of care. Treatment standards may not evolve to incorporate our product. New industry standards for the development, manufacture and marketing of medical devices may evolve and we may not be able to conform to the changes, meet new standards in a timely fashion or maintain a competitive position in the market. In particular, regulatory standards for electrical treatments of medical conditions are evolving. If we face material delays in introducing our products and new technology, we may fail to attract new customers.
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Customer or third-party complaints or negative reviews or publicity about our company or our products could harm our reputation and brand.
We are heavily dependent on customers who use our ClearUP device to provide good reviews and word-of-mouth recommendations to contribute to our growth. Customers who are dissatisfied with their experiences with our products or services may post negative reviews. We may also be the subject of blog, forum or other media postings that include inaccurate statements and/or create negative publicity. In addition, any negative news regarding bioelectronic medicine may adversely impact our business. Any negative reviews or publicity, whether real or perceived, disseminated by word-of-mouth, by the general media, by electronic or social networking means or by other methods, could harm our reputation and brand and could severely diminish consumer confidence in our products.
We may face risks associated with expanding to international markets.
We intend to pursue marketing and selling our products internationally, primarily through distribution arrangements and out-bound regional licensing. We have limited experience operating outside the United States, and we will likely need to rely heavily on distributors and licensees. Expansion into international markets may expose us to, among other things, the following additional risks:
| · | strain on our managerial resources; |
| · | pricing pressure that we may experience internationally; |
| · | a shortage of high-quality salespeople and distributors; |
| · | competitive disadvantage to competition with established business and customer relationships; |
| · | foreign currency exchange rate fluctuations; |
| · | the imposition of additional U.S. and foreign governmental controls or regulations; |
| · | economic instability; |
| · | changes in duties and tariffs, license obligations and other non-tariff barriers to trade; |
| · | the imposition of restrictions on the activities of foreign agents, representatives and distributors; |
| · | scrutiny of foreign tax authorities which could result in significant fines, penalties and additional taxes being imposed on us; |
| · | laws and business practices favoring local companies; |
| · | difficulties in maintaining consistency with our internal guidelines; |
| · | difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; |
| · | the imposition of costly and lengthy new export licensing requirements; |
| · | the imposition of U.S. or international sanctions against a country, company, person or entity with whom we do business that would restrict or prohibit continued business with the sanctioned country, company, person or entity; and |
| · | the imposition of new trade restrictions. |
The size and expected growth of our available market has not been established with precision and may be smaller than we estimate.
Our data on the available market for our current products and future products is based on a number of internal and third-party research reports, estimates and assumptions. While we believe that such research, our assumptions and the data underlying our estimates are reasonable, these assumptions and estimates may not be correct. In addition, the statements in this prospectus relating to, among other things, the expected growth in the market for our ClearUP device are based on a number of internal and third-party data, estimates and assumptions, and may prove to be inaccurate. If the actual number of consumers who would benefit from our products, the price at which we can sell future products or the available market for our products is smaller than we estimate, it could have a material adverse effect on our business, financial condition and results of operations.
Our insurance may not adequately cover our operating risk or litigation exposure.
We have insurance to protect our assets, operations and employees. While we believe our insurance coverage addresses the material risks to which we are exposed and is adequate and customary in our current state of operations, such insurance is subject to coverage limits and exclusions and may not be available for the risks and hazards to which we are exposed. Also, our insurance may be insufficient to cover the costs of any securities-related or other lawsuits or litigation, regardless of the merits of any such lawsuits or litigation. In addition, no assurance can be given that such insurance will be adequate to cover our liabilities or will be generally available in the future or, if available, that premiums will be commercially justifiable or affordable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, or if we were to incur such liability at a time when we are not able to obtain liability insurance, our business, results of operations and financial condition could be materially adversely affected.
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Our business could be disrupted by catastrophic occurrences and similar events.
Our headquarters are located in the San Francisco Bay Area, and we are vulnerable to interruption from catastrophic occurrences, such as earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, criminal acts, sabotage, other intentional acts of vandalism and misconduct, geopolitical events, disease, such as the COVID-19 pandemic, and similar events. The San Francisco Bay Area is a region known for seismic activity. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at our facilities or the facilities of our suppliers and vendors could result in disruptions and other performance and quality problems. If we are unable to develop adequate plans to ensure that our business functions continue to operate during and after a disaster and/or to execute successfully on those plans in the event of a disaster or emergency, our business would be seriously harmed.
We rely on third parties to supply and manufacture our devices, and we expect to continue to rely on third parties to manufacture and supply our devices. The supply or manufacture of our devices could be stopped, delayed or made less profitable if any of these third parties fail to provide us with sufficient quantities at acceptable quality levels or prices, or fail to maintain or achieve satisfactory regulatory compliance.
We rely on, and expect to continue to rely on, third-party providers for the supply and manufacturing of our devices, including components and electronic parts. The circumstances relating to the COVID-19 pandemic, as well as other disasters, have caused significant shortages in the supply of electronic parts. To the extent any of our manufacturers or suppliers is unable to meet our requirements in a timely manner, including as a result of circumstances relating to the COVID-19 pandemic, we may not be able to obtain an adequate supply of electronic parts or components and our business may be adversely affected. We do not control the operational processes of the contract manufacturing organizations with whom we contract and are dependent on these third parties for the production of our devices in accordance with relevant regulations, which include, among other things, quality control, quality assurance and the maintenance of records and documentation. In general, reliance on third-party providers may expose us to more risk than if we were to manufacture our devices ourselves, and such reliance may limit our ability to scale operations.
Risks Related to Legal and Regulatory Matters
Changes in the regulatory landscape for our products could render our business model contrary to applicable regulatory requirements, and we may be required to seek additional clearance or approval for our products.
Our ClearUP device is a US FDA Class II device with FDA clearance for over-the-counter purchase. ClearUP Gen 2 is a design modification of the ClearUP device. Given that ClearUP Gen 2 is a line extension of the ClearUP device, and based on the approval by our designated EU Notified Body (an organization designated by an EU member state to assess the conformity of certain products prior to their release in the EU market) and our assessment of relevant FDA guidance (Guidance for Industry and Food and Drug Administration Staff “Deciding When to Submit a 510(k) for a Change to and Existing Device” October 25, 2017), we have determined that the Gen 2 device is covered under the same regulatory clearances as ClearUP. If the FDA were to determine that our products do not properly satisfy the conditions for FDA clearance as Class II devices, or that our ClearUP Gen 2 device is not covered by the same regulatory clearances as our existing ClearUP device, we could be forced to cease distribution of our products until we obtain regulatory clearance or approval, and we could be subject to additional enforcement action by the FDA. All existing FDA clearances, including those covering our first generation ClearUP device, could be subject to change based on subsequent FDA review or changes in FDA regulations. In addition, many states have laws regarding the provision of medical devices, and if we are found to be in violation of the laws of any state in which our devices are sold, we could be subject to further sanctions at the state level.
The laws and regulations applicable to the industries in which we operate are continuously evolving. Changes in our regulatory and legal landscape could substantially increase the costs of compliance, increase the time and resources required to bring new products to market, or otherwise negatively impact our business. There can be no assurance that new legislation or regulations will not impose significant additional costs or burdens on our business or subject us to additional liabilities. We may be or become subject to claims that our operations violate these laws or regulations.
Our business, financial condition, results of operations and growth may be impacted by the effects of the COVID-19 pandemic.
We are subject to risks related to public health crises, such as the global pandemic associated with COVID-19. In December 2019, a novel strain of coronavirus, SARS-CoV-2, was reported to have surfaced in Wuhan, China. Since then, SARS-CoV-2, and the resulting disease COVID-19, has spread to most countries, and all 50 states within the United States. Of significant current concern is the emergence of a number of SARS-CoV-2 variants, some of which have increased transmissibility and may be resistant to current vaccines being administered throughout the world. The impact of such variants cannot be predicted at this time, and could depend on numerous factors, including vaccination rates among the population, the effectiveness of COVID-19 vaccines against such variants and the response by governmental bodies and regulators. The continuing COVID-19 pandemic may negatively impact our operations and revenues and overall financial condition by harming the ability or willingness of customers to pay for our products due to macro-economic conditions resulting from the pandemic or the operations of manufacturers, suppliers and other third parties with which we do business. These challenges will likely continue for the duration of the pandemic, which is uncertain, and the macro-economic effects of the pandemic will likely continue far beyond the duration of the pandemic.
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Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. The electronics supply chain on which we depend has been impacted by plant closures and reduced operations, resulting in global parts shortages for the electronic industry as a whole. The governor of California, where our headquarters are located, previously issued “shelter-in-place” or “stay at home” orders restricting non-essential activities, travel and business operations, which could potentially be put in place again in the future. Such orders or restrictions have resulted in our offices closing, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations. Other potential disruptions may include delays in processing registrations or approvals by applicable state or federal regulatory bodies, delays in product development efforts, and additional government requirements or other incremental mitigation efforts that may further impact our capacity to manufacture, sell and support the use of our ClearUP device. In addition, even after the “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19 are lifted, we may continue to experience disruptions to our business.
While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, reducing our ability to access capital, which could negatively affect our future liquidity, including our ability to repay our existing indebtedness. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. The COVID-19 pandemic has also resulted in a significant increase in unemployment in the United States, which may continue even after the pandemic subsides. The occurrence of any such events may lead to reduced disposable income and reduced consumer demand, which could adversely affect the number of our products sold after the pandemic has subsided.
We are subject to consumer protection laws that regulate our marketing practices and prohibit unfair or deceptive acts or practices. Our actual or perceived failure to comply with such obligations could harm our business, and changes in such regulations or laws could require us to modify our products or marketing or advertising efforts.
In connection with the marketing or advertisement of our products, we could be the target of claims relating to false, misleading, deceptive or otherwise noncompliant advertising or marketing practices, including under the auspices of the FTC and state consumer protection statutes. If we rely on third parties to provide any marketing and advertising of our products, we could be liable for, or face reputational harm as a result of, their marketing practices if, for example, they fail to comply with applicable statutory and regulatory requirements.
If we are found to have breached any consumer protection, advertising, unfair competition or other laws or regulations, we may be subject to enforcement actions that require us to change our marketing and business practices in a manner that may negatively impact us. This could also result in litigation, fines, penalties and adverse publicity that could cause reputational harm and loss of customer trust, which could have a material adverse effect on our business, financial condition and results of operations.
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Our reliance on vendors in foreign countries, including China, subjects us to risks and uncertainties relating to foreign laws and regulations and changes in relations between the United States and such foreign countries.
Electronic components for our ClearUP devices are sourced primarily from China, and we may in the future source components from vendors located in other foreign countries. Under its current leadership, the government of China has been pursuing economic reform policies, including by encouraging foreign trade and investment. However, there is no assurance that the Chinese government will continue to pursue such policies, that such policies will be successfully implemented, that such policies will not be significantly altered, or that such policies will be beneficial to our partnerships in China. China’s system of laws, as well as the laws of other foreign countries where we may source components, can be unpredictable, especially with respect to foreign investment and foreign trade. The United States government has called for substantial changes to foreign trade policy with China and has raised tariffs on several Chinese goods. China has retaliated with increased tariffs on United States goods. Any further changes in United States trade policy could trigger retaliatory actions by affected countries, including China, resulting in trade wars. Changes to Chinese regulations affecting the manufacture of electronic components may also be unpredictable. Changes to regulations in any other country where we may source components in the future may also be unpredictable and could affect the manufacture of electronic components in such countries and our ability to purchase components on a cost-effective basis. Any regulatory changes and changes in United States and China relations, or changes in relations with the United States any other country where we may source components in the future, may have a material adverse effect on our vendors in China and other such countries which could materially harm our business and financial condition.
International trade disputes could result in tariffs and other protectionist measures that could have a material adverse effect on our business, financial condition and results of operations.
Tariffs could increase the cost of our products and raw materials that go into making them. These increased costs could adversely impact the gross margin that we earn on our products. Tariffs could also make our products more expensive for customers, which could make our products less competitive and reduce consumer demand. Countries may also adopt other protectionist measures that could limit our ability to offer our products. Political uncertainty surrounding international trade disputes and protectionist measures could also have a negative effect on consumer confidence and spending, which could have a material adverse effect on our business, financial condition and results of operations.
We may in the future become subject to the requirements of the Sunshine Act.
We are not currently subject to the Physician Payment Sunshine Act (“Sunshine Act”), which was enacted as part of the Affordable Care Act. However, if we begin selling our products directly to governmental entities or our products become reimbursable by Medicare or Medicaid, then we may become subject to the Sunshine Act, which will require us to report annually to the Secretary of Health and Human Services: (i) payments or other transfers of value made by us, or by a third-party as directed by us, to physicians and teaching hospitals or to third parties on behalf of physicians or teaching hospitals; and (ii) physician ownership and investment interests in our company. The payments required to be reported include the cost of meals provided to a physician, travel reimbursements and other transfers of value, including those provided as part of contracted services such as speaker programs, advisory boards, consultation services and clinical trial services. Failure to comply with the reporting requirements can result in significant civil monetary penalties ranging from $1,000 to $10,000 for each payment or other transfer of value that is not reported (up to a maximum per annual report of $150,000) and from $10,000 to $100,000 for each knowing failure to report (up to a maximum per annual report of $1.0 million). Additionally, becoming subject to the Sunshine Act and the information we disclose could lead to greater scrutiny, which could result in modifications to established practices and additional costs. Additionally, similar reporting requirements have also been enacted on the state level domestically, and an increasing number of countries worldwide have either adopted or are considering adopting similar laws requiring transparency of interactions with healthcare professionals.
Risks Related to Our Intellectual Property
We are highly dependent on intellectual property (“IP”), and our methods of protecting our IP may not be adequate or could be costly.
We rely on a combination of patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our IP rights. We are building our IP portfolio, and may not be able to secure sufficient protection to prevent competition from entering the market or from creating competing products.
We cannot be certain that we will be able to obtain patent protection on the key components of our technology or that we will be able to obtain patents in key jurisdictions, such as the United States, Europe and Asia. We cannot give assurances that we will develop new products or technologies that are patentable or (to the extent applicable) that any new products will be covered by existing patents, that any issued patent will provide us with any competitive advantages or will not be challenged by third parties, or that the patents of others will not impair our ability to do business.
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We cannot guarantee that the applicable governmental authorities will approve any of our future trademark applications. Even if the applications are approved, third parties may seek to oppose or challenge these registrations. A failure to obtain trademark registrations in key jurisdictions could limit our ability to use our trademarks and impede our marketing efforts in those jurisdictions.
Despite our efforts to protect our IP, unauthorized parties may attempt to copy or obtain and use our technology. Policing the unauthorized use of our technology on a global basis is difficult, and there can be no assurance that the steps taken by us will prevent misappropriation of our technology.
We cannot give assurances that our measures for preserving the secrecy of our trade secrets and confidential information will be sufficient to prevent others from obtaining our trade secrets.
We generally require our employees, consultants and corporate partners to sign confidentiality and non-disclosure agreements prohibiting them from disclosing any of our trade secrets. Our employment agreements and consulting agreements also contain confidentiality undertakings, as well as non-compete provisions, which prohibit employees, advisors and consultants from acting contrary to our interests during the period of their relationship with us.
Despite our efforts to preserve the secrecy of our trade secrets and confidential information, we may not have adequate remedies to preserve our trade secrets or to compensate us fully for our loss if employees, consultants or corporate partners breach confidentiality agreements with us. We cannot give assurances that our trade secrets will provide any competitive advantage, as they may become known to, or be independently developed by, competitors, regardless of the success of any measures we may take to try to preserve their confidentiality.
Any failure or inability to protect any of our IP or confidential information, or to enforce our rights against any infringement or misappropriation of our IP or confidential information, could have a material adverse effect on our business, financial condition and results of operations. Additionally, we may be forced to litigate to enforce or defend our IP, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
We may face risks of claims for IP infringement.
Our competitors or other persons may have already obtained or may in the future obtain patents or other rights relating to one or more aspects of our technology. Because we have not conducted a formal freedom to operate analysis for patents related to our technology, we may not be aware of issued patents that a third party might assert are infringed by our current or any future technology, which could materially impair our ability to commercialize our current or any future technology. Even if we diligently search third-party patents for potential infringement by our current or any future technology, we may not successfully find patents that our current or any future technology may infringe. If we are unable to secure and maintain freedom to operate, others could preclude us from commercializing our current or future technology. We may in the future become party to, or be threatened with, adversarial proceedings or litigation regarding intellectual property rights with respect to our current and any future technology, whether or not we are actually infringing, misappropriating or otherwise violating the rights of third parties. If we are sued for patent or other intellectual property right infringement, we may be forced to incur substantial costs in defending our self.
If litigation were to result in a judgment that we infringed a valid and enforceable patent or other intellectual property right, a court may order us to pay substantial damages to the owner of the patent or other intellectual property right and to stop using any infringing technology or products. This could cause a significant disruption in our business and force us to incur substantial costs to develop and implement alternative, non-infringing technology or products, or to obtain a license from the patent or other intellectual property right owner.
We cannot give assurance that we would be able to develop non-infringing alternatives at a reasonable cost that would be commercially acceptable, or that we would be able to obtain a license from any patent or other intellectual property right owner on commercially reasonable terms, if at all.
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We may be unable to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. The area of bioelectronic medicine, specifically, is a nascent and emerging industry. To the extent we demonstrate novel means to manage physiological functions, the nature and degree of intellectual property protection we can obtain throughout the world may vary. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. This could make it difficult for us to stop infringement of our foreign patents, if obtained, or the misappropriation of our other intellectual property rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against certain third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of our intellectual property.
Risks Related to Our Stock and this Offering
We expect that our stock price may fluctuate significantly and investors may not be able to resell their shares at or above the initial public offering price. An active trading market for our common stock may never develop.
Prior to this offering, you could not buy or sell our common stock publicly. Although we have applied to have our common stock listed on the , no assurance can be given that our application will be approved. Even if our application is approved and our common stock is listed on the , an active trading market for our shares may never develop or be sustained following this offering. If an active market for our common stock does not develop or is not maintained, it may be difficult for you to sell shares you purchase in this offering without depressing the market price for the shares, or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling additional shares of our common stock and may impair our ability to acquire other companies or technologies by using shares of our common stock as consideration.
The initial public offering price of our common stock will be determined through negotiations with the underwriters. This determined price may not reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The market price of shares of our common stock following this offering could be subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
| · | the effect of the COVID-19 pandemic on our business and operations and on market conditions generally; |
| · | the success of our products and of competitive products or technologies; |
| · | regulatory or legal developments in the United States and other countries; |
| · | the level of expenses related to our products or development programs; |
| · | announcements by us, our partners or our competitors of new products or therapies, significant contracts, strategic partnerships, joint ventures, collaborations, commercial relationships or capital commitments; |
| · | failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public; |
| · | issuance of new or updated research or reports by securities analysts or recommendations for our stock; |
| · | disputes or other developments related to proprietary rights (including patents), litigation matters, and our ability to obtain patent protection for our technologies; |
| · | commencement of, or our involvement in, litigation; |
| · | fluctuations in the valuation of companies perceived by investors to be comparable to us; |
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| · | manufacturing disputes or delays; |
| · | any future sales of our common stock or other securities; |
| · | any change to the composition of the board of directors or key personnel; |
| · | general economic conditions and slow or negative growth of our markets; |
| · | share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| · | announcement or expectation of additional debt or equity financing efforts; and |
| · | other factors described in this section of the prospectus. |
These and other market and industry factors may cause the market price and demand for our common stock to fluctuate substantially, regardless of our actual operating performance. In addition, the stock market in general, and medical device companies in particular, have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. In the past, when the market price of a stock has been volatile, holders of that stock have on occasion instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit against us, the defense and disposition of the lawsuit could be costly and divert the time and attention of our management and harm our operating results.
We do not expect to pay any cash dividends for the foreseeable future.
We do not expect to pay dividends to our stockholders at any time in the foreseeable future. Anyone considering investing in our stock should not rely on such investment to provide dividend income. Instead, we plan to retain any earnings to establish, maintain and expand our operations and product offerings. In addition, any future debt financing arrangement may contain terms prohibiting or limiting the amount of dividends that may be declared or paid on our stock. Accordingly, investors must rely on sales of their shares after price appreciation, which may never occur, as the only way to realize any return on their investment.
Future issuances of stock or other securities could dilute the holdings of stockholders and could materially affect the price of the shares of stock being issued in connection with this offering.
We anticipate that we will issue shares of capital stock in conjunction with future funding requirements. Any issuance of new shares of stock, or securities exercisable for or convertible into shares of stock, for the purpose of securing capital will result in the dilution of the ownership interests of our existing stockholders.
We have used and intend to continue to use equity incentives for employees, advisors, directors, key consultants and select affiliates. Any issuance of stock upon the conversion of options and/or incentive rights will result in the dilution of the ownership interests of our existing stockholders.
In addition, we may in the future decide to offer additional stock or other securities in order to finance new capital-intensive projects, in connection with unanticipated liabilities or expenses or for any other purposes. There is no assurance that we will not decide to conduct offerings of securities in the future. Depending on the structure of any future offering, certain existing stockholders may not have the ability to purchase additional equity securities. If we raise additional funds by issuing additional equity securities, the holdings and voting interests of existing stockholders could be diluted.
We are an “emerging growth company” and a “smaller reporting company,” and the reduced public company reporting and disclosure requirements applicable to emerging growth companies and smaller reporting companies may make our common stock less attractive to investors.
We qualify as an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to public companies that are not emerging growth companies. These provisions include, but are not limited to: being permitted to have only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure; an exemption from compliance with the auditor attestation requirement in the assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley Act”); not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; reduced disclosure obligations regarding executive compensation arrangements in our periodic reports, registration statements and proxy statements; and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, the JOBS Act permits emerging growth companies to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We intend to take advantage of certain of the exemptions discussed above.
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In addition, we are currently a “smaller reporting company,” as defined in the Securities Exchange Act of 1934, as amended (“Exchange Act”), and have elected to take advantage of certain of the scaled disclosures available to smaller reporting companies. To the extent that we continue to qualify as a “smaller reporting company” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an “emerging growth company” may continue to be available to us as a “smaller reporting company,” including exemption from compliance with the auditor attestation requirements pursuant to the Sarbanes-Oxley Act and reduced disclosure about our executive compensation arrangements. We will continue to be a “smaller reporting company” until we have more than $250 million in public float (based on our common stock) measured as of the last business day of our most recently completed second fiscal quarter or, in the event we have no public float (based on our common stock), annual revenues of more than $100 million during the most recently completed fiscal year.
As a result, the information we provide will be different than the information that is available with respect to other public companies. In this prospectus, we have not included all of the executive compensation-related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and the market price of our common stock may be more volatile.
If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock may decline.
As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. In addition, beginning with our second annual report on Form 10-K, we will be required to furnish a report by management on the effectiveness of our internal control over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. The process of designing, implementing and testing the internal control over financial reporting required to comply with this obligation is time consuming, costly and complicated. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to assert that our internal control over financial reporting is effective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could decline, and we could also become subject to investigations by the stock exchange on which our common stock is listed, the SEC or other regulatory authorities, which could require additional financial and management resources.
A significant portion of our total outstanding shares of common stock are restricted from immediate resale but may be sold into the market in the near future. This could cause the market price of our common stock to drop significantly, even if our business is doing well.
Subject to certain exceptions, without the prior written consent of ThinkEquity, a division of Fordham Financial Management, Inc., as representative of the underwriters, our 5% or greater stockholders, during the period ending 6 months after the date of this prospectus, and our officers and directors and, during the period ending 12 months after the date of this prospectus, have agreed not to: (i) offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into, exchangeable for or that represent the right to receive shares of common stock; (ii) file any registration statement with the Securities and Exchange Commission (“SEC”) relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or (iii) enter into any swap or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of common stock, subject to certain exceptions. ThinkEquity, in its sole discretion, may release the common stock and other securities subject to the lock-up agreements described above in whole or in part at any time with or without notice. See the section of this prospectus entitled “Underwriting.”
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The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the market price of our common stock might impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities.
If our operating and financial performance in any given period does not meet any guidance that we provide to the public, the market price of our common stock may decline.
We may, but are not obligated to, provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this prospectus and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts, or if we reduce our guidance for future periods, the market price of our common stock may decline. Even if we do issue public guidance, there can be no assurance that we will continue to do so in the future.
Investors in this offering will experience immediate and substantial dilution.
The initial public offering price of our common stock is substantially higher than the pro forma net tangible book value per share of our common stock. Therefore, if you purchase shares of our common stock in this offering, you will pay a price per share that substantially exceeds our pro forma net tangible book value per share after this offering. Based on the initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, you will experience immediate dilution of $ per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, if the underwriters exercise their option to purchase additional shares, or outstanding options and warrants are exercised, you could experience further dilution. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus entitled “Dilution.”
Participation in this offering by our existing stockholders and/or their affiliated entities may reduce the public float of our common stock.
To the extent certain of our existing stockholders and their affiliated entities participate in this offering, such purchases would reduce the non-affiliate public float of our shares, meaning the number of shares of our common stock that are not held by officers, directors and controlling stockholders. A reduction in the public float could reduce the number of shares that are available to be traded at any given time, thereby adversely impacting the liquidity of our common stock and depressing the price at which you may be able to sell shares of common stock purchased in this offering.
We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.
We will have broad discretion in the application of the net proceeds to us from this offering, including for any of the purposes described in the section of this prospectus entitled “Use of Proceeds,” and you will not have the opportunity as part of your investment decision to assess whether the net proceeds are being used appropriately. Because of the number and variety of factors that will determine our use of the net proceeds from this offering, our ultimate use may vary substantially from our currently intended use. Investors will need to rely upon the judgment of our management with respect to the use of proceeds. Pending use, we may invest the net proceeds from this offering in short-term, investment-grade, interest-bearing securities, such as money market accounts, certificates of deposit, commercial paper, and guaranteed obligations of the U.S. government that may not generate a high yield for our stockholders. If we do not use the net proceeds that we receive in this offering effectively, our business, financial condition, results of operations, and prospects could be harmed, and the market price of our common stock could decline.
Anti-takeover provisions in our charter documents, which will be effective upon completion of this offering, and under Delaware law, could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, as they will be in effect upon the closing of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and amended and restated bylaws will include provisions that:
| · | authorize our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock with terms, rights, and preferences determined by our board of directors that may be senior to our common stock; |
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| · | require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent; |
| · | specify that special meetings of our stockholders can be called only by our board of directors, the chairperson of our board of directors, or our Chief Executive Officer; |
| · | establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors; |
| · | prohibit cumulative voting in the election of directors; |
| · | establish that our board of directors will be divided into three classes—Class I, Class II, and Class III—with each class serving staggered three-year terms; |
| · | provide that, so long as our board of directors is classified, directors may only be removed for cause; |
| · | provide that vacancies on our board of directors may be filled only by a majority of directors then in office, even though less than a quorum; and |
| · | require the approval of our board of directors or the holders of two-thirds of our outstanding shares of voting stock to amend our bylaws and certain provisions of our certificate of incorporation. |
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally, subject to certain exceptions, prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder. Any of the foregoing provisions could limit the price that investors might be willing to pay in the future for shares of our common stock, and they could deter potential acquirers of our company, thereby reducing the likelihood that you would receive a premium for your shares of our common stock in an acquisition.
Our amended and restated certificate of incorporation and amended and restated bylaws, to be in effect upon the completion of this offering, will provide that the Court of Chancery of the State of Delaware or the federal district court for the District of Delaware will be the exclusive forum for certain disputes between us and our stockholders, which could result in increased costs for our stockholders to bring a claim and could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation and amended and restated bylaws, both of which will be in effect upon consummation of this offering, will provide that the Court of Chancery of the State of Delaware (or, in the event that the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a claim of breach of fiduciary duty, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine; provided that, the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction; and provided further that, if and only if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, such action may be brought in another state or federal court sitting in the State of Delaware. Our amended and restated certificate of incorporation and amended and restated bylaws will also provide that the federal district courts of the United States of America will be the exclusive forum for the resolution of any complaint asserting a cause of action against us or any of our directors, officers, employees or agents and arising under the Securities Act. Nothing in our amended and restated certificate of incorporation or amended and restated bylaws will preclude stockholders that assert claims under the Exchange Act from bringing such claims in state or federal court, subject to applicable law.
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We believe these provisions may benefit us by providing increased consistency in the application of Delaware law and federal securities laws by chancellors and judges, as applicable, particularly experienced in resolving corporate disputes, efficient administration of cases on a more expedited schedule relative to other forums and protection against the burdens of multi-forum litigation. However, this choice of forum provision could result in increased costs for our stockholders to bring a claim and could may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders, which may discourage lawsuits with respect to such claims, although our stockholders will not be deemed to have waived our compliance with federal securities laws and the rules and regulations thereunder. Furthermore, the enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions, and there can be no assurance that such provisions will be enforced by a court in those other jurisdictions. If a court were to find the choice of forum provision that will be contained in our amended and restated certificate of incorporation and amended and restated bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.
General Risk Factors
If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, the market price and trading volume of our common stock could decline.
The market price and trading volume of our common stock following the completion of this offering will be heavily influenced by the way analysts interpret our financial information and other disclosures. We do not have control over these analysts. If few securities analysts commence coverage of us, or if industry analysts cease coverage of us, our stock price would be negatively affected. If securities or industry analysts do not publish research or reports about our business, downgrade our common stock, or publish negative reports about our business, our stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our stock price to decline and could decrease the trading volume of our common stock.
We will incur increased costs and become subject to additional regulations and requirements as a result of becoming a public company, which could lower our profits or make it more difficult to run our business.
As a public company, we will incur significant legal, accounting and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will continue to incur costs associated with the Sarbanes-Oxley Act, and related rules implemented by the SEC, and the exchange our securities will be listed on. The expenses generally incurred by public companies for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, other regulatory action and potentially civil litigation.
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Actual or perceived failures to comply with applicable data privacy and security laws, regulations, policies, standards, contractual obligations and other requirements related to data privacy and security and changes to such laws, regulations, standards, policies and contractual obligations could adversely affect our business, financial condition and results of operations.
The global data protection landscape is rapidly evolving, and there has been an increasing focus on privacy and data protection issues with the potential to affect our business. We are subject to numerous state, federal and foreign laws, requirements and regulations governing the collection, transmission, use, disclosure, storage, retention and security of personal and personally-identifying information, such as information that we may collect in connection with conducting our business in the United States and abroad. Implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future, and we cannot yet determine the impact future laws, regulations, standards or perception of their requirements may have on our business. This evolution may create uncertainty in our business; affect our ability to operate in certain jurisdictions; or to collect, store, transfer use and share personal information; necessitate the acceptance of more onerous obligations in our contracts; result in liability or impose additional costs on us. The cost of compliance with these laws, regulations and standards is high and is likely to increase in the future. Any failure or perceived failure by us to comply with federal, state or foreign laws or regulation, our internal policies and procedures, or our contracts governing our processing of personal information could result in negative publicity, government investigations and enforcement actions, fines, imprisonment of company officials and public censure, claims by third parties, damage to our reputation and loss of goodwill, any of which could have a material adverse effect on our business, financial condition and results of operations.
Changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters could significantly affect our financial results.
U.S. generally accepted accounting principles (“GAAP”) and related pronouncements, implementation guidelines and interpretations with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, revenue recognition, stock-based compensation, trade promotions and income taxes are highly complex and involve many subjective assumptions, estimates and judgments by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments by our management could significantly change our reported results.
We are subject to anti-corruption, anti-bribery, anti-money laundering, and similar laws, and non-compliance with such laws could subject us to criminal or civil liability and harm our business, financial condition, and results of operations.
We are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), U.S. domestic bribery laws, the UK Bribery Act 2010, and other anti-corruption and anti-money laundering laws in the countries in which we conduct business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, and their third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. As we increase our international sales and business and sales to the public sector, we may engage with business partners and third-party intermediaries to market our products and to obtain necessary permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. We can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, representatives, contractors, partners, and agents, even if we do not explicitly authorize such activities. While we have policies and procedures to address compliance with such laws, there is a risk that our employees and agents will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. As we expand internationally, our risks under these laws may increase.
Detecting, investigating, and resolving actual or alleged violations of anti-corruption laws can require a significant diversion of time, resources, and attention from senior management. In addition, noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, suspension or debarment from contracting with certain persons, reputational harm, adverse media coverage, and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or if we do not prevail in any possible civil or criminal proceeding, our business, financial condition, and results of operations could be harmed.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
This prospectus may contain certain “forward-looking” statements as such term is defined by the SEC in its rules, regulations and releases, which represent our expectations or beliefs, including but not limited to, statements concerning our operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intent,” “could,” “estimate,” “might,” “plan,” “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the operations of the Company and its subsidiaries, volatility of stock price, commercial viability of our product candidates and any other factors discussed in this and other registrant filings with the SEC.
These risks and uncertainties and other factors include, but are not limited to those set forth under “Risk Factors” of this prospectus. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as otherwise required by applicable law, we undertake no obligation to publicly update or revise any forward-looking statements or the risk factors described in this prospectus or in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or any other reason after the date of this prospectus.
This prospectus contains forward-looking statements, including statements regarding, among other things:
| · | our ability to continue as a going concern; |
| · | our anticipated needs for working capital; |
| · | our ability to secure additional financing; |
| · | we have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future; |
| · | regulatory or legal developments in the United States and other countries; |
| · | developments or disputes concerning patent applications, issued patents or other proprietary rights; |
| · | the level of expenses related to our product development and operations; and |
| · | our efforts to expand our products and our business. |
Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks outlined under “Risk Factors” and matters described in prospectus generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will in fact occur. We caution you not to place undue reliance on these forward-looking statements. In addition to the information expressly required to be included in this prospectus, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.
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Assuming a public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $ million (or $ million if the representative of the underwriters exercises its over-allotment option in full), after deducting underwriting discounts and commissions and the estimated offering expenses payable by us.
Each $1.00 increase (decrease) in the assumed public offering price would increase (decrease) the net proceeds to us from this offering by approximately $ million (or $ million if the representative of the underwriters exercises its over-allotment option in full), assuming the number of shares we sell, as set forth on the cover page of this prospectus, remains the same, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. Similarly, an increase (decrease) of shares offered would increase (decrease) the net proceeds to us from this offering by approximately $ million, assuming the assumed public offering price remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock and thereby enable access to the public equity markets for us and our stockholders. As of the date of this prospectus, we do not have a specific plan for the net proceeds to us from this offering. However, we intend to use the net proceeds (which will be approximately $ million, or $ million if the representative of the underwriters exercises its over-allotment option in full) to support our organic growth, to expand our sales and marketing, including through advertising, of ClearUP and its related products, to conduct research and development activities to generate, test, and/or further advance new product candidates, and to identify potential investments and acquisitions complementary to and consistent with our growth strategy, and for other general corporate purposes. Although we may, from time to time, evaluate potential strategic investments and acquisitions, we do not have any definitive agreements in place to make any such acquisitions at this current time. We will have broad discretion in the way that we use the net proceeds of this offering. See “Risk Factors—Risks Related to our Stock and this Offering.” We will have broad discretion in the use of the net proceeds to us from this offering and may not use them effectively.”
The expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions, which could change in the future as our plans and business conditions evolve and change. As a result, our management will have broad discretion over how these proceeds are used. Proceeds held by us will be invested in short-term investments until needed for the uses described above.
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We have never declared or paid cash dividends on our capital stock. We currently intend to retain our future earnings, if any, for use in our business and therefore do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, and current and anticipated cash needs. Investors should not purchase our common stock with the expectation of receiving cash dividends.
Pursuant to our existing certificate of incorporation, the holders of our preferred stock are entitled to receive dividends prior to and in preference to any dividends on common stock, when and if declared by our board of directors. Any additional dividends will be paid ratably to holders of common and preferred stock, with the holders of preferred stock participating on an as-converted basis. Our existing certificate of incorporation also provides that we may not pay or set aside any dividends on shares of any class or series of capital stock without the prior written consent of the holders of a majority of the outstanding shares of preferred stock. All outstanding shares of our preferred stock, however, will be converted into shares of common stock immediately prior to the completion of this offering.
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The following table sets forth our cash, cash equivalents, debt securities and other investments available for sale and securities and our capitalization as of March 31, 2021:
| · | on an actual basis; |
| · | on a pro forma basis to give effect to (i) the 1-for- reverse stock split, based on the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, (ii) the automatic conversion of all our outstanding convertible promissory notes, including accrued interest, as described herein, into shares of common stock, (iii) the conversion of all our outstanding convertible preferred stock described herein into 8,908,600 shares of common stock, which will occur immediately prior to the completion of this offering, and (iv) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering; and |
| · | on a pro forma as adjusted basis to give effect to the pro forma adjustments and to give further effect to the sale of shares of our common stock in this offering, assuming an initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
The pro forma and pro forma as adjusted information below is illustrative only, and our capitalization following the corporate conversion and the completion of this offering will depend on the actual initial public offering price and other terms of this offering determined at pricing. You should read the following information together with the information contained under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited and unaudited consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.
| As of March 31, 2021 | ||||||||||||
| Actual | Pro Forma |
Pro Forma As Adjusted(1) |
||||||||||
| (in thousands, except share and per share amounts) |
||||||||||||
| Cash, cash equivalents and short-term investments | $ | 600 | ||||||||||
| Convertible notes payable, net of debt discount | $ | 1,726 | ||||||||||
| Stockholders’ equity: | ||||||||||||
| Convertible preferred stock, $0.0001 par value, 10,113,621 shares authorized, 8,908,600 shares issued and outstanding, actual; shares authorized and no shares outstanding, pro forma and pro forma as adjusted | $ | 1 | ||||||||||
| Common stock, $0.0001 par value, 25,000,000 shares authorized, 9,497,916 issued and outstanding, actual; shares authorized, shares issued and outstanding, pro forma (unaudited); shares issued and outstanding, pro forma as adjusted (unaudited) | $ | 1 | ||||||||||
| Additional paid-in capital | $ | 9,889 | ||||||||||
| Accumulated deficit | $ | (12,343 | ) | |||||||||
| Total stockholders’ equity | $ | (2,452 | ) | |||||||||
| Total capitalization | $ | (1,852 | ) | |||||||||
| (1) | Each $1.00 increase or decrease in the assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) would increase or decrease, as applicable, the pro forma as adjusted amounts of each of our cash, cash equivalents, and short-term investments, common stock and additional paid-in capital, total stockholders’ equity (deficit), and total capitalization by approximately $ million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares offered by us would increase or decrease, as applicable, the pro forma as adjusted amounts of each of our cash, cash equivalents, and short-term investments, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $ million, assuming the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. |
| (2) | This pro forma and pro forma as adjusted information is illustrative only and will depend on the actual initial public offering price and other terms of this offering determined at pricing. |
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The number of shares of common stock issued and outstanding, pro forma and pro forma as adjusted in the table above is based on (i) 9,497,916 shares of our common stock outstanding as of March 31, 2021, (ii) 8,908,600 shares of common stock issuable upon conversion of 8,908,600 shares of our outstanding preferred stock immediately prior to the completion of this offering, and (iii) shares of common stock issuable upon conversion of outstanding convertible notes in the principal amount of $ , and excludes the following:
| · | 2,997,876 shares of common stock issuable upon exercise of options to purchase shares of common stock outstanding as of March 31, 2021, with a weighted-average exercise price of $0.10 per share; |
| · | 629,281 shares of common stock reserved for future issuance as of March 31, 2021, under our 2017 Plan; and |
| · | shares of common stock to be reserved for future issuance under our 2021 Plan, which will be effective upon the completion of this offering. |
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If you invest in our common stock, your ownership interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the book value of our total tangible assets less the book value of our total liabilities divided by the number of shares of common stock then issued and outstanding.
Our historical net tangible book value of our common stock as of March 31, 2021 was $(2,452,000), or $(0.26) per share.
The pro forma net tangible book value of our common stock as of March 31, 2021 was $ , or $ per share, after giving effect to (i) the 1-for- reverse stock split, based on the assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, (ii) the automatic conversion of all our outstanding convertible promissory notes, including accrued interest, as described herein, into shares of common stock, (iii) the conversion of all our outstanding convertible preferred stock described herein into 8,908,600 shares of common stock, which will occur immediately prior to the completion of this offering, and (iv) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.
After giving further effect to the receipt of the net proceeds from our sale of shares of common stock in this offering at an assumed public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2021, would have been $ , or $ per share. This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution of $ per share to investors purchasing common stock in this offering.
We calculate dilution per share to new investors by subtracting the pro forma net tangible book value per share from the public offering price paid by the new investor. The following table illustrates the dilution to new investors on a per share basis:
| Assumed initial public offering price per share | $ | |||||||
| Pro forma net tangible book value per share as of | $ | |||||||
| Increase in net tangible book value per share attributable to this offering | $ | |||||||
| Pro forma as adjusted net tangible book value per share after giving effect to this offering | $ | |||||||
| Dilution per share to new investors in this offering | $ |
Each $1.00 increase (decrease) in the assumed public offering price of $ would increase (decrease) our pro forma as adjusted net tangible book value per share after this offering by $ per share and the dilution to new investors by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, an increase (decrease) of shares offered would increase (decrease) the pro forma as adjusted net tangible book value by $ per share and the dilution to new investors by $ per share, assuming the assumed public offering price remains the same, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the representative of the underwriters’ option to purchase additional shares to cover over-allotments is exercised in full, the pro forma as adjusted net tangible book value per share after giving effect to this offering would be $ per share, representing an immediate increase to existing stockholders of $ per share, and immediate dilution to new investors in this offering of $ per share.
The foregoing calculations:
| · | assume no exercise by the representative of the underwriters of its over-allotment option; |
| · | give effect to the 1-for- reverse stock split with respect to our common stock effected on , 2021; |
| · | exclude 2,997,876 shares of common stock issuable upon exercise of options to purchase shares of common stock outstanding as of March 31, 2020, with a weighted-average exercise price of $0.10 per share; |
| · | exclude shares of common stock reserved for future issuance pursuant to our 2021 Plan. |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Financial Data” and the financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” and in other parts of this prospectus.
Overview
We are a bioelectronic device company delivering non-invasive neuromodulation products for treatment of inflammatory conditions. Bioelectronic Medicine, also referred to as electroceuticals or neuromodulation, is the treatment of disease and conditions by preferentially activating electrical functions of the body to modify central or peripheral nerve activity.
Business Developments
Since our formation in September 2016, we have devoted substantially all of our efforts to research and development, to regulatory clearance and to early market development and testing for our first product, released September 2019 in the United States. We are not profitable and have incurred losses in each year since our inception. Our net loss was $1,291,000, $3,639,000 and $4,148,000 for the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019, respectively. As of March 31, 2021, we had an accumulated deficit of $12,343,000. We currently have one product approved for sale with two United States indications and CE Mark. We expect to incur sales and marketing costs to drive adoption and market access in the United States market, with later expansion under the CE Mark. We expect to incur additional research and development expenses related to extending the indications for our product(s). We expect to incur additional general and administrative expenses related to scaling our operations and operating as a public company.
In February 2018, we initiated the FDA pivotal trial for ClearUP Sinus Pain Relief, a handheld neuromodulation device targeting the symptoms of sinus inflammation, and secured FDA clearance in January 2019. In February 2020, we were granted the CE Mark for ClearUP and in March 2021, the FDA extended the use of ClearUP to allow broader marketing. We expect that our operating expenses will increase significantly as we discover, acquire, validate and develop additional product candidates; seek regulatory approval and, if approved, proceed to commercialization of new products; obtain, maintain, protect and enforce our intellectual property portfolio; and hire additional personnel. Furthermore, we have incurred and will continue to incur additional costs associated with operating as a public company that we did not experience as a private company. We expect to continue to incur significant losses for the foreseeable future.
We have funded our operations primarily from the issuance and sale of convertible preferred stock and convertible notes payable and the sale of our products. As of March 31, 2021, we had $600,000 in cash and cash equivalents.
We currently generate sales revenue through both owned channels and third-party on-line retailers. Our ability to grow sales revenue will depend on successfully executing a comprehensive marketing campaign to drive additional sales through existing and new channels. Long-term growth will be commensurate with our ability to successfully identify, develop, and secure regulatory approval of one or more additional product candidates beyond ClearUP. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through private or public equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate funding may not be available to us on acceptable terms, or at all. If we fail to raise capital or enter into such agreements as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of our products and/or future product candidates.
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We rely heavily on third-party service providers, including marketing agencies, clinical research organizations and academic research partnerships, finance and accounting support, legal support, and contract manufacturing organizations to carry out our operations. We expect to increase headcount selectively, but will continue to rely significantly on third-party service providers with specialized expertise and/or facilities.
Components of Results of Operations
Revenue
Revenue is generated by the sale of our products. In 2019, our sales came primarily through pre- and post-launch sales on product discovery platforms and our owned and operated website, with sales initiated on Amazon.com in late 2019. In 2020, revenue came through our owned and operated websites, Amazon.com and on-line retail.
Cost of Sales
Cost of sales consists primarily of the materials and services to manufacture our products, the internal personnel costs to oversee manufacturing and supply chain functions, and the shipment of goods to customers. A significant portion of our cost of sales is currently in fixed and semi-fixed expenses associated with the management of manufacturing and supply chain. Cost of sales is expected to increase on an absolute basis as sales volume increases. Cost of sales is expected to decrease as a proportion of revenue with (1) the release of our second generation ClearUP design, optimized for mass manufacturing, and (2) the allocation of fixed and semi-fixed expenses over increasing unit sales volume.
Gross Margin
Our gross margin has been and will continue to be affected by a variety of factors, including sales volumes, product and channel mix, pricing strategies, costs of finished goods, and product return rates. We expect our gross margin to increase with the launch of ClearUP Gen 2 (SN200) and increasing sales volume over which fixed and semi-fixed costs are allocated. Any increase in gross margin will likely fluctuate from quarter to quarter as we continue to introduce new products, new manufacturing and suppliers and adopt new technologies.
Operating Expenses
Research and Development Expenses
Our research and development expenses consist primarily of costs incurred to conduct research, including the discovery, development and validation of product candidates. Research and development expenses include personnel costs, including stock-based compensation expense, third-party contractor services, including development and testing of prototype devices, and maintenance of limited in-house research facilities. We expense research and development costs as they are incurred. We expect research and development expenses to increase with the discovery and validation of new product candidates.
Sales and Marketing Expenses
Sales and marketing expenses include personnel costs and expenses for advertising and other marketing services. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. We expect sales and marketing expenses to increase as we expand the marketing of our products and pursue sales growth.
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General and Administrative Expenses
General and administrative expenses include personnel costs, expenses for outside professional services and other expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. Outside professional services consist of legal, finance, accounting and audit services, and other consulting fees. We expect general and administrative expenses to increase as we build our operational infrastructure. We expect general and administrative expenses will decrease as a proportion of revenue as revenue scales against fixed and semi-fixed administrative expenses.
Other Income / Expense, Net
Other expense, net primarily consists of the fair value adjustments related to the derivative liability for conversion rights, amortization of debt discount included in interest expense and the loss from the extinguishment of debt from the conversion of the convertible notes to preferred stock.
Results of Operations
Comparison of the Three Months Ended March 31, 2021 and 2020
| Three Months Ended March 31, | ||||||||||||
| Statement of operations data: | 2021 | 2020 | Change | |||||||||
| (unaudited) | (unaudited) | |||||||||||
| Revenue | $ | 298 | $ | 122 | $ | 176 | ||||||
| Cost of sales | 301 | 156 | 145 | |||||||||
| Gross loss | (3 | ) | (34 | ) | 31 | |||||||
| Operating expenses: | ||||||||||||
| Research and development | 178 | 226 | (48 | ) | ||||||||
| Sales and marketing | 274 | 385 | (111 | ) | ||||||||
| General and administrative | 536 | 361 | 175 | |||||||||
| Total operating expenses | 988 | 972 | 15 | |||||||||
| Loss from operations | (991 | ) | (1,006 | ) | 16 | |||||||
| Other income (expense): | ||||||||||||
| Interest expense | (274 | ) | - | (274 | ) | |||||||
| Change in fair value of derivative liabilities | (27 | ) | - | (27 | ) | |||||||
| Other income | 2 | 4 | (2 | ) | ||||||||
| Total other income (expense) | (299 | ) | 4 | (303 | ) | |||||||
| Loss before provision for income taxes | (1,290 | ) | (1,002 | ) | (288 | ) | ||||||
| Provision for income taxes | 1 | - | 1 | |||||||||
| Net loss | $ | (1,291 | ) | $ | (1,002 | ) | $ | (289 | ) | |||
Revenue
Revenue increased $176,000 (144%) from $122,000 for the three months ended March 31, 2020 to $298,000 for the three months ended March 31, 2021. The increase is attributable to the addition of new sales channels. Our product sales were significantly adversely impacted starting in February 2020 as COVID-19 responses in our major channel (Amazon) compromised fulfillment of orders and disrupted our largely digital launch campaigns.
Cost of Sales
Cost of sales for the three months ended March 31, 2021 was $301,000 compared to $156,000 for the three months ended March 31, 2020, an increase of $145,000 or 93%. The increase in cost of sales was due to higher sales volume in the three months ended March 31, 2021. Gross margin was improved in the three months ended March 31, 2021 due to higher volume absorbing the fixed costs of third-party logistics support and Company personnel, and a higher percentage of sales through direct channels with higher margins.
Research and Development Expenses
Research and development expenses decreased by $48,000 from $226,000 for the three months ended March 31, 2020 compared to $178,000 for the three months ended March 31, 2021. The emphasis of activity in 2020 was primarily related to completion of a four-week at home clinical study supporting the application for a CE Mark for ClearUP. Activity in 2021 was primarily focused on developing the next generation of product, ClearUP Gen 2, and preparation for seeking FDA approval for a second indication for the ClearUP product line.
Sales and Marketing Expenses
Sales and marketing expenses decreased to $274,000 for the three months ended March 31, 2021, compared to $385,000 for the three months ended March 31, 2021. The decrease of $111,000 was due to the increasing impact of marketing and public relations programs in the quarter ended March 31, 2021 relative to the same period in 2020.
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General and Administrative Expenses
General and administrative expenses were $536,000 for the three months ended March 31, 2021, compared to $361,000 for the three months ended March 31, 2020. The increase of $175,000 was primarily due to audit fees, consulting fees and other professional services to upgrade the accounting and finance function and obtain an audit.
Other Income (Expense), Net
Other income (expense), net for the three months ended March 31, 2021 is primarily due to amortization of debt discount of $261,000 and the fair value remeasurement of the convertible feature derivative liability of $27,000. There were no similar expenses in the three months ended March 31, 2020 as there was no convertible debt activity during this period.
Comparison of the Years Ended December 31, 2020 and 2019
The following table summarizes our results of operations (in thousands):
| Year Ended December 31, | ||||||||||||
| Statement of operations data: | 2020 | 2019 | Change | |||||||||
| Revenue | $ | 860 | $ | 420 | $ | 440 | ||||||
| Cost of sales | 1,085 | 709 | 376 | |||||||||
| Gross loss | (225 | ) | (289 | ) | 64 | |||||||
| Operating expenses: | ||||||||||||
| Research and development | 659 | 990 | (331 | ) | ||||||||
| Sales and marketing | 1,306 | 1,191 | 115 | |||||||||
| General and administrative | 1,014 | 1,173 | (159 | ) | ||||||||
| Total operating expenses | 2,979 | 3,354 | (375 | ) | ||||||||
| Loss from operations | (3,204 | ) | (3,643 | ) | 439 | |||||||
| Other income (expense): | ||||||||||||
| Interest expense | (423 | ) | (443 | ) | 20 | |||||||
| Change in fair value of derivative liabilities | (27 | ) | (75 | ) | 48 | |||||||
| Other income | 15 | 15 | - | |||||||||
| Total other income (expense) | (435 | ) | (503 | ) | 68 | |||||||
| Loss before provision for income taxes | (3,639 | ) | (4,146 | ) | 507 | |||||||
| Provision for income taxes | - | 2 | (2 | ) | ||||||||
| Net loss | $ | (3,639 | ) | $ | (4,148 | ) | $ | 509 | ||||
Revenue
Revenue increased $440,000 (105%) from $420,000 for the year ended December 31, 2019 to $860,000 for the year ended December 31, 2020. The increase is attributable to a full year of sales in the year ended December 31, 2020 and the addition of new sales channels. We commenced sales in September 2019, and therefore revenue for the year ended December 31, 2019 includes only four months of sales. Our product sales were significantly adversely impacted in the first half of 2020 as COVID-19 responses in our major channel (Amazon) compromised fulfillment of orders and disrupted the Company’s largely digital launch campaigns. Approximately 72% of sales were secured in the second half of 2020 after the Company launched new sales channel relationships with online retailers.
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Cost of Sales
Cost of sales for the year ended December 31, 2020 was $1,085,000 compared to $709,000 for the year ended December 31, 2019, an increase of $376,000 or 53%. The increase in cost of sales was due to higher sales volume in 2020. Gross margin is negative due to the cost of third-party logistics support and Company personnel exceeding the contribution from the low volume of revenue. Cost of sales as a proportion of revenue decreased by 42% with allocation of these expenses across a larger sales volume.
Research and Development Expenses
Research and development expenses decreased by $331,000 from $990,000 for the year ended December 31, 2019 compared to $659,000 for the year ended December 31, 2020. The emphasis of activity in 2019 was primarily related to completion of pre-launch clinical studies supporting the release of ClearUP in September 2019. Activity in 2020 was primarily focused on product improvement and obtaining additional regulatory clearances, including an FDA De Novo grant for treatment of moderate to severe congestion and a CE Mark for treatment of sinus pain, pressure, and congestion.
Sales and Marketing Expenses
Sales and marketing expenses increased to $1,306,000 for the year ended December 31, 2020, compared to $1,191,000 for the year ended December 31, 2019. The increase of $115,000 was due to selective advertising campaigns used to drive increased revenue.
General and Administrative Expenses
General and administrative expenses were $1,014,000 for the year ended December 31, 2020, compared to $1,173,000 for the year ended December 31, 2019. The decrease of $159,000 was primarily due to higher level of legal and other professional services incurred prior to the release of the initial production model in 2019 offset by higher compensation in 2020.
Other Income (Expense), Net
Other income (expense), net decreased by $68,000 from $503,000 expense in the year ended December 31, 2019 to $435,000 for the year ended December 31, 2020. The decrease is due to a lower expense from the fair value remeasurement of the convertible feature derivative liability of $48,000 and lower amortization of debt discount of $20,000.
Liquidity and Capital Resources
Sources of Liquidity
From our inception through March 31, 2021, we have generated $1,402,332 revenue from product sales and have incurred operating losses and negative cash flows from our operations. As of March 31, 2021, we had cash and cash equivalents of $600,000, a working capital deficit of $629,000 and an accumulated deficit of $12,343,000. We have financed our operations to date primarily through issuances of SAFE instruments, convertible notes and convertible preferred stock. In 2019, we sold an aggregate of 2,787,854 shares of our convertible preferred stock to accredited investors, generating net proceeds of $3,843,000, and borrowings from convertible notes payables issued to investors in the amount of $1,710,000. In 2020, we borrowed $1,573,000 by issuing convertible notes and issued notes payable to borrow $195,000. During the three months ended March 31, 2021, we borrowed $300,000 by issuing convertible notes payable.
During the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019, we incurred net losses of $1,291,000, $3,639,000 and $4,148,000, respectively, and used $739,000, $3,027,000 and $3,670,000 of cash for operations, respectively. Management expects to incur substantial additional operating losses for at least the next two years to expand our markets, complete development of new products, obtain regulatory approvals, launch and commercialize our products and continue research and development programs.
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Recent Developments
In April 2021, we issued a convertible note payable for total proceeds of $115,000. The note is unsecured, has interest accrued at a rate of 3% per annum and has a term of thirteen months.
On May 11, 2021, the SBA approved forgiveness of our PPP Loan, including accrued interest. The amount forgiven by the SBA was $157,000.
Effective as of June 7, 2021, the Company reincorporated as a Delaware corporation.
In June 2021, we issued convertible note payables for total proceeds of $1,866,000. The notes were issued at an original issue discount of $244,000 with principal outstanding of $2,110,000. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum.
In June 2021, we issued convertible notes payable for total proceeds of $232,000. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum.
In June 2021, we issued a convertible note payable to our Chief Executive Officer for total proceeds of $100,000. The note is unsecured, has a term of twenty-three months, and accrues interests at a rate of 3% per annum.
We intend to raise additional capital through the issuance of additional equity and debt. If financing is not available at adequate levels, we may need to reevaluate our operating plans. Based on projected activities, management projects that cash and cash equivalents on hand are not sufficient to support operations for at least the next 12 months following issuance of the financial statements for fiscal year ended December 31, 2020, which raises substantial doubt about the company's ability to continue as a going concern.
Plan of Operation and Future Funding Requirements
We use our capital resources primarily to fund operating expenses, primarily marketing and advertising for ClearUP and general operating expenses. We plan to increase our marketing and advertising investments to drive sales of ClearUP through existing and new channels. Our advertising investments will focus principally on driving adoption of the second generation version of ClearUP. We plan to increase our research and development investments to identify and validate new product candidates, move them through pre-clinical and clinical development, and develop go-to-market strategies that leverage our existing sales channels and call points. At this time, due to the inherently unpredictable nature of research and new product adoption, we cannot reasonably estimate the costs we will incur and the timelines that will be required to complete development, obtain marketing approval and commercialize future product candidates, if at all. For the same reasons, we are also unable to predict how quickly we will ramp-up revenue from ClearUP product sales or whether, or when, if ever, we may achieve profitability from the sales of one or more products. Clinical and preclinical development timelines, the probability of success, and sell-in costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be best developed and/or monetized through future collaborations, when such arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.
We have generated operating losses in each period since inception. We have incurred an accumulated deficit of $12,343,000 through March 31, 2021. We expect to incur additional losses in the future as we expand both our marketing and research and development activities. Based on our current plans, we expect that proceeds from the initial public offering will be sufficient to fund the company for 18 months. We have based this estimate on assumptions that may prove to be wrong, however, and we could use our capital resources sooner than we expect.
The timing and amount of our operating expenditures will depend largely on:
| · | the timing and progress of sales initiatives driving top-line revenue;
| |
| · |
the timing and adoption rate of ClearUP Gen 2 at lower cost of goods;
| |
| · |
the payment terms and timing of commercial contracts entered into for manufacturing and sales of our products to and through third-party retailers;
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the timing and progress of preclinical and clinical development activities;
| |
| · |
the number and scope of preclinical and clinical programs we decide to pursue;
| |
| · |
the timing and amount of milestone payments we may receive under any future collaboration agreements;
| |
| · |
our ability to source new business opportunities through licenses and research and development programs and to establish new collaboration arrangements;
| |
| · |
the costs involved in prosecuting and enforcing patent and other intellectual property claims;
| |
| · |
the cost and timing of additional regulatory approvals beyond those currently held by us; and
| |
| · | our efforts to enhance operational systems and hire additional personnel, including personnel to support finance, sales, marketing, operations and development of our product candidates and satisfy our obligations as a public company. |
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Until such time, if ever, as we can generate substantial revenue from product sales, we expect to fund our operations and capital funding needs through equity and/or debt financings. We may also consider entering into collaboration arrangements or selectively partnering with third parties for clinical development and commercialization. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of additional debt would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations or our ability to incur additional indebtedness or pay dividends, among other items. If we raise additional funds through governmental funding, collaborations, strategic partnerships and alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, liquidate assets where possible, and/or suspend or curtail planned programs. Any of these actions could materially and adversely affect our business, financial condition, results of operations and prospects.
Cash Flows
The following table summarizes our cash flows for the period indicated (in thousands):
| Year Ended | Three Months Ended | |||||||||||||||
| December 31, | March 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Cash used in operating activities | $ | (3,027 | ) | $ | (3,670 | ) | $ | (739 | ) | $ | (1,294 | ) | ||||
| Cash used in investing activities | - | (31 | ) | - | - | |||||||||||
| Cash provided by financing activities | 1,760 | 5,553 | 295 | 10 | ||||||||||||
| Net (decrease) in cash and cash equivalents | $ | (1,267 | ) | $ | 1,852 | $ | (444 | ) | $ | (1,284 | ) | |||||
Operating Activities
Net cash used in operating activities for the three months ended March 31, 2021 was $739,000, which consisted primarily of net loss of $1,291,000 decreased by non-cash charges of $314,000 and decreased by a net change of $238,000 in our net operating assets. The non-cash charges primarily consisted of debt discount amortization of $261,000, change in fair value remeasurement of derivative liabilities of $27,000, accounts receivable allowances of $22,000 and stock-based compensation of $10,000. The change in our net operating assets and liabilities was primarily due to an increase in accounts payable and accrued expenses of $400,000 offset by increase in prepaid and other current assets of $120,000 and increase in accounts receivable of $49,000.
Net cash used in operating activities for the three months ended March 31, 2020 was $1,294,000, which consisted primarily of net loss of $1,002,000 decreased by non-cash charges of $38,000 and increased by a net change of $330,000 in our net operating assets. The non-cash charges primarily consisted of stock-based compensation of $38,000. The change in our net operating assets and liabilities was primarily due to an increase in accounts receivable, inventory and prepaid expenses and other current assets of $140,000 and a decrease in accounts payable and accrued expenses of $190,000.
Net cash used in operating activities for the year ended December 31, 2020, was $3,027,000, which consisted primarily of net loss of $3,639,000 decreased by non-cash charges of $568,000 and decreased by a net change of $44,000 in our net operating assets. The non-cash charges primarily consisted of debt discount amortization of $411,000, stock-based compensation of $78,000, and change in fair value remeasurement of derivative liabilities of $27,000. The change in our net operating assets and liabilities was primarily due to an increase in inventory, accompanied by a decrease in accrued liabilities in 2020.
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Net cash used in operating activities for the year ended December 31, 2019, was $3,670,000, which consisted primarily of net loss of $4,148,000 decreased by non-cash charges of $546,000 and increased by a net change of $68,000 in our net operating assets. The non-cash charges primarily consisted of debt discount amortization of $351,000, change in fair value remeasurement of derivative liabilities of $75,000, and noncash interest of $93,000. The change in our net operating assets and liabilities was primarily due to an increase in current assets of $637,000 offset by increased payables and accrued liabilities of $569,000 in 2019.
Investing Activities
We had no investing activities during the three month periods ended March 31, 2021 and 2020.
Our investing activities used $31,000 of cash during the year ended December 31, 2019, which consisted of purchases of property and equipment. We had no investing activities during the year ended December 31, 2020.
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Financing Activities
Our financing activities provided $295,000 of cash during the three months ended March 31, 2021, which consisted primarily of convertible notes payable borrowings of $300,000 offset by repayment of notes payable borrowings of $11,000.
Our financing activities provided $10,000 of cash during the three months ended March 31, 2020, which consisted primarily of proceeds from the issuance of our convertible preferred stock of $10,000.
Our financing activities provided $1,760,000 of cash during the year ended December 31, 2020, which consisted primarily of convertible notes payable borrowings of $1,573,000, borrowings of $156,000 in the form of the federal Paycheck Protection Program and borrowings of $39,000 to finance our insurance policies.
Our financing activities provided $5,553,000 of cash during the year ended December 31, 2019, which consisted primarily of proceeds from the issuance of our convertible preferred stock of $3,843,000, and convertible notes payable borrowings of $1,710,000.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements.
Contractual Obligations and Commitments
Convertible Promissory Notes
From June 2020 through December 2020, we issued unsecured convertible promissory notes (the “2020 Bridge Notes”) in the amount of approximately $1.57 million to accredited investors pursuant to the terms of a Note Purchase Agreement dated June 2020, as amended October 2020. The 2020 Bridge Notes have a maturity date of June 2022, and are generally convertible into the Company’s equity securities at a per share conversion price that will be computed on the basis of a Cap of $40 million or a Discount Rate of 25%, whichever results in the issuance of a greater number of equity securities to the investors. The 2020 Bridge Notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
From March 2021 through April 2021, we issued unsecured convertible promissory notes in the amount of approximately $0.4 million to accredited investors. These notes accrue interest at a rate of 3% per annum, and mature on June 1, 2022. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
In June 2021, we issued convertible note payables for total proceeds of approximately $1.86 million to accredited investors. The notes were issued at an original issue discount of approximately $0.24 million with principal outstanding of approximately $2.11 million. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
In June 2021, we issued a convertible note payable to our Chief Executive Officer for total proceeds of $0.10 million. The note is unsecured, has a term of twenty-three months, and accrues interests at a rate of 3% per annum. This note will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
In June 2021, we issued convertible notes payable for total proceeds of approximately $0.23 million. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
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Office Lease
We lease office space in Newark, California under a cancelable operating lease agreement. Rent expense recorded during the three months ended March 31, 2021 and 2020 was $6,000 and $19,000, respectively. Rent expense recorded during the years ended December 31, 2020 and 2019 was $55,000 and $67,000, respectively.
We enter into contracts in the normal course of business with our contract manufacturer and other vendors to assist in the manufacturing of our products and performance of our research and development activities and other services for operating purposes. These contracts generally provide for termination on notice, and therefore are cancelable contracts and not included in the table of contractual obligations and commitments.
Critical Accounting Policies and Significant Judgments and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
We believe that the accounting policies described below involve a high degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Financial accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). The standard applies to all contracts with customers, except contracts that are within scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are in within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inceptions, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
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The Company sells its products through direct sales and third-party retailers. Revenue is recognized when control of the promised goods is transferred to the customers or retailer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected consideration in the transaction.
Based on the Company’s assessment, it was determined that there were no contract assets as of March 31, 2021 and December 31, 2020 and 2019 because receivables outstanding are unconditional and only the passage of time is required before payment of that consideration is due. The Company may receive payments at the onset of the contract and before goods have been delivered. In such instances, the Company records a deferred revenue liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met.
The Company relies on third parties to have procedures in place to detect and prevent credit card fraud, as the Company has exposure to losses from fraudulent charges. The Company records the losses related to chargebacks as incurred.
The Company has also elected to exclude from the measurement of the transaction price sales taxes remitted to governmental authorities.
Stock-Based Compensation
We measure all stock options and other stock-based awards granted to our employees, directors, consultants and other non-employee service providers based on the fair value on the date of the grant. Compensation expense related to awards to employees and directors with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award, which is typically the vesting term. Compensation expense related to awards to employees with performance-based vesting conditions is recognized based on grant date fair value over the requisite service period using the accelerated attribution method to the extent achievement of the performance condition is probable. Non-employee option awards are measured at the earlier of the commitment date for performance by the counterparty or the date when the performance is complete, and compensation expense is recognized in the same manner as if we had paid cash for goods or services.
We classify stock-based compensation expense in our statement of operations in the same way the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.
We use the Black-Scholes option pricing model to estimate the fair value of stock options on the date of grant. Using the Black-Scholes option pricing model requires management to make significant assumptions and judgments. We determined these assumptions for the Black-Scholes option-pricing model as discussed below.
| · | Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we based our expected term for awards issued to employees and non-employees using the simplified method which is presumed to be the midpoint between the vesting date and the end of the contracted term. |
| · | Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury constant maturity notes with terms approximately equal to the stock-based awards’ expected term. |
| · | Expected Volatility—Since we do not have a trading history of common stock, the expected volatility was derived from the average historical stock volatilities of the common stock of several public companies within the industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards. |
| · | Dividend Rate—The expected dividend rate is zero as we have not paid and do not anticipate paying any dividends in the foreseeable future. |
| · | Fair Value of Common Stock—Prior to our initial public offering (“IPO”), the fair value of the shares of common stock underlying the stock-based awards was determined by our board of directors with input from management. Because there was no public market for our common stock, our board of directors determined the fair value of our common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having valuations of the common stock performed by a third-party valuation specialist, as further described below. |
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As of March 31, 2021, the total compensation cost related to nonvested service-based awards not yet recognized is $39,000. The weighted-average period over which the nonvested awards is expected to be recognized is 1.2 years. The aggregate intrinsic value of stock options outstanding as of March 31, 2021 was $819,000, of which $620,000 related to vested options and $199,000 related to unvested options.
Common Stock Valuations
The fair value of the shares of common stock underlying our stock-based awards prior to our IPO was determined by our board of directors with input from management and contemporaneous third-party valuations. We believe that our board of directors had the relevant experience and expertise to determine the fair value of our common stock prior to our IPO. Given the absence of a public trading market of our common stock, and in accordance with the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors exercised reasonable judgment and considered numerous and subjective factors to determine the best estimate of the fair value of our common stock at each grant date. These factors include:
| · | contemporaneous valuations of our common stock performed by independent third-party specialists; |
| · | the prices, rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; |
| · | the prices of common or convertible preferred stock sold to third-party investors by us; |
| · | lack of marketability of our common stock; |
| · | our actual operating and financial performance; |
| · | current business conditions and projections; |
| · | hiring of key personnel and the experience of our management; |
| · | the history of the company and notable milestones; |
| · | our stage of development; |
| · | likelihood of achieving a liquidity event, such as an initial public offering or a merger or acquisition of our company given prevailing market conditions; |
| · | the market performance of comparable publicly traded companies; and |
| · | the U.S. and global capital market conditions. |
In valuing our common stock, our board of directors determined the equity value of our business using the hybrid method with input from management and contemporaneous third-party valuations. The hybrid method is based upon the probability-weighted value across two scenarios, being (i) successfully consummating an initial public offering and (ii) alternative scenarios in which an initial public offering is not consummated. The hybrid method can be a useful alternative to explicitly modeling all probability-weighted expected return scenarios in situations when the company has transparency into one or more near term exits but is unsure about what will occur if current plans do not materialize. In the first scenario, the potential exit date, the probability exit value and the likelihood of interim financings were considered. In the second scenario, which was assigned the residual probability, the potential exit date, the equity volatility, the assumed interest rate, the dividend yield and equity inflection points at which the allocation of proceeds changes were considered. The valuation method considers the total number of shares authorized and outstanding, as well as recent issuances of both preferred and common stock.
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Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding the time to the liquidation event and volatility. Changes in these estimates and assumptions or the relationships between these assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of common stock.
Following our IPO, the fair value of each share of underlying common stock will be based on the closing price of our common stock as reported by , or such other national securities exchange that our common stock is listed on, on the date of grant or as otherwise provided in the proposed 2021 Equity Incentive Plan. Future expense amounts for any particular period could be affected by changes in our assumptions or market conditions.
Derivative Instruments
The Company issued certain convertible notes in 2018, 2019 and 2020, which notes contained put options. These embedded put options are not considered clearly and closely related to the debt host and result in embedded derivatives that must be bifurcated and accounted for separately from the debt host. Accordingly, the Company has recorded these as a derivative financial liability.
Derivative financial liabilities are initially recorded at fair value, with gains and losses arising for changes in fair value recognized in the statement of operations at each period end while such instruments are outstanding. The liability is being valued using a probability weighted expected return model. The derivative financial liability related to convertible notes issued in 2018 and 2019 was derecognized upon conversion of the convertible notes in 2019.
Recent Accounting Pronouncements
For a description of recent accounting pronouncements, see Note 2 of the notes to our audited financial statements for the year ended December 31, 2020, included elsewhere in this prospectus.
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Business Overview
Tivic Health Systems, Inc. is a commercial-phase bioelectronic medicine company focused on inflammation. Our first product, ClearUP™ Sinus Relief (ClearUP), is a patented handheld device that uses ultra-low current electrical waves to relieve symptoms of sinus and nasal inflammation. ClearUP is a US FDA Class II and EU Class IIa medical device that has received three regulatory clearances: (US FDA 510(k) number K182025, US FDA De Novo number DEN200006 and EU CE Mark Certificate number CE 704687). ClearUP consistently gets high ratings from consumers across multiple sales platforms.
McKinsey & Co estimates that bioelectronic medicine “represents a multibillion dollar opportunity even with modest penetration.” Bioelectronic medicine treats disease and conditions by modulating the electrical signals carried along various nerve pathways. The field grew out of the multi-billion-dollar neuromodulation industry and relied, historically, on implantable devices (e.g. pacemakers, spinal implants, deep brain stimulators). We have shown that ClearUP, a non-invasive bioelectronic therapy, can safely and comfortably deliver therapeutic benefits with a favorable safety profile.
We have brought bioelectronic medicine to the home treatment market for nasal allergies, sinus infections, chronic sinusitis, cold and flu. This $9.9 billion U.S. market is dominated by pharmaceuticals. However, through a market research study commissioned by the Company, in which 600 individuals who reported ongoing sinus conditions were electronically surveyed, we discovered that:
| · | 70% of sufferers are not completely satisfied with over the counter treatment options; |
| · | 90% are interested in treatments that reduce use of medications; and |
| · | 66% are concerned about side effects. |
We conducted two published clinical studies with leading research institutions. The first clinical study was a randomized controlled double-blind trial conducted by the Standard University Sinus Center consisting of 71 subjects suffering from sinus pain and congestion, each of whom used either ClearUP or a sham device. The second clinical study was a 30-person study on the use of ClearUP over a period of four weeks conducted by the Allergy and Asthma Associates of Santa Clara Valley Research Center. These studies demonstrated that ClearUP is highly effective at treating sinus pain from allergic rhinitis and moderate to severe congestion with no substantive side effects. ClearUP has received customer validation over 450 4- and 5-star reviews across multiple sales platforms.
We are currently preparing a second generation version of ClearUP, ClearUP Gen 2, for market. Covered by the same patents, our ClearUP Gen 2 version of ClearUP is designed to lower cost for high-volume manufacturing and distribution. Based on our analysis of regulatory guidance and approval by our designated EU Notified Body (an organization designated by an EU member state to assess the conformity of certain products prior to their release in the EU market), we have determined that ClearUP Gen 2 is covered by the same regulatory clearances as ClearUP, and therefore will not require separate approvals from the U.S. Food and Drug Administration (“FDA”) prior to commercialization. However, it is possible the FDA could determine that ClearUP Gen 2 is not covered by the same regulatory clearances as our existing ClearUP device. If the FDA were to make such a determination, we could be forced to cease distribution of ClearUP Gen 2 until we obtain regulatory clearance or approval, and we could be subject to additional enforcement action by the FDA.
Core Technology
We combine proprietary algorithms, programmable stimulation parameters, and a patented monopolar delivery mechanism to modulate the nerve signals that control inflammation-driven symptoms like pain and congestion. we are researching the clinical utility of this stimulation approach for other clinical conditions. This platform has the potential to accelerate new product development by: (i) extending the existing device platform to other clinical areas, thereby reducing research and development time, and (ii) continuing to benefit from low risk non-invasive device designations and regulatory pathways by the FDA, which typically result in shorter time to approval when compared with invasive devices or new drugs. While it is our intention to bring new products to market, medical device development is inherently uncertain and there is no guarantee that our research and development efforts will lead to approved products for other clinical indications.
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Key elements of our platform include:
| · | a proprietary algorithmic means of detecting areas of dense nerve innervation and blood vessels, which help guide a user to the optimal treatment locations; |
| · | a proprietary algorithmic means of adapting treatment currents and detection to the unique physiological attributes of the technology’s user at the time of use; |
| · | a proprietary algorithmic means of dynamically adjusting treatment levels to maintain both efficacy and comfort; |
| · | programmability of the stimulation protocols via firmware to deliver varied stimulation protocols for different physical and disease targets, providing accelerated opportunities for new product applications; and |
| · | a unique monopolar design that enables ultra-low currents to pass through skin and tissue while maintaining nearly imperceptible current levels. |
This combination creates a platform for non-invasively influencing peripheral activity with an ultra-low current level.
Numerous inflammatory conditions are associated with peripheral nerve activity of the face, including:
| · | chronic quality-of-life conditions such as migraines (39 million U.S.) and tinnitus (50 million U.S.); |
| · | severe, life-altering conditions such as trigeminal neuralgia (150,000 U.S., severe condition); and |
| · | acute conditions such as ear infections (50% of children) and pain and swelling from facial and sinus surgeries (600,000 functional endoscopic surgeries annually, U.S.). |
Each of these applications would involve regulation of pain and inflammation-related mediators like those seen in sinus and nasal inflammation.
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First Product in Market
Our first product in market, based on our core technology, is ClearUP™ Sinus Relief (“ClearUP”). ClearUP has received FDA clearance for treating various symptoms of allergic rhinitis (nasal allergies), sinusitis and cold and flu. It is available without prescription.
Since launching in late 2019 and through June 30, 2021, we sold over 20,000 units of ClearUP through our own websites, Amazon.com, Walgreens.com, BestBuy.com, Walmart.com, FSAStore.com and other specialty online retailers.
Market Opportunity
The FDA initially gave ClearUP 510(k) clearance as an allergy treatment in January 2019. As a treatment for allergy-related sinus pain, we believe that the available market for ClearUP is approximately 45 million U.S. adults.
Factors such as industrialization, climate change, and changing lifestyles are increasing the prevalence of allergic rhinitis, making this a large and growing segment.
The FDA granted ClearUP a subsequent De Novo clearance in March 2021, which expanded ClearUP’s label, enabling marketing of ClearUP for allergies, sinusitis, cold, flu, and any inflammatory condition involving congestion. With this De Novo clearance, we believe that the available market for ClearUP expands to over 200 million U.S. adults. Based upon our market research (conducted by a national sampling company, which electronically surveyed 600 individuals reporting ongoing sinus conditions) indicating that 27% of consumers are willing to pay the current retail price for ClearUP, we estimate an available U.S. market of approximately $8 billion.
According to Mintel Group Ltd., over-the-counter allergy, cough, cold and flu treatments were a $9.9 billion market in 2019 in the U.S. alone. According to our research, among recurring sufferers (those who reported having an ongoing chronic sinus condition), 90% are interested in treatments that reduce use of medications, 66% are concerned about the side effects of pharmaceutical choices, and over 43% are concerned about addiction. We commissioned this research, and it was conducted by a national sampling company, which electronically surveyed 600 individuals reporting ongoing sinus conditions. Only subjects who reported having an ongoing chronic sinus condition were eligible to participate in the study.
In clinical research studies pertaining to ClearUP:
| · | 82% of participants indicated that they prefer it to their current treatments;(1) and |
| · | 77% of participants indicated that they would recommend ClearUP.(2) |
(1) Data from a 71-person randomized controlled study conducted by a third-party academic research center.
(2) Data from a 30-person open label trial conducted by a third-party clinical research organization.
Additionally, we have received a CE Mark for international marketing. The CE Mark for ClearUP covers an equally broad set of conditions related to sinonasal inflammation with the symptoms pain, pressure and congestion. The CE Mark allows sales in the European Union, United Kingdom, Australia, New Zealand and numerous other countries that recognize the CE Mark for regulatory governance. We believe that ClearUP is an international opportunity.
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Competitive Landscape
Pharmaceutical Treatments
Sinus pain and congestion can be caused by allergic rhinitis (allergies), rhinosinusitis, sinus infections, cold and flu and are most often treated with over-the-counter products targeted symptomatically.
| · | Sinus pain/pressure is usually managed with analgesic medications (e.g., ibuprofen/Advil, acetaminophen/Tylenol, naproxen sodium/Aleve). Analgesic medications provide short periods of relief and are often associated with side effects including stomach pain, bleeding, ulcers, constipation, diarrhea, gas, bloating, heartburn, nausea, vomiting, dizziness, headache, nervousness, and rash. |
| · | Congestion is treated with a variety of approaches: |
| o | Antihistamine medications are often a first-line therapy for allergy-related symptoms and research indicates that they are effective for treating allergy symptoms such as itchiness, but are less effective for congestion. Antihistamine medications (e.g., loratadine/Claratin) are generally well-tolerated but may have side-effects including headache, sleepiness, fatigue, dry mouth, and sore throat. |
| o | Oral decongestants (e.g., phenylephrine/Sudafed) used to treat congestion have been demonstrated to exert poor to moderate efficacy, and are associated with nervousness, restlessness, insomnia, dizziness, tachycardia, heart palpitations, syncope, headache, sweating, nausea or vomiting, trembling, paleness, and weakness. |
| o | Intranasal decongestants (e.g., oxymetazoline/Afrin) are more effective than oral decongestants. However, they have reduced effectiveness and rebound effects after three days of use and can lead to the development of a serious condition, rhinitis medicamentosa. Additionally, intranasal decongestants cause side effects including nose irritation or burning, sneezing, dizziness, increased blood pressure, tachycardia, heart palpitations, restlessness and insomnia. |
| o | Intranasal glucocorticoids (e.g., fluticasone propionate/Flonase) have been shown to have the most significant benefits, with some studies showing a 34% reduction in congestion severity after one week of use. Intranasal glucocorticoids have several side effects including epistaxis, dryness, stinging, burning in nose, headache, nausea, vomiting, diarrhea, dizziness, sore throat, and cough. |
Examples of companies developing drugs for pain and congestion include GlaxoSmithKline, Bayer, and Johnson & Johnson.
Limitations on Use of Pharmaceutical Treatments
Due to the side effect profiles of pharmaceuticals, many of the above-mentioned treatments carry warnings to discontinue use after two weeks or less according to the U.S. National Library of Medicine. Additionally, some carry warnings regarding use with certain medications or diseases such as high blood pressure.
Non-pharmaceutical Treatments
According to Mintel Group Ltd., consumers are increasingly seeking natural, non-pharmaceutical treatment options.
| o | Nasal irrigation with saline, rinsing the nasal passages with saline solution, is the most common non-pharmaceutical treatment, representing approximately $706 million in sales in the U.S. Example products include Sinus Rinse and Navage Nasal Care. Nasal irrigation is understudied, but there is some evidence of improved quality of life and clearance of mucus. However, saline can irritate an already inflamed sinonasal tissue and nasal irrigation using tap water has been found to carry risk of parasite-driven encephalitis. |
| o | Bioelectronic devices. ClearUP is the only FDA-cleared bioelectronic device for self-treatment of sinus pain and congestion. |
Examples of companies developing non-drug products for sinus pain and congestion include NeilMed, Rhinosystems Inc., and Vapore LLC.
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Principal Competitors
Over the counter pharmaceuticals have historically had the greatest market share for sinus pain and congestion treatments; however, according to Mintel Group Ltd.’s 2020 report on Cough, Cold, Flu, and Allergy Remedies, there is increasing interest among consumers to reduce reliance on drugs and to find non-drug solutions. For this reason, other companies selling non-pharmaceutical treatments, specifically nasal irrigation products, represent our closest competitors. ClearUP is an emerging new product offering in the non-drug category and currently has small market share.
Clinical Research on ClearUP
Allergic rhinitis is an inflammatory disease driven by IgE-mediated reactions to inhaled indoor or seasonal outdoor allergens. The resulting sinus and nasal inflammation may cause symptoms including sinus pain and pressure, nasal congestion, runny nose, sneezing, and nasal itching. Allergic rhinitis affects a significant number of U.S. adults, of which a vast majority experience sinus pain, pressure and congestion as a result of inflammation of the nasal and sinus mucosa.
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Key Technical Features
| · | Treatment Point Detection. ClearUP employs an advanced treatment point detection algorithm that dynamically personalizes to each user. Haptic vibration indicates to the user to hold the device over these points to facilitate stimulation in areas that maximize therapeutic benefit. We have innovated by integrating dynamic measurement with neuromodulation technology to create this novel therapy. (Issued patents: US10625076, US10537738; 10 patents pending) |
| · | Monopolar Circuit. ClearUP delivers microcurrent stimulation via a monopolar circuit in which the rounded tip of the device is the active electrode and the conductive housing of the device serves as the return electrode. The monopolar design of ClearUP is a significant improvement over typical bipolar approaches to neuromodulation engineering and facilitates deeper delivery of current and sensitive treatment point detection. (Issued patents: US10625076, US10596374; 7 patents pending) |
| · | Proprietary Waveform Delivery. ClearUP delivers a specific frequency, waveform shape, and amplitude of microcurrent that was empirically determined to have fast-acting therapeutic effects on users with common sinonasal symptoms like pain and congestion. Additionally, we have developed an adaptive algorithm that ensures consistent and comfortable delivery of microcurrent treatment on different parts of the face that can have varying electrical properties. (Issued patents: US10625076, US10537738; 10 patents pending) |
| · | Ergonomic Design and Ease of Use. ClearUP’s design ensures the product is comfortable to hold and that the hand will always be in contact with the conductive housing of the monopolar circuit. The device shape has also been refined so that the user can navigate the treatment path with ease. Additionally, the single-button control and intuitive indicators make ClearUP Sinus Relief simple to use. Greater than 95% of users report that applying ClearUP Sinus Relief treatment is easy. (Issued patents: US10596374, US10576280; 3 patents pending) |
Two separate clinical trials have demonstrated the safety and efficacy of ClearUP Sinus Relief in treating sinus pain from allergic rhinitis and moderate to severe congestion.
Pivotal Study: randomized, placebo-controlled, double-blinded clinical trial
In July 2018, the Stanford University Sinus Center conducted a double-blind randomized controlled clinical trial using the ClearUP bioelectronic device. 71 subjects suffering from sinus pain and congestion used either ClearUP or a sham device. The sham device was identical to ClearUP in every way except that it used a continuous DC output instead of the pulsed AC stimulation used by ClearUP.
Each subject used the real or sham device for a single five-minute treatment. Before and ten minutes after treatment, subjects completed questionnaires to quantify their symptoms. Subjects treated with ClearUP reported a rapid and clinically meaningful reduction in sinus pain (-29.6%) and congestion (-35%) at ten minutes after treatment.
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Data represented as mean ± SEM. **p < 0.01, two-tailed unpaired t-test.
This magnitude of change was significantly greater than that observed in sham device-treated subjects.
PUBLICATION: Maul, X. A., Borchard, N. A., Hwang, P. H., & Nayak, J. V. (2019, April). Microcurrent technology for rapid relief of sinus pain: a randomized, placebo-controlled, double-blinded clinical trial. In International forum of allergy & rhinology (Vol. 9, No. 4, pp. 352-356).
Open-label Prospective Trial
The Allergy and Asthma Associates of Santa Clara Valley Research Center conducted a 30-person study on the use of ClearUP over four weeks. Subjects with sinus pain and congestion used the ClearUP device for five minutes during the study visit and then took the device home with them with instructions to use the device one to four times daily for five minutes per treatment as needed for four weeks. Subjects rated their symptoms weekly using a questionnaire. After the first five-minute treatment with ClearUP, subjects reported reduced sinus pain that remained six hours later, the longest time interval tested in the study. Additionally, subjects reported that after four weeks of use, they experienced an average of 43% reduction in sinus pain and 44% reduction in congestion. This magnitude of change was equivalent to efficacy seen in studies of fluticasone propionate after two-weeks of use.
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Data represented as mean ± SEM. **p < 0.01, ****p < 0.0001, repeated measures one-way ANOVA with Dunnett correction for multiple comparisons or paired two-sided t-test.
PUBLICATION: Goldsobel, A. B., Prabhakar, N., & Gurfein, B. T. (2019). Prospective trial examining safety and efficacy of microcurrent stimulation for the treatment of sinus pain and congestion. Bioelectronic medicine, 5(1), 1-9.
Safety
In the clinical studies and post-market surveillance, there have been no reports of any significant side effects and very few reports of minor side effects. Minor side effects have included reddening of skin (0.02%), eyelid twitch (0.01%), and headache (0.01%), all of which resolved without intervention.
Customers
We sell our products either direct-to-consumer through our own websites and through platforms such as Amazon.com or to major U.S. online retailers (such as BestBuy.com, FSAStore.com, Walgreens.com, Walmart.com). Retailers also purchase directly from us and/or through our authorized representatives. We plan to expand our customer base to include additional online and instore retailers in both the U.S. and internationally, who may purchase directly from us and/or through authorized representatives.
Sales and Marketing
Purchase Motivation
ClearUP’s main consumer benefits as supported by our clinical studies, include the following:
| · | Efficacious drug-free alternative with no significant side effects. |
| · | Efficacy for 74% of trial subjects within ten minutes of first treatment. |
| · | Efficacy for 92% of trial subjects with use over four-weeks. |
| · | Continued reduction of sinus pain and congestion with regular use. |
| · | Unlike many pharmaceutical alternatives, no recommendations to discontinue use after a specified period of time or limitations on the number of times per day ClearUP can be used. |
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Sales Channels
ClearUP is sold over-the-counter without a prescription. When launched in late 2019, we initially sold ClearUP through our own websites and Amazon.com. In 2020, we began selling ClearUP on Walgreens.com, FSAStore.com, BestBuy.com, and other specialty online retailers. We recently obtained approval to begin selling ClearUP on Walmart.com’s seller-managed platform, and implementation is in progress.
The expansion of our ClearUP sales channels has been gradual and measured in order to maintain pricing integrity, cultivate consumer acceptance and establish strong channel relationships. With this foundation in place, we believe we are poised to accelerate sales through the expansion of our advertising and marketing efforts.
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As of June 30, 2021, we have sold in excess of 20,000 units of ClearUP. This represents a penetration rate of <0.1% of the market for allergic rhinitis and <0.02% penetration of the market available under our second FDA clearance for congestion.
We project that there is a significant growth opportunity for ClearUP with expanded advertising and additional channel reach.
Marketing and Advertising Strategies
Over the years, we have tested and refined an omnichannel marketing approach to raise consumer awareness of ClearUP and convert consumers to purchasers. We plan to invest in what we believe are the most effective, scalable strategies for guiding a consumer from awareness to purchase, including video-based advertising (television, cable, online) paired with digital marketing support and public relations.
We also use a variety of strategies to attract potential customers to our websites. We believe meaningful and timely content encourages sharing, builds the organic searchability of the website and increases credibility. In 2020, the first year following the launch of ClearUP, our website attracted 236,000 visitors, of which 33% originated from organic searches.
We believe that we have laid the groundwork to grow our sales through expanded investment in marketing and advertising of ClearUP.
New Product Introductions
We are currently developing a second generation of ClearUP, ClearUP Gen 2, that we believe will be better optimized for high volume manufacturing.
ClearUP Gen 2 has the same functionality as the original ClearUP product and we believe that ClearUP Gen 2 will be covered by our existing regulatory clearances and patents. Designed for high-volume manufacturing, total product design has been developed with input from potential retail channel partners and we believe will allow us to meet the target pricing for instore retail introductions
Research Initiatives: New Product Candidates
We combine proprietary algorithms, programmable stimulation parameters, and a patented monopolar delivery mechanism to modulate the nerve signals that control inflammation-driven symptoms like pain and congestion. This design has proven effective in treating sinus and nasal inflammatory conditions and we are researching the clinical utility of this stimulation approach for other clinical conditions. This platform has the potential to accelerate new product development by: (i) extending the existing device platform to other clinical areas, thereby reducing research and development time, and (ii) continuing to benefit from low risk non-invasive device designations and regulatory pathways by the FDA, which typically result in shorter time to approval when compared with invasive devices or new drugs.
Numerous inflammatory conditions are associated with peripheral nerve activity of the face, including:
| · | chronic quality-of-life conditions such as migraines (39 million U.S.), temporomandibular joint disorder (31 million U.S.), and tinnitus (50 million U.S.); |
| · | severe, life-altering conditions such as trigeminal neuralgia (150,000 U.S., severe condition); and |
| · | acute conditions such as ear infections (50% of children) and pain and swelling from facial and sinus surgeries (600,000 functional endoscopic surgeries annually, U.S.). |
Each of these applications would involve regulation of pain and inflammation-related mediators like those seen in sinus and nasal inflammation. Firmware programming allows various stimulation protocols to be used for different disease and neural targets, providing accelerated opportunities for new product candidates at varying price points.
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For example, we completed a ten-person pilot study with the U.S. Institute for Advanced Sinus Care and Research (Cleveland, OH) to evaluate a new device for the treatment of postoperative pain after functional endoscopic sinus surgery (“FESS”). Of the ten individuals who participated in the study, only nine successfully completed it. Outcomes included a decrease in the numeric rating scale for pain reported by participants, indicating pain relief; a decrease in the amount of opioid medication used by participants, as quantified in the participants’ medication diaries; and feasibility for at-home use of the device, as reported by the participants in user feedback questionnaires completed by the participants. The pilot study was conducted to establish clinical feasibility and identify trends and was, therefore, not designed (powered) to establish conclusive, statistically significant results. The trends observed, while not statistically significant, indicated further investigation is warranted. We are developing a controlled clinical study with a top tier academic collaborator to further test the clinical merit of a product candidate in this area.
We have also carried out research and development in the area of migraine headache, which affects 1 billion people worldwide and 50 million people in the U.S. As part of our development activities for migraine, we have engaged with the FDA via their pre-submission process to determine an appropriate regulatory path.
Additional product development activities are ongoing for two product candidates: (i) npdPP, an at home-use device for treating postoperative pain after sinus surgery, and (ii) npdMI, an at home-use device for treating migraine headaches. These product candidates are still in early stages of development, and will require additional studies and regulatory clearances prior to bringing them to market.
We plan to pursue other research activities in 2022 and 2023, including the feasibility of our platform for treatment of one or more disease candidates using peripheral nerve stimulation, including those listed in “Future Potential Use Cases for Peripheral Nerve Stimulation” below. Each of these applications would involve regulation of pain and inflammation-related mediators like those seen in sinonasal inflammation.
We believe our commitment to non-invasive bioelectronic medicine simplifies clinical trial approaches, improves the safety profile important in regulatory matters, and lowers barriers to adoption once in the market. These factors could afford us a unique opportunity for a rapid pace of innovation relative to most medical product companies. While it is our intention to bring new products to market, medical device development is inherently uncertain and there is no guarantee that our research and development efforts will lead to approved products for other clinical indications.
Future Potential Use Cases for Peripheral Nerve Stimulation
The facial area presents numerous opportunities for our non-invasive, ultra-low-current bioelectronic platform. Inflammatory conditions associated with peripheral nerves of the face include:
| · | Temporomandibular joint disorder (31 million annually); |
| · | Otitis media (50% of children); |
| · | Tinnitus (50 million); and |
| · | Trigeminal neuralgia (150,000, severe condition). |
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Manufacturing
The ClearUP device uses conventional, off-the-shelf electronic components. Suppliers must be registered with the FDA and certified for manufacturing of products of the class of product. Suppliers that meet these certifications are abundant. Our products require no specialty manufacturing capabilities or unique, sole-source components. This reduces our dependence on any single manufacturer.
Our electronic components are sourced primarily from China. To increase predictability in sourcing and pricing of electronic components used in our products, we maintain an agreement with Future Electronics, Inc., one of the largest global electronics components’ distributors. The contract has an initial term of 12 months that automatically renews for additional 12-month periods, subject to annual review, and provides for extended payment terms. Future Electronics may terminate the agreement upon 30 days prior written notice if it determines, in its sole discretion, that we are not meeting our minimum purchase requirement or we are otherwise not performing our obligations under the agreement.
Packaging production is divided between North America and China. The plastic enclosure components and sub-assemblies are produced in China. Materials for both packaging and plastics are commonly available and can be sourced from multiple vendors with minimal lead times.
Electronic components are assembled onto printed circuit boards in the San Francisco Bay Area, near our final assembly and test house. ClearUP is assembled, tested, and warehoused at, and distributed from the San Francisco Bay Area.
We are currently investing in development of a second-generation version of ClearUP to reduce manufacturing costs in volume manufacturing.
Intellectual Property / Barriers to Entry
Intellectual Property
Our success depends in part on our ability to obtain and maintain proprietary protection for our product candidates and other discoveries, inventions, trade secrets and know-how that are critical to our business operations. Our success also depends in part on our ability to operate without infringing the proprietary rights of others, and in part, on our ability to prevent others from infringing our proprietary rights. A comprehensive discussion on risks relating to intellectual property is provided under the section of this prospectus titled “Risk Factors—Risks Related to Our Intellectual Property.”
We rely primarily on a combination of patent, copyright, trademark, and trade secret laws, as well as contractual provisions with employees and third parties, to establish and protect our intellectual property rights. Our patent strategy is to pursue broad protection for key technologies, supplemented by additional patent filings covering conceptual methods, specific aspects of current and proposed products, and forward-looking applications and technological developments. We also engage in strategic analysis of our owned patent assets, and pursue additional patent claims from our existing portfolio that may provide us with market advantages. We do not rely heavily on trade secret protection, but do maintain a certain amount of in-house know-how that is not disclosed publicly.
Our intellectual property portfolio currently consists of:
| · | 4 issued U.S. patents. |
| · | 18 patents pending in the U.S. and abroad. |
| · | Several non-provisional patents have been filed in: |
| o | the U.S. (5); |
| o | China (2); |
| o | Europe (2); |
| o | Australia (2); and |
| o | India (2). |
| · | 4 provisional patent applications have been filed in the U.S. |
| · | 7 trademarks granted in the U.S. and China. |
Our intellectual property portfolio includes a large number of disclosures that cover enhanced cost and manufacturability, performance, ergonomics, comfort, ease of use, system expansion, and treatments performed. Identity is protected by way of trademarks. Various aspects of design and function that cannot be readily reverse engineered are held as trade secrets.
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Our patents and pending patent applications are detailed in the table below.
| Jurisdiction | Patent / Application No. | Filing Date | Status | Issue/Grant Date | Expiration Date | Product/Product Candidate |
| US | 16/280,295 | 04/24/2018 | Issued | 4/21/2020 | 04/24/2038 | ClearUP; Postoperative Pain Device |
| US | 16/664,051 | 10/25/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| AU | 2018258221 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| CN | 2018800278808 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| IN | 201917043650 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| EP | 18791846.1 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| US | 16/280,339 | 4/24/2018 | Issued | 3/24/2020 | 4/24/2038 | ClearUP; Postoperative Pain Device |
| US | 16/664,061 | 10/25/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| US | 16/280,412 | 9/17/2018 | Issued | 3/3/2020 | 9/17/2038 | ClearUP; Postoperative Pain Device |
| US | 16/664,072 | 10/25/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| US | 16/280,422 | 4/24/2018 | Issued | 1/21/2020 | 4/24/2038 | ClearUP; Postoperative Pain Device |
| US | 16/664,085 | 10/25/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| AU | 2018258223 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| CN | 2018800278935 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| IN | 201917043652 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| EP | 18789787.1 | 10/28/2019 | Pending | ClearUP; Postoperative Pain Device | ||
| US | 16/983,592 | 8/3/2020 | Pending | ClearUP; Postoperative Pain Device | ||
| WO | PCT/US2021/034926 | 5/28/2021 | Pending | ClearUP; Postoperative Pain Device | ||
| US | 63/189,004 | 5/14/2021 | Pending | TMJ Treatment Device | ||
| US | 63/189,867 | 5/18/2021 | Pending | Migraine Device | ||
| US | 63/189,948 | 5/18/2021 | Pending | Migraine Device | ||
| US | 63/190,034 | 5/18/2021 | Pending | TMJ Treatment Device |
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In most jurisdictions in which we file, the patent term is 20 years from the earliest date of filing of a non-provisional patent application. However, the term of U.S. patents may be extended 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”). We intend to seek patent term extensions in any jurisdiction where these are available and where we also have a patent that may be eligible; however, there is no guarantee that the applicable authorities will agree with our assessment of whether such extensions should be granted, and even if granted, the length of such extensions.
Other Barriers to Entry
We have published high quality clinical research in high-impact peer reviewed journals. We are building relationships with the clinical community including key opinion leaders in the fields of ear, nose and throat (“ENT”) and allergy medicine, establishing Tivic Health as an evidence-based company. Our first-to-market position has secured a high volume and proportion of positive reviews on our websites and other ecommerce channels. We believe that each of these assets, in addition to our regulatory clearances, will create barriers to entry and adoption by consumers.
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Government Regulation
Regulation by the FDA
In the United States, the Federal Food, Drug, and Cosmetic Act (“FD&C Act”), as well as FDA regulations and other federal and state statutes and regulations, govern medical device design and development, preclinical and clinical testing, device safety, premarket clearance, grant, and approval, establishment registration and device listing, manufacturing, labeling, storage, record-keeping, advertising and promotion, sales and distribution, export and import, recalls and field safety corrective actions, and post-market surveillance, including complaint handling and medical device reporting of adverse events.
The FDA classifies medical devices into three classes (Class I, II or III) based on the degree of risk associated with a device and the level of regulatory control deemed necessary to ensure its safety and effectiveness. Class I devices are those for which safety and effectiveness can be assured by adherence to the FDA’s general controls for medical devices. Class II devices are subject to the FDA’s general controls and any other special controls the FDA deems necessary to ensure the safety and effectiveness of the device. Class III devices are those that support or sustain human life, are of substantial importance in preventing impairment of human health, or which present a potential, unreasonable risk of illness or injury.
De Novo classification is a risk-based classification process. The De Novo process provides a pathway to classify novel medical devices for which general controls alone, or general and special controls, provide reasonable assurance of safety and effectiveness for the intended use, but for which there is no legally marketed predicate device. De Novo classified devices fall either into Class I or Class II and may be marketed and used as predicates for future premarket notification 510(k) submissions.
The FDA classifies our peripheral nerve stimulation platform as a Transcutaneous Electrical Nerve Stimulator (“TENS”) regulated as a Class II medical device.
ClearUP sinus relief was cleared under 510(k) number K182025 based on clinical data supporting its safety and efficacy for the temporary relief of sinus pain associated with allergic rhinitis. We were subsequently granted the rights to market ClearUP for the temporary relief of moderate to severe congestion under De Novo number DEN200006.
Labeling
All TENS devices commercially distributed in the U.S. must comply with specific FDA labeling requirements. These requirements address the labeling (e.g., device label, Instruction for Use, package label, etc.) that must be affixed to the device or packaging and provided to all users of the device. Our ClearUP labeling has been reviewed by the FDA as part of our regulatory clearances and our quality management system provides for control of documents to prevent changes that might invalidate FDA’s review.
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Quality System Regulation
The TENS devices that we commercially distribute in the U.S. are subject to pervasive and continuing regulation by the FDA and certain state agencies. This includes product listing and establishment registration requirements, which facilitate FDA inspections and other regulatory actions. We adhere to applicable current good manufacturing practice, or cGMP, requirements, as set forth in the 21 CFR 820 QSR, which require manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all phases of the design and manufacturing process. We are also required to verify that our suppliers maintain facilities, procedures and operations that comply with applicable quality and regulatory requirements. The FDA enforces the QSR through periodic announced or unannounced inspections of medical device manufacturing facilities, which may include the facilities of contractors. FDA regulations also require investigation and correction of any deviations from the QSR and impose reporting and documentation requirements upon us and our third-party manufacturers.
Post-market surveillance
We must also comply with post-market surveillance regulations, including medical device reporting (“MDR”), requirements which require that we review and report to the FDA any incident in which our products may have caused or contributed to a death or serious injury, and any incident in which our device has malfunctioned if that malfunction would likely cause or contribute to a death or serious injury if it were to recur. We must also comply with medical device correction and removal reporting regulations, which require manufacturers to report to the FDA corrections and removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FD&C Act that may present a risk to health. Although we may undertake recall actions voluntarily, we must submit detailed information on any recall action to the FDA, and the FDA can order a medical device recall in certain circumstances.
In addition to post-market quality and safety actions, labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the FTC. Medical devices approved, cleared, or granted by the FDA may not be promoted for outside their respective Indication for Use, otherwise known as “off-label” promotion.
Other healthcare laws and regulations
The healthcare industry is also subject to federal and state fraud and abuse laws, including anti-kickback, self-referral, false claims and physician payment transparency laws, as well as patient data privacy and security and consumer protection and unfair competition laws and regulations. Our operations are also subject to certain state and local laws, including manufacturing license, sales and marketing practices, interactions with consumers, consumer incentive and other promotional programs, and state corporate practice and fee-splitting prohibitions.
Currently, ClearUP is not reimbursed by any government or private healthcare program, limiting our exposure under certain laws such as the Sunshine Act.
CE Mark – European Union, United Kingdom, and other jurisdictions that recognize the CE Mark
In 2020 we secured the CE Mark CE 704687 allowing sales and marketing of ClearUP in the European Union, United Kingdom and in any country that recognizes CE Mark certificate for relief of sinus pain, pressure and congestion, without regard to the cause of pain, pressure and congestion. Sales in such jurisdictions will expose our operations to additional regulations.
To the extent that any of our products are sold in a foreign country, we may become subject to foreign laws, which may include, for example, applicable post-marketing requirements, including post-market clinical follow up, safety surveillance, anti-fraud and abuse laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals. We must operate our business within the requirements of these laws.
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Coverage and reimbursement
Our current product is purchased on a cash-pay basis and is not covered by government healthcare programs and other third-party payors. However, we monitor federal and state legislations and regulatory changes that could affect our results of operations.
Privacy and security
The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their implementing regulations, imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health care providers, health plans and health care clearinghouses), and their respective business associates, individuals or entities that create, received, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity.
Even when HIPAA does not apply, according to the FTC, failing to take appropriate steps to keep consumers’ personal information secure constitutes unfair acts or practices in or affecting commerce in violation of Section 5(a) of the Federal Trade Commission Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards.
In addition, certain states and non-U.S. laws, such as the GDPR govern the privacy and security of health information in certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil and/or criminal penalties and private litigation. For example, California recently enacted the California Consumer Privacy Act, or CCPA, which took effect on January 1, 2020. The CCPA, among other things, creates new data privacy obligations for covered companies and provides new privacy rights to California residents, including the right to opt out of certain disclosures of their information.
Environmental Matters
Our operations, properties and products are subject to a variety of U.S. and foreign environmental laws and regulations governing, among other things, use of manufacturing components containing substances below established threshold, air emissions, wastewater discharges, management and disposal of hazardous and non-hazardous materials and waste and remediation of releases of hazardous materials. We believe, based on current information that we are in material compliance with environmental laws and regulations applicable to us and rely heavily on our outsourced design and manufacturing partners to assist in maintaining compliance.
Facilities
Our registered office is located at 750 Menlo Avenue, Suite 200, Menlo Park, California 94025. Our principal executive office is located in Newark, California at 39899 Balentine Drive, Suite 200, Newark, California 94560, which space we lease on a month-to-month basis.
Human capital resources
As of December 31, 2020, we had eight full-time employees and five contractors. None of our employees is represented by a labor union, and we consider our employee relations to be good. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees. The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards.
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Legal proceedings
We are not currently a party to any material legal proceedings. We may, however, in the ordinary course of business face various claims brought by third parties, and we may, from time to time, make claims or take legal actions to assert our rights, including intellectual property rights as well as claims relating to employment matters and the safety or efficacy of our products. Any of these claims could subject us to costly litigation. If this were to happen, the payment of any such awards could have a material adverse effect on our business, financial condition and results of operations. Additionally, any such claims, whether or not successful, could damage our reputation and business.
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The following table sets forth the names, ages, and positions of our executive officers and directors:
| Name | Age | Position | |||
| Jennifer Ernst | 52 | Chief Executive Officer, Secretary and Director | |||
| Briana Benz | 60 | Chief Financial Officer | |||
| Blake Gurfein, PhD | 37 | Chief Scientific Officer | |||
| Ryan Sabia | 35 | VP of Sales and Operations | |||
| Sheryle Bolton | 74 | Director | |||
| Karen Drexler | 61 | Director | |||
| Dean Zikria | 53 | Director | |||
Executive Officers
Jennifer Ernst is a co-founder and has served as our Chief Executive Officer and as a director since September 2016, and served as our Chief Financial Officer from September 2016 to July 2021. Previously, Ms. Ernst served as the Chief Executive Officer of the U.S. subsidiary of Thin Film Electronics ASA from April 2011 to December 2015. Ms. Ernst also served as the Chief Strategy Officer of Thin Film Electronics ASA from January 2015 to December 2015, where she established and guided the strategic planning process across all business functions and four separate product lines. Ms. Ernst also worked for Xerox PARC for over 20 years, where she held multiple go-to-market roles, including as the Director of Business Development. Ms. Ernst previously served as a director of FlexTech Alliance, the U.S. national consortium for flexible and printed electronics, for three years, including one year as the Chair. Ms. Ernst earned her Master of Business Administration degree from Santa Clara University. We believe Ms. Ernst is qualified to serve on our Board of Directors because of the perspective and experience she provides as our co-founder and Chief Executive Officer, as well as her significant experience as an executive in the technology and electronics industries and her experience in product development and commercialization.
Briana Benz has served as our Chief Financial Officer since July 2021. Ms. Benz has over 30 years of broad based financial, investment banking and growth company experience. Prior to her recent sabbatical, Ms. Benz worked at Campus Televideo, Inc., the nation’s largest private cable operator dedicated exclusively to the college and university market, where she served as Chief Financial Officer from March 2002 to November 2003, both Chief Financial Officer and Chief Operating Officer from November 2003 to December 2005, and Chief Executive Officer, President, Chief Financial Officer and board member from December 2005 to July 2015. Prior to that, Ms. Benz served in various roles, including Chief Financial Officer, SVP Finance and Chief Financial Officer, from January 1998 to August 2001, at Onsite Access, Inc., one of the largest building-centric integrated communication companies in the United States and Canada. Prior to that, Ms. Benz held Chief Financial Officer positions with several venture capital backed ventures and was an Investment Banker with Merrill Lynch Interfunding, a leveraged buyout fund. Ms. Benz was previously a Certified Public Accountant. Ms. Benz earned her Bachelor’s degree in Business Administration from State of University of New York at Polytechnic Institute, Master’s degree in Accounting from State of University of New York at Albany, and Master of Business Administration from Columbia Business School.
Blake Gurfein, PhD serves as our Chief Scientific Officer, a role that he has held since March 2019, prior to which he served as our Vice President of Research commencing in January 2018. Dr. Gurfein leads our clinical and scientific research. In addition to his full-time role with the Company, he has also served as an Adjunct Assistant Professor of Medicine at the University of California San Francisco since 2012. Dr. Gurfein is an expert in neuromodulation device development and has served as a research executive and consultant for several medical device and pharma companies, including as Chief Scientific Officer of Rio Grande Neurosciences from 2014 to 2017 and as a Medical Writer for EMD Serono/Pfizer in 2012. Dr. Gurfein’s prior research in neuroscience and immunology has been funded by the National Institutes of Health and philanthropic donors, yielding high-impact journal publications. Dr. Gurfein has a Ph.D. in Neuroscience from the Icahn School of Medicine at Mount Sinai and an Sc.B. in Neuroscience from Brown University.
Ryan Sabia serves as our Vice President of Sales and Operations, a role that he has held since March 2021. Mr. Sabia has 18 years of experience in global supply chain, systems infrastructure, and sales operations in industries that range from automotive, medical supply, and consumer electronics. From June 2019 to April 2021, Mr. Sabia served as Global Director of Strategic Operations for Mars, Inc. From July 2015 to December 2018, he served as General Manager of Operations for Medelita, LLC, a medical apparel design and manufacturing company. Prior to that, he worked as Senior Director of Operations for Pinpoint Resources Group, a software technology consulting and staffing company, from January 2013 to July 2015, and as a Head Fund Financial Reporting Analyst for J.P. Morgan from August 2012 to January 2013. Mr. Sabia is seasoned in environments that range from Fortune 500 companies (J.P. Morgan, BestBuy, and Toyota) to bootstrap startups, while specializing in scaling for global omnichannel logistics and e-commerce marketplaces. As a result of his finance and accounting background, Mr. Sabia drives a data-focused approach while leveraging modern technologies for business analytics and resource planning. Mr. Sabia graduated from Suffolk University Sawyer Business School with a Bachelor of Science in Finance.
Non-Employee Directors
Sheryle Bolton has served as a director since July 16, 2019. She is an experienced serial technology entrepreneur, public company CEO, corporate executive, speaker, board member, and investor. Ms. Bolton has been a corporate executive in financial services, media, and health care and has served on the boards of private and public corporations, ranging from large groups of mutual funds to technology and finance companies, as well as non-profits, including an NGO, where she served as Chair of the Audit Committee, focused on financing small businesses in Asia and Sub-Saharan Africa and Berry College, a private college with an internationally known work-study program. Ms. Bolton worked in private equity investing as an investment banker at Merrill Lynch Capital Markets, as Director of Strategy at Home Box Office and in asset management at Rockefeller & Co. As CEO, she raised significant funding for several start-ups from angels, venture capital, and the public and institutional markets. She was CEO of Scientific Learning Corporation, a health care and educational technology company, where she led the company from pre-product to IPO with venture funding from Warburg Pincus. She was also CEO and Chair of the public company. She has served as a board member for more than forty Scudder-Kemper mutual funds. From 2015 to 2021, Ms. Bolton was an adjunct Professor of Practice at Hult International Business School, where she taught entrepreneurship and finance courses in graduate and undergraduate programs. She has also been an invited speaker on business and entrepreneurship in the US, Asia, the Pacific Rim, Latin America, and Europe. Harvard Business School recognized Ms. Bolton as one of its most influential female graduates in Silicon Valley and the San Francisco Bay Area. She was a recipient of the first Springboard All-Women’s IPO Class award, a former Chair of Watermark, the largest organization in Silicon Valley for female executives and entrepreneurs, and a recipient of the “A Woman Who Made Her Mark” award, among many other honors and recognition. Ms. Bolton started her career as a Peace Corps Volunteer in Africa. She holds a Bachelor of Arts. and a Master of Arts in Linguistics from the University of Georgia and a Master of Business Administration from Harvard Business School. We believe that Ms. Bolton is qualified to serve as a member of our Board of Directors due to her experience as an entrepreneur, as a CEO taking a company public, and as a public company CEO and director.
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Karen Drexler has served as a director since July 16, 2019. Ms. Drexler is a serial entrepreneur with expertise in the fields of digital health, medical devices and diagnostics. From June 2016 until June 2020, she was the CEO and a board member of Sandstone Diagnostics, Inc., a private company developing instruments and consumables for point-of-care medical testing. Ms. Drexler also serves on the boards of ResMed (NYSE: RSMD), OutSet Medical (NASDAQ: OM), VIDA Health, a leading company in Al-powered lung intelligence solutions and analytics, and Bone Health Technologies, a company developing vibration-based solutions to avoid and treat bone loss. From 2011 to 2017, she served as chair of the board of Hygieia, Inc., a digital insulin therapy company, and remains involved as an advisor to the CEO. She also acts as a senior strategic advisor for other early-stage companies and spent 11 years on the board of the Keller Center for Innovation in Engineering Education at Princeton University. Ms. Drexler has served on numerous private company boards in the fields of diagnostics, medical devices, and digital health. She is an active mentor and advisor with Astia, a global nonprofit that supports high-potential female founders. She is a founding member of Astia Angels, a network of individual investors who fund such founders, and a lead mentor with StartX, the Stanford University incubator. She is also on the Life Science and Women’s Health Councils for Springboard, an accelerator for women-led technology-oriented companies. Through her work with Astia, Springboard, and StartX, she interacts with many promising young medtech companies. Ms. Drexler was founder, president, and CEO of Amira Medical Inc., a private company focused on minimally invasive glucose monitoring technology, from 1996 until it was sold to Roche Holding AG in 2001. Before Amira Medical, she held management roles at LifeScan and played a key role in its sale to Johnson & Johnson (NYSE: JNJ). Ms. Drexler graduated magna cum laude with a Bachelor of Science in Chemical Engineering from Princeton University and earned a Master of Business Administration with honors from the Stanford University Graduate School of Business. Ms. Drexler’s executive and board experience in the medical diagnostics and medical device industries, and particularly her experience in digital health, technology and data security, and out-of-hospital care models, led our Board to conclude she should serve as a director.
Dean Zikria has served as a director since July 10, 2019. Dean brings deep industry experience in allergy and asthma as well as other chronic diseases to the Board. Most recently, commencing on June 1, 2021, he has been serving as the Chief Commercial Officer at Intuity Medical Inc., a Silicon Valley MedTech company launching a highly disruptive glucose meter in the diabetes industry. In addition, he has served as Chairman of DZ Advisors, LLC, a company founded by Mr. Zikria in 2017 that provides consulting and advisory services to the med-tech, bio-tech, digital health and pharmaceutical industries, since inception, where he also served as President from December 2017 until May 31, 2021. Mr. Zikira also sits on the boards of the following privately held companies: AsthmaTek, Inc., a startup digital health company in the asthma space, Paneau Inc., a technology company placing targeted advertising in ride shares, Brev.Dev, Inc., a technology company developing a disruptive platform to aid developers, and Mind Machine LLC, a marketing and advertising agency focused on the MedTech industry. Mr. Zikria is also on the scientific advisory board of Bailard, Inc., a multi-billion dollar independent wealth and investment management firm. From 2019 to 2021, Mr. Zikria served as the CEO of Mind Machine LLC, a marketing/advertising agency, where he was also the Founder and continues to serve as Chairman. He has previously served as CEO of Spirosure Inc., a FeNO detection company for asthma diagnostics, from 2014 to 2017. He has also previously served as head of global marketing for Johnson & Johnson’s Animas Corporation within their medical device & diagnostics division. He was head of strategy for Pfizer Pharmaceuticals U.S. Cardiovascular Unit, a division with approximately $7 billion in annual revenues. Mr. Zikria brings experience in strategic planning, scenario planning and analysis, and mergers and acquisitions, including sourcing, transactions and integration. We believe that Mr. Zikria is qualified to serve as a member of our Board of Directors due to his experience in the allergy and asthma industries, as well as his experience in strategic planning, scenario planning and analysis, and mergers and acquisitions.
Family Relationships
There are no family relationships among any of our directors or executive officers.
Corporate Governance
Composition of our Board of Directors
Our business and affairs are managed under the direction of our board of directors (“Board”). The number of directors will be fixed by our Board, subject to the terms of our amended and restated certificate of incorporation and amended and restated bylaws, which will include a requirement that the number of directors be fixed exclusively by a resolution adopted by directors constituting a majority of the total number of authorized directors, whether or not there exist any vacancies in previously authorized directorships. The size of our Board is currently fixed at five directors, with one vacancy.
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our Board to satisfy its oversight responsibilities effectively in light of our business and structure, the Board focuses primarily on each person’s background and experience as reflected in the information discussed in each of the directors’ individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
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Corporate Governance Profile
We intend to structure our corporate governance in a manner we believe closely aligns our interests with those of our stockholders. Notable features of our corporate governance structure will include the following:
| · | our Board will be divided into three staggered classes of directors and each will be assigned to one of the three classes, Class I, Class II and Class III. Each class of directors will be elected for a three-year term, except that the initial term for Class I directors will expire in 2022, the initial term for Class II directors will expire in 2023, the initial term for Class III directors will expire in 2024; |
| · | we expect that a majority of our directors will satisfy the listing standards for independence; |
| · | generally, all matters to be voted on by stockholders will be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together as a single class; |
| · | we intend to comply with the requirements of the rules, including having committees comprised solely of independent directors; and |
| · | we do not have a stockholder rights plan. |
Our directors will stay informed about our business by attending meetings of our Board and its committees and through supplemental reports and communications. Our independent directors will meet regularly in executive sessions without the presence of our corporate officers or non-independent directors.
Leadership Structure and Risk Oversight
The Board does not have a policy regarding the separation of the roles of Chief Executive Officer and Chairman of the Board, as our Board believes it is in the best interest of the Company to make that determination based on the position and direction of the Company and the membership of the Board. We do not have a lead independent director.
The Board actively manages the Company’s risk oversight process and receives periodic reports from management on areas of material risk to the Company, including operational, financial, legal, and regulatory risks. The Board committees will assist the Board in fulfilling its oversight responsibilities in certain areas of risk. The Audit Committee will assist the Board with its oversight of the Company’s major financial risk exposures. The Compensation Committee will assist the Board with its oversight of risks arising from the Company’s compensation policies and programs. The Corporate Governance and Nominating Committee will assist the Board with its oversight of risks associated with board organization, board independence, and corporate governance. While each committee will be responsible for evaluating certain risks and overseeing the management of those risks, the entire Board will continue to be regularly informed about the risks.
Director Independence
The rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominations committees be independent, or, if a listed company has no nominations committee, that director nominees be selected or recommended for the board’s selection by independent directors constituting a majority of the board’s independent directors. The rules further require that audit committee members satisfy independence criteria set forth in Rule 10A-3 under the Exchange Act and that compensation committee members satisfy the independence criteria set forth in Rule 10C-1 under the Exchange Act.
Prior to the completion of this offering, our Board undertook a review of the independence of our directors and considered whether any director has a material relationship with us that could compromise that director’s ability to exercise independent judgment in carrying out that director’s responsibilities. Our Board has affirmatively determined that each of Dean Zikria, Sheryle Bolton and Karen Drexler qualify as an independent director, as defined under the applicable corporate governance standards of . These rules require that our Audit Committee be composed of at least three members, one of whom must be independent on the date of listing on , a majority of whom must be independent within 90 days of the effective date of the registration statement containing this prospectus, and all of whom must be independent within one year of the effective date of the registration statement containing this prospectus.
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Board Committees and Meetings
Upon completion of this offering, the Board will have three standing committees, the Audit Committee, the Compensation Committee, and the Corporate Governance and Nominating Committee, to assist it with the performance of its responsibilities. The Board will designate the members of these committees and the committee chairs based on the recommendation of the Corporate Governance and Nominating Committee. The Board has adopted written charters for each of these committees, effective upon completion of this offering, which can be found at the investor relations section of our corporate website upon completion of this offering. The chair of each committee develops the agenda for that committee and determines the frequency and length of committee meetings.
Audit Committee
Our Board has established an Audit Committee which, effective upon completion of this offering, will consist of three independent directors, Dean Zikria, Sheryle Bolton and Karen Drexler, with Sheryle Bolton serving as the Chairperson. The Board has determined that each member of the Audit Committee meets the independence requirements of Rule 10A-3 of the Exchange Act, and the applicable rules of , and has sufficient knowledge in financial and auditing matters to serve on the Audit Committee. The committee’s primary duties upon completion of this offering will include:
| · | selecting a firm to serve as the independent registered public accounting firm to audit our financial statements; |
| · | reviewing and discussing with management and our independent auditor our annual and quarterly financial statements and related disclosures, including disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the results of the independent auditor’s audit or review, as the case may be; |
| · | reviewing our financial reporting processes and internal control over financial reporting systems and the performance, generally, of our internal audit function; |
| · | overseeing the audit and other services of our independent registered public accounting firm and being directly responsible for the appointment, independence, qualifications, compensation and oversight of the independent registered public accounting firm, which reports directly to the Audit Committee; |
| · | providing an open means of communication among our independent registered public accounting firm, management, our internal auditing function and our Board; |
| · | reviewing any disagreements between our management and the independent registered public accounting firm regarding our financial reporting; |
| · | preparing the Audit Committee report for inclusion in our proxy statement for our annual stockholder meetings; |
| · | establishing procedures for complaints received regarding our accounting, internal accounting control and auditing matters; and |
| · | approving all audit and permissible non-audit services conducted by our independent registered public accounting firm. |
The Board has determined that Sheryle Bolton is an “audit committee financial expert,” as that term is defined in the rules promulgated by the SEC pursuant to the Sarbanes-Oxley Act of 2012. The Board has further determined that each of the members of the Audit Committee is financially literate and that at least one member of the committee has accounting or related financial management expertise, as such terms are interpreted by the Board in its business judgment.
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Compensation Committee
Our Board has established a Compensation Committee which, effective upon completion of this offering, will consist of three independent directors (as defined under the general independence standards of and our Corporate Governance Guidelines): Dean Zikria, Sheryle Bolton and Karen Drexler are each a “non-employee director” (within the meaning of Rule 16b-3 of the Exchange Act). Karen Drexler will serve as Chairperson of the Compensation Committee. The committee’s primary duties will include:
| · | reviewing all overall compensation policies and practices; |
| · | approving corporate goals and objectives relevant to executive officer compensation and evaluate executive officer performance in light of those goals and objectives; |
| · | determining and approving executive officer compensation, including base salary and incentive awards; |
| · | reviewing and approving, or making recommendations to the Board regarding, compensation plans; and |
| · | administering our equity incentive plan, subject to Board approval. |
Our Compensation Committee determines and approves elements of executive officer compensation, except that compensation of our Chief Executive Officer and Chief Financial Officer will be subject to review and approval by the Board. It also provides recommendations to the Board with respect to non-employee director compensation. The Compensation Committee may not delegate its authority to any other person, other than to a subcommittee.
Corporate Governance and Nominating Committee
Our Board has also established a Corporate Governance and Nominating Committee which, effective upon completion of this offering, will consist of Dean Zikria, Sheryle Bolton and Karen Drexler, with Karen Drexler serving as Chairperson. The committee’s primary duties will include:
| · | recruiting new directors, consider director nominees recommended by stockholders and others and recommend nominees for election as directors; |
| · | reviewing the size and composition of our Board and committees; |
| · | overseeing the evaluation of the Board; |
| · | recommending actions to increase the Board’s effectiveness; and |
| · | developing, recommending and overseeing our corporate governance principles, including our Code of Business Conduct and Ethics and our Corporate Governance Guidelines. |
Code of Business Conduct and Ethics
We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting, which will be effective upon completion of this offering. Upon the completion of this offering, our Code of Business Conduct and Ethics will be available on the investor relations section of our corporate website. We intend to disclose any amendments to the code, or any waivers of its requirements, on our corporate website or in a Current Report on Form 8-K.
Legal Proceedings
To our knowledge, (i) no director or executive officer has been a director or executive officer of any business that has filed a bankruptcy petition or had a bankruptcy petition filed against it during the past ten years; (ii) no director or executive officer has been convicted of a criminal offense or is the subject of a pending criminal proceeding during the past ten years; (iii) no director or executive officer has been the subject of any order, judgment or decree of any court permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities during the past ten years; and (iv) no director or officer has been found by a court to have violated a federal or state securities or commodities law during the past ten years.
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EXECUTIVE AND DIRECTOR COMPENSATION
The following table sets forth, for the fiscal years ended December 31, 2019 and December 31, 2020, the dollar value of all cash and noncash compensation earned by any person that was our principal executive officer (“PEO”) during the last fiscal year and the two most highly compensated individuals other than our PEO who were serving as executive officers during the last fiscal year.
Summary Compensation Table
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plane Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($)(1) | Totals ($) | |||||||||||||||||||||||||||
| Jennifer Ernst, | 2019 | 205,154 | - | - | - | - | - | 15,599 | 220,753 | |||||||||||||||||||||||||||
| CEO and Director | 2020 | 181,125 | - | - | - | - | - | 16,317 | 197,442 | |||||||||||||||||||||||||||
| Blake Gurfein, PhD | 2019 | 226,038 | - | - | - | - | - | 15,229 | 241,267 | |||||||||||||||||||||||||||
| Chief Scientific Officer | 2020 | 226,250 | - | - | - | - | - | 16,276 | 242,526 | |||||||||||||||||||||||||||
| (1) | Includes the cost of health insurance coverage and benefits paid for by us for each named executive officer that is not reimbursed. |
Narrative to the summary compensation table
Employment Agreements/Arrangements
We have not entered into a written employment agreement with Jennifer Ernst, but we intend to enter into such employment agreement prior to the completion of this offering. Blake Gurfein is subject to a standard, at-will offer letter. We intend to enter into a more formal, written employment agreement with Dr. Gurfein prior to the completion of this offering. In addition, we intend to enter into a written employment agreement with Briana Benz, who was appointed as our Chief Financial Officer subsequent to the year ended December 31, 2020, prior to completing of this offering. Currently, the annual compensation of each of the executive officers is fixed by the Board. The named executive officers are also entitled to participate in the Company’s benefit plans, which such benefits are generally available to all full-time employees.
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Outstanding equity awards at fiscal year-end
The following table provides information regarding the outstanding equity awards held by our named executive officers as of December 31, 2020. All awards were granted pursuant to the 2017 Plan. See “Equity Incentive Plans–2017 Equity Incentive Plan” below for additional information.
| Name and principal position | Grant Date (1) | Vesting Commencement Date | Number of securities underlying unexercised options (#) (exercisable) | Number of securities underlying unexercised options (#) (unexercisable) | Number of securities underlying unexercised unearned options (#) | Option exercise price ($) | Option expiration date | |||||||||||||||||
| Jennifer Ernst | 04/04/2018 | 04/01/2018 | 333,333 | 166,667 | ||||||||||||||||||||
| CEO | ||||||||||||||||||||||||
| Blake Gurfein, PhD | 04/04/2018 | 01/01/2018 | 218,750 | (1) | 81,250 | |||||||||||||||||||
| Chief Scientific Officer | 06/28/2018 | 06/28/2018 | 145,833 | 54,167 | ||||||||||||||||||||
| (1) | Dr. Gurfein exercised his options with respect to 200,000 shares of common stock in March 2021. |
Equity Incentive Plans
2017 Equity Incentive Plan
The Board adopted the 2017 Plan on April 13, 2017. The principal purpose of the 2017 Plan is to attract, retain and motivate selected employees, consultants and directors through the granting of stock-based compensation awards and cash-based performance bonus awards. The material terms of the 2017 Plan are summarized below.
Share reserve. Under the 2017 Plan, 3,925,073 shares of our common stock were reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, restricted stock awards, and other stock-based awards. With respect to the share reserve under the 2017 Plan:
| · | to the extent that an award terminates, expires or lapses for any reason or an award is settled in cash without the delivery of shares, any shares subject to the award at such time will be available for future grants under the 2017 Plan; and | |
| · | to the extent that shares of our common stock are repurchased by us prior to vesting so that shares are returned to us, such shares will be available for future grants under the 2017 Plan. |
Administration. Following completion of this offering, the Compensation Committee of the Board is expected to administer the 2017 Plan unless the Board assumes authority for administration.
Subject to the terms and conditions of the 2017 Plan, the administrator has the authority to select the persons to whom awards are to be made, to determine the number of shares to be subject to awards and the terms and conditions of awards, and to make all other determinations and to take all other actions necessary or advisable for the administration of the 2017 Plan. The administrator is also authorized to adopt, amend or rescind rules relating to administration of the 2017 Plan. The Board may at any time remove the Compensation Committee as the administrator and revest in itself the authority to administer the 2017 Plan.
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Eligibility. Options, restricted stock and all other stock-based and cash-based awards under the 2017 Plan may be granted to individuals who are then our officers, employees or consultants or are the officers, employees or consultants of certain of our subsidiaries. Such awards also may be granted to our directors. Only employees of our company or certain of our subsidiaries may be granted incentive stock options (“ISOs”).
Awards. The 2017 Plan provides that the administrator may grant or issue stock options, restricted stock, other stock- or cash-based awards and dividend equivalents, or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award, which will indicate the type, terms and conditions of the award.
· Incentive stock options. ISOs will be designed in a manner intended to comply with the provisions of Section 422 of the Code and will be subject to specified restrictions contained in the Code. Among such restrictions, ISOs must have an exercise price of not less than the fair market value of a share of common stock on the date of grant, may only be granted to employees, and must not be exercisable after a period of ten years measured from the date of grant. In the case of an ISO granted to an individual who owns (or is deemed to own) at least 10% of the total combined voting power of all classes of our capital stock, the 2017 Plan provides that the exercise price must be at least 110% of the fair market value of a share of common stock on the date of grant and the ISO must not be exercisable after a period of five years measured from the date of grant.
· Nonstatutory stock options. Nonstatutory Stock Options, or NSOs, will provide for the right to purchase shares of our common stock at a specified price which may not be less than fair market value on the date of grant, and usually will become exercisable (at the discretion of the administrator) in one or more installments after the grant date, subject to the participant’s continued employment or service with us and/ or subject to the satisfaction of corporate performance targets and individual performance targets established by the administrator. NSOs may be granted for any term specified by the administrator that does not exceed ten years.
· Restricted stock. Restricted stock may be granted to any eligible individual and made subject to such restrictions as may be determined by the administrator. Restricted stock, typically, may be forfeited for No consideration or repurchased by us at the original purchase price if the conditions or restrictions on vesting are not met. In general, restricted stock may not be sold or otherwise transferred until restrictions are removed or expire. Purchasers of restricted stock, unlike recipients of options, will have voting rights and will have the right to receive dividends, if any, prior to the time when the restrictions lapse, however, extraordinary dividends will generally be placed in escrow, and will not be released until restrictions are removed or expire.
· Other stock-based awards. Other stock-based awards are awards of fully vested shares of our common stock and other awards valued wholly or partially by referring to, or otherwise based on, shares of our common stock. Other stock-based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards. The plan administrator will determine the terms and conditions of other stock-based awards, which may include vesting conditions based on continued service, performance and/or other conditions.
Any award may be granted as a performance award, meaning that the award will be subject to vesting and/or payment based on the attainment of specified performance goals.
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Change in control. In the event of a change in control, to the extent that an award (i) is vested, (ii) the terms of an award provide for acceleration of vesting upon a change in control, or (iii) the administrator elects to accelerate the vesting of the award in connection with the change in control, the plan administrator may elect to provide for the purchase or exchange of an award for cash or other property in an amount equal to the difference between (x) the value of cash or other property the optionee would receive in connection with such change in control if the optionee exercised the award, and (y) the aggregate exercise price of the vested portion of the award. If the award is not purchased or exchanged as provided above, then the award will be terminated and cease to be exercisable unless the award is expressly assumed or substituted by the acquirer.
Adjustments of awards. In the event of any stock dividend or other distribution, stock split, reverse stock split, reorganization, combination or exchange of shares, merger, consolidation, split-up, spin-off, recapitalization, repurchase or any other corporate event affecting the number of outstanding shares of our common stock or the share price of our common stock that would require adjustments to the 2017 Plan or any awards under the 2017 Plan in order to prevent the dilution or enlargement of the potential benefits intended to be made available thereunder, the administrator will make appropriate, proportionate adjustments to: (i) the aggregate number and type of shares subject to the 2017 Plan; (ii) the number and kind of shares subject to outstanding awards and terms and conditions of outstanding awards (including, without limitation, any applicable performance targets or criteria with respect to such awards); and (iii) the grant or exercise price per share of any outstanding awards under the 2017 Plan.
Amendment and termination. The administrator may terminate, amend or modify the 2017 Plan at any time and from time to time. However, we must generally obtain stockholder approval to amend or modify the 2017 Plan to the extent required by applicable law, rule or regulation (including any applicable stock exchange rule). Notwithstanding the foregoing, an option may be amended to reduce the per share exercise price below the per share exercise price of such option on the grant date and options may be granted in exchange for, or in connection with, the cancellation or surrender of options having a higher per share exercise price without receiving additional stockholder approval.
No ISOs may be granted pursuant to the 2017 Plan after the tenth anniversary of the effective date of the 2017 Plan. Any award that is outstanding on the termination date of the 2017 Plan will remain in force according to the terms of the 2017 Plan and the applicable award agreement.
2021 Equity Incentive Plan
The Company intends to adopt the 2021 Plan, which will become effective upon the completion of this offering. Upon the effectiveness of the 2021 Plan, it would replace the 2017 Plan except with respect to awards outstanding under the 2017 Plan, and no further awards will be made under the 2017 Plan. Additionally, any awards that are cancelled or expire under the 2017 Plan will not be reissued. The principal purpose of the 2021 Plan is to attract, retain and incentivize the Company’s employees and other service providers through the granting of certain stock-based awards, including performance-based awards. The material terms of the 2021 Plan, as it is currently contemplated, are summarized below.
Share reserve. Under the 2021 Plan, shares of our common stock will be reserved for issuance pursuant to a variety of stock-based compensation awards, including stock options, restricted stock awards, restricted stock units, stock bonus awards and performance-based awards. With respect to the share reserve under the 2021 Plan:
· to the extent that an award terminates, expires or lapses for any reason or an award is settled in cash without the delivery of shares, any shares subject to the award at such time will be available for future grants under the 2021 Plan; and
· to the extent that shares of our common stock are repurchased by us prior to vesting so that shares are returned to us, such shares will be available for future grants under the 2021 Plan.
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Administration. Following completion of this offering, the Compensation Committee of the Board is expected to administer the 2021 Plan unless the Board assumes authority for administration. The Compensation Committee must consist of at least two members of the Board, each of whom is intended to qualify as a “non-employee director” for purposes of Rule 16b-3 under the Exchange Act and an “independent director” within the meaning of the rules of the applicable stock exchange, or other principal securities market on which shares of our common stock are traded. The term Administrator refers to either the Board or the Compensation Committee, as applicable.
Subject to the terms and conditions of the 2021 Plan, the Administrator has the authority to construe and interpret the 2021 Plan and awards granted under it and to determine the persons to whom and the dates on which awards will be granted, the number of shares of common stock to be subject to each award, the time or times during the term of each award within which all or a portion of such award may be exercised, the exercise price, the type of consideration and other terms of the award. All decisions, determinations and interpretations by the Administrator regarding the 2021 Plan shall be final and binding on all participants or other persons claiming rights under the 2021 Plan or any award.
Awards. The 2021 Plan provides that the Administrator may grant or issue stock options, restricted stock, other stock-based awards and dividend equivalents, or any combination thereof. Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award.
Eligibility. Options, restricted stock, restricted stock units and all other stock-based awards under the 2021 Plan may be granted to individuals who are then our officers, employees, directors or consultants or are the officers, employees or consultants of certain of our subsidiaries. Only employees of our company or certain of our subsidiaries may be granted incentive stock options, or ISOs. No ISO may be granted under the 2021 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of the Company or any affiliate of the Company, unless the exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to which ISOs are exercisable for the first time by a participant during any calendar year (under the 2021 Plan and all other such plans of the Company and its affiliates) may not exceed $100,000. ISOs are not transferable except by will or by the laws of descent and distribution, provided that a participant may designate a beneficiary who may exercise an option following the participant’s death.
· Stock Options. Options granted under the 2021 Plan may become exercisable in cumulative increments (“vest”) as determined by the Administrator. Such increments may be based on continued service to the Company over a certain period of time, the occurrence of certain performance milestones, or other criteria. Options granted under the 2021 Plan may be subject to different vesting terms. Except as to a maximum of five percent (5%) of the number of shares reserved and available for grant and issuance under the 2021 Plan, any options that vest on the basis of the participant’s continued service will have a minimum vesting period of one year. In addition, the Administrator may not use discretion to accelerate the vesting of options (subject to a maximum five percent (5%) of shares under the 2021 Plan that may be accelerated) other than in connection with a death, disability or a change in control (where a participant terminates employment in certain situations or equity awards are not assumed or substituted for in the transaction).
To the extent provided by the terms of an option, a participant may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a cash payment upon exercise, by authorizing the Company to withhold a portion of the stock otherwise issuable to the participant, or by such other method as may be set forth in the option agreement. The maximum term of options under the 2021 Plan is 10 years, except that in certain cases (see Eligibility) the maximum term of certain incentive stock options is five years. Options under the 2021 Plan generally terminate sixty (60) days after termination of the participant’s service unless (i) such termination is due to the participant’s disability, in which case the option may, but need not, provide that it may be exercised at any time within 6 months of such termination; (ii) the participant dies before the participant’s service has terminated, or within three months after termination of such service, in which case the option may, but need not, provide that it may be exercised within 12 months of the participant’s death by the person or persons to whom the rights to such option pass by will or by the laws of descent and distribution; or (iii) the option by its terms specifically provides otherwise. If an optionee’s service with the Company, or any affiliate of the Company, ceases with cause, the option will terminate at the time the optionee’s service ceases. In no event may an option be exercised after its expiration date.
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· Stock Bonuses and Restricted Stock Awards. Stock bonus awards and restricted stock awards are granted through a stock bonus award agreement or restricted stock award agreement. Subject to certain limitations, the purchase price for restricted stock or stock bonus awards must be at least the par value of our Common Stock. The purchase price for a stock purchase award may be payable in cash, or any other form of legal consideration approved by the Administrator. Stock bonus awards may be granted in consideration for the recipient’s past services for the Company. Common stock issued under a restricted stock or stock bonus award agreement may be subject to a share repurchase option or forfeiture right in our favor, each in accordance with a vesting schedule and subject to the minimum vesting requirement. If a recipient’s service relationship with us terminates, we may reacquire or receive via forfeiture all of the shares of our Common Stock issued to the recipient pursuant to a restricted stock or stock bonus award that have not vested as of the date of termination. Rights under a stock bonus or restricted stock bonus agreement may be transferred only as expressly authorized by the terms of the applicable stock bonus or restricted stock purchase agreement.
· Restricted Stock Units. Restricted stock unit awards are issued pursuant to a restricted stock unit award agreement. Subject to certain limitations, the consideration, if any, for restricted stock unit awards must be at least the par value of our common stock. The consideration for a stock unit award may be payable in any form acceptable to the Administrator and permitted under applicable law. The Administrator may impose any restrictions or conditions upon the vesting of restricted stock unit awards, or that delay the delivery of the consideration after the vesting of stock unit awards, that it deems appropriate consistent with the minimum vesting requirement. Restricted stock unit awards may be settled in cash or shares of the Company’s common stock, as determined by the Administrator. No dividends payments will be made on unvested restricted stock unit awards, but instead any dividends will be deferred until awards become vested. If a restricted stock unit award recipient’s service relationship with the Company terminates, any unvested portion of the restricted stock unit award is forfeited upon the recipient’s termination of service.
· Performance-Based Award. Any award may be granted as a performance award, meaning that the award will be subject to vesting and/or payment based on the attainment of specified performance goals. Generally, such pre-established performance goals consist of one or more business criteria and a targeted performance level with respect to such criteria as a condition of awards being granted or becoming exercisable, or as a condition to accelerating the timing of such events. Performance may be measured over a period of any length specified by the Administrator.
Certain Corporate Transactions. In the event of a merger, sale of all or substantially all of the assets of the Company or other change of control transaction, unless otherwise determined by the Board, all outstanding awards will be subject to the agreement governing such merger, asset sale or other change of control transaction. Such agreement need not treat all such awards in an identical manner, and it will provide for one or more of the following with respect to each award: (i) the continuation of the award, (ii) the assumption of the award, (iii) the substitution of the award, or (iv) the payment of the excess of the fair market value of the shares subject to the award over the exercise price or purchase price of such shares. In the event the successor corporation refuses to either continue, assume or substitute the shares subject to the award pursuant to the terms of the 2021 Plan, pay the excess of the fair market value of the shares subject to the award over the exercise price or purchase price of such shares, then outstanding awards shall vest and become exercisable as to 100% of the shares subject thereto contingent upon the consummation of such change of control transaction.
Adjustments Provisions. Transactions not involving receipt of consideration by the Company, such as a merger, consolidation, reorganization, recapitalization, reincorporation, reclassification, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, or a change in corporate structure may change the type(s), class(es) and number of shares of common stock subject to the 2021 Plan and outstanding awards. In that event, the 2021 Plan will be appropriately adjusted as to the type(s), class(es) and the maximum number of shares of Common Stock subject to the 2021 Plan, and outstanding awards will be adjusted as to the type(s), class(es), number of shares and price per share of Common Stock subject to such awards.
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Amendment and termination. The administrator may terminate, amend or modify the 2021 Plan at any time and from time to time. However, we must generally obtain stockholder approval to amend or modify the 2021 Plan to the extent required by applicable law, rule or regulation (including any applicable stock exchange rule). Notwithstanding the foregoing, an option may be amended to reduce the per share exercise price below the per share exercise price of such option on the grant date and options may be granted in exchange for, or in connection with, the cancellation or surrender of options having a higher per share exercise price without receiving additional stockholder approval.
Compensation of Directors
The Company has not yet implemented a formal compensation plan for its directors but plans to do so prior to the completion of this offering. However, during the year ended December 31, 2020, the Company granted its directors options to purchase an aggregate of 25,000 shares of Company common stock as considerations for their services as directors on the Company’s Board.
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CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
We describe below the transactions and series of similar transactions, since January 1, 2019, to which we were a party or will be a party, in which:
| · | the amounts involved exceeded or will exceed the lesser of $120,000 or one percent (1%) of the average of our total assets for the last two (2) fiscal years; and | |
| · | any of our directors, executive officers, holders of more than 5% of our capital stock or any member of their immediate family had or will have a direct or indirect material interest, other than equity and other compensation, termination, change in control and other arrangements with directors and executive officers, which are described where required under the section above entitled “Executive and Director Compensation.” |
Subinoy Das is both a consultant and investor in the Company. We entered into a consulting agreement with Dr. Das on May 1, 2019 to provide us with support for research and clinical activities. We expensed and accrued $42,000 included in ‘Other accrued liabilities’ at December 31, 2019 for his services. On December 30, 2020, the Board granted Dr. Das 113,292 non-statutory stock options to replace amounts accrued for his services for fiscal years ended December 31, 2020 and 2019. The fair value of this grant is $13,000 and was expensed in fiscal year ended December 31, 2020. We recognized a gain on settlement of $117,000 which is included in research and development expense for the year ended December 31, 2020.
In June 2021, we issued a convertible note payable to our Chief Executive Officer for total proceeds of $100,000. The note is unsecured, has a term of two years, and accrues interest at a rate of 3% per annum. This note will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
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The following table sets forth certain information regarding the beneficial ownership of our outstanding common stock and preferred stock as of August 1, 2021 by: (i) each of our directors, (ii) each of our named executive officers (as defined by Item 402(a)(3) of Regulation S-K promulgated under the Exchange Act), (iii) all of our directors and named executive officers as a group, and (iv) each person known to us to beneficially own more than 5% of each class of our outstanding voting securities. As of August 1, 2021, there were 18,856,516 shares of our common stock issued and outstanding, after giving effect to the conversion of all 8,908,600 outstanding shares of our preferred stock into 8,908,600 shares of our common stock on a one-for-one basis immediately prior to completion of this offering.
Beneficial ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding preferred stock, options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our Common Stock owned by them, except to the extent that power may be shared with a spouse. The Company does not know of any arrangements the operation of which may at a subsequent date result in a change of control of the Company.
| Common Stock | Series Seed Preferred Stock(14) | Percentage of Shares of Common Stock Beneficially Owned | ||||||||||||||||||||
| Name of Beneficial Owner (1) | Shares Beneficially Held | Percent of Class | Shares Beneficially Held | Percent of Class | Before Offering | After Offering | ||||||||||||||||
| Certain Stockholders | ||||||||||||||||||||||
| John Claude(2) | 4,784,000 | 25.4 | % | - | - | 25.4 | % | |||||||||||||||
| Subinoy Das(3) | 1,220,981 | 6.4 | % | 899,981 | 10.1 | % | 6.4 | % | ||||||||||||||
| Murahari Amarnath(10) | 901,346 | 4.8 | % | 901,346 | 10.1 | % | 4.8 | % | ||||||||||||||
| Sand Hill Angels XVIII, LLC(11) | 726,902 | 3.9 | % | 726,902 | 8.2 | % | 3.9 | % | ||||||||||||||
| Astia Angels Tivic LLC(12) | 680,027 | 3.6 | % | 680,027 | 7.6 | % | 3.6 | % | ||||||||||||||
| GS Tivic Health LLC(13) | 561,228 | 3.0 | % | 561,228 | 6.3 | % | 3.0 | % | ||||||||||||||
| Directors and Executive Officers | ||||||||||||||||||||||
| Jennifer Ernst(4) | 4,859,066 | 25.2 | % | 5,566 | * | 25.2 | % | |||||||||||||||
| Briana Benz(9) | 450,000 | 2.4 | % | - | 2.4 | % | ||||||||||||||||
| Blake Gurfein, PhD(5) | 468,750 | 2.5 | % | - | 2.5 | % | ||||||||||||||||
| Ryan Sabia | - | - | - | - | ||||||||||||||||||
| Dean Zikria(6) | 12,500 | * | - | * | ||||||||||||||||||
| Sheryle Bolton(7) | 12,500 | * | - | * | ||||||||||||||||||
| Karen Drexler(8) | 37,500 | * | - | * | ||||||||||||||||||
| All officers and directors as a group (7 persons) | 5,840,316 | 29.8 | % | * | 29.8 | % | ||||||||||||||||
* Less than 1%
| (1) | Unless otherwise indicated, the address for each beneficial owner listed is c/o Tivic Health Systems, Inc., 39899 Balentine Drive, Suite 200, Newark, California 94560. |
| (2) | Includes 4,784,000 shares of common stock held by Mr. Claude. Mr. Claude is a former director of the company. |
| (3) | Includes 899,981 shares of Series Seed Preferred Stock that are convertible into 899,981 shares of common stock held by Dr. Das, as well as options to purchase 321,000 shares of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). The address of Dr. Das is 770 Jasonway Ave Suite 1B, Columbus Ohio 43214. |
| (4) | Includes 4,416,000 shares of common stock held by Ms. Ernst, 5,566 shares of Series Seed Preferred Stock that are convertible into 5,566 shares of common stock, as well as options to purchase 437,500 of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). Does not include shares of common stock issuable upon conversion of an unsecured convertible promissory note in the principal amount of $100,000 held by Ms. Ernst, as the conversion price per share will be determined based upon the initial public offering price per share of common stock issued in connection with this offering. |
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| (5) | Includes 200,000 shares of common stock held by Dr. Gurfein, as well as options to purchase 268,750 shares of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). |
| (6) | Includes options to purchase 12,500 shares of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). |
| (7) | Includes options to purchase 12,500 shares of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). |
| (8) | Includes options to purchase 37,500 shares of common stock that are vested and exercisable (or will be vested and exercisable within 60 days of August 1, 2021). |
| (9) | Includes 450,000 shares of restricted common stock issued to Ms. Benz pursuant to a restricted stock purchase agreement. Ms. Benz was appointed as the Company’s Chief Financial Officer in July 2021 and has been included herein although not listed as a “named executive officer” under the “Executive Compensation” section of this preliminary prospectus as she was appointed after the last completed fiscal year. |
| (10) | Includes 901,346 shares of Series Seed Preferred Stock that are convertible into 901,346 shares of common stock held by Murahari Amarnath. The address of Murahari Amarnath is 505 Hamilton Ave., #100, Palo Alto, CA 94301. |
| (11) | Includes 726,902 shares of Series Seed Preferred Stock that are convertible into 726,902 shares of common stock held by Sand Hill Angels XVIII, LLC. The address of Sand Hill Angels XVIII, LLC is 1060 La Avenida St., Mountain View, CA 94043. |
| (12) | Includes 680,027 shares of Series Seed Preferred Stock that are convertible into 680,027 shares of common stock held by Astia Angels Tivic LLC. The address of Astia Angels Tivic LLC is c/o Astia, 2164 Hyde Street, Suite 714 , San Francisco, CA 94109. |
| (13) | Includes 561,228 shares of Series Seed Preferred Stock that are convertible into 561,228 shares of common stock held by GS Tivic Health LLC. The address of GS Tivic Health LLC is c/o Golden Seeds, FDR Station, Box 642, New York, NY 10150. |
| (14) | Our class of Series Seed Preferred Stock consists of: (i) 2,794,979 shares of Seed-1 Preferred Stock; (ii) 774,894 shares of our Seed-2 Preferred Stock issued and outstanding; (iii) 3,615,580 shares of our Seed-3 Preferred Stock issued and outstanding; and (iv) 1,723,147 shares of our Seed-4 Preferred Stock issued and outstanding (collectively, the “Series Seed Preferred Stock”). All 8,908,600 shares of our outstanding Series Seed Preferred Stock will convert 1:1 into an aggregate of 8,908,600 shares of our common stock immediately prior to the completion of this offering. |
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Capital Stock
General
Upon completion of this offering, our authorized capital stock will consist of shares of common stock, par value $0.0001 per share, and shares of preferred stock, par value $0.0001 per share, all of which will be undesignated. Upon completion of the offering, we will have shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding.
As of August 1, 2021, there were (i) 9,947,916 shares of our common stock issued and outstanding, held by approximately four stockholders of record; (ii) 2,794,979 shares of our Seed-1 Preferred Stock issued and outstanding; (iii) 774,894 shares of our Seed-2 Preferred Stock issued and outstanding; (iv) 3,615,580 shares of our Seed-3 Preferred Stock issued and outstanding; and (v) 1,723,147 shares of our Seed-4 Preferred Stock issued and outstanding. All 8,908,600 shares of our outstanding preferred stock will convert into an aggregate of 8,908,600 shares of our common stock immediately prior to the completion of this offering.
We reincorporated in the State of Delaware effective as of June 7, 2021. The following description of our capital stock and provisions of our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective upon the completion of this offering, are summaries of material terms and provisions and are qualified by reference to our amended and restated certificate of incorporation and amended and restated bylaws, copies of which have been filed with the SEC as exhibits to the registration statement of which this prospectus is a part. The descriptions of our common stock and convertible preferred stock reflect the content of the amended and restated certificate of incorporation and amended and restated bylaws that will become effective upon the completion of this offering.
Common Stock
Upon completion of this offering, we will be authorized to issue one class of common stock. Holders of our common stock will be entitled to one vote for each share of common stock held of record for the election of our directors and all other matters requiring stockholder action, except with respect to amendments to our certificate of incorporation that alter or change the powers, preferences, rights or other terms of any outstanding preferred stock if the holders of such affected series of preferred stock are entitled to vote on such an amendment. Our directors are elected by a plurality of the votes cast by the stockholders entitled to vote at our annual meeting of stockholders, and will not be entitled to cumulative voting rights. Holders of common stock will be entitled to receive such dividends, if any, as may be declared from time to time by our Board in its discretion out of funds legally available therefor. The payment of dividends, if any, on shares of our common stock will be subject to the prior payment of dividends on any outstanding preferred stock, of which there will be none immediately following completion of this offering. Upon our liquidation or dissolution, the holders of our common stock will be entitled to receive a pro rata portion of all assets remaining available for distribution to stockholders after payment of all liabilities and provision for the liquidation of any shares of preferred stock outstanding at that time. The holders of our common stock will have no preemptive, subscription or redemption rights, and will have no rights to convert their common stock into any other securities. The absence of preemptive rights could result in a dilution of the interest of the existing stockholders should additional shares of our common stock be issued. In addition, the rights of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future.
Preferred Stock
No shares of preferred stock will be outstanding upon completion of this offering. Upon completion of this offering, our Board will be authorized, without action by our stockholders, to designate and issue up to 10,000,000 shares of preferred stock in one or more series. Our Board will have the right to fix the voting rights, if any, designations, powers, preferences, the relative, participating, optional or other special rights, if any, and any qualifications, limitations and restrictions thereof, applicable to the shares of each series of designated preferred stock. Our Board will be able to, without stockholder approval, issue shares of preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of our common stock and could have anti-takeover effects. The ability of our Board to issue preferred stock without stockholder approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management. Although we do not currently intend to issue any shares of preferred stock, we cannot assure you that we will not do so in the future.
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Stock Options
As of March 31, 2021, 2,997,876 shares of common stock were issuable upon the exercise of outstanding stock options, at a weighted-average exercise price of approximately $0.10 per share. For additional information regarding terms of our equity incentive plans, see the section of this prospectus entitled “Executive and director compensation—Equity Incentive Plans.”
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Effective as of June 7, 2021, we reincorporated as a Delaware corporation. Certain provisions of Delaware law, as well as our amended and restated certificate of incorporation and our amended and restated bylaws, both of which will become effective upon completion of this offering, will contain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. These provisions are also designed, in part, to encourage persons seeking to acquire control of us to first negotiate with our Board. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging such proposals, including proposals that are priced above the then-current market value of our common stock, because, among other reasons, such negotiation could result in an improvement of the terms of such proposals.
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws.
Certain provisions set forth in our amended and restated certificate of incorporation, our amended and restated bylaws (both of which will become effective upon completion of this offering), and in Delaware law, which are summarized below, may be deemed to have an anti-takeover effect and may delay, deter or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests, including attempts that might result in a premium being paid over the market price for the shares held by stockholders.
Classified Board of Directors
Upon completion of this offering, our Board will be divided into three classes serving three-year terms, with one class being elected each year by a plurality of the votes cast by the stockholders entitled to vote on the election.
Proposals of business and nominations.
Our amended and restated bylaws will generally regulate proposals of business and nominations for election of directors by stockholders. In general, Section 2.5 will require stockholders intending to submit proposals or nominations at a stockholders meeting to provide the Company with advance notice thereof, including information regarding the stockholder proposing the business or nomination as well as information regarding the proposed business or nominee. Sections 2.4 and 2.5 will provide a time period during which business or nominations must be provided to the Company that will create a predictable window for the submission of such notices, eliminating the risk that the Company finds a meeting will be contested after printing its proxy materials for an uncontested election and providing the Company with a reasonable opportunity to respond to nominations and proposals by stockholders.
Blank Check Preferred Stock.
Our Board will have the right to issue preferred stock in one or more series and to determine the designations, rights, preferences of such preferred stock without stockholder approval.
Board Vacancies.
Our amended and restated bylaws will generally provide that only our Board (and not the stockholders) may fill vacancies and newly created directorships.
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While the foregoing provisions of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law may have an anti-takeover effect, these provisions are intended to enhance the likelihood of continuity and stability in the composition of the Board and in the policies formulated by the Board, and to discourage certain types of transactions that may involve an actual or threatened change of control. In that regard, these provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management.
Delaware Anti-Takeover Statute
Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law (“Section 203”) regulating corporate takeovers. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder unless:
| · | prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; | |
| · |
upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, the outstanding voting stock owned by the interested stockholder, (i) shares owned by persons who are directors and also officers and (ii) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
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| · |
at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.
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Generally, a business combination includes a merger, asset, stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own 15% or more of a corporation’s outstanding voting stock. We expect the existence of Section 203 to have an anti-takeover effect with respect to transactions our Board does not approve in advance. We also anticipate that Section 203 may discourage business combinations or other attempts that might result in a premium over the market price for the shares of common stock held by our stockholders.
Listing
We have applied to list our common stock on the under the ticker symbol “TIVC.” No assurance can be given that our application will be approved. The closing of this offering is contingent upon the successful listing of our common stock on the or another national securities exchange.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equiniti Trust Company. The transfer agent’s principal business address is 90 Park Avenue, 25th Floor, New York, NY 10016, and its telephone number is 800-468-9716.
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SHARES ELIGIBLE FOR FUTURE SALE
Before the completion of this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock, including shares issued upon the exercise of outstanding options and warrants, in the public market after this offering, or the possibility of these sales or issuances occurring, could adversely affect the prevailing market price for our common stock or impair our ability to raise equity capital.
Based on our shares outstanding as of March 31, 2021, assuming (i) the automatic conversion of all our convertible promissory notes (as described herein) into shares of common stock, and (ii) the conversion of all our convertible preferred stock (described herein) into 8,908,600 shares of common stock immediately prior to the completion of this offering, upon the completion of this offering, a total of shares of common stock will be outstanding. Of these shares, all of the common stock sold in this offering by us, plus any shares sold by us on exercise of the representative of the underwriters’ option to purchase additional common stock, will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by “affiliates,” as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock will be, and shares of common stock subject to stock options will be upon issuance, “restricted securities,” as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under the Securities Act’s Rules 144 or 701, which Rules are summarized below. Restricted securities may also be sold outside of the U.S. to non-U.S. persons in accordance with Rule 904 of Regulation S.
Subject to the lock-up agreements described below and the provisions of Rule 144 and 701 or Regulation S under the Securities Act, as well as our insider trading policy, these restricted securities will be available for sale in the public market after the date of this prospectus.
Rule 144
In general, under Rule 144 (as currently in effect), once we have been subject to public company reporting requirements of Section 13 or Section 15(d) of the Exchange Act for at least 90 days, an eligible stockholder is entitled to sell such shares without complying with the manner of sale, volume limitation, or notice provisions of Rule 144, subject to compliance with the public information requirements of Rule 144. To be an eligible stockholder under Rule 144, such stockholder must not be deemed to have been one of our affiliates for purposes of the Securities Act at any time during the 90 days preceding a sale and must have beneficially owned the shares proposed to be sold for at least six months, including the holding period of any prior owner other than our affiliates. If such a person has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than our affiliates, then such person is entitled to sell such shares without complying with any of the requirements of Rule 144, subject to the expiration of the lock-up agreements described below.
In general, under Rule 144, as currently in effect, our affiliates or persons selling shares on behalf of our affiliates are entitled to sell shares upon the expiration of the lock-up agreements described below. Beginning 90 days after the date of this prospectus and subject to any lock-up agreement, within any three-month period, such stockholders may sell a number of shares that does not exceed the greater of:
| · |
1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering, assuming no exercise of the representative of the underwriter’s option to purchase additional shares of common stock from us; or
|
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| · |
the average weekly trading volume of our common stock on the during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale.
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Sales under Rule 144 by our affiliates or persons selling shares on behalf of our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
Rule 701 generally allows a stockholder who was issued shares under a written compensatory plan or contract and who is not deemed to have been an affiliate of our company during the immediately preceding 90 days, to sell these shares in reliance on Rule 144, but without being required to comply with the public information, holding period, volume limitation, or notice provisions of Rule 144. Rule 701 also permits affiliates of our company to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required by that rule to wait until 90 days after the date of this prospectus before selling those shares under Rule 701, and any such proposed sales shall remain subject to the expiration of the lock-up agreements described below.
Form S-8 Registration Statements
We intend to file one or more registration statements on Form S-8 under the Securities Act with the SEC to register the offer and sale of shares of our common stock that are issuable under our existing or planned stock option and incentive plans. These registration statements will become effective immediately upon filing with the SEC. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to vesting restrictions, any applicable lock-up agreements described below, and Rule 144 limitations applicable to affiliates.
Lock-up Arrangements
Pursuant to “lock-up” agreements, we, our executive officers, directors and our stockholders (including holders of our common stock to be received upon conversion of our outstanding convertible notes payable and convertible preferred stock) have agreed, without the prior written consent of the representative of the underwriters, not to (i) directly or indirectly offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of) our common stock; (ii) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of our common stock; (iii) make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any other securities of ours; or (iv) publicly disclose the intention to do any of the foregoing, subject to customary exceptions, for a period of six months after the date of this prospectus (twelve months in the case of our officers and directors). The representative of the underwriters may, in its sole discretion, release any of the securities subject to these lock-up agreements at any time.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of certain U.S. federal income tax considerations applicable to non-U.S. holders (as defined below) with respect to their ownership and disposition of shares of our common stock issued pursuant to this offering. For purposes of this discussion, a non-U.S. holder means a beneficial owner of our common stock that is for U.S. federal income tax purposes:
| · | a non-resident alien individual; |
| · | a foreign corporation or any other foreign organization taxable as a corporation for U.S. federal income tax purposes; or |
| · | a foreign estate or trust, the income of which is not subject to U.S. federal income tax on a net income basis. |
This discussion does not address the tax treatment of partnerships or other entities that are pass-through entities for U.S. federal income tax purposes or persons that hold their common stock through partnerships or other pass-through entities. A partner in a partnership or other pass-through entity that will hold our common stock should consult his, her or its tax advisor regarding the tax consequences of holding and disposing of our common stock through a partnership or other pass-through entity, as applicable.
This discussion is based on the current provisions of the Internal Revenue Code of 1986, as amended (“Code”), existing and proposed U.S. Treasury Regulations promulgated thereunder, current administrative rulings and judicial decisions, all as in effect as of the date of this prospectus and, all of which are subject to change or to differing interpretation, possibly with retroactive effect. Any such change or differing interpretation could alter the tax consequences to non-U.S. holders described in this prospectus. There can be no assurance that the Internal Revenue Service (“IRS”) will not challenge one or more of the tax consequences described herein. We assume in this discussion that a non-U.S. holder holds shares of our common stock as a capital asset within the meaning of Section 1221 of the Code, which is generally property held for investment.
This discussion does not address all aspects of U.S. federal income taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances including the alternative minimum tax, or the Medicare tax on net investment income, the timing of income accruals required under Section 451(b) of the Code, the rules regarding qualified small business stock within the meaning of Section 1202 of the Code and any election to apply Section 1400Z-2 of the Code to gains recognized with respect to shares of our common stock. This discussion also does not address any U.S. state, local or non-U.S. taxes or any other aspect of any U.S. federal tax other than the income tax. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as:
| · | insurance companies; |
| · | tax-exempt or governmental organizations; |
| · | banks or other financial institutions; |
| · | brokers or dealers in securities or currencies; |
| · | regulated investment companies and real estate investment trusts; |
| · | retirement plans, including tax-qualified retirement plans; |
| · | “controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax; |
| · | Pension plans, including “qualified foreign pension funds” as defined in Section 897(l)(2) of the Code and entities wholly-owned by a “qualified foreign pension fund”; |
| · | partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes and other pass-through entities (and partners and investors therein); |
| · | persons deemed to sell our common stock under the constructive sale provisions of the Code; |
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| · | persons that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; |
| · | persons who have elected to mark securities to market; |
| · | persons who have a functional currency other than the U.S. dollar; |
| · | persons that own, or have owned, actually or constructively, more than 5% of our common stock; |
| · | persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation; and |
| · | expatriates or long-term residents of the United States. |
This discussion is for general information only and is not tax advice. Accordingly, all prospective non-U.S. holders of our common stock should consult their tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock.
Distributions on our common stock
In general, distributions (including constructive distributions), if any, on our common stock to non-U.S. holders will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s tax basis in the common stock. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “Gain on sale or other taxable disposition of our common stock.” Any such distributions will also be subject to the discussions below under the sections entitled “Backup withholding and information reporting” and “Withholding and information reporting requirements — FATCA.”
Subject to the discussion in the following two paragraphs in this section, dividends paid to a non-U.S. holder generally will be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence. If we or another withholding agent apply over-withholding or if a non-U.S. holder does not timely provide us with the required certification, the non-U.S. holder may be entitled to a refund or credit of any excess tax withheld by timely filing an appropriate claim with the IRS.
Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to United States persons (as defined in the Code). Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.
A non-U.S. holder of our common stock who claims the benefit of an applicable income tax treaty between the United States and such holder’s country of residence generally will be required to provide a properly executed IRS Form W-8BEN or W-8BEN-E (or successor form) to the applicable withholding agent and satisfy applicable certification and other requirements. Non-U.S. holders are urged and expected to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty. A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may be entitled to obtain a refund or credit of any excess amounts withheld by timely filing a U.S. tax return with the IRS.
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Gain on sale or other taxable disposition of our common stock
Subject to the discussions below under “Backup withholding and information reporting” and “Withholding and information reporting requirements — FATCA,” a non-U.S. holder generally will not be subject to any U.S. federal income tax on any gain realized upon such holder’s sale or other taxable disposition of shares of our common stock unless:
| · | the gain is effectively connected with the non-U.S. holder’s conduct of a U.S. trade or business and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed-base maintained by such non-U.S. holder in the United States, in which case the non-U.S. holder generally will be taxed on a net income basis at the graduated U.S. federal income tax rates applicable to United States persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in “Distributions on our common stock” also may apply; | |
| · |
the non-U.S. holder is a nonresident alien individual who is present in the United States for a period or periods aggregating 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence) on the net gain derived from the disposition, which may be offset by certain U.S. source capital losses of the non-U.S. holder, if any (even though the individual is not considered a resident of the United States), provided that the non-U.S. holder has timely filed U.S. federal income tax returns with respect to such losses; or
| |
| · | we are, or have been, at any time during the five-year period preceding such sale or other taxable disposition (or the non-U.S. holder’s holding period, if shorter) a “U.S. real property holding corporation,” unless our common stock is regularly traded on an established securities market and the non-U.S. holder holds no more than 5% of our outstanding common stock, directly or indirectly, actually or constructively, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our common stock. Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. No assurance can be provided that our common stock will be regularly traded on an established securities market for purposes of the rules described above. |
Backup withholding and information reporting
We must report annually to the IRS and to each non-U.S. holder the gross amount of the distributions on our common stock paid to such holder and the tax withheld, if any, with respect to such distributions. Non-U.S. holders may have to comply with specific certification procedures to establish that the holder is not a United States person (as defined in the Code) in order to avoid backup withholding at the applicable rate with respect to dividends on our common stock. Dividends paid to non-U.S. holders subject to withholding of U.S. federal income tax, as described above in “Distributions on our common stock,” generally will be exempt from U.S. backup withholding.
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Information reporting and backup withholding will generally apply to the proceeds of a disposition of our common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules to them. Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that an appropriate claim is filed with the IRS in a timely manner.
Withholding and information reporting requirements — FATCA
Sections 1471 through 1474, inclusive, of the Code and the Treasury Regulations and administrative guidance promulgated thereunder (commonly referred to as the “Foreign Account Tax Compliance Act,” or “FATCA,”) generally imposes a U.S. federal withholding tax at a rate of 30% on payments of dividends on our common stock paid to a foreign entity unless (i) if the foreign entity is a “foreign financial institution,” such foreign entity undertakes certain due diligence, reporting, withholding, and certification obligations, (ii) if the foreign entity is not a “foreign financial institution,” such foreign entity identifies certain of its U.S. investors, if any, or (iii) the foreign entity is otherwise exempt under FATCA. Under applicable U.S. Treasury regulations, withholding under FATCA currently applies to payments of dividends on our common stock. Currently proposed U.S. Treasury Regulations provide that FATCA withholding does not apply to gross proceeds from the disposition of property of a type that can produce U.S. source dividends or interest; however, prior versions of the rules would have made such gross proceeds subject to FATCA withholding. Taxpayers (including withholding agents) can generally rely on the proposed Treasury Regulations until final Treasury Regulations are issued. Under certain circumstances, a non-U.S. holder may be eligible for refunds or credits of this withholding tax. An intergovernmental agreement between the United States and an applicable foreign country may modify the requirements described in this paragraph. Non-U.S. holders should consult their tax advisors regarding the possible implications of this legislation on their investment in our common stock and the entities through which they hold our common stock, including, without limitation, the process and deadlines for meeting the applicable requirements to prevent the imposition of the 30% withholding tax under FATCA.
The preceding discussion of U.S. federal income tax considerations is for general information only and does not constitute tax advice. Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed change in applicable laws.
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ThinkEquity, a division of Fordham Financial Management, Inc., is acting as representative of the underwriters. Subject to the terms and conditions of an underwriting agreement between us and the representative, we have agreed to sell to each underwriter named below, and each underwriter named below has severally agreed to purchase, at the public offering price less the underwriting discounts set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:
| Underwriters | Number of Shares |
|||
| ThinkEquity, a division of Fordham Financial Management, Inc. | ||||
| Total | ||||
The underwriting agreement provides that the obligations of the underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to various conditions and representations and warranties, including the approval of certain legal matters by their counsel and other conditions specified in the underwriting agreement. The shares of common stock are offered by the underwriters, subject to prior sale, when, as and if issued to and accepted by them. The underwriters reserve the right to withdraw, cancel or modify the offer to the public and to reject orders in whole or in part. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares of common stock are taken, other than those shares of common stock covered by the over-allotment option described below.
We have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to contribute to payments the underwriters may be required to make in respect thereof.
Over-Allotment Option
We have granted a 45-day option to the representative of the underwriters to purchase up to additional shares of our common stock at a public offering price of $ per share, solely to cover over-allotments, if any. The underwriters may exercise this option for 45 days from the date of this prospectus solely to cover sales of shares of common stock by the underwriters in excess of the total number of shares of common stock set forth in the table above. If any of these additional shares are purchased, the underwriters will offer the additional shares on the same terms as those on which the shares are being offered.
Discounts, Commissions and Reimbursement
The underwriters propose initially to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share of common stock. If all of the shares of common stock offered by us are not sold at the public offering price, the underwriters may change the offering price and other selling terms by means of a supplement to this prospectus.
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The following table shows the public offering price, underwriting discounts and commissions and proceeds, before expenses, to us. The information assumes either no exercise or full exercise of the over-allotment option we granted to the representative of the underwriters.
| Per Share | Total Without Over-allotment Option |
Total With Over-allotment Option | ||||||||
| Public offering price | $ | $ | $ | |||||||
| Underwriting discounts and commissions (7.5%) | $ | $ | $ | |||||||
| Proceeds, before expenses, to us | $ | $ | $ | |||||||
| Non-accountable expense allowance (1%)(1) | $ | $ | $ | |||||||
| (1) | The non-accountable expense allowance will not be payable with respect to the representative’s exercise of the over-allotment option, if any. |
We have agreed to pay a non-accountable expense allowance to the representative of the underwriters equal to 1% of the gross proceeds received at the completion of the offering. The non-accountable expense allowance of 1% is not payable with respect to any shares sold upon exercise of the representative’s over-allotment option. We have paid an expense deposit of $35,000 to the representative, which will be applied against the out-of-pocket accountable expenses that will be paid by us to the underwriters in connection with this offering, and will be reimbursed to us to the extent not actually incurred in compliance with FINRA Rule 5110(g)(4)(A).
We have also agreed to pay certain of the representative’s expenses relating to the offering, including (i) all filing fees and communication expenses relating to the registration of the shares of common stock to be sold in the offering (including the shares subject to the representative’s over-allotment option) with the SEC; (ii) all filing fees and expenses associated with the review of the offering by FINRA; (iii) all fees and expenses relating to the listing of such public securities on the , or such other national securities exchange on which our common stock may be listed, including any fees charges by The Depository Trust for new securities; (iv) all fees, expenses and disbursements relating to background checks of our officers, directors and entities, not to exceed $15,000; (v) all fees, expenses and disbursements relating to the registration or qualification of the shares of our common stock under the “blue sky” securities laws of such states and other jurisdictions as the representative may reasonably designate; (vi) all fees, expenses and disbursements relating to the registration, qualification or exemption of the shares of our common stock under the securities laws of such foreign jurisdictions as the representative may reasonably designate; (vii) the costs of all mailing and printing of the underwriting documents (including, without limitation, the underwriting agreement, any blue sky surveys and, if appropriate, any agreement among underwriters, selected dealers’ agreement, underwriters’ questionnaire and power of attorney), registration statements, prospectuses and all amendments, supplements and exhibits thereto and as many preliminary and final prospectuses as the representative may reasonably deem necessary; (viii) the costs and expenses of a public relations firm; (ix) the costs of preparing, printing and delivering certificates representing the common stock; (x) fees and expenses of the transfer agent for the shares of common stock; (xi) stock transfer and/or stamp taxes, if any, payable upon the transfer of securities from us to the underwriters; (xii) the fees and expenses of our accountants; (xiii) the fees and expenses of our legal counsel and other agents and representatives; (xiv) the $29,500 cost associated with the underwriters’ use of Ipreo’s book-building, prospectus tracking and compliance software for the offering; (xv) fees and expenses of the underwriter’s legal counsel, not to exceed $125,000; (xvi) $10,000 for data services and communications expenses; and (xvii) up to $30,000 of the underwriters’ actual accountable “road show,” market making and trading, and clearing firm settlement expenses for the offering.
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Our total estimated expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, are approximately $ .
Representative’s Warrants
Upon completion of this offering, we have agreed to issue to the representative as compensation warrants to purchase up to shares of common stock (5% of the aggregate number of shares of common stock sold in this offering inclusive of the over-allotment option, or the representative’s warrants). The representative’s warrants will be exercisable at a per share exercise price equal to 125% of the public offering price per share in this offering. The representative’s warrants are exercisable at any time and from time to time, in whole or in part, during the four and one half year period commencing 180 days following the commencement of sales of the securities issued in this offering.
The representative’s warrants have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(e)(1)(A) of FINRA. The representative (or permitted assignees under Rule 5110(e)(2)) will not sell, transfer, assign, pledge, or hypothecate these warrants or the securities underlying these warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days following the commencement of sales of the securities issued in this offering. In addition, the representative’s warrants provide for registration rights upon request, in certain cases. The sole demand registration right provided will not be greater than five years from the commencement of sales of the securities issued in this offering in compliance with FINRA Rule 5110(g)(8)(C). The piggyback registration rights provided will not be greater than seven years from the commencement of sales of the securities issued in this offering in compliance with FINRA Rule 5110(g)(8)(D). We will bear all fees and expenses attendant to registering the securities issuable on exercise of the warrants other than underwriting commissions incurred and payable by the holders. The exercise price and number of shares issuable upon exercise of the warrants may be adjusted in certain circumstances including in the event of a stock dividend or our recapitalization, reorganization, merger or consolidation. However, the warrant exercise price or underlying shares will not be adjusted for issuances of shares of common stock at a price below the warrant exercise price.
Lock-Up Agreements
Pursuant to “lock-up” agreements, we, our executive officers and directors, and certain stockholders, have agreed, without the prior written consent of the representative not to directly or indirectly, offer to sell, sell, pledge or otherwise transfer or dispose of any of shares of (or enter into any transaction or device that is designed to, or could be expected to, result in the transfer or disposition by any person at any time in the future of) our common stock, enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of shares of our common stock, make any demand for or exercise any right or cause to be filed a registration statement, including any amendments thereto, with respect to the registration of any shares of common stock or securities convertible into or exercisable or exchangeable for common stock or any other securities of ours or publicly disclose the intention to do any of the foregoing, subject to customary exceptions, for a period of twelve months in the case of our executive officers and directors, and six months in the case of us and certain existing stockholders, after the date of this prospectus.
Right of First Refusal
Until 18 months from the closing date of this offering, the representative will have an irrevocable right of first refusal, in its sole discretion, to act as sole and exclusive investment banker, sole and exclusive book-runner, and/or sole and exclusive placement agent, at the representative’s sole discretion, for each and every future public and private equity and debt offering, including all equity linked financings, during such 18 month period for us, or any successor to our company or any subsidiary of our company, on terms and conditions customary to the representative. The representative will have the sole right to determine whether or not any other broker-dealer will have the right to participate in any such offering and the economic terms of any such participation.
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Discretionary Accounts
The underwriters do not intend to confirm sales of the shares of common stock offered hereby to any accounts over which they have discretionary authority.
National Exchange Listing
We have applied to have our common stock approved for listing on the under the symbol “TIVC.” No assurance can be given that our listing application will be approved. The completion of this offering is contingent upon the successful listing of our common stock on the or another national securities exchange.
Determination of Offering Price
The public offering price of the securities we are offering was negotiated between us and the underwriters. Factors considered in determining the public offering price of the shares include our history and prospects, the stage of development of our business, our business plans for the future and the extent to which they have been implemented, an assessment of our management, general conditions of the securities markets at the time of the offering and such other factors as were deemed relevant.
Other Relationships
From time to time, certain of the underwriters and/or their affiliates may in the future provide, various investment banking and other financial services for us for which they may receive customary fees. In the course of their businesses, the underwriters and their affiliates may actively trade our securities or loans for their own account or for the accounts of customers, and, accordingly, the underwriters and their affiliates may at any time hold long or short positions in such securities or loans. Except for services provided in connection with this offering, no underwriter has provided any investment banking or other financial services to us during the 180-day period preceding the date of this prospectus and we do not expect to retain any underwriter to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.
Price Stabilization, Short Positions and Penalty Bids
In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may over-allot in connection with this offering by selling more shares than are set forth on the cover page of this prospectus. This creates a short position in our common stock for its own account. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares of common stock over-allotted by the underwriters is not greater than the number of shares of common stock that they may purchase in the over-allotment option. In a naked short position, the number of shares of common stock involved is greater than the number of shares common stock in the over-allotment option. To close out a short position, the underwriters may elect to exercise all or part of the over-allotment option. The underwriters may also elect to stabilize the price of our common stock or reduce any short position by bidding for, and purchasing, common stock in the open market.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter or dealer repays selling concessions allowed to it for distributing shares of common stock in this offering because the underwriter repurchases the shares of common stock in stabilizing or short covering transactions.
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Finally, the underwriters may bid for, and purchase, shares of our common stock in market making transactions, including “passive” market making transactions as described below.
These activities may stabilize or maintain the market price of our common stock at a price that is higher than the price that might otherwise exist in the absence of these activities. The underwriters are not required to engage in these activities, and may discontinue any of these activities at any time without notice. These transactions may be effected on the national securities exchange on which our shares of common stock are traded, in the over-the-counter market, or otherwise.
In connection with this offering, the underwriters or their affiliates may engage in passive market making transactions in our common stock immediately prior to the commencement of sales in this offering, in accordance with Rule 103 of Regulation M under the Exchange Act. Rule 103 generally provides that:
| · | a passive market maker may not effect transactions or display bids for our common stock in excess of the highest independent bid price by persons who are not passive market makers; |
| · | net purchases by a passive market maker on each day are generally limited to 30% of the passive market maker’s average daily trading volume in our common stock during a specified two-month prior period or 200 shares of common stock, whichever is greater, and must be discontinued when that limit is reached; and |
| · | passive market making bids must be identified as such. |
Indemnification
We have agreed to indemnify the underwriters against liabilities relating to this offering arising under the Securities Act and the Exchange Act, liabilities arising from breaches of some or all of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.
Electronic Distribution
This prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters, or by their affiliates. Other than this prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
Selling Restrictions
No action has been taken in any jurisdiction (except in the United States) that would permit a public offering of our common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or our common stock in any jurisdiction where action for that purpose is required. Accordingly, our common stock may not be offered or sold, directly or indirectly, and this prospectus or any other offering material or advertisements in connection with our common stock may be distributed or published, in or from any country or jurisdiction, except in compliance with any applicable rules and regulations of any such country or jurisdiction.
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European Economic Area and United Kingdom
In relation to each Member State of the European Economic Area and the United Kingdom (each a “Relevant State”), no common stock has been offered or will be offered pursuant to the offering to the public in that Relevant State prior to the publication of a prospectus in relation to the common stock which has been approved by the competent authority in that Relevant State or, where appropriate, approved in another Relevant State and notified to the competent authority in that Relevant State, all in accordance with the Prospectus Regulation, except that offers of shares may be made to the public in that Relevant State at any time under the following exemptions under the Prospectus Regulation:
| · | to legal entities which are qualified investors as defined under the Prospectus Regulation; |
| · | by the underwriters to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Regulation), subject to obtaining the prior consent of the representatives of the underwriters for any such offer; or |
| · | in any other circumstances falling within Article 1(4) of the Prospectus Regulation, |
provided that no such offer of common stock shall result in a requirement for us or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Regulation or supplement a prospectus pursuant to Article 23 of the Prospectus Regulation.
For the purposes of this provision, the expression an “offer of common stock to the public” in relation to any common stock in any Relevant State means the communication in any form and by any means of sufficient information on the terms of the offer and any common stock to be offered so as to enable an investor to decide to purchase or subscribe for our common stock, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.
United Kingdom
This prospectus has only been communicated or caused to have been communicated and will only be communicated or caused to be communicated as an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act of 2000, or the FSMA) as received in connection with the issue or sale of our common stock in circumstances in which Section 21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA will be complied with in respect to anything done in relation to our common stock in, from or otherwise involving the United Kingdom.
Australia
This prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian Securities and Investments Commission and does not purport to include the information required of a disclosure document under Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and, unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities sold to the offeree within 12 months after its transfer to the offeree under this prospectus.
Canada
The shares of common stock may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts, or NI 33-105, the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
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The validity of the securities offered by this prospectus will be passed upon for us by Procopio, Cory, Hargreaves & Savitch LLP, San Diego, California. Certain legal matters will be passed upon for the underwriters by Gracin & Marlow, LLP, New York, New York.
Rosenberg Rich Baker Berman, P.A., independent registered public accounting firm, has audited our financial statements at December 31, 2020 and 2019, and for the years then ended, as set forth in their report. We have included our financial statements in this prospectus and elsewhere in the registration statement in reliance on Rosenberg Rich Baker Berman P.A.’s report, given on their authority as experts in accounting and auditing.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the registrant pursuant to the foregoing provisions, the registrant has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert named in the registration statement of which this prospectus forms a part as having prepared or certified any part thereof (or is named as having prepared or certified a report or valuation for use in connection with such registration statement) or counsel named in this prospectus as having given an opinion upon the validity of the securities being offered pursuant to this prospectus or upon other legal matters in connection with the registration or offering such securities was employed for such purpose on a contingency basis. Also, at the time of such preparation, certification or opinion or at any time thereafter, through the date of effectiveness of such registration statement or that part of such registration statement to which such preparation, certification or opinion relates, no such person had, or is to receive, in connection with the offering, a substantial interest, direct or indirect, in our company or any of its parents or subsidiaries. Nor was any such person connected with our company or any of its parents or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer or employee.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the securities offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits filed therewith. For further information about us and the common stock offered hereby, reference is made to the registration statement and the exhibits filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and in each instance we refer you to the copy of such contract or other document filed as an exhibit to the registration statement. The SEC also maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
We currently do not file periodic reports with the SEC. Upon the completion of our initial public offering, we will be required to file periodic reports, proxy statements and other information with the SEC pursuant to the Exchange Act. These periodic reports, proxy statements and other information will be available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referred to above.
We also maintain a website at www.tivichealth.com. Upon completion of this offering, you may access these materials at our corporate website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Information contained on our corporate website is not a part of this prospectus and the inclusion of our corporate website address in this prospectus is an inactive textual reference only.
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Tivic Health Systems, Inc.
Financial Statements
Table of Contents
December 31, 2020 and 2019
| Page(s) | |
| Independent Auditors’ Report | F-2 |
| Financial Statements for the Years Ended December 31, 2020 and 2019 | |
| Balance Sheets as of December 31, 2020 and 2019 | F-3 |
| Statements of Operations for the years ended December 31, 2020 and 2019 | F-4 |
| Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2020 and 2019 | F-5 |
| Statements of Cash Flows for the years ended December 31, 2020 and 2019 | F-6 |
| Notes to Financial Statements | F7–26 |
| Unaudited Interim Condensed Financial Statements for the Three Months Ended March 31, 2021 and 2020 | |
| Interim Condensed Balance Sheet as of March 31, 2021 (unaudited) | F-31 |
| Interim Condensed Statements of Operations for the three months ended March 31, 2021 and 2020 (unaudited) | F-32 |
| Interim Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited) | F-34 |
| Notes to Interim Condensed Financial Statements (unaudited) | F-35 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Tivic Health Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Tivic Health Systems Inc. (the “Company”) as of the years December 31, 2020 and 2019, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
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 audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the 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 audits 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 audits provide a reasonable basis for our opinion.
Emphasis of Matter
The accompanying financial statements have been prepared assuming that Tivic Health Systems Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, there is substantial doubt about the ability of Tivic Health Systems Inc. to continue as a going concern at December 31, 2020. Management’s evaluation of the events and conditions and management's plans in regard to that matter also are described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.
We have served as the Company’s auditor since 2020.
Somerset, New Jersey
May 14, 2021, except for the change in par value of convertible preferred and common stock referenced in Note 1, as to which the date is July 2, 2021
F-2
Tivic Health Systems Inc.
December 31, 2020 and 2019
(in thousands, except share and per share data)
| December 31, 2020 |
December 31, 2019 |
|||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 1,044 | $ | 2,311 | ||||
| Accounts receivable, net | 52 | 13 | ||||||
| Inventory, net | 241 | 475 | ||||||
| Prepaid expenses and other current assets | 160 | 175 | ||||||
| Total current assets | 1,497 | 2,974 | ||||||
| Property and equipment, net | 19 | 27 | ||||||
| Other assets | 15 | 23 | ||||||
| Total assets | $ | 1,531 | $ | 3,024 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 370 | $ | 369 | ||||
| Other accrued liabilities | 152 | 284 | ||||||
| Current portion of notes payable | 36 | - | ||||||
| Conversion feature derivative liability | 717 | - | ||||||
| Total current liabilities | 1,275 | 653 | ||||||
| Notes payable | 139 | - | ||||||
| Convertible notes payable, net of debt discount | 1,294 | - | ||||||
| Total liabilities | 2,708 | 653 | ||||||
| Stockholders' equity (deficit) | ||||||||
| Convertible preferred stock, $0.0001 par value, 10,113,621 shares authorized; | ||||||||
| 8,908,600 and 8,901,475 shares issued and outstanding at December 31, 2020 | ||||||||
| and 2019, respectively | 1 | 1 | ||||||
| Common stock, $0.0001 par value, 25,000,000 shares authorized; | ||||||||
| 9,297,916 and 9,200,000 shares issued and outstanding at December 31, 2020 | ||||||||
| and 2019, respectively | 1 | 1 | ||||||
| Additional paid in capital | 9,873 | 9,782 | ||||||
| Accumulated deficit | (11,052 | ) | (7,413 | ) | ||||
| Total stockholders' equity (deficit) | (1,177 | ) | 2,371 | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,531 | $ | 3,024 | ||||
The accompanying notes are an integral part of these financial statements.
F-3
Tivic Health Systems Inc.
Years Ended December 31, 2020 and 2019
(in thousands, except share and per share data)
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Revenue | $ | 860 | $ | 420 | ||||
| Cost of sales | 1,085 | 709 | ||||||
| Gross loss | (225 | ) | (289 | ) | ||||
| Operating expenses: | ||||||||
| Research and development | 659 | 990 | ||||||
| Sales and marketing | 1,306 | 1,191 | ||||||
| General and administrative | 1,014 | 1,173 | ||||||
| Total operating expenses | 2,979 | 3,354 | ||||||
| Loss from operations | (3,204 | ) | (3,643 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (423 | ) | (443 | ) | ||||
| Change in fair value of derivative liabilities | (27 | ) | (75 | ) | ||||
| Other income | 15 | 15 | ||||||
| Total other income (expense) | (435 | ) | (503 | ) | ||||
| Loss before provision for income taxes | (3,639 | ) | (4,146 | ) | ||||
| Provision for income taxes | - | 2 | ||||||
| Net loss and comprehensive loss | $ | (3,639 | ) | $ | (4,148 | ) | ||
| Net loss per share - basic and diluted | $ | (0.40 | ) | $ | (0.45 | ) | ||
| Weighted-average number of shares - basic and diluted | 9,212,950 | 9,200,000 | ||||||
The accompanying notes are an integral part of these financial statements.
F-4
Statements of Stockholders’ Equity (Deficit)
Years Ended December 31, 2020 and 2019
(in thousands except share and per share data)
| Convertible | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Stockholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||||||||
| Balances at January 1, 2019 | - | $ | - | 9,200,000 | $ | 1 | $ | 8 | $ | (3,265 | ) | $ | (3,256 | ) | ||||||||||||||
| Issuance of convertible preferred stock, net of issuance costs | 2,787,854 | - | - | - | 3,843 | - | 3,843 | |||||||||||||||||||||
| Conversion of convertible notes payable to convertible preferred stock | 5,338,727 | 1 | - | - | 4,124 | - | 4,125 | |||||||||||||||||||||
| Conversion of SAFE arrangements to convertible preferred stock | 774,894 | - | - | - | 870 | - | 870 | |||||||||||||||||||||
| Reclassify conversion feature liability to additional paid-in capital | - | 927 | 927 | |||||||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 10 | - | 10 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (4,148 | ) | (4,148 | ) | |||||||||||||||||||
| Balances at December 31, 2019 | 8,901,475 | 1 | 9,200,000 | - | 9,782 | (7,413 | ) | 2,371 | ||||||||||||||||||||
| Issuance of convertible preferred stock, net of issuance costs | 7,125 | - | - | - | 10 | - | 10 | |||||||||||||||||||||
| Exercise of stock options | - | - | 97,916 | - | 3 | - | 3 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 78 | - | 78 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,639 | ) | (3,639 | ) | |||||||||||||||||||
| Balances at December 31, 2020 | 8,908,600 | $ | 1 | 9,297,916 | $ | 1 | $ | 9,873 | $ | (11,052 | ) | $ | (1,177 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-5
Statements of Cash Flows
Years Ended December 31, 2020 and 2019
(in thousands)
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (3,639 | ) | $ | (4,148 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 78 | 10 | ||||||
| Depreciation | 8 | 4 | ||||||
| Change in fair value of derivative liabilities | 27 | 75 | ||||||
| Amortization of debt discount | 411 | 351 | ||||||
| Noncash interest | - | 93 | ||||||
| Accounts receivable allowances | 36 | 13 | ||||||
| Reserve for inventory obsolescence | 8 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (75 | ) | (26 | ) | ||||
| Inventory | 227 | (476 | ) | |||||
| Prepaid expenses and other current assets | 23 | (135 | ) | |||||
| Accounts payable | 1 | 348 | ||||||
| Accrued liabilities | (132 | ) | 221 | |||||
| Net cash used in operating activities | (3,027 | ) | (3,670 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | - | (31 | ) | |||||
| Net cash used in investing activities | - | (31 | ) | |||||
| Cash flows from financing activities | ||||||||
| Proceeds from notes payable borrowings | 195 | - | ||||||
| Repayment of notes payable borrowings | (21 | ) | - | |||||
| Proceeds from convertible notes payable borrowings | 1,573 | 1,710 | ||||||
| Proceeds from exercise of stock options | 3 | - | ||||||
| Proceeds from issuance of convertible preferred stock, net of issuance costs | 10 | 3,843 | ||||||
| Net cash provided by financing activities | 1,760 | 5,553 | ||||||
| Net increase, (decrease) in cash and cash equivalents | (1,267 | ) | 1,852 | |||||
| Cash and cash equivalents | ||||||||
| Beginning of period | 2,311 | 459 | ||||||
| End of period | $ | 1,044 | $ | 2,311 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for income tax | $ | 1 | $ | 2 | ||||
| Cash paid for interest | $ | 1 | $ | - | ||||
| Noncash transaction | ||||||||
| Issuance of conversion feature derivative liability | $ | 699 | $ | 302 | ||||
| Conversion of convertible notes payable and accrued interest to convertible preferred stock |
$ | - | $ | 4,125 | ||||
| Conversion of SAFE arrangement to convertible preferred stock | $ | - | $ | 870 | ||||
| Reclassify conversion feature derivative liability to additional paid in capital | $ | - | $ | 927 | ||||
The accompanying notes are an integral part of these financial statements.
F-6
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Since commencing principal activities, the Company has been engaged primarily in research and development activities and raising capital.
Liquidity
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the pharmaceutical industry. These risks include, but are not limited to, the uncertainty of availability of additional financing and the uncertainty of achieving future profitability.
Since inception, the Company has devoted substantially all of its efforts to research and development activities, regulatory clearance and early market development and testing of our first product released in 2019. The Company has experienced losses and negative cash flows from operations since inception and at December 31, 2020, the Company had an accumulated deficit of $11,052 and cash and cash equivalents of $1,044. During the years ended December 31, 2020 and 2019, the Company incurred net losses of $3,639 and $4,148, respectively and used $3,027 and $3,670 of cash for operations, respectively. Management expects to incur substantial additional operating losses for at least the next two years to expand its markets, complete development of new products, obtain regulatory approvals, launch and commercialize our products and continue research and development programs.
The Company intends to raise additional capital through the issuance of additional equity and debt. If financing is not available at adequate levels, the Company may need to reevaluate its operating plans. Based on projected activities, management projects that cash and cash equivalents on hand are not sufficient to support operations for at least the next 12 months following issuance of these financial statements, which raises substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate.
F-7
Fair Value of Financial Instruments
The Company discloses and recognizes the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). The guidance establishes three levels of the fair value hierarchy as follows:
Level 1 Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
Level 2 Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active;
Level 3 Inputs are unobservable in which there is little or no market data available, which require the reporting entity to develop its own assumptions that are unobservable.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at date of purchase to be cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts. The allowance for doubtful accounts is based on our assessment of the collectability of accounts. Management regularly reviews the adequacy of the allowance for doubtful accounts by considering the age of each outstanding invoice, each customer’s expected ability to pay, and the collection history with each customer, when applicable, to determine whether a specific allowance is appropriate. Accounts receivable deemed uncollectible are charged against the allowance for doubtful accounts when identified. As of December 31, 2020 and 2019, the allowance for doubtful accounts activity was $5 and $0, respectively.
Inventory
Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) basis. Inventories are reviewed periodically to identify slow-moving inventory based on anticipated sales activity.
Property and Equipment
Property and equipment are recorded at cost net of accumulated depreciation. Depreciation is computed on a straight-line method over the estimated useful lives of the assets, four years. Depreciation expense was $8 and $4 for the years ended December 31, 2020 and 2019, respectively. Upon retirement or sale of assets, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Repairs and maintenance costs that do not improve tor extend the lives of the respective assets are charged to operations as incurred.
F-8
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of these asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of each asset to the future undiscounted cash flows the asset is expected to generate over its remaining life. When indications of impairment are present and the estimated undiscounted future cash flows from the use of these assets is less than the assets’ carrying value, the related assets will be written down to fair value. There were no impairments of the Company’s long-lived assets for the periods presented.
Derivative Instruments
The Company issued certain convertible notes in 2018, 2019 and 2020 which contained put options. These embedded put options are not considered clearly and closely related to the debt host and result in embedded derivatives that must be bifurcated and accounted for separately from the debt host. Accordingly, the Company has recorded these as a derivative financial liability.
Derivative financial liabilities are initially recorded at fair value, with gains and losses arising for changes in fair value recognized in the statement of operations at each period end while such instruments are outstanding. The liability is being valued using a probability weighted expected return model. The derivative financial liability related to convertible notes issued in 2018 and 2019 was derecognized upon conversion of the convertible notes in 2019. See Note 9 for further discussion of the convertible notes and the embedded derivative liability.
Debt Discounts
Debt discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements using the effective-interest method.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Financial accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. The standard applies to all contracts with customers, except contracts that are within scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are in within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inceptions, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
F-9
The Company sells its products through direct sales and independent distributors. Revenue is recognized when control of the promised goods is transferred to the customers or distributor, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected consideration in the transaction.
The Company may offer an extended warranty to its customers. The extended warranty is considered a separate performance obligation. The Company allocates the transaction price based on estimated relative standalone selling prices of the promised product and services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. As of December 31, 2020 and 2019, the Company's deferred revenue for unrecognized extended warranties was $14 and $0, respectively, and is included in “Other Accrued Liabilities” on the accompanying balance sheets.
F-10
Based on the Company’s assessment, it was determined that there were no contract assets as of December 31, 2020 and 2019 because receivables outstanding are unconditional and only the passage of time is required before payment of that consideration is due. The Company may receive payments at the onset of the contract and before goods have been delivered. In such instances, the Company records a deferred revenue liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met. As of December 31, 2020 and 2019, the contract liability related to the Company’s deferred revenues approximated $2 and $1, respectively, and are included in “Other Accrued Liabilities” on the accompanying balance sheets.
The Company relies on a third party to have procedures in place to detect and prevent credit card fraud as the Company has exposure to losses from fraudulent charges. The Company records the losses related to chargebacks as incurred.
The Company has also elected to exclude from the measurement of the transaction price sales taxes remitted to governmental authorities.
Sales Tax
Sales tax collected from customers and remitted to governmental authorities is accounted for on a net basis and therefore, is excluded from net sales.
Shipping and Handling
Shipping and handling fees paid by customers are recorded within net sales, with the related expenses recorded in cost of sales.
Product Warranty
The Company offers a one-year limited warranty on its products. The Company estimates the costs associated with the warranty obligation using historical data of warranty claims and costs incurred to satisfy those claims. Estimated warranty costs are expensed to cost of sales.
Sales and Marketing Expenses
Sales and marketing expenses are expensed as incurred and consist primarily of merchandising, customer service and targeted online marketing costs, such as display advertising, keyword search campaigns, search engine optimization and social media and offline marketing costs such as television, radio and print advertising. Sales and marketing expenses also include payroll costs and stock-based compensation expense for employees involved in marketing activities. Sales and marketing expenses are primarily related to growing and retaining the customer base. Advertising and other promotional costs to market the Company’s products and services amounted to $688 and $326 for the years ended December 31, 2020 and 2019, respectively.
Research and Development Expenses
Research and development expenses include costs directly attributable to the conduct of research and development programs, including the cost of salaries, payroll taxes, employee benefits, materials, supplies, depreciation on and maintenance of research equipment, the cost of services provided by outside contractors, and the allocable portions of facility costs, such as rent, utilities, insurance, repairs and maintenance, depreciation, and general support services. All costs associated with research and development are expensed as incurred.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements with employees and non-employee consultants using a fair value method which requires the recognition of compensation expense for costs related to all stock-based payments, including stock options. The fair value method requires the Company to estimate the fair value of stock-based payment awards to employees and non-employees on the date of grant using an option pricing model.
F-11
Stock-based compensation costs are based on the fair value of the underlying option calculated using the Black-Scholes option-pricing model and recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company measures equity-based compensation awards granted to non-employees at fair value as the awards vest and recognizes the resulting value as compensation expense at each financial reporting period.
Determining the appropriate fair value model and related assumptions requires judgment, including estimating stock price volatility, expected dividend yield, expected term, risk-free rate of return, and the estimated fair value of the underlying common stock. Due to the lack of company-specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded. The historical volatility is calculated based on a period of time commensurate with the expected term assumption. The group of representative companies have characteristics similar to the Company, including stage of product development and focus on the life science industry. The Company uses the simplified method, which is the average of the final vesting tranche date and the contractual term, to calculate the expected term for options granted to employees as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company uses an assumed dividend yield of zero as the Company has never paid dividends and has no current plans to pay any dividends on its common stock. The Company accounts for forfeitures as they occur.
Segment Reporting
Operating segments are identified as components of an enterprise for which separate discrete financial information is available for evaluation by the Company’s Chief Executive Officer to make decisions with respect to resource allocation and assessment of performance. To date, the Company has viewed its operations and manages its business as one operating segment.
Net Loss per Common Share
Basic net loss per share is computed using the “two-class” method which includes the weighted average number of shares of common stock outstanding during the period and other securities that participate in dividends (a participating security). The Company’s convertible preferred stock are participating securities as defined by ASC 260-10, Earnings per Share. During the periods where the Company incurs net losses, the Company allocates no loss to participating securities because these securities have no contractual obligation to share in the losses of the Company. Under the two-class method, basic net loss per share applicable to common stockholders is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed similar to basic net loss per share except that the denominator is increased to include the number of additional shares for the potential dilutive effects of warrants, convertible preferred stock and stock options outstanding during the period calculated in accordance with the treasury stock method, or the two-class method, whichever is more dilutive. The Company allocates net earnings on a pari passu (equal) basis to both common and preferred stockholders. Net losses are not allocated to preferred stockholders as they do not have an obligation to share in the Company’s net losses. For all periods presented, basic and diluted net loss per share are the same, as any additional share equivalents would be anti-dilutive.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss 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. Valuation allowances are established when necessary to reduce deferred taxes to the amounts expected to be realized.
F-12
The Company recognizes benefits of uncertain tax positions if it is more likely than not that such positions will be sustained upon examination based solely on their technical merit, as the largest amount of benefit that is more likely than not to be realized upon the ultimate settlement. The Company’s policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. To date, there have been no interest or penalties charged in relation to the unrecognized tax benefits.
Concentration of Credit Risk and Other Risks and Uncertainties
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents. Cash and cash equivalents include a checking account held at one financial institution in the United States. At times, such deposits may be in excess of insured limits. Management believes that the financial institution is financially sound, and accordingly, minimal credit risk exists with respect to the financial institution. The Company has not experienced any losses on its deposits of cash and cash equivalents.
COVID-19
In March 2020, the World Health Organization declared the outbreak of the COVID-19 virus a global pandemic. The pandemic continues to cause major disruptions to businesses and markets worldwide as the virus spreads or has a resurgence in certain jurisdictions. A number of countries as well as many states and cities within the United States have implemented measures in an effort to contain the virus, including physical distancing, travel restrictions, border closures, limitations on public gatherings, work from home and closure of or restrictions on nonessential businesses. The effects of the outbreak are still evolving, and the ultimate severity and duration of the pandemic and the implications on global economic conditions remains uncertain.
Recently adopted accounting standards and recently issued accounting pronouncements
Recently adopted accounting standards:
Adoption of Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, which eliminates certain disclosures, such as the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. The Company adopted this ASU effective January 1, 2020. The adoption of this ASU did not have an impact to the Company’s financial statements.
F-13
Recently issued accounting pronouncements:
ASU 2016-02, Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, which changes how lessees account for leases. For most leases, the standard requires a liability to be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company is now required to recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset. Similar to capital leases under the previous accounting standard, leases are accounted for as finance leases when the relevant criteria are met. On June 3, 2020, the FASB extended the adoption date for all other entities, including emerging growth companies (“EGCs”), as defined by the SEC, that have elected to defer adoption until the standard is effective for non-public business entities, to annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and Subsequent Amendments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 (which was then further clarified in subsequent ASUs), which requires that credit losses for certain types of financial instruments, including accounts receivable, be estimated based on expected credit losses among other changes. This guidance is effective for annual and interim periods beginning after December 15, 2019 for SEC filers, December 15, 2020 for public business entities that are not SEC filers, and December 15, 2021 for all other entities, including EGCs that have elected to defer adoption until the guidance becomes effective for non-public entities, with early adoption permitted. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
ASU 2019-12 - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 which reduces the complexity of accounting for income taxes by eliminating certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740, Income Taxes. Additionally, the ASU simplifies GAAP by amending the requirements related to the accounting for "hybrid" tax regimes and also by adding the requirement to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination and when it should be considered a separate transaction. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively.
The Company will adopt this new ASU effective January 1, 2021. Provisions related to general intra-period tax allocations, the calculation of income taxes for interim periods, and the effects of changes in tax laws or tax rates will be adopted on a prospective basis. The provision applicable to exceptions to the recognition of deferred taxes for investment ownership changes will be adopted using a modified retrospective approach, with a cumulative adjustment to retained earnings, and the provision for changes in accounting for franchise taxes will be applied either on a retrospective basis or using a modified retrospective approach.
F-14
The Company does not expect this change in guidance to have a material impact to its financial statements.
ASU 2021-04 - Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Based Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU 2021-04 which clarified an issuer's accounting for modification or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The provisions of ASU No. 2021-04 are effective for annual reporting periods beginning after December 15, 2021, and interim reporting periods within those annual periods, with early adoption permitted, including adoption in any interim period for public business entities for periods for which consolidated financial statements have not yet been issued or made available for issuance. This ASU shall be applied on a prospective basis. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
| 3. | Financial Instruments and Fair Value Measurements |
The Company’s financial instruments consist of money market funds and conversion right liability. The following tables shows the Company’s cash equivalents and conversion right liability’s carrying value and fair value at December 31, 2020 and 2019:
| As of December 31, 2020 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Quoted Priced in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Money market funds | $ | 639 | $ | 639 | $ | 639 | $ | - | $ | - | ||||||||||
| Total assets | $ | 639 | $ | 639 | $ | 639 | $ | - | $ | - | ||||||||||
| Liabilities | ||||||||||||||||||||
| Conversion right liability | $ | 717 | $ | 717 | $ | - | $ | - | $ | 717 | ||||||||||
| Total liabilities | $ | 717 | $ | 717 | $ | - | $ | - | $ | 717 | ||||||||||
| As of December 31, 2019 | ||||||||||||||||||||
| Carrying Amount | Fair Value | Quoted Priced in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Money market funds | $ | 2,139 | $ | 2,139 | $ | 2,139 | $ | - | $ | - | ||||||||||
| Total assets | $ | 2,139 | $ | 2,139 | $ | 2,139 | $ | - | $ | - | ||||||||||
F-15
Cash equivalents – Cash equivalents of $639 and $2,139 as of December 31, 2020 and 2019, respectively, consisted of money market funds. Money market funds are classified as Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
Conversion right liability – The fair value of the conversion right liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The conversion right liability outstanding when the Preferred Stock Series Seed was issued in July 2019 was reclassified to additional paid-in capital.
| Conversion Right Liability | ||||
| Balance at January 1, 2019 | $ | 551 | ||
| Issuance of convertible rights | 301 | |||
| Changes in fair value | 75 | |||
| Reclassification to additional paid-in capital | (927 | ) | ||
| Balance at December 31, 2019 | - | |||
| Issuance of convertible rights | 690 | |||
| Changes in fair value | 27 | |||
| Balance at December 31, 2020 | $ | 717 | ||
F-16
There have been no changes to the valuation methods utilized by the Company during the years ended December 31, 2020 and 2019. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the years ended December 31, 2020 and 2019.
| 4. | Accounts Receivable Factoring |
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) in May 2020. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. During fiscal year ended December 31, 2020, the Company factored accounts receivable in the amount of $58 for a factored amount of $54. The fees related to factoring was $5 and recorded in general and administrative expenses. At December 31, 2020, the outstanding amount of unpaid advances to the Factor was $4.
| 5. | Inventory, net |
| December 31, 2020 | December 31, 2019 | |||||||
| Raw materials | $ | 171 | $ | 341 | ||||
| Work in process | 13 | 23 | ||||||
| Finished goods | 65 | 111 | ||||||
| Inventory at cost | 249 | 475 | ||||||
| Less reserve for obsolescence | (8 | ) | - | |||||
| Inventory, net | $ | 241 | $ | 475 | ||||
| 6. | Commitments |
The Company leases office space in Newark, California under a cancelable operating lease agreement. Rent expense recorded during the years ended December 31, 2020 and 2019 was $55 and $67, respectively.
At December 31, 2020, there were no purchase commitments with third-party suppliers.
Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when future expenditures are probable and such expenditures can be reasonably estimated. The Company recorded no liabilities for contingent matters as of December 31, 2020.
F-17
| 7. | Notes Payable |
On April 18, 2020, the Company applied for a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The loan, in the principal amount of $156, was disbursed by Bank of the West (“Lender”) on May 7, 2020, pursuant to a Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).
The program was later amended by the Paycheck Protection Flexibility Act of 2020 whereby debtors were granted a minimum maturity date of the five-year anniversary of the funding date and a deferral of ten months from the end of the covered period. The PPP Loan bears interest at a fixed rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence after the sixteen-month anniversary of the funding date. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Note and Agreement provides for customary events of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
All or a portion of the PPP Loan may be forgiven by the SBA upon application to the Lender by the Company within 10 months after the last day of the covered period. The Lender will have 90 days to review borrower’s forgiveness application and the SBA will have an additional 60 days to review the Lender’s decision as to whether the borrower’s loan may be forgiven. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities, and certain covered mortgage interest payments during the twenty-four-week period beginning on the date of the first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $100, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100or less annually are reduced by more than 25%. The Company obtained forgiveness of the PPP Loan on May 11, 2021.
On August 10, 2020, the Company entered into an agreement with Alliant Insurance Services, Inc. to finance its 2020 to 2021 insurance premiums with First Insurance Funding Corp. in the amount of $39. The interest rate on the note payable is 4.20% and the note is payable with a down payment at borrowing of $6 and nine equal monthly instalment payments beginning in September 2020. As of December 31, 2020, the remaining liability under this financing agreement was $19.
| Year Ending December 31 | ||||
| 2021 | $ | 36 | ||
| 2022 | 41 | |||
| 2023 | 41 | |||
| 2022 | 41 | |||
| 2023 | 16 | |||
| $ | 175 | |||
| 8. | Simple Agreement for Future Equity |
The Company issued Simple Agreement for Future Equity (“SAFE”) instruments pursuant to which it designated a right to Investors for certain shares of the Company’s capital stock, utilizing a valuation estimate, as defined, (“Valuation Cap”) and 80% discount rate (the “Discount Rate”). From December 2016 to August 2018, the Company raised $870 by entering into SAFEs. The number of shares to be issued upon conversion of SAFEs are subject to the following:
F-18
| · | Equity Financing – Prior to the expiration or termination of the SAFEs, if there is an equity financing that occurs, the Company will automatically issue a number of shares of Preferred Stock, equal to the Purchase amount divided by the Discount Price. |
| · | Discount Price – Means the price per share of the equity instrument sold in an Equity Financing multiplied by the Discount Rate. |
| · | Liquidity Event – If there is a Liquidity Event, as defined, before the scheduled termination of the SAFE instruments, the holder of a SAFE can either (i) receive a cash payment equal to the amount paid for the SAFE (“SAFE Amount”) or (ii) automatically receive from the Company a number of shares of Common Stock equal to the SAFE Amount divided by the price per share from the Liquidation Event. If there are sufficient funds to pay the holders of SAFEs, the remaining funds available for distribution will be on a pro-rata basis among the holders in proportion with their SAFE amounts. |
| · | Dissolution Event – Upon a dissolution event that occurs before the expiration of the SAFEs, the Company will pay an amount equal to the SAFE Amount to the holder at the time of the Dissolution Event, prior and in preference to any distribution of any other assets of the Company to holders of any outstanding Capital Stock. If the Company has insufficient funds to make complete payment to all holders of SAFEs, the Company will then distribute assets with equal priority and pro rata among all holders of SAFEs. |
The Company evaluated the SAFEs in accordance with ASC 480-10 and determined that the SAFEs represented an obligation that the Company must settle by issuing a variable number of its equity shares, the monetary value of which is known when entering into the SAFE.
In July 2019, the SAFEs converted to 774,894 shares of Series Seed Preferred Stock.
F-19
| 9. | Convertible Notes Payable |
Beginning in 2018, the Company entered into Agreements with its lenders (“Lenders”) to issue unsecured Convertible Promissory Notes (“the Notes”) to raise bridge financing until the Company’s next round of equity financing.
In 2018, the Company issued Notes to various investors for total proceeds of $1,983. The notes are unsecured, have interest accrued at a rate of 6% per annum and have a term of two years. Also in 2018, the Company issued convertible note payable to various investors for total proceeds of $270. The notes are unsecured, have interest accrued at a rate of 4% per annum and have a term of two years.
In the year ended December 31, 2019, the Company issued convertible note payable to various investors for total proceeds of $1,710. The notes are unsecured, have interest accrued at a rate of 4% per annum and have a term of two years.
In July 2019, all of the Notes payable issued in 2018 and 2019 plus accrued interest thereon converted into 3,615,580 shares of Preferred Series Seed 3 at a price of $0.5841 and 1,723,147 shares of Preferred Series Seed 4 at a price of $1.1681.
In the year ended December 31, 2020, the Company issued convertible note payable to various investors for total proceeds of $1,595. The notes are unsecured, have interest accrued at a rate of 3% per annum and have a term of two years.
The Notes issued in 2020 and outstanding at December 31, 2020 have the following terms and conditions for conversion:
Auto Conversion upon Qualified Financing
Qualified Financing is defined as the closing of an equity financing undertaken by the Company before the Maturity Date, principally for capital raising purposes, in which the aggregate amount of gross proceeds (not including cancellation of the indebtedness represented by all Notes and other convertible securities that will convert) received by the Company is at least $2,000 in the aggregate.
The Notes shall be automatically canceled on the date of the initial closing of a Qualified Financing, and the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon, shall be automatically converted at a conversion price per share equal to the lesser of:
(x) a Discount Percentage of the price per share of Qualified Securities sold to the investors in a Qualified Financing of 25%
and
(y) the quotient of (A) the Cap value divided by (B) the number of outstanding shares of the Company, on a Fully Diluted Basis, as determined immediately prior to the Qualified Financing. The Cap value is $40 million.
The conversion shall be deemed to occur immediately prior to the consummation of the Qualified Financing. In the event of a conversion of the Notes in connection with a Qualified Financing, the Company may, solely at its option, elect to convert the Notes into Shadow Preferred.
Shadow Preferred means the shares of a series of Preferred Stock issued in the Qualified Financing, having the identical rights, privileges, preferences and restrictions as the shares of Qualified Securities, other than with respect to:
F-20
| (i) | the per share liquidation preference; and |
| (ii) | the percentage of the conversion price to determine the per share dividend rights. |
Conversion Upon Change in Control
In the event of a Change in Control prior to the Maturity Date or prior to the conversion of this Note, the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon, on the date of conversion will be converted, immediately prior to the consummation of the transaction constituting a Change in Control, into that number of shares of Common Stock, as follows:
At the election of the holders,
(i) the outstanding Principal Amount and accrued interest will be converted into that number of Preferred Conversion Stock equal to the quotient obtained by dividing (x) the outstanding principal amount and all accrued interest by (y) the Preferred Conversion Price
or
(ii) Holder shall receive an amount equal to 1.5X the principal amount outstanding. Accrued interest which is not converted into Common Stock shall be paid to Holder in cash.
Conversion at Maturity
Based on the terms and conditions of the note, the following would occur at maturity:
The outstanding Principal Amount and all accrued interest shall convert into Preferred Conversion Stock equal to the quotient obtained by dividing (x) the outstanding Principal Amount and accrued interest by (y) the Preferred Conversion Price.
The conversion features in the Notes met the accounting definition of an embedded derivative and required separate accounting. The Company value the embedded derivative on the Notes using the Monte Carlo simulation method which included significant estimates regarding the expected time to conversion, volatility, and discount rate. The estimated fair value of these derivatives was recorded as a discount to the Notes and a derivative liability. The debt discount was amortized to interest expense over the expected term of the Notes. The liability was remeasured to fair value at year end with the offsetting amount recorded in other income, expense.
On July 15, 2019, upon the closing of the Series Seed Preferred Stock round, the derivative liability associated with the converted notes was marked to market fair value and reclassified to Additional Paid in Capital. Since the notes converted before their scheduled maturity date, the remaining unamortized debt discount associated with these converted notes was recorded as loss on early extinguishment of debt.
F-21
Convertible notes issued, converted and outstanding are as follows:
| Convertible Notes Payable | ||||
| Balance at January 1, 2019 | $ | 2,253 | ||
| Issuance of convertible notes payable | 1,710 | |||
| Converted to Series Seed Preferred Stock | (3,963 | ) | ||
| Matured | - | |||
| Balance at December 31, 2019 | - | |||
| Issuance of convertible notes payable | 1,572 | |||
| Matured | - | |||
| Balance at December 31, 2020 | $ | 1,572 | ||
Debt discount related to convertible notes are as follows:
| Debt Discount | ||||
| Balance at January 1, 2019 | $ | 49 | ||
| Debt discount recognized | 302 | |||
| Amortized to interest expense | (301 | ) | ||
| Written of due to conversion | (50 | ) | ||
| Balance at December 31, 2019 | - | |||
| Debt discount recognized | 690 | |||
| Amortized to interest expense | (412 | ) | ||
| Balance at December 31, 2020 | $ | 278 | ||
| 10. | Convertible Preferred Stock |
In July 2019, the Company raised $3,843 by issuing 2,787,854 shares of Series Seed Convertible Preferred Stock. Coincident with the issuance of Series Seed Preferred Stock, $870 of SAFEs converted to 774,894 shares of Series Seed Preferred Stock and $4,124 of convertible notes, including accrued interest, converted to 5,338,727 shares of Series Seed Preferred Stock.
The Company is authorized to issue up to 10,113,621 of convertible preferred stock with $0.0001 par value. 4,000,000 shares have been designated as Series Seed-1 convertible preferred stock, 774,894 shares have been designated as Series Seed-2 convertible preferred stock, 3,615,580 shares have been designated as Series Seed-3 convertible preferred stock and 1,723,147 shares have been designated as Series Seed-4 convertible preferred stock (collectively, “Series Seed Preferred” or “preferred stock“). At December 31, 2020 and 2019, the Company had 8,908,600 and 8,901,475 of Series Seed Preferred issued and outstanding, respectively.
The holders of preferred stock have the rights, preferences, privileges and restrictions as set forth below:
Dividends:
The holders of preferred stock are entitled to receive dividends prior to and in preference to any declaration of payment of dividends on common stock, when and if declared by the Board of Directors. Any additional dividends will be paid ratably to holders of common and preferred stock, with the holders of preferred stock participating on an as-if converted basis. No dividends have been declared or paid as of December 31, 2020 and 2019.
F-22
Voting Rights:
The holders of each share of preferred stock are entitled to voting rights equal to the number of shares of common stock into which the shares could be converted. As long as 2,419,099 shares of preferred stock remain outstanding, the holders of preferred stock, voting together as a class, shall be entitled to elect two members of the Company’s Board of Directors. The holders of common stock, voting together as a single class, shall be entitled to elect two members of the Company’s Board of Directors. Remaining members of the Company’s Board of Directors will be elected by the holders of a majority of the shares of preferred stock and common stock, voting together as a single class.
Liquidation Rights / Redemption Provision:
In the event of any liquidation, dissolution or winding up of the Company or a deemed liquidation event, whether voluntary or involuntary, the holders of preferred stock have liquidation preferences, before any distribution or payment is made to holders of any common stock, an amount per share equal to the original issue price of $1.4034 for Series Seed-1 preferred stock, $1.1227 for Series Seed-2 preferred stock, $0.5841 for Series Seed-3 preferred stock and $1.1681 for Series Seed-4 preferred stock as adjusted for stock splits, stock dividends, combinations, recapitalizations and the like, plus any declared but unpaid dividends. If the assets and funds to be distributed among the holders of preferred stock are insufficient to permit the payment to such holders, then the entire assets and funds of the Company legally available for distribution will be distributed ratably among the holders of preferred stock in proportion to the preferential amount each such holder is otherwise entitled to receive.
Upon completion of the payment of the full liquidation preference of preferred stock, the remaining assets of the Company, if any, shall be distributed ratably to the holders of preferred stock and common stock on a pari passu basis.
Redemption:
The preferred stock is not redeemable. Upon certain change in control events that are outside of the Company’s control, including liquidation, sale or transfer of control of the Company, the preferred stock is contingently redeemable.
Conversion:
Each share of preferred stock is convertible into shares of common stock, at the option of the holder, at any time after date of issuance. Each share of preferred stock automatically converts to the number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) written consent of a majority of the then outstanding shares of preferred stock, voting together as a single class or (ii) the closing of a public offering, in which the gross cash proceeds are at least $20,000. At December 31, 2020 and 2019, the conversion price for each share of Series Seed-1 preferred stock, Series Seed-2 preferred stock, Series See-3 preferred stock and Series Seed-4 preferred stock is $1.4034, $1.1227, $0.5841 and $1.1681, respectively. The conversion price is subject to downward adjustment if the Company issues options or convertible securities with exercise or conversion terms more favorable than the preferred stock.
Protective Provisions:
The holders of preferred stock have certain protective provisions. As long as 2,419.099 of the shares of Series Seed Preferred remain outstanding (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations, reorganizations, reclassifications or the like), the Company shall not, either directly or by amendment, merger, consolidation, reclassification or otherwise, amend, alter or repeal any provision of the Company’s Certificate of Incorporation or Bylaws in a manner that would adversely alter the rights, preferences, and privileges of the Series Seed Preferred without first obtaining approval of the majority of the outstanding shares of Series Seed Preferred.
F-23
| 11. | Common Stock |
The Company is authorized to issue up to 25,000,000 shares of common stock with $0.0001 par value. At December 31, 2020 and 2019, there were 9,297,916 and 9,200,000 shares issued and outstanding.
Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the rights of the preferred stockholders. As of December 31, 2020, no dividends on common stock had been declared by the Company. At December 31, 2020 and 2019, the Company had reserved shares of common stock for issuance as follows:
| December 31, | December 31, | |||||||
| 2020 | 2019 | |||||||
| Convertible preferred stock outstanding | 8,908,600 | 8,901,475 | ||||||
| Options issued and outstanding | 3,197,876 | 2,335,000 | ||||||
| Shares available for future stock option grants | 629,281 | 1,590,073 | ||||||
| Total | 12,735,757 | 12,826,548 | ||||||
| 12. | Equity Incentive Plans |
In 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). As of December 31, 2020, there were 3,925,073 shares of common stock authorized and 629,281 shares available for issuance under the Plan. Options granted under the Plan may be Incentive Stock Options or Non-statutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. The term shall be no more than ten years from the date of grant thereof. In the case of an Incentive Stock Option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the option shall be five years from the date of grant or such shorter term as may be provided in the option Agreement.
In the case of an Incentive Stock Option, (i) granted to an employee who, at the time of grant of such option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (ii) granted to any other employee, the per share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. In the case of a Non-statutory Stock Option; (i) granted to a and employee who, at the time of grant of such option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (ii) granted to any other service provider, the per share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing, options may be granted with a per share exercise price other than as required above pursuant to a merger or other corporate transaction.
The options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares so purchased shall be subject to repurchase by the Company at the original exercise price of the option.
F-24
| Options Outstanding | ||||||||||||||||||||||||
| Weighted- | ||||||||||||||||||||||||
| Weighted | Weighted- | Average | Aggregate | |||||||||||||||||||||
| Shares | Average | Average | Remaining | Intrinsic | ||||||||||||||||||||
| Available | Number of | Exercise | Grant Date | Contractual Life | Value | |||||||||||||||||||
| for Grant | Options | Price | Fair Value | (in years) | (in 000s) | |||||||||||||||||||
| Balances, January 1, 2019 | 1,590,073 | 2,335,000 | $ | 0.04 | $ | 0.02 | 9.26 | $ | 52 | |||||||||||||||
| Shares reserved for issuance | - | - | ||||||||||||||||||||||
| Options granted | - | - | ||||||||||||||||||||||
| Options forfeited / cancelled | - | - | ||||||||||||||||||||||
| Options exercised | - | - | ||||||||||||||||||||||
| Balances, December 31, 2019 | 1,590,073 | 2,335,000 | $ | 0.04 | $ | 0.02 | 8.26 | $ | 496 | |||||||||||||||
| Shares reserved for issuance | - | - | ||||||||||||||||||||||
| Options granted | (985,792 | ) | 985,792 | $ | 0.25 | $ | 0.11 | |||||||||||||||||
| Options forfeited / cancelled | 18,230 | (18,230 | ) | $ | 0.25 | $ | 0.11 | |||||||||||||||||
| Options expired | 6,770 | (6,770 | ) | $ | 0.25 | $ | 0.11 | |||||||||||||||||
| Options exercised | - | (97,916 | ) | $ | 0.03 | $ | 0.01 | |||||||||||||||||
| Balances, December 31, 2020 | 629,281 | 3,197,876 | $ | 0.10 | $ | 0.04 | 7.88 | $ | 505 | |||||||||||||||
| At December 31, 2020 | ||||||||||||||||||||||||
| Vested | 2,209,352 | $ | 0.09 | 0.04 | 7.77 | $ | 368 | |||||||||||||||||
| Exercisable | 2,209,352 | $ | 0.09 | 0.04 | 7.77 | $ | 368 | |||||||||||||||||
| Vested and expected to vest | 3,197,876 | $ | 0.10 | 0.04 | 7.88 | $ | 505 | |||||||||||||||||
The weighted-average grant date fair value per share of stock options granted in 2020 was $0.25. The aggregate intrinsic value of options vested and expected to vest and exercisable as of December 31, 2020 is calculated based on the difference between the exercise price and the current fair value of our common stock. The intrinsic value of options exercised in 2020 was $1.
The following table sets forth the status of the Company’s non-vested restricted common stock:
| Number of Shares | ||||
| Non-vested as of January 1, 2019 | 4,216,667 | |||
| Vested | (2,300,000 | ) | ||
| Non-vested as of December 31, 2019 | 1,916,667 | |||
| Vested | (1,916,667 | ) | ||
| Non-vested as of December 31, 2020 | - | |||
Stock-Based Compensation
Options generally vest over four years whereby 25% vest upon the first anniversary of the issuance date and 1/48th per month thereafter. Stock-based compensation expense recognized during the years ended December 31, 2020 and 2019 was $78 and $10, respectively. As of December 31, 2020, there were total unrecognized compensation costs of $48 related to share-based payment awards which is expected to be recognized over a weighted-average amortization period of 1.4 years.
The grant date fair market value of the shares of common stock underlying stock options has historically been determined by the Company’s Board of Directors. Because there has been no public market for the Company’s common stock, the Board of Directors exercises reasonable judgment and considers a number of objective and subjective factors to determine the best estimate of the fair market value, which include valuations performed by an independent third-party, important developments in the Company's operations, sales of the Company’s convertible preferred stock, actual operating results, financial performance, the conditions in the life sciences industry, the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company's common stock.
F-25
The Company estimated the fair value of share-based payment awards using the Black-Scholes options valuation model. The fair value of share-based payment awards is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of share-based payment awards was estimated on the date of grant using the following assumptions:
| 2020 | ||||
| Expected life (in years) | 5.00 - 6.05 | |||
| Expected volatility | 46.39% - 52.10% | |||
| Risk-free interest rate | .22% - 1.42% | |||
| Dividend yield | 0% | |||
Expected Term: The Company uses the simplified method to calculate expected term described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, which takes into account vesting term and expiration date of the options.
Volatility: Volatility is based on an average of the historical volatilities of comparable publicly traded companies for the expected term.
Risk Free Interest Rate: The risk-free rate is based on the U.S. Treasury yields in effect at the time of grant for periods corresponding with the expected term of the option.
Dividend Yield: The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation model.
No income tax benefits have been recognized relating to stock-based compensation expenses and no tax benefits have been realized from exercised stock options.
Total Stock-Based Compensation
Total stock-based compensation expense recorded related to share-based payment awards was allocated to research and development and general and administrative expense as follows:
| 2020 | 2019 | |||||||
| Cost of sales | $ | 2 | $ | 1 | ||||
| Research and development | 30 | 2 | ||||||
| Sales and marketing | 2 | 3 | ||||||
| General and administrative | 44 | 4 | ||||||
| Total stock-based compensation | $ | 78 | $ | 10 | ||||
| 13. | Income Taxes |
The provision for income taxes differs from the amount which would result by applying the federal statutory income tax rate to pre-tax loss for the years ended December 31, 2020 and 2019.
A reconciliation of the provision computed at the federal statutory rate to the provision for income taxes included in the accompanying statements of operations for the Company is as follows.
| For the Years Ended | ||||||||
| December 31, 2020 |
December 31, 2019 |
|||||||
| Income tax provision at statutory rate | 21 | % | 21 | % | ||||
| State income taxes, net of federal benefit | 6 | % | 7 | % | ||||
| Other | -3 | % | -3 | % | ||||
| Change in valuation allowance | -24 | % | -25 | % | ||||
| Effective income tax rate | 0 | % | 0 | % | ||||
F-26
For the years ended December 31, 2020 and 2019, the Company’s effective tax rate is below the federal statutory income tax rate of 21% primarily due to state income taxes, net of federal benefit and the Company’s position to establish a full valuation allowance on its deferred tax assets.
The tax effects of temporary differences and carryforwards that give rise to significant portions of the net deferred tax assets are presented below:
| For the Years Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 2,607 | $ | 1,769 | ||||
| Derivative liability | 81 | - | ||||||
| Research and development credits | 61 | 48 | ||||||
| Other temporary differences | 56 | 22 | ||||||
| Total deferred tax assets | 2,805 | 1,839 | ||||||
| Valuation allowance | (2,724 | ) | (1,839 | ) | ||||
| Deferred tax assets recognized | 81 | - | ||||||
| Deferred tax liabilities: | ||||||||
| Debt discount | (81 | ) | - | |||||
| Total deferred tax liabilities | (81 | ) | - | |||||
| Net deferred tax assets | $ | - | $ | - | ||||
The Company has recorded a valuation allowance for its deferred tax assets that it does not believe will be realizable at a more likely than not level based on analysis of all available sources of taxable income. The valuation allowance increased by $885 and $1,063 for the years ended December 31, 2020 and 2019, respectively due to current and previous year losses and credits claimed.
At December 31, 2020 and 2019, the Company had federal net operating loss carryforwards of approximately $9,370 and $6,334, respectively, which will begin to expire in 2036. Approximately $8,925 of federal net operating losses can be carried forward indefinitely. At December 31, 2020 and 2019, the Company had state net operating loss carryforwards for California of approximately $9,184 and 6,304, respectively, which will begin to expire in 2031. The Company also has state research and development credit carryforward of approximately $110 at December 31, 2020. The California state credits carryforward indefinitely.
Federal and state tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue code. Accordingly, the Company’s ability to utilize these carryforwards may be limited as a result of such ownership changes. Such a limitation could result in limitation in the use of net operating losses in future years and possibly a reduction of the net operating losses available. The Company has not performed a study to determine if any ownership changes have occurred which could potentially limit the utilization of the tax attribute carryforwards.
F-27
A reconciliation of the beginning and ending amount of gross unrecognized tax positions is as follows:
| For the Years Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Unrecognized tax benefits, beginning of year | $ | 26 | $ | 15 | ||||
| Additions related to current year tax positions | 7 | 11 | ||||||
| Net deferred tax assets | $ | 33 | $ | 26 | ||||
F-28
| During the years ended December 31, 2020 and 2019, the amount of unrecognized tax benefits increased by $7 and 11, respectively, due to additional research and development credits generated during those years. As of December 31, 2020 and 2019, the total amount of unrecognized tax benefits was $33 and 26, respectively. The reversal of the uncertain tax benefits would not affect the Company’s effective tax rate to the extent that it continues to maintain a full valuation allowance against its deferred tax assets. | |
| The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes line item in the statements of operations and comprehensive loss. As of December 31, 2020, and 2019, the Company had not accrued any interest or penalties related to uncertain tax positions. The Company does not anticipate any material change in its unrecognized tax benefits over the next twelve months. The unrecognized tax benefits may change during the next year for items that arise in the ordinary course of business. | |
| The Company files tax returns in U.S. Federal and state jurisdictions. The tax periods from 2016 to 2020 remain open to examination in all jurisdictions. In addition, any tax losses that were generated in prior years and carried forward may also be subject to examination by the respective authorities. The Company is not currently under examination by income tax authorities for federal or state purposes. | |
| In March 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act (the “Act”) was signed into law. The Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company was able to defer $35 related to certain payroll taxes, received a PPP loan of $156 and an EIDL grant of $8 during the year ended December 31, 2020. |
| 14. | Net Loss per Share |
| The following outstanding potentially dilutive common stock equivalents have been excluded from the calculation of diluted net loss per share for the periods presented due to their antidilutive effect: |
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Convertible preferred stock (as converted) | 8,908,600 | 8,901,475 | ||||||
| Convertible notes payable | - | - | ||||||
| Common stock options issued and outstanding | 3,197,876 | 2,335,000 | ||||||
| Total | 12,106,476 | 11,236,475 | ||||||
| For the Years Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net loss | $ | (3,639 | ) | $ | (4,148 | ) | ||
| Weighted-average number of shares - basic and diluted | 9,212,950 | 9,200,000 | ||||||
| Net loss per share - basic and diluted | $ | (0.40 | ) | $ | (0.45 | ) | ||
F-29
| 15. | Related Party Transactions |
| Dr. Subinoy Das is both a consultant and investor in the Company. The Company entered into a consulting agreement with Dr. Das on May 1, 2019 to provide support for research and clinical activities. The Company expensed and accrued $42,000 included in ‘Other accrued liabilities’ at December 31, 2019 for his services. On December 30, 2020, the Board granted Dr. Das 113,292 Non-statutory Stock Options to replace amounts accrued for his services for fiscal years ended December 31, 2020 and 2019. The fair value of this grant is $13 and was expensed in the year ended December 31, 2020. The Company recognized a gain on settlement of $117 which is included in research and development expense for the year ended December 31, 2020. |
| 16. | Subsequent Events |
| In March 2021, the Company issued convertible note payables for total proceeds of $300. The notes are unsecured, have interest accrued at a rate of 3% per annum and have a term of fourteen months. | |
| In April 2021, the Company issued a convertible note payable for total proceeds of $115. The notes are unsecured, have interest accrued at a rate of 3% per annum and have a term of thirteen months. | |
| On May 11, 2021, the SBA approved forgiveness of the PPP Loan, including accrued interest. The amount forgiven by the SBA was $157. | |
| Effective as of June 7, 2021, the Company reincorporated as a Delaware corporation, which included establishment of $0.0001 par value for convertible preferred stock and common stock. |
F-30
Tivic Health Systems, Inc.
Condensed Balance Sheets (Unaudited)
March 31, 2021 and December 31, 2020
(in thousands, except share and per share data)
| March 31, 2021 | December 31, 2020 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 600 | $ | 1,044 | ||||
| Accounts receivable, net | 79 | 52 | ||||||
| Inventory, net | 241 | 241 | ||||||
| Prepaid expenses and other current assets | 281 | 160 | ||||||
| Total current assets | 1,201 | 1,497 | ||||||
| Property and equipment, net | 17 | 19 | ||||||
| Other assets | 15 | 15 | ||||||
| Total assets | $ | 1,233 | $ | 1,531 | ||||
| LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | 664 | $ | 370 | ||||
| Other accrued liabilities | 257 | 152 | ||||||
| Current portion of notes payable | 35 | 36 | ||||||
| Conversion feature derivative liability | 874 | 717 | ||||||
| Total current liabilities | 1,830 | 1,275 | ||||||
| Notes payable | 129 | 139 | ||||||
| Convertible notes payable, net of debt discount | 1,726 | 1,294 | ||||||
| Total liabilities | 3,685 | 2,708 | ||||||
| Stockholders' equity (deficit) | ||||||||
| Convertible preferred stock, $0.0001 par value, 10,113,621 shares authorized; 8,908,600 shares issued and outstanding at March 31, 2021 and December 31, 2020 | 1 | 1 | ||||||
| Common stock, $0.0001 par value, 25,000,000 shares authorized; 9,497,916 and 9,297,916 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | 1 | 1 | ||||||
| Additional paid in capital | 9,889 | 9,873 | ||||||
| Accumulated deficit | (12,343 | ) | (11,052 | ) | ||||
| Total stockholders' equity (deficit) | (2,452 | ) | (1,177 | ) | ||||
| Total liabilities and stockholders' equity (deficit) | $ | 1,233 | $ | 1,531 | ||||
The accompanying notes are an integral part of these financial statements.
F-31
Tivic Health Systems, Inc.
Condensed Statements of Operations (Unaudited)
Three Months Ended March 31, 2021 and 2020
(in thousands, except share and per share data)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | 298 | $ | 122 | ||||
| Cost of sales | 301 | 156 | ||||||
| Gross loss | (3 | ) | (34 | ) | ||||
| Operating expenses: | ||||||||
| Research and development | 178 | 226 | ||||||
| Sales and marketing | 274 | 385 | ||||||
| General and administrative | 536 | 361 | ||||||
| Total operating expenses | 988 | 972 | ||||||
| Loss from operations | (991 | ) | (1,006 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (274 | ) | - | |||||
| Change in fair value of derivative liabilities | (27 | ) | - | |||||
| Other income | 2 | 4 | ||||||
| Total other income (expense) | (299 | ) | 4 | |||||
| Loss before provision for income taxes | (1,290 | ) | (1,002 | ) | ||||
| Provision for income taxes | 1 | - | ||||||
| Net loss and comprehensive loss | $ | (1,291 | ) | $ | (1,002 | ) | ||
| Net loss per share - basic and diluted | $ | (0.14 | ) | $ | (0.11 | ) | ||
| Weighted-average number of shares - basic and diluted | 9,337,916 | 9,200,000 | ||||||
The accompanying notes are an integral part of these financial statements.
F-32
Tivic Health Systems, Inc.
Statements of Stockholders’ Equity (Deficit) (Unaudited)
Three Months Ended March 31, 2021 and 2020
(in thousands except share and per share data)
For the Three Months Ended March 31, 2020
| Total | ||||||||||||||||||||||||||||
| Convertible | Additional | Stockholders' | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balances at January 1, 2020 | 8,901,475 | $ | 1 | 9,200,000 | $ | 1 | $ | 9,782 | $ | (7,413 | ) | $ | 2,371 | |||||||||||||||
| Issuance of convertible preferred stock, net of issuance costs | 7,125 | - | - | - | 10 | - | 10 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 38 | - | 38 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,002 | ) | (1,002 | ) | |||||||||||||||||||
| Balances at March 31, 2020 | 8,908,600 | $ | 1 | 9,200,000 | $ | 1 | $ | 9,830 | $ | (8,415 | ) | $ | 1,417 | |||||||||||||||
For the Three Months Ended March 31, 2021
| Total | ||||||||||||||||||||||||||||
| Convertible | Additional | Stockholders' | ||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balances at January 1, 2021 | 8,908,600 | $ | 1 | 9,297,916 | $ | 1 | $ | 9,873 | $ | (11,052 | ) | $ | (1,177 | ) | ||||||||||||||
| Exercise of stock options | - | - | 200,000 | - | 6 | - | 6 | |||||||||||||||||||||
| Stock-based compensation expense | - | - | - | - | 10 | - | 10 | |||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,291 | ) | (1,291 | ) | |||||||||||||||||||
| Balances at March 31, 2021 | 8,908,600 | $ | 1 | 9,497,916 | $ | 1 | $ | 9,889 | $ | (12,343 | ) | $ | (2,452 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-33
Tivic Health Systems, Inc.
Condensed Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2021 and 2020
(in thousands)
| Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | (1,291 | ) | $ | (1,002 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock based compensation | 10 | 38 | ||||||
| Depreciation | 2 | 2 | ||||||
| Change in fair value of derivative liabilities | 27 | - | ||||||
| Amortization of debt discount | 261 | - | ||||||
| Accounts receivable allowances | 22 | (2 | ) | |||||
| Reserve for inventory obsolescence | (8 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (49 | ) | (12 | ) | ||||
| Inventory | 7 | (54 | ) | |||||
| Prepaid expenses and other current assets | (120 | ) | (74 | ) | ||||
| Accounts payable | 295 | (98 | ) | |||||
| Accrued liabilities | 105 | (92 | ) | |||||
| Net cash used in operating activities | (739 | ) | (1,294 | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | - | - | ||||||
| Net cash used in investing activities | - | - | ||||||
| Cash flows from financing activities | ||||||||
| Repayment of notes payable borrowings | (11 | ) | - | |||||
| Proceeds from convertible notes payable borrowings | 300 | - | ||||||
| Proceeds from exercise of stock options | 6 | - | ||||||
| Proceeds from issuance of convertible preferred stock, net of issuance costs | - | 10 | ||||||
| Net cash provided by financing activities | 295 | 10 | ||||||
| Net decrease in cash and cash equivalents | (444 | ) | (1,284 | ) | ||||
| Cash and cash equivalents | ||||||||
| Beginning of period | 1,044 | 2,311 | ||||||
| End of period | $ | 600 | $ | 1,027 | ||||
| Supplemental disclosures of cash flow information | ||||||||
| Cash paid for income tax | $ | 1 | $ | - | ||||
| Noncash transaction | ||||||||
| Issuance of conversion feature derivative liability | $ | 130 | $ | - | ||||
The accompanying notes are an integral part of these financial statements.
F-34
| 1. | Formation and Business of the Company |
Tivic Health Systems, Inc. (the “Company”), was incorporated in the state of California on September 22, 2016 for the purpose of developing and commercializing microcurrent therapy solutions to address inflammation. Effective as of June 7, 2021, the Company reincorporated as a Delaware corporation, which included establishment of $0.0001 par value for convertible preferred stock and common stock. The financial statements have been retroactively adjusted as if the change in corporation status occurred on January 1, 2019. The Company's primary product, ClearUP, is a medical device intended to relieve sinus and nasal inflammation. The Company is headquartered in Newark, California.
| 2. | Summary of Significant Accounting Policies |
Basis of Presentation
The accompanying condensed balance sheet as of December 31, 2020, which has been derived from audited financial statements, and the unaudited interim condensed financial statements as of March 31, 2021, and for the first quarters ended March 31, 2021 and March 31, 2020 have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations. In the opinion of management, all accounting entries and adjustments (including normal, recurring adjustments) considered necessary for a fair presentation of the financial position and the results of operations for the interim periods have been made. Operating results for the first quarter ended March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021. For further information, including a description of the significant accounting policies of the Company, refer to the audited financial statements and notes thereto included elsewhere in this filing.
Liquidity
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the pharmaceutical industry. These risks include, but are not limited to, the uncertainty of availability of additional financing and the uncertainty of achieving future profitability.
Since inception, the Company has devoted substantially all of its efforts to research and development activities, regulatory clearance and early market development and testing of our first product released in 2019. The Company has experienced losses and negative cash flows from operations since inception and at March 31, 2021, the Company had a working capital deficit of $629, an accumulated deficit of $12,343 and cash and cash equivalents of $600. During the three months ended March 31, 2021 and the years ended December 31, 2020 and 2019, the Company incurred net losses of $1,291, $3,639 and $4,148, respectively and used $739, $3,027 and $3,670 of cash for operations, respectively. Management expects to incur substantial additional operating losses for at least the next two years to expand its markets, complete development of new products, obtain regulatory approvals, launch and commercialize our products and continue research and development programs.
The Company intends to raise additional capital through the issuance of additional equity and debt. If financing is not available at adequate levels, the Company may need to reevaluate its operating plans. Based on projected activities, management projects that cash and cash equivalents on hand are not sufficient to support operations for at least the next 12 months following issuance of these financial statements, which raises substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying financial statements do not include any adjustment that might be necessary if the Company is unable to continue as a going concern.
F-35
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual results could differ materially from those estimates. The Company evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts those estimates and assumptions when facts and circumstances dictate.
Revenue Recognition
The Company recognizes revenue from product sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements. The standard applies to all contracts with customers, except contracts that are within scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments.
Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are in within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inceptions, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company sells its products through direct sales and independent distributors. Revenue is recognized when control of the promised goods is transferred to the customers or distributor, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods and services. Revenue associated with products holding rights of return are recognized when the Company concludes there is not a risk of significant revenue reversal in the future periods for the expected consideration in the transaction.
The Company may offer an extended warranty to its customers. The extended warranty is considered a separate performance obligation. The Company allocates the transaction price based on estimated relative standalone selling prices of the promised product and services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. As of March 31, 2021 and December 31, 2020, the Company's deferred revenue for unrecognized extended warranties was $14 and $14, respectively, and is included in “Other Accrued Liabilities” on the accompanying balance sheets.
Based on the Company’s assessment, it was determined that there were no contract assets as of March 31, 2021 and December 31, 2020 because receivables outstanding are unconditional and only the passage of time is required before payment of that consideration is due. The Company may receive payments at the onset of the contract and before goods have been delivered. In such instances, the Company records a deferred revenue liability. The Company recognizes these contract liabilities as sales after the revenue criteria are met. As of March 31, 2021 and December 31, 2020, the contract liability related to the Company’s deferred revenues approximated $0 and $2, respectively, and are included in “Other Accrued Liabilities” on the accompanying balance sheets.
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The Company relies on a third party to have procedures in place to detect and prevent credit card fraud as the Company has exposure to losses from fraudulent charges. The Company records the losses related to chargebacks as incurred.
The Company has also elected to exclude from the measurement of the transaction price sales taxes remitted to governmental authorities.
Recently adopted accounting standards and recently issued accounting pronouncements
Recently adopted accounting standards:
Adoption of Accounting Standards Update ("ASU") 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, which eliminates certain disclosures, such as the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and adds new disclosure requirements for Level 3 measurements. The Company adopted this ASU effective January 1, 2020. The adoption of this ASU did not have an impact to the Company’s financial statements.
ASU 2019-12 - Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12 which reduces the complexity of accounting for income taxes by eliminating certain exceptions to the general principles in Accounting Standards Codification ("ASC") 740, Income Taxes. Additionally, the ASU simplifies GAAP by amending the requirements related to the accounting for "hybrid" tax regimes and also by adding the requirement to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination and when it should be considered a separate transaction. Certain of the provisions are to be applied retrospectively with other provisions applied prospectively.
The Company adopted this new ASU effective January 1, 2021. The adoption of this ASU did not have a material impact to the Company’s financial statements.
Recently issued accounting pronouncements:
ASU 2016-02, Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, which changes how lessees account for leases. For most leases, the standard requires a liability to be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. For leases classified as operating leases, the Company is now required to recognize lease costs on a straight-line basis based on the combined amortization of the lease obligation and the right-of-use asset. Similar to capital leases under the previous accounting standard, leases are accounted for as finance leases when the relevant criteria are met. On June 3, 2020, the FASB extended the adoption date for all other entities, including emerging growth companies (“EGCs”), as defined by the SEC, that have elected to defer adoption until the standard is effective for non-public business entities, to annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and Subsequent Amendments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13 (which was then further clarified in subsequent ASUs), which requires that credit losses for certain types of financial instruments, including accounts receivable, be estimated based on expected credit losses among other changes. This guidance is effective for annual and interim periods beginning after December 15, 2019 for SEC filers, December 15, 2020 for public business entities that are not SEC filers, and December 15, 2021 for all other entities, including EGCs that have elected to defer adoption until the guidance becomes effective for non-public entities, with early adoption permitted. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
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ASU 2021-04 - Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation - Stock Based Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Issuer's Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options
In May 2021, the FASB issued ASU 2021-04 which clarified an issuer's accounting for modification or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The provisions of ASU No. 2021-04 are effective for annual reporting periods beginning after December 15, 2021, and interim reporting periods within those annual periods, with early adoption permitted, including adoption in any interim period for public business entities for periods for which consolidated financial statements have not yet been issued or made available for issuance. This ASU shall be applied on a prospective basis. The Company is currently evaluating the impact of the accounting standard update on its financial statements.
| 3. | Financial Instruments and Fair Value Measurements |
The Company’s financial instruments consist of money market funds and conversion right liability. The following tables shows the Company’s cash equivalents and conversion right liability’s carrying value and fair value at March 31, 2021 and December 31, 2020:
| As of March 31, 2021 | ||||||||||||||||||||
| Carrying Amount |
Fair Value |
Quoted Priced in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
||||||||||||||||
| Assets | ||||||||||||||||||||
| Money market funds | $ | 352 | $ | 352 | $ | 352 | $ | - | $ | - | ||||||||||
| Total assets | $ | 352 | $ | 352 | $ | 352 | $ | - | $ | - | ||||||||||
| Liabilities | ||||||||||||||||||||
| Conversion feature derivative liability | $ | 874 | $ | 874 | $ | - | $ | - | $ | 874 | ||||||||||
| Total liabilities | $ | 874 | $ | 874 | $ | - | $ | - | $ | 874 | ||||||||||
| As of December 31, 2020 | ||||||||||||||||||||
| Carrying Amount |
Fair Value |
Quoted Priced in active markets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) |
||||||||||||||||
| Assets | ||||||||||||||||||||
| Money market funds | $ | 639 | $ | 639 | $ | 639 | $ | - | $ | - | ||||||||||
| Total assets | $ | 639 | $ | 639 | $ | 639 | $ | - | $ | - | ||||||||||
| Liabilities | ||||||||||||||||||||
| Conversion feature derivative liability | $ | 717 | $ | 717 | $ | - | $ | - | $ | 717 | ||||||||||
| Total liabilities | $ | 717 | $ | 717 | $ | - | $ | - | $ | 717 | ||||||||||
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Cash equivalents – Cash equivalents of $352 and $639 as of March 31, 2021 and December 31, 2020, respectively, consisted of money market funds. Money market funds are classified as Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets.
Conversion feature derivative liability – The fair value of the conversion feature derivative liability is based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy.
| Conversion Feature Derivative Liability | ||||
| Balance at January 1, 2020 | $ | - | ||
| Issuance of convertible rights | 690 | |||
| Changes in fair value | 27 | |||
| Balance at December 31, 2020 | 717 | |||
| Issuance of convertible rights | 130 | |||
| Changes in fair value | 27 | |||
| Balance at March 31, 2021 | $ | 874 | ||
There have been no changes to the valuation methods utilized by the Company during the three months ended March 31, 2021 and the year ended December 31, 2020. The Company evaluates transfers between levels at the end of each reporting period. There were no transfers of financial instruments between levels during the three months ended March 31, 2021 and the year ended December 31, 2020.
| 4. | Accounts Receivable Factoring |
The Company entered into an accounts receivable factoring arrangement with a financial institution (the “Factor”) in May 2020. Pursuant to the terms of the arrangement, the Company, from time to time, sells to the Factor certain of its accounts receivable balances on a non-recourse basis for credit approved accounts. During fiscal year ended December 31, 2020, the Company factored accounts receivable in the amount of $58 for a factored amount of $54. During the three months ended March 31, 2021, the Company factored accounts receivable in the amount of $68 for a factored amount of $61. The fees related to factoring was $5 and $5 for the three months ended March 31, 2021 and year ended December 31, 2020 and recorded in general and administrative expenses. At March 31, 2021, the outstanding amount of unpaid advances to the Factor was $57.
| 5. | Inventory, net |
| March 31, 2021 | December 31, 2020 | |||||||
| Raw materials | $ | 208 | 171 | |||||
| Work in process | 19 | 13 | ||||||
| Finished goods | 14 | 65 | ||||||
| Inventory at cost | 241 | 249 | ||||||
| Less reserve for obsolescence | - | (8 | ) | |||||
| Inventory, net | $ | 241 | $ | 241 | ||||
| 6. | Commitments |
The Company leases office space in Newark, California under a cancelable operating lease agreement. Rent expense recorded during the three months ended March 31, 2021 and 2020 was $6 and $19, respectively.
At March 31, 2021, there were no purchase commitments with third-party suppliers.
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Contingencies
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when future expenditures are probable and such expenditures can be reasonably estimated. The Company recorded no liabilities for contingent matters as of March 31, 2021.
| 7. | Notes Payable |
On April 18, 2020, the Company applied for a loan pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), as administered by the U.S. Small Business Administration (the “SBA”). The loan, in the principal amount of $156, was disbursed by Bank of the West (“Lender”) on May 7, 2020, pursuant to a Paycheck Protection Program Promissory Note and Agreement (the “Note and Agreement”).
The program was later amended by the Paycheck Protection Flexibility Act of 2020 whereby debtors were granted a minimum maturity date of the five-year anniversary of the funding date and a deferral of ten months from the end of the covered period. The PPP Loan bears interest at a fixed rate of 1.00% per annum. Monthly principal and interest payments, less the amount of any potential forgiveness (discussed below), will commence after the sixteen-month anniversary of the funding date. The Company did not provide any collateral or guarantees for the PPP Loan, nor did the Company pay any facility charge to obtain the PPP Loan. The Note and Agreement provides for customary events of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company may prepay the principal of the PPP Loan at any time without incurring any prepayment charges.
All or a portion of the PPP Loan may be forgiven by the SBA upon application to the Lender by the Company within 10 months after the last day of the covered period. The Lender will have 90 days to review borrower’s forgiveness application and the SBA will have an additional 60 days to review the Lender’s decision as to whether the borrower’s loan may be forgiven. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, and covered utilities, and certain covered mortgage interest payments during the twenty-four-week period beginning on the date of the first disbursement of the PPP Loan. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee earning more than $100, prorated annually. Not more than 40% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of $100 or less annually are reduced by more than 25%. The Company obtained forgiveness of the PPP Loan on May 11, 2021.
On August 10, 2020, the Company entered into an agreement with Alliant Insurance Services, Inc. to finance its 2020 to 2021 insurance premiums with First Insurance Funding Corp. in the amount of $39. The interest rate on the note payable is 4.20% and the note is payable with a down payment at borrowing of $6 and nine equal monthly instalment payments beginning in September 2020. As of March 31, 2021, the remaining liability under this financing agreement was $7. The following table summarizes the future minimum payments of the PPP Loan and the insurance loan as of March 31, 2021:
| Nine Months Ending December 31, 2021 | $ | 24 | ||
| Year Ending December 31, 2022 | 41 | |||
| Year Ending December 31, 2023 | 41 | |||
| Year Ending December 31, 2022 | 41 | |||
| Year Ending December 31, 2023 | 16 | |||
| $ | 163 |
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| 8. | Convertible Notes Payable |
In the year ended December 31, 2020, the Company issued convertible note payable to various investors for total proceeds of $1,595. The notes are unsecured, have interest accrued at a rate of 3% per annum and have a term of two years.
In the three months ended March 31, 2021, the Company issued convertible note payable to various investors for total proceeds of $300. The notes are unsecured, have interest accrued at a rate of 3% per annum and have a term of two years.
The Notes issued in 2020 and during the three months ended March 31, 2021 and outstanding at March 31, 2021 have the following terms and conditions for conversion:
Auto Conversion upon Qualified Financing
Qualified Financing is defined as the closing of an equity financing undertaken by the Company before the Maturity Date, principally for capital raising purposes, in which the aggregate amount of gross proceeds (not including cancellation of the indebtedness represented by all Notes and other convertible securities that will convert) received by the Company is at least $2,000 in the aggregate.
Note shall be automatically canceled on the date of the initial closing of a Qualified Financing, and the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon, shall be automatically converted at a conversion price per share equal to the lesser of:
(x) a Discount Percentage of the price per share of Qualified Securities sold to the investors in a Qualified Financing of 25%
and
(y) the quotient of (A) the Cap value divided by (B) the number of outstanding shares of the Company, on a Fully Diluted Basis, as determined immediately prior to the Qualified Financing. The Cap value is $40 million.
The conversion shall be deemed to occur immediately prior to the consummation of the Qualified Financing. In the event of a conversion of the Notes in connection with a Qualified Financing, the Company may, solely at its option, elect to convert the Notes into Shadow Preferred.
Shadow Preferred means the shares of a series of Preferred Stock issued in the Qualified Financing, having the identical rights, privileges, preferences and restrictions as the shares of Qualified Securities, other than with respect to:
| (i) | the per share liquidation preference; and |
| (ii) | the percentage of the conversion price to determine the per share dividend rights. |
Conversion Upon Change in Control
In the event of a Change in Control prior to the Maturity Date or prior to the conversion of this Note, the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon, on the date of conversion will be converted, immediately prior to the consummation of the transaction constituting a Change in Control, into that number of shares of Common Stock, as follows:
At the election of the holders,
(i) the outstanding Principal Amount and accrued interest will be converted into that number of Preferred Conversion Stock equal to the quotient obtained by dividing (x) the outstanding principal amount and all accrued interest by (y) the Preferred Conversion Price
or
(ii) Holder shall receive an amount equal to 1.5X the principal amount outstanding. Accrued interest which is not converted into Common Stock shall be paid to Holder in cash.
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Conversion at Maturity
Based on the terms and conditions of the note, the following would occur at maturity:
The outstanding Principal Amount and all accrued interest shall convert into Preferred Conversion Stock equal to the quotient obtained by dividing (x) the outstanding Principal Amount and accrued interest by (y) the Preferred Conversion Price.
The conversion features in the Notes met the accounting definition of an embedded derivative and required separate accounting. The Company value the embedded derivative on the Notes using the Monte Carlo simulation method which included significant estimates regarding the expected time to conversion, volatility, and discount rate. The estimated fair value of these derivatives was recorded as a discount to the Notes and a derivative liability. The debt discount was amortized to interest expense over the expected term of the Notes. The liability was remeasured to fair value at year end with the offsetting amount recorded in other income, expense.
Convertible notes issued, converted and outstanding are as follows:
| Convertible Notes Payable |
||||
| Balance at January 1, 2020 | $ | - | ||
| Issuance of convertible notes payable | 1,572 | |||
| Matured | - | |||
| Balance at December 31, 2020 | 1,572 | |||
| Issuance of convertible notes payable | 300 | |||
| Matured | - | |||
| Balance at March 31, 2021 | $ | 1,872 | ||
Debt discount related to convertible notes are as follows:
| Debt Discount | ||||
| Balance at January 1, 2020 | $ | - | ||
| Debt discount recognized | 690 | |||
| Amortized to interest expense | (412 | ) | ||
| Balance at December 31, 2020 | 278 | |||
| Debt discount recognized | 130 | |||
| Amortized to interest expense | (261 | ) | ||
| Balance at March 31, 2021 | $ | 147 | ||
| 9. | Convertible Preferred Stock |
In July 2019, the Company raised $3,843 by issuing 2,787,854 shares of Series Seed Convertible Preferred Stock. Coincident with the issuance of Series Seed Preferred Stock, $870 of Simplified Agreements for Future Equity converted to 774,894 shares of Series Seed Preferred Stock and $4,124 of convertible notes, including accrued interest, converted to 5,338,727 shares of Series Seed Preferred Stock.
F-42
The Company is authorized to issue up to 10,113,621 of convertible preferred stock with $0.0001 par value. 4,000,000 shares have been designated as Series Seed-1 convertible preferred stock, 774,894 shares have been designated as Series Seed-2 convertible preferred stock, 3,615,580 shares have been designated as Series Seed-3 convertible preferred stock and 1,723,147 shares have been designated as Series Seed-4 convertible preferred stock (collectively, “Series Seed Preferred” or “preferred stock”). At March 31, 2021 and December 31, 2020, the Company had 8,908,600 shares of Series Seed Preferred issued and outstanding, respectively.
The holders of preferred stock have the rights, preferences, privileges and restrictions as set forth below:
Dividends:
The holders of preferred stock are entitled to receive dividends prior to and in preference to any declaration of payment of dividends on common stock, when and if declared by the Board of Directors. Any additional dividends will be paid ratably to holders of common and preferred stock, with the holders of preferred stock participating on an as-if converted basis. No dividends have been declared or paid as of March 31, 2021 and December 31, 2020.
Voting Rights:
The holders of each share of preferred stock are entitled to voting rights equal to the number of shares of common stock into which the shares could be converted. As long as 2,419,099 shares of preferred stock remain outstanding, the holders of preferred stock, voting together as a class, shall be entitled to elect two members of the Company’s Board of Directors. The holders of common stock, voting together as a single class, shall be entitled to elect two members of the Company’s Board of Directors. Remaining members of the Company’s Board of Directors will be elected by the holders of a majority of the shares of preferred stock and common stock, voting together as a single class.
Liquidation Rights / Redemption Provision:
In the event of any liquidation, dissolution or winding up of the Company or a deemed liquidation event, whether voluntary or involuntary, the holders of preferred stock have liquidation preferences, before any distribution or payment is made to holders of any common stock, an amount per share equal to the original issue price of $1.4034 for Series Seed-1 preferred stock, $1.1227 for Series Seed-2 preferred stock, $0.5841 for Series Seed-3 preferred stock and $1.1681 for Series Seed-4 preferred stock as adjusted for stock splits, stock dividends, combinations, recapitalizations and the like, plus any declared but unpaid dividends. If the assets and funds to be distributed among the holders of preferred stock are insufficient to permit the payment to such holders, then the entire assets and funds of the Company legally available for distribution will be distributed ratably among the holders of preferred stock in proportion to the preferential amount each such holder is otherwise entitled to receive.
Upon completion of the payment of the full liquidation preference of preferred stock, the remaining assets of the Company, if any, shall be distributed ratably to the holders of preferred stock and common stock on a pari passu basis.
Redemption:
The preferred stock is not redeemable. Upon certain change in control events that are outside of the Company’s control, including liquidation, sale or transfer of control of the Company, the preferred stock is contingently redeemable.
Conversion:
Each share of preferred stock is convertible into shares of common stock, at the option of the holder, at any time after date of issuance. Each share of preferred stock automatically converts to the number of shares of common stock determined in accordance with the conversion rate upon the earlier of (i) written consent of a majority of the then outstanding shares of preferred stock, voting together as a single class or (ii) the closing of a public offering, in which the gross cash proceeds are at least $20,000. At March 31, 2021 and December 31, 2020, the conversion price for each share of Series Seed-1 preferred stock, Series Seed-2 preferred stock, Series See-3 preferred stock and Series Seed-4 preferred stock is $1.4034, $1.1227, $0.5841 and $1.1681, respectively. The conversion price is subject to downward adjustment if the Company issues options or convertible securities with exercise or conversion terms more favorable than the preferred stock.
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Protective Provisions:
The holders of preferred stock have certain protective provisions. As long as 2,419.099 of the shares of Series Seed Preferred remain outstanding (as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations, reorganizations, reclassifications or the like), the Company shall not, either directly or by amendment, merger, consolidation, reclassification or otherwise, amend, alter or repeal any provision of the Company’s Certificate of Incorporation or Bylaws in a manner that would adversely alter the rights, preferences, and privileges of the Series Seed Preferred without first obtaining approval of the majority of the outstanding shares of Series Seed Preferred.
| 10. | Common Stock |
The Company is authorized to issue up to 25,000,000 shares of common stock with $0.0001 par value. At March 31, 2021 and December 31, 2020, there were 9,497,916 and 9,297,916 shares issued and outstanding.
Common stockholders are entitled to dividends if and when declared by the Board of Directors subject to the rights of the preferred stockholders. As of March 31, 2021, no dividends on common stock had been declared by the Company. At March 31, 2021 and December 31, 2020, the Company had reserved shares of common stock for issuance as follows:
| March 31, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Convertible preferred stock outstanding | 8,908,600 | 8,908,600 | ||||||
| Options issued and outstanding | 2,997,876 | 3,197,876 | ||||||
| Shares available for future stock option grants | 629,281 | 629,281 | ||||||
| Total | 12,535,757 | 12,735,757 | ||||||
| 11. | Equity Incentive Plans |
In 2017, the Company adopted the 2017 Equity Incentive Plan (the “Plan”). As of March 31 2021, there were 3,925,073 shares of common stock authorized and 629,281 shares available for issuance under the Plan. Options granted under the Plan may be Incentive Stock Options or Non-statutory Stock Options, as determined by the Administrator at the time of grant. Stock Purchase Rights may also be granted under the Plan. The term shall be no more than ten years from the date of grant thereof. In the case of an Incentive Stock Option granted to an optionee who, at the time the option is granted, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the option shall be five years from the date of grant or such shorter term as may be provided in the option Agreement.
In the case of an Incentive Stock Option, (i) granted to an employee who, at the time of grant of such option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (ii) granted to any other employee, the per share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. In the case of a Non-statutory Stock Option; (i) granted to a and employee who, at the time of grant of such option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant; (ii) granted to any other service provider, the per share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. Notwithstanding the foregoing, options may be granted with a per share exercise price other than as required above pursuant to a merger or other corporate transaction.
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The options may include provisions permitting exercise of the option prior to full vesting. Any unvested shares so purchased shall be subject to repurchase by the Company at the original exercise price of the option.
| Options Outstanding | ||||||||||||||||||
| Weighted- | ||||||||||||||||||
| Weighted | Weighted- | Average | Aggregate | |||||||||||||||
| Shares | Average | Average | Remaining | Intrinsic | ||||||||||||||
| Available | Number of | Exercise | Grant Date | Contractual Life | Value | |||||||||||||
| for Grant | Options | Price | Fair Value | (in years) | (in 000s) | |||||||||||||
| Balances, January 1, 2020 | 1,590,073 | 2,335,000 | $ | 0.04 | $ | 0.02 | 8.26 | $ | 496 | |||||||||
| Shares reserved for issuance | - | - | ||||||||||||||||
| Options granted | (985,792 | ) | 985,792 | $ | 0.25 | $ | 0.11 | |||||||||||
| Options forfeited / cancelled | 18,230 | (18,230 | ) | $ | 0.25 | $ | 0.11 | |||||||||||
| Options expired | 6,770 | (6,770 | ) | $ | 0.25 | $ | 0.11 | |||||||||||
| Options exercised | - | (97,916 | ) | 0.03 | $ | 0.01 | ||||||||||||
| Balances, December 31, 2020 | 629,281 | 3,197,876 | $ | 0.10 | $ | 0.04 | 7.88 | $ | 505 | |||||||||
| Shares reserved for issuance | - | - | ||||||||||||||||
| Options granted | - | - | $ | - | $ | - | ||||||||||||
| Options forfeited / cancelled | - | - | $ | - | $ | - | ||||||||||||
| Options expired | - | - | $ | - | $ | - | ||||||||||||
| Options exercised | - | (200,000 | ) | $ | 0.03 | $ | 0.01 | |||||||||||
| Balances, March 31, 2021 (unaudited) | 629,281 | 2,997,876 | $ | 0.10 | $ | 0.05 | 7.67 | $ | 819 | |||||||||
| At December 31, 2020 | ||||||||||||||||||
| Vested | 2,209,352 | $ | 0.09 | 0.04 | 7.77 | $ | 368 | |||||||||||
| Exercisable | 2,209,352 | $ | 0.09 | 0.04 | 7.77 | $ | 368 | |||||||||||
| Vested and expected to vest | 3,197,876 | $ | 0.10 | 0.04 | 7.88 | $ | 505 | |||||||||||
| At March 31, 2021 (unaudited) | ||||||||||||||||||
| Vested | 2,231,844 | $ | 0.10 | 0.04 | 7.60 | $ | 620 | |||||||||||
| Exercisable | 2,231,844 | $ | 0.10 | 0.04 | 7.60 | $ | 620 | |||||||||||
| Vested and expected to vest | 2,997,876 | $ | 0.11 | 0.04 | 7.67 | $ | 819 | |||||||||||
The weighted-average grant date fair value per share of stock options granted in 2020 was $0.25. The aggregate intrinsic value of options vested and expected to vest and exercisable as of March 31, 2021 and December 31, 2020 is calculated based on the difference between the exercise price and the current fair value of our common stock. The intrinsic value of options exercised during the three months ended March 31, 2021 and in 2020 was $74 and $1, respectively.
F-45
Stock-Based Compensation
Options generally vest over four years whereby 25% vest upon the first anniversary of the issuance date and 1/48th per month thereafter. Stock-based compensation expense recognized during the three months ended March 31, 2021 and 2020 was $10 and $38, respectively. As of March 31, 2021, there were total unrecognized compensation costs of $39 related to share-based payment awards which is expected to be recognized over a weighted-average amortization period of 1.2 years.
The grant date fair market value of the shares of common stock underlying stock options has historically been determined by the Company’s Board of Directors. Because there has been no public market for the Company’s common stock, the Board of Directors exercises reasonable judgment and considers a number of objective and subjective factors to determine the best estimate of the fair market value, which include valuations performed by an independent third-party, important developments in the Company's operations, sales of the Company’s convertible preferred stock, actual operating results, financial performance, the conditions in the life sciences industry, the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company's common stock.
The Company estimated the fair value of share-based payment awards using the Black-Scholes options valuation model. The fair value of share-based payment awards is being amortized on a straight-line basis over the requisite service period of the awards. The fair value of share-based payment awards was estimated on the date of grant using the following assumptions:
| 2020 | ||||
| Expected life (in years) | 5.00 - 6.05 | |||
| Expected volatility | 46.39% - 52.10% | |||
| Risk-free interest rate | .22% - 1.42% | |||
| Dividend yield | 0% | |||
Expected Term: The Company uses the simplified method to calculate expected term described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107, which takes into account vesting term and expiration date of the options.
Volatility: Volatility is based on an average of the historical volatilities of comparable publicly traded companies for the expected term.
Risk Free Interest Rate: The risk-free rate is based on the U.S. Treasury yields in effect at the time of grant for periods corresponding with the expected term of the option.
Dividend Yield: The Company has never declared or paid any cash dividends and does not plan to pay cash dividends in the foreseeable future, and therefore, used an expected dividend yield of zero in the valuation model.
No income tax benefits have been recognized relating to stock-based compensation expenses and no tax benefits have been realized from exercised stock options.
Total Stock-Based Compensation
Total stock-based compensation expense recorded related to share-based payment awards was allocated to research and development and general and administrative expense as follows:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cost of sales | $ | - | $ | - | ||||
| Research and development | 4 | - | ||||||
| Sales and marketing | 1 | 1 | ||||||
| General and administrative | 5 | 37 | ||||||
| Total stock-based compensation | $ | 10 | $ | 38 | ||||
F-46
| 12. | Income Taxes |
During the three months ended March 31, 2021 and 2020, the Company recorded a full valuation allowance on federal and state deferred tax assets since management does not forecast the Company to be in a taxable position in the near future.
| 13. | Net Loss per Share |
The following outstanding potentially dilutive common stock equivalents have been excluded from the calculation of diluted net loss per share for the periods presented due to their antidilutive effect:
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Convertible preferred stock (as converted) | 8,908,600 | 8,908,600 | ||||||
| Convertible notes payable | - | - | ||||||
| Common stock options issued and outstanding | 2,997,876 | 3,105,000 | ||||||
| Total | 11,906,476 | 12,013,600 | ||||||
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Net loss | $ | (1,291 | ) | $ | (1,002 | ) | ||
| Weighted-average number of shares - basic and diluted | 9,337,916 | 9,200,000 | ||||||
| Net loss per share - basic and diluted | $ | (0.14 | ) | $ | (0.11 | ) | ||
| 14. | Related Party Transactions |
Dr. Subinoy Das is both a consultant and investor in the Company. The Company entered into a consulting agreement with Dr. Das on May 1, 2019 to provide support for research and clinical activities. The Company expensed and accrued $42,000 included in ‘Other accrued liabilities’ at December 31, 2019 for his services. On December 30, 2020, the Board granted Dr. Das 113,292 Non-statutory Stock Options to replace amounts accrued for his services for fiscal years ended December 31, 2020 and 2019. The fair value of this grant is $13 and was expensed in the year ended December 31, 2020. The Company recognized a gain on settlement of $117 which is included in research and development expense for the year ended December 31, 2020. There were no payments to Dr. Das during the three months ended March 31, 2021.
| 15. | Subsequent Events |
In April 2021, the Company issued a convertible note payable for total proceeds of $115. The note is unsecured, has interest accrued at a rate of 3% per annum and has a term of thirteen months.
On May 11, 2021, the SBA approved forgiveness of the PPP Loan, including accrued interest. The amount forgiven by the SBA was $157.
Effective as of June 7, 2021, the Company reincorporated as a Delaware corporation, which included establishment of $0.0001 par value for convertible preferred stock and common stock.
F-47
In June 2021, the Company issued convertible note payables for total proceeds of $1,866. The notes were issued at an original issue discount of $244 with principal outstanding of $2,110. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum.
In June 2021, the Company issued a convertible note payable to its Chief Executive Officer for total proceeds of $100. The note is unsecured, has a term of twenty-three months, and accrues interests at a rate of 3% per annum.
In June 2021, the Company issued convertible notes payable for total proceeds of $232. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum.
F-48
Shares of Common Stock
Tivic Health Systems, Inc.
| PRELIMINARY PROSPECTUS | ||
ThinkEquity
a division of Fordham Financial Management, Inc.
, 2021
Through and including , 2021 (the 25th day after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities being registered hereunder. All of the amounts shown are estimates, except for the Securities and Exchange Commission registration fee, FINRA filing fee and exchange listing fee.
| Amount to be Paid |
||||
| SEC Registration Fee | $ | |||
| FINRA filing fee | ||||
| Exchange listing fee | ||||
| Printing expenses | ||||
| Legal fees and expenses | ||||
| Accounting fees and expenses | ||||
| Transfer agent and registrar fees | ||||
| Miscellaneous expenses | ||||
| Total | $ |
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 102 of the Delaware General Corporation Law, we intend to adopt provisions in our amended and restated certificate of incorporation and amended and restated bylaws that will be effective upon completion of this offering that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for:
| · | any breach of the director’s duty of loyalty to us or our stockholders; |
| · | any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| · | any act related to unlawful stock repurchases, redemptions or other distributions or payment of dividends; or |
| · | any transaction from which the director derived an improper personal benefit. |
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These limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our amended and restated certificate of incorporation to be effective upon completion of this offering will authorize us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.
As permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws will provide that:
| · | we may indemnify our directors, officers, and employees to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; |
| · | we may advance expenses to our directors, officers and employees in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and |
| · | the rights provided in our bylaws are not exclusive. |
Our amended and restated certificate of incorporation will provide that we will indemnify each person who was or is a party, or is or was threatened to be made a party, to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of us) by reason of the fact that he or she is or was, or has agreed to become, a director or officer, or is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to as an “Indemnitee”), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding and any appeal therefrom, if such Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. Our amended and restated certificate of incorporation will provide that we will indemnify any Indemnitee who was or is a party to an action or suit by or in the right of us to procure a judgment in our favor by reason of the fact that the Indemnitee is or was, or has agreed to become, a director or officer, or is or was serving, or has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably incurred in connection with such action, suit or proceeding, and any appeal therefrom, if the Indemnitee acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, our best interests, except that no indemnification shall be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to us, unless a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that any Indemnitee has been successful, on the merits or otherwise, he or she will be indemnified by us against all expenses (including attorneys’ fees) actually and reasonably incurred in connection therewith. Expenses must be advanced to an Indemnitee under certain circumstances.
The above discussion of our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law is not intended to be exhaustive and is respectively qualified in its entirety by such amended and restated certificate of incorporation, amended and restated bylaws and applicable Delaware law.
We have entered into indemnification agreements with each of our directors and officers. These indemnification agreements may require us, among other things, to indemnify our directors and officers for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by a director or officer in any action or proceeding arising out of his or her service as one of our directors or officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.
We maintain standard policies of insurance that provide coverage for certain liabilities of directors and officers of our corporation arising out of claims based on acts or omissions in their capacities as directors or officers.
101
In any underwriting agreement we enter into in connection with the sale of common stock being registered hereby, the underwriters will agree to indemnify, under certain conditions, us, our directors, our officers and persons who control us within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), against certain liabilities.
To the extent that our directors and officers are indemnified under the provisions contained in our amended and restated bylaws, Delaware law or contractual arrangements against liabilities arising under the Securities Act, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Convertible Debt
From December 2017 through November 2018, we issued unsecured convertible promissory notes (the “$7 Million Cap Notes”) in the aggregate amount of approximately $1.98 million to accredited investors pursuant to the terms of a Note Purchase Agreement dated December 2017, as amended September 2018. Each of the $7 Million Cap Notes had a maturity date of December 2019, and were generally convertible into the Company’s equity securities at a per share conversion price that was computed on the basis of a valuation cap (the “Cap”) of $7 million, or a discount rate of 20% to the next round of financing (the “Discount Rate”), whichever resulted in the issuance of a greater number of equity securities to the investors, and were converted into shares of our Series Seed-3 Preferred Stock in connection with our preferred stock financing, discussed in further detail below.
From August 2018 through April 2019, we issued unsecured convertible promissory notes (the “$14 Million Cap Notes”) in the aggregate amount of approximately $1.53 million to accredited investors pursuant to the terms of a Note Purchase Agreement dated August 2018. Each of the 14 Million Cap Notes had a maturity date of September 2020, and were generally convertible into the Company’s equity securities at a per share conversion price that was computed on the basis of a Cap of $14 million, or a Discount Rate of 15%, whichever resulted in the issuance of a greater number of equity securities to the investors, and were converted into shares of our Series Seed-4 Preferred Stock in connection with our preferred stock financing, discussed in further detail below.
In May 2019, we issued an unsecured convertible promissory note (the “May 2019 Note”) in the amount of $455,000 to an accredited investor pursuant to the terms of a Note Purchase Agreement dated May 2019. The May 2019 Note had a maturity date of September 2021, and was generally convertible into the Company’s equity securities at a per share conversion price that was computed on the basis of a Cap of $14 million, or a Discount Rate of 15%, whichever resulted in the issuance of a greater number of equity securities to the investors, and were converted into shares of our Series Seed-4 Preferred Stock in connection with our preferred stock financing, discussed in further detail below.
From June 2020 through December 2020, we issued unsecured convertible promissory notes (the “2020 Bridge Notes”) in the amount of approximately $1.57 million to accredited investors pursuant to the terms of a Note Purchase Agreement dated June 2020, as amended October 2020. The 2020 Bridge Notes have a maturity date of June 2022, and are generally convertible into the Company’s equity securities at a per share conversion price that will be computed on the basis of a Cap of $40 million or a Discount Rate of 25%, whichever results in the issuance of a greater number of equity securities to the investors. The 2020 Bridge Notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
From March 2021 through April 2021, we issued unsecured convertible promissory notes in the amount of approximately $0.4 million to accredited investors. These notes accrue interest at a rate of 3% per annum, and mature on June 1, 2022. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
102
In June 2021, we issued convertible note payables for total proceeds of approximately $1.86 million to accredited investors. The notes were issued at an original issue discount of approximately $0.24 million with principal outstanding of approximately $2.11 million. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
In June 2021, we issued a convertible note payable to our Chief Executive Officer for total proceeds of $0.10 million. The note is unsecured, has a term of twenty-three months, and accrues interests at a rate of 3% per annum. This note will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
In June 2021, we issued convertible notes payable for total proceeds of approximately $0.23 million. The notes are unsecured, have a term of twenty-three months, and accrue interest at a rate of 3% per annum. These notes will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
Simple Agreements for Future Equity
From December 2016 through August 2018, we entered into Simple Agreements for Future Equity (the “SAFEs”) with accredited investors in the aggregate amount of $870,000. The SAFEs had a Discount Rate of 20%, and were converted into shares of our Series Seed-2 Preferred Stock in connection with our preferred stock financing, discussed in further detail below.
103
Preferred Stock Financing
From July 2019 through January 2020, we issued an aggregate of 2,794,979 shares of our Series Seed-1 Preferred Stock at a purchase price of $1.4034 per share for an aggregate purchase price of approximately $3.9 million to accredited investors pursuant to the terms of a Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement (the “Preferred Stock Financing”). In connection with the Preferred Stock Financing, the SAFEs were converted into an aggregate of 774,894 shares of our Series Seed-2 Preferred Stock at a conversion price of $1.1227 per share; the $7 Million Cap Notes, including accrued interest, were converted into an aggregate of 3,615,580 shares of our Series Seed-3 Preferred Stock at a conversion price of $0.5841 per share; the $14 Million Cap Notes, including accrued interest, were converted into an aggregate of 1,331,150 shares of our Series Seed-4 Preferred Stock at a conversion price of $1.1681 per share; and the May 2019 Note, including accrued interest, was converted into 391,997 shares of our Series Seed-4 Preferred Stock at a conversion price of $1.1681 per share.
Each share of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock and Series Seed-4 Preferred Stock will convert into shares of our common stock in connection with this offering, after giving effect to the 1-for- reverse stock split.
Stock Option Exercises
From September through December 2020, employees purchased an aggregate of 97,916 shares of our common stock at an exercise price of $0.03, for total consideration of $2,937.48, upon the exercise of stock options granted pursuant to our 2017 Equity Incentive Plan. In March 2021, one employee purchased 200,000 shares of our common stock at an exercise price of $0.03 per share, for total consideration of $6,000.00, upon the exercise of stock options granted pursuant to our 2017 Equity Incentive Plan.
Stock Option Grants
During the second quarter of 2018, we granted stock options to purchase an aggregate of 1,025,000 shares of our common stock, of which options to purchase an aggregate of 1,000,000 shares of our common stock are outstanding. All such stock options have an exercise price of $0.03 per share. During the second half of 2018, we granted stock options to purchase an aggregate of 475,000 shares of our common stock, all of which are outstanding. All such stock options have an exercise price of $0.06 per share. From February 2020 through August 2020, we granted stock options to purchase an aggregate of 835,000 shares of our common stock, of which options to purchase an aggregate of 810,000 shares are outstanding. All such stock options have an exercise price of $0.25 per share. During the fourth quarter of 2020, we granted stock options to purchase an aggregate of 150,792 shares of our common stock, all of which are outstanding. All such stock options have an exercise price of $0.26 per share. In June 2021, we granted options to purchase 200,000 shares of our common stock, all of which are outstanding. All such stock options have an exercise price of $0.40 per share.
Restricted Stock Grants
On July 29, 2021, we issued 450,000 shares of restricted stock under our 2017 Equity Incentive Plan to our newly-appointed CFO.
Warrants
On July 1, 2021, we issued a warrant to purchase 200,000 shares of our common stock to a consultant as partial consideration for services provided to the Company. The warrant was fully vested upon issuance, has a term of five years, and the exercise price of the shares of common stock underlying the warrant is $0.26 per share.
Applicable Exemptions
No underwriters were used in the foregoing transactions, and no discounts or commissions were paid for the transactions described in this item. All sales of securities described in this item were exempt from the registration requirements of the Securities Act in reliance on Section 4(a)(2) of the Securities Act, Rule 701 promulgated under the Securities Act or Regulation D promulgated under the Securities Act, relating to transactions by an issuer not involving a public offering. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
104
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The registrant has filed the exhibits listed on the accompanying Exhibit Index of this registration statement.
(b) Financial Statement Schedules.
All financial statement schedules are omitted because the information called for is not required or is shown either in the financial statements or in the notes thereto.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1.) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i.) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii.) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
(iii.) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;
(2.) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
(3.) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and
(4.) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
105
(5.) That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i.) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii.) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii.) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv.) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
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| Incorporated by Reference |
||||||||
| Exhibit number |
Exhibit description | Incorporated by Reference (Form Type) | Filing Date | Filed herewith | ||||
| 1.1* | Form of Underwriting Agreement. | |||||||
| 3.1 | Certificate of Incorporation, as currently in effect. | X | ||||||
| 3.2* | Form of Amended and Restated Certificate of Incorporation, to be in effect upon completion of this offering. | |||||||
| 3.3 | Bylaws, as currently in effect. | X | ||||||
| 3.4* | Form of Amended and Restated Bylaws, to be in effect upon completion of this offering. | |||||||
| 4.1* | Specimen Stock Certificate. | |||||||
| 4.2* | Form of Representative’s Warrant. | |||||||
| 5.1* | Opinion of Procopio, Cory, Hargreaves & Savitch LLP. | |||||||
| 10.1 | Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated July 16, 2019. | X | ||||||
| 10.2 | First Amendment to Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated July 18, 2019. | X | ||||||
| 10.3(a)# | 2017 Equity Incentive Plan, as amended. | X | ||||||
| 10.3(b)# | Form Agreements under 2017 Equity Incentive Plan. | X | ||||||
| 10.4(a)#* | 2021 Equity Incentive Plan, to be in effect upon completion of this offering. | |||||||
| 10.4(b)#* | Form Agreements under 2021 Equity Incentive Plan, to be in effect upon completion of this offering. | |||||||
| 10.5#* | Form of Restricted Stock Purchase Agreement. | |||||||
| 10.6#* | Form of Indemnification Agreement for directors and officers. | |||||||
| 10.7 | Form of Note Purchase Agreement, dated June 17, 2020, and Unsecured Convertible Promissory Note. | X | ||||||
| 10.8 | Form of Unsecured Convertible Promissory Note. | X | ||||||
| 10.9 | Form of Note Amendment Agreement, dated October 14, 2020 | X | ||||||
| 10.10* | Master Services Agreement, between Tivic Health Systems Inc. and Extron Logistics LLC, dated April 27, 2019. | |||||||
| 10.11* | Letter Agreement, between Tivic Health Systems Inc. and Future Electronics Corp., dated April 6, 2020. | |||||||
| 10.12* | Form of United States Special Product Agreement for Bonded Inventory, between Tivic Health Systems Inc. and Future Electronics Corp. | |||||||
| 10.13 | Form of Note Purchase Agreement, dated June 17, 2021, and Unsecured Convertible Promissory Note. | X | ||||||
| 10.14 | Form of Unsecured Convertible Promissory Note. | X | ||||||
| 10.15 | Form of (OID) Unsecured Convertible Promissory Note. | X | ||||||
| 23.1 | Consent of Rosenberg Rich Baker Berman, P.A., independent registered public accounting firm. | X | ||||||
| 23.2* | Consent of Procopio, Cory, Hargreaves & Savitch LLP (included in Exhibit 5.1). | |||||||
| 24.1 | Power of Attorney (included on the signature page if this Registration Statement). | X | ||||||
| * | To be filed by amendment. |
| # | Indicates management contract or compensatory plan. |
| † | Portions of the exhibit, marked by brackets, have been omitted because the omitted information (i) is not material and (ii) would likely cause competitive harm if publicly disclosed. |
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Newark, State of California, on August 3, 2021.
| TIVIC HEALTH SYSTEMS, INC. | ||
| By: | /s/ Jennifer Ernst | |
| Jennifer Ernst | ||
| Chief Executive Officer | ||
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Jennifer Ernst and Briana Benz, as his or her true and lawful attorneys-in-fact and agent with full power of substitution, for him or her in any and all capacities, to sign any and all amendments to this registration statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) under the Securities Act of 1933 increasing the number of securities for which registration is sought), and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact, proxy, and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorney-in-fact, proxy and agent, or his substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| NAME | TITLE | DATE | ||
| /s/ Jennifer Ernst | Chief Executive Officer, Chairman (Principal Executive) | August 3, 2021 | ||
| Jennifer Ernst | ||||
| /s/ Briana Benz | Chief Financial Officer | August 3, 2021 | ||
| Briana Benz | (Principal Financial and Accounting Officer) | |||
| /s/ Sheryle Bolton | Director | August 3, 2021 | ||
| Sheryle Bolton | ||||
| /s/ Karen Drexler | Director | August 3, 2021 | ||
| Karen Drexler | ||||
| /s/ Dean Zikria | Director | August 3, 2021 | ||
| Dean Zikria |
108
Exhibit 3.1
CERTIFICATE OF INCORPORATION
OF
TIVIC HEALTH SYSTEMS, INC.,
a Delaware corporation
The undersigned, a natural person (the “Sole Incorporator”), for the purpose of organizing a corporation to conduct the business and promote the purposes hereunder stated, under the provisions and subject to the requirements of the laws of the State of Delaware, hereby certifies that:
ARTICLE I.
The name of this corporation is Tivic Health Systems, Inc. (the “Corporation”).
ARTICLE II.
The address of the registered office of this Corporation in the State of Delaware is 251 Little Falls Drive, Wilmington, Delaware 19808, County of New Castle, and the name of the registered agent of this Corporation at such address is Corporation Service Company.
ARTICLE III.
The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware.
ARTICLE IV.
The total number of shares of all classes of stock which the Corporation shall have authority to issue is 35,113,621 shares, of which (i) 25,000,000 shares shall be designated as common stock, par value $0.0001 per share (“Common Stock”), and (ii) 10,113,621 shares shall be designated as preferred stock, par value $0.0001 per share (“Preferred Stock”).
The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK
1. General. The voting, dividend and liquidation rights of the holders of the Common Stock are subject to and qualified by the rights, powers and preferences of the holders of the Preferred Stock set forth herein.
2. Voting. The holders of the Common Stock are entitled to one vote for each share of Common Stock held at all meetings of stockholders (and written actions in lieu of meetings).
B. PREFERRED STOCK
4,000,000 shares of the authorized Preferred Stock of the Corporation are hereby designated “Series Seed-1 Preferred Stock,” 774,894 shares of the authorized Preferred Stock of the Corporation are hereby designated “Series Seed-2 Preferred Stock,” 3,615,580 shares of the authorized Preferred Stock of the Corporation are hereby designated “Series Seed-3 Preferred Stock,” and 1,723,147 shares of the authorized Preferred Stock of the Corporation are hereby designated “Series Seed-4 Preferred Stock,” with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “sections” or “subsections” in this Part B of this Article IV refer to sections and subsections of Part B of this Article IV.
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1. Dividends.
1.1 Dividends. The Corporation shall not pay or set aside any dividends on shares of any class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) in any calendar year unless (in addition to the obtaining of any consents required elsewhere in this Certificate of Incorporation) the holders of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock and Series Seed-4 Preferred Stock then outstanding shall first receive, a dividend on each outstanding share of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable, in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable, as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable, in each case calculated on the record date for determination of holders entitled to receive such dividend, or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable, determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (B) multiplying such fraction by an amount equal to the Series Seed-1 Original Issue Price, Series Seed-2 Original Issue Price, Series Seed-3 Original Issue Price or Series Seed-4 Original Issue Price (each as defined below), as applicable; provided that, if the Corporation declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Corporation, the dividend payable to the holders of Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable, pursuant to this Section 1 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest dividend on the Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, as applicable. The “Original Issue Price” shall mean (i) in the case of the Series Seed-1 Preferred Stock $1.4034 per share (the “Series Seed-1 Original Issue Price”), (ii) in the case of the Series Seed-2 Preferred Stock $1.1227 per share (the “Series Seed-2 Original Issue Price”), (iii) in the case of the Series Seed-3 Preferred Stock $0.5841 per share (the “Series Seed-3 Original Issue Price”), and (iv) in the case of the Series Seed-4 Preferred Stock $1.1681 per share (the “Series Seed-4 Original Issue Price”), each as subject to appropriate adjustment in the event of any stock splits and combinations of shares and for dividends paid on the Series Seed-1 Preferred Stock, Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock or Series Seed-4 Preferred Stock, in shares of such stock, respectively. Notwithstanding anything to the contrary in this Section 1.1, all series of Preferred Stock shall be pari passu with respect to one another regarding dividends (i.e., in no event shall the effective dividend rate declared on one series of Preferred Stock be greater than that of another series of Preferred Stock).
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1.2 Non-Cash Dividends. Whenever a dividend provided for in this Section 1 shall be payable in property other than cash, the value of such dividend shall be deemed to be the fair market value of such property as determined in good faith by the Board.
2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.
2.1 Preferential Payments to Holders of Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, and in the event of a Deemed Liquidation Event (as defined below), the holders of shares of Preferred Stock then outstanding shall be entitled to be paid out of the consideration payable to stockholders in such Deemed Liquidation Event or out of the Available Proceeds (as defined below), as applicable, before any payment shall be made to the holders of Common Stock by reason of their ownership thereof, on a pari passu basis, an amount per share equal to the greater of (A) (i) with respect to the holders of shares of Series Seed-1 Preferred Stock, the Series Seed-1 Original Issue Price, plus any dividends declared but unpaid thereon; (ii) with respect to the holders of shares of Series Seed-2 Preferred Stock, the Series Seed-2 Original Issue Price, plus any dividends declared but unpaid thereon; (iii) with respect to the holders of shares of Series Seed-3 Preferred Stock, the Series Seed-3 Original Issue Price, plus any dividends declared but unpaid thereon; or (iv) with respect to the holders of shares of Series Seed-4 Preferred Stock, the Series Seed-4 Original Issue Price, plus any dividends declared but unpaid thereon, and (B) (i) with respect to the holders of shares of Series Seed-1 Preferred Stock such amount per share as would have been payable had all shares of Series Seed-1 Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount per share of Series Seed-1 Preferred Stock payable pursuant to this sentence is hereinafter referred to as the “Series Seed-1 Preferred Liquidation Amount”), (ii) with respect to the holders of shares of Series Seed-2 Preferred Stock such amount per share as would have been payable had all shares of Series Seed-2 Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount per share of Series Seed-2 Preferred Stock payable pursuant to this sentence is hereinafter referred to as the “Series Seed-2 Preferred Liquidation Amount”), (iii) with respect to the holders of shares of Series Seed-3 Preferred Stock such amount per share as would have been payable had all shares of Series Seed-3 Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount per share of Series Seed-3 Preferred Stock payable pursuant to this sentence is hereinafter referred to as the “Series Seed-3 Preferred Liquidation Amount”), (iv) with respect to the holders of shares of Series Seed-4 Preferred Stock such amount per share as would have been payable had all shares of Series Seed-4 Preferred Stock been converted into Common Stock pursuant to Section 4 immediately prior to such liquidation, dissolution, winding up or Deemed Liquidation Event (the amount per share of Series Seed-4 Preferred Stock payable pursuant to this sentence is hereinafter referred to as the “Series Seed-4 Preferred Liquidation Amount” and, together with the Series Seed-1 Preferred Liquidation Amount, Series Seed-2 Preferred Liquidation Amount and Series Seed-3 Preferred Liquidation Amount, the “Preferred Liquidation Amount”). If upon any such liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, the assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Preferred Stock the full amount to which they shall be entitled under this Subsection 2.1, the holders of shares of Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.
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2.2 Payments to Holders of Common Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or Deemed Liquidation Event, after the payment in full of all preferential amounts required to be paid to the holders of shares of Preferred Stock pursuant to Section 2.1, the remaining assets of the Corporation available for distribution to its stockholders or, in the case of a Deemed Liquidation Event, the consideration not payable to the holders of shares of Preferred Stock pursuant to Section 2.1 or the remaining Available Proceeds, as the case may be, shall be distributed among the holders of Common Stock, pro rata based on the number of shares held by each such holder.
2.3 Deemed Liquidation Events.
2.3.1 Definition. Each of the following events shall be considered a “Deemed Liquidation Event” unless the holders of at least a majority of the outstanding Preferred Stock (voting together as a single class on an as-converted basis) elect otherwise by written notice sent to the Corporation at least seven (7) days prior to the effective date of any such event:
(a) merger or consolidation in which
| (i) | the Corporation is a constituent party, or |
| (ii) | a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation, |
except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, at least a majority, by voting power, of the capital stock of (1) the surviving or resulting corporation; or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger or consolidation, the parent corporation of such surviving or resulting corporation; or
(b) the sale, lease, transfer, exclusive license that is the functional equivalent of a sale of all or substantially all of the intellectual property of the Corporation, or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole or the sale or disposition (whether by merger, consolidation or otherwise, and whether in a single transaction or a series of related transactions) of one or more subsidiaries of the Corporation if substantially all of the assets of the Corporation and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Corporation.
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2.3.2 Effecting a Deemed Liquidation Event.
(a) The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(i) unless the agreement or plan of merger or consolidation for such transaction (the “Merger Agreement”) provides that the consideration payable to the stockholders of the Corporation in such Deemed Liquidation Event shall be paid to the holders of capital stock of the Corporation in accordance with Subsections 2.1 and 2.2.
(b) In the event of a Deemed Liquidation Event referred to in Subsection 2.3.1(a)(ii) or 2.3.1(b), if the Corporation does not effect a dissolution of the Corporation under the Delaware General Corporation Law within ninety (90) days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice to each holder of Preferred Stock no later than the ninetieth (90th) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause to require the redemption of such shares of Preferred Stock, and (ii) if the holders of a majority of the outstanding Preferred Stock (as a single class on an as-converted basis) so request in a written instrument delivered to the Corporation not later than one hundred twenty (120) days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or technology licensed, as determined in good faith by the Board of Directors of the Corporation), together with any other assets of the Corporation available for distribution to its stockholders, all to the extent permitted by Delaware law governing distributions to stockholders (the “Available Proceeds”), on the one hundred fiftieth (150th) day after such Deemed Liquidation Event, to redeem all outstanding shares of each series of Preferred Stock at a price per share equal to the Preferred Liquidation Amount for such series of Preferred Stock. Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall redeem a pro rata portion of each holder’s shares of Preferred Stock to the fullest extent of such Available Proceeds, based on the respective amounts which would otherwise be payable in respect of the shares to be redeemed if the Available Proceeds were sufficient to redeem all such shares, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. Prior to the distribution or redemption provided for in this Subsection 2.3.2(b), the Corporation shall not expend or dissipate the consideration received for such Deemed Liquidation Event, except to discharge expenses incurred in connection with such Deemed Liquidation Event or in the ordinary course of business.
2.3.3 Amount Deemed Paid or Distributed. The amount deemed paid or distributed to the holders of capital stock of the Corporation upon any such merger, consolidation, sale, transfer, exclusive license, other disposition or redemption shall be the cash or the value of the property, rights or securities paid or distributed to such holders by the Corporation or the acquiring person, firm or other entity. The value of such property, rights or securities shall be determined in good faith by the Board of Directors of the Corporation.
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3. Voting.
3.1 General. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which such shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of this Certificate of Incorporation, holders of Preferred Stock shall vote together with the holders of Common Stock as a single class and on an as-converted to Common Stock basis.
3.2 Election of Directors. (i) The holders of record of the shares of Preferred Stock, exclusively and as a separate class, shall, at any time when at least 2,419,099 shares of Preferred Stock are outstanding (as adjusted for subsequent stock dividends, splits, combinations or similar events), be entitled to elect two directors of the Corporation (each a “Preferred Director”) (provided, for administrative convenience, the initial Preferred Director(s) may also be appointed by the Board of Directors in connection with the approval of the initial issuance of Preferred Stock without a separate action by the holders of a majority of Preferred Stock); (ii) the holders of record of the shares of Common Stock, exclusively and as a separate class, shall be entitled to elect two directors of the Corporation; and (iii) the holders of record of at least (x) a majority of the shares of Common Stock, and (y) a majority of the shares of Preferred Stock, exclusively and voting as separate classes, shall be entitled to elect the balance of the total number of directors of the Corporation (each, an “At-Large Director”) (provided, for administrative convenience, the initial At-Large Director(s) may also be appointed by the Board of Directors in connection with the approval of the initial issuance of Preferred Stock without a separate action by the holders of a majority of Common Stock and a majority of Preferred Stock). Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class(es) or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Preferred Stock and/or Common Stock, as the case may be, fail to elect a sufficient number of directors to fill all directorships for which they are entitled to elect directors, voting exclusively and as a separate class, pursuant to the first sentence of this Subsection 3.2, then any directorship not so filled shall remain vacant until such time as the holders of the Preferred Stock and/or Common Stock, as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship, voting exclusively and as a separate class. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this Subsection 3.2, a vacancy in any directorship filled by the holders of any class or series shall be filled only by vote or written consent in lieu of a meeting of the holders of such class or series or by any remaining director or directors elected by the holders of such class or series pursuant to this Subsection 3.2.
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3.3 Preferred Stock Protective Provisions. At any time when at least 2,419,099 shares of Preferred Stock are outstanding (as adjusted for subsequent stock dividends, splits, combinations or similar events), the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or the Certificate of Incorporation) the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) as a single class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:
3.3.1 adversely change rights of the Preferred Stock by amendment of the Corporation’s Certificate of Incorporation or Bylaws;
3.3.2 purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the Corporation other than (i) redemptions of or dividends or distributions on the Preferred Stock as expressly authorized herein, (ii) dividends or other distributions payable on the Common Stock solely in the form of additional shares of Common Stock and (iii) repurchases of stock from former employees, officers, directors, consultants or other persons who performed services for the Corporation or any subsidiary in connection with the cessation of such employment or service at no higher than the original purchase price therefor, or (iv) as approved by the Board of Directors; or
3.3.3 issue any equity securities of the Corporation at a price per share below the Series Seed-1 Preferred Original Issue Price (other than Exempted Securities, as defined below);
4. Optional Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):
4.1 Right to Convert.
4.1.1 Conversion Ratio. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Common Stock as is determined by dividing the applicable Original Issue Price by the Applicable Conversion Price (as defined below) in effect at the time of conversion. The “Series Seed-1 Conversion Price” shall initially be equal to $1.4034 per share of Series Seed-1 Preferred Stock. The “Series Seed-2 Conversion Price” shall initially be equal to $1.1227 per share of Series Seed-2 Preferred Stock. The “Series Seed-3 Conversion Price” shall initially be equal to $0.5841 per share of Series Seed-3 Preferred Stock. The “Series Seed-4 Conversion Price” shall initially be equal to $1.1681 per share of Series Seed-4 Preferred Stock. The Series Seed-1 Conversion Price, the Series Seed-2 Conversion Price. the Series Seed-3 Conversion Price and the Series Seed-4 Conversion Price shall be referred to, collectively, as the “Conversion Price” and individually, as the “Applicable Conversion Price.” Such initial Conversion Price, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.
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4.1.2 Termination of Conversion Rights. In the event of a notice of redemption of any shares of Preferred Stock pursuant to Section 2.3.2(b), the Conversion Rights of the shares designated for redemption shall terminate at the close of business on the last full day preceding the date fixed for redemption, unless the redemption price is not fully paid on such redemption date, in which case the Conversion Rights for such shares shall continue until such price is paid in full. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock.
4.2 Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors of the Corporation. Whether or not fractional shares would be issuable upon such conversion shall be determined on the basis of the total number of shares of Preferred Stock the holder is at the time converting into Common Stock and the aggregate number of shares of Common Stock issuable upon such conversion.
4.3 Mechanics of Conversion.
4.3.1 Notice of Conversion. In order for a holder of Preferred Stock to voluntarily convert shares of Preferred Stock into shares of Common Stock, such holder shall (a) provide written notice to the Corporation’s transfer agent at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent) that such holder elects to convert all or any number of such holder’s shares of Preferred Stock and, if applicable, any event on which such conversion is contingent and (b) if such holder’s shares are certificated, surrender the certificate or certificates for such shares of Preferred Stock (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate), at the office of the transfer agent for the Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent). Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the shares of Common Stock to be issued. If required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his, her or its attorney duly authorized in writing. The close of business on the date of receipt by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) of such notice and, if applicable, certificates (or lost certificate affidavit and agreement) shall be the time of conversion (the “Conversion Time”), and the shares of Common Stock issuable upon conversion of the specified shares shall be deemed to be outstanding of record as of such date. The Corporation shall, as soon as practicable after the Conversion Time, (i) issue and deliver to such holder of Preferred Stock, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion in accordance with the provisions hereof and a certificate for the number (if any) of the shares of Preferred Stock represented by the surrendered certificate that were not converted into Common Stock, (ii) pay in cash such amount as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and (iii) pay all declared but unpaid dividends on the shares of Preferred Stock converted.
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4.3.2 Reservation of Shares. The Corporation shall at all times when the Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued capital stock, for the purpose of effecting the conversion of the Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation shall take such corporate action as may be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate of Incorporation.
4.3.3 Effect of Conversion. All shares of Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares shall immediately cease and terminate at the Conversion Time, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor, to receive payment in lieu of any fraction of a share otherwise issuable upon such conversion as provided in Subsection 4.2 and to receive payment of any dividends declared but unpaid thereon. Any shares of Preferred Stock so converted shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.
4.3.4 No Further Adjustment. Upon any such conversion, no adjustment to the Applicable Conversion Price of any series of Preferred Stock shall be made for any declared but unpaid dividends on the Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.
4.3.5 Taxes. The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.
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4.4 Adjustments to Conversion Price for Diluting Issues.
4.4.1 Special Definitions. For purposes of this Article IV, the following definitions shall apply:
(a) “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.
(b) “Original Issue Date” shall mean the date on which the first share of Preferred Stock was issued.
(c) “Convertible Securities” shall mean any evidences of indebtedness, shares or other securities directly or indirectly convertible into or exchangeable for Common Stock, but excluding Options.
(d) “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Subsection 4.4.3 below, deemed to be issued) by the Corporation after the Original Issue Date, other than (1) the following shares of Common Stock and (2) shares of Common Stock deemed issued pursuant to the following Options and Convertible Securities (clauses (1) and (2), collectively, “Exempted Securities”):
| (i) | shares of Common Stock, Options or Convertible Securities issued as a dividend or distribution on Preferred Stock; |
| (ii) | shares of Common Stock or Convertible Securities actually issued upon the exercise of Options or shares of Common Stock actually issued upon the conversion or exchange of Convertible Securities, in each case provided such issuance is pursuant to the terms of such Option or Convertible Security; |
| (iii) | shares of Common Stock, Options or Convertible Securities issued by reason of a dividend, stock split, split-up or other distribution on shares of Common Stock that is covered by Subsection 4.5, 4.6, 4.7 or 4.8; |
| (iv) | shares of Common Stock or Options issued to employees or directors of, or consultants or advisors to, the Corporation or any of its subsidiaries pursuant to a plan, agreement or arrangement approved by the Board of Directors of the Corporation in an aggregate amount not to exceed 1,140,073 from the Original Issue Date through the one-year anniversary of the Original Issue Date (but which limitation on the aggregate amount shall not apply to issuances after the one-year anniversary of the Original Issue Date); |
| (v) | shares of Common Stock, Options or Convertible Securities issued to banks, equipment lessors or other financial institutions, or to real property lessors, pursuant to a debt financing, equipment leasing or real property leasing transaction approved by the Board of Directors of the Corporation; |
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| (vi) | shares of Common Stock, Options or Convertible Securities issued as acquisition consideration pursuant to the acquisition of another corporation by the Corporation by merger, purchase of substantially all of the assets or other reorganization or to a joint venture agreement, provided that such issuances are approved by the Board of Directors of the Corporation; |
| (vii) | shares of Common Stock, Options or Convertible Securities issued in connection with sponsored research, collaboration, technology license, development, OEM, marketing, manufacturing or other similar agreements or strategic partnerships approved by the Board of Directors of the Corporation or any other arrangements involving vendors, customers, or other corporate partners, the terms of which business relationship with such entity are approved by the Board of Directors; or |
| (viii) | shares of Common Stock, Options or Convertible Securities issued to any purchase agreement for Preferred Stock; or |
| (ix) | shares of Common Stock that are otherwise excluded by the written consent or affirmative vote of the holders of a majority of the then outstanding Preferred Stock. |
4.4.2 No Adjustment of Conversion Price. No adjustment in the Conversion Price for a series of Preferred Stock shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the holders of a majority of the outstanding shares of such Preferred Stock agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.
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4.4.3 Deemed Issue of Additional Shares of Common Stock.
(a) If the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.
(b) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, are revised as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase or decrease in the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any such Option or Convertible Security or (2) any increase or decrease in the consideration payable to the Corporation upon such exercise, conversion and/or exchange, then, effective upon such increase or decrease becoming effective, the Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.
(c) If the terms of any Option or Convertible Security (excluding Options or Convertible Securities which are themselves Exempted Securities), the issuance of which did not result in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4 (either because the consideration per share (determined pursuant to Subsection 4.4.5) of the Additional Shares of Common Stock subject thereto was equal to or greater than the Conversion Price then in effect, or because such Option or Convertible Security was issued before the Original Issue Date), are revised after the Original Issue Date as a result of an amendment to such terms or any other adjustment pursuant to the provisions of such Option or Convertible Security (but excluding automatic adjustments to such terms pursuant to anti-dilution or similar provisions of such Option or Convertible Security) to provide for either (1) any increase in the number of shares of Common Stock issuable upon the exercise, conversion or exchange of any such Option or Convertible Security or (2) any decrease in the consideration payable to the Corporation upon such exercise, conversion or exchange, then such Option or Convertible Security, as so amended or adjusted, and the Additional Shares of Common Stock subject thereto (determined in the manner provided in Subsection 4.4.3(a) shall be deemed to have been issued effective upon such increase or decrease becoming effective.
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(d) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, the Conversion Price shall be readjusted to such Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.
(e) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to the Conversion Price provided for in this Subsection 4.4.3 shall be effected at the time of such issuance or amendment based on such number of shares or amount of consideration without regard to any provisions for subsequent adjustments (and any subsequent adjustments shall be treated as provided in clauses (b) and (c) of this Subsection 4.4.3). If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, cannot be calculated at all at the time such Option or Convertible Security is issued or amended, any adjustment to the Conversion Price that would result under the terms of this Subsection 4.4.3 at the time of such issuance or amendment shall instead be effected at the time such number of shares and/or amount of consideration is first calculable (even if subject to subsequent adjustments), assuming for purposes of calculating such adjustment to the Conversion Price that such issuance or amendment took place at the time such calculation can first be made.
4.4.4 Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4.4.3), without consideration or for a consideration per share less than the Conversion Price for a series of Preferred Stock in effect immediately prior to such issue, then the Conversion Price for such series of Preferred Stock shall be reduced, concurrently with such issue, to a price (calculated to the nearest one-hundredth of a cent) determined in accordance with the following formula:
CP2 = CP1* (A + B) ÷ (A + C).
For purposes of the foregoing formula, the following definitions shall apply:
(a) “CP2” shall mean the Conversion Price for a series of Preferred Stock in effect immediately after such issue or deemed issue of Additional Shares of Common Stock
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(b) “CP1” shall mean the Conversion Price for a series of Preferred Stock in effect immediately prior to such issue or deemed issue of Additional Shares of Common Stock;
(c) “A” shall mean the number of shares of Common Stock outstanding immediately prior to such issue of Additional Shares of Common Stock (treating for this purpose as outstanding all shares of Common Stock issuable upon exercise of Options outstanding immediately prior to such issue or upon conversion or exchange of Convertible Securities (including the Preferred Stock) outstanding (assuming exercise of any outstanding Options therefor) immediately prior to such issue);
(d) “B” shall mean the number of shares of Common Stock that would have been issued if such Additional Shares of Common Stock had been issued at a price per share equal to CP1 (determined by dividing the aggregate consideration received by the Corporation in respect of such issue by CP1); and
(e) “C” shall mean the number of such Additional Shares of Common Stock issued in such transaction.
4.4.5 Determination of Consideration. For purposes of this Subsection 4.4, the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:
(a) Cash and Property: Such consideration shall:
| (i) | insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation, excluding amounts paid or payable for accrued interest; |
| (ii) | insofar as it consists of property other than cash, be computed at the fair market value thereof at the time of such issue, as determined in good faith by the Board of Directors of the Corporation; and |
| (iii) | in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (i) and (ii) above, as determined in good faith by the Board of Directors of the Corporation. |
(b) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Subsection 4.4.3, relating to Options and Convertible Securities, shall be determined by dividing:
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| (i) | The total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by |
| (ii) | the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities. |
4.4.6 Multiple Closing Dates. In the event the Corporation shall issue on more than one date Additional Shares of Common Stock that are a part of one transaction or a series of related transactions and that would result in an adjustment to the Conversion Price pursuant to the terms of Subsection 4.4.4, and such issuance dates occur within a period of no more than ninety (90) days from the first such issuance to the final such issuance, then, upon the final such issuance, the Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).
4.5 Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Applicable Conversion Price of each series of Preferred Stock in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding. If the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock, the Applicable Conversion Price of each series of Preferred Stock in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each such series shall be decreased in proportion to such decrease in the aggregate number of shares of Common Stock outstanding. Any adjustment under this subsection shall become effective at the close of business on the date the subdivision or combination becomes effective.
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4.6 Adjustment for Certain Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable on the Common Stock in additional shares of Common Stock, then and in each such event the Applicable Conversion Price of each series of Preferred Stock in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Applicable Conversion Price of each series of Preferred Stock then in effect by a fraction:
(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.
Notwithstanding the foregoing (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Applicable Conversion Price of each series of Preferred Stock shall be recomputed accordingly as of the close of business on such record date and thereafter the Applicable Conversion Price of each series of Preferred Stock shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions; and (b) that no such adjustment shall be made if the holders of such series of Preferred Stock simultaneously receive a dividend or other distribution of shares of Common Stock in a number equal to the number of shares of Common Stock as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.
4.7 Adjustments for Other Dividends and Distributions. In the event the Corporation at any time or from time to time after the Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation (other than a distribution of shares of Common Stock in respect of outstanding shares of Common Stock) or in other property and the provisions of Section 1 do not apply to such dividend or distribution, then and in each such event the holders of Preferred Stock shall receive, simultaneously with the distribution to the holders of Common Stock, a dividend or other distribution of such securities or other property in an amount equal to the amount of such securities or other property as they would have received if all outstanding shares of Preferred Stock had been converted into Common Stock on the date of such event.
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4.8 Adjustment for Merger or Reorganization, etc. Subject to the provisions of Subsection 2.3, if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not the Preferred Stock) is converted into or exchanged for securities, cash or other property (other than a transaction covered by Subsections 4.4, 4.6 or 4.7), then, following any such reorganization, recapitalization, reclassification, consolidation or merger, each share of Preferred Stock shall thereafter be convertible in lieu of the Common Stock into which it was convertible prior to such event into the kind and amount of securities, cash or other property which a holder of the number of shares of Common Stock of the Corporation issuable upon conversion of one share of Preferred Stock immediately prior to such reorganization, recapitalization, reclassification, consolidation or merger would have been entitled to receive pursuant to such transaction; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors of the Corporation) shall be made in the application of the provisions in this Section 4 with respect to the rights and interests thereafter of the holders of the Preferred Stock, to the end that the provisions set forth in this Section 4 (including provisions with respect to changes in and other adjustments of the Applicable Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any securities or other property thereafter deliverable upon the conversion of the Preferred Stock.
4.9 Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Applicable Conversion Price of any series of Preferred Stock pursuant to this Section 4, the Corporation at its expense shall, as promptly as reasonably practicable but in any event not later than ten (10) days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of such series of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which such series of Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of any series of Preferred Stock (but in any event not later than ten (10) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Applicable Conversion Price then in effect, and (ii) the number of shares of Common Stock and the amount, if any, of other securities, cash or property which then would be received upon the conversion of such series of Preferred Stock.
4.10 Notice of Record Date. In the event:
(a) the Corporation shall take a record of the holders of its Common Stock (or other capital stock or securities at the time issuable upon conversion of the Preferred Stock) for the purpose of entitling or enabling them to receive any dividend or other distribution, or to receive any right to subscribe for or purchase any shares of capital stock of any class or any other securities, or to receive any other security; or
(b) of any capital reorganization of the Corporation, any reclassification of the Common Stock of the Corporation, or any Deemed Liquidation Event; or
(c) of the voluntary or involuntary dissolution, liquidation or winding-up of the Corporation,
then, and in each such case, the Corporation will send or cause to be sent to the holders of the Preferred Stock a notice specifying, as the case may be, (i) the record date for such dividend, distribution or right, and the amount and character of such dividend, distribution or right, or (ii) the effective date on which such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up is proposed to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such other capital stock or securities at the time issuable upon the conversion of the Preferred Stock) shall be entitled to exchange their shares of Common Stock (or such other capital stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, transfer, dissolution, liquidation or winding-up, and the amount per share and character of such exchange applicable to the Preferred Stock and the Common Stock. Such notice shall be sent at least ten (10) days prior to the record date or effective date for the event specified in such notice.
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5. Mandatory Conversion.
5.1 Trigger Events. Upon either (a) the closing of the sale of shares of Common Stock to the public in a firm-commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, resulting in at least $20 million of gross proceeds to the Corporation or (b) the date and time, or the occurrence of an event, specified by vote or written consent of the holders of a majority of the outstanding Preferred Stock (voting as a single class on an as-converted basis) (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), then (i) all outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate as calculated pursuant to Subsection 4.1.1 and (ii) such shares may not be reissued by the Corporation.
5.2 Procedural Requirements. All holders of record of shares of Preferred Stock shall be sent written notice of the Mandatory Conversion Time and the place designated for mandatory conversion of all such shares of Preferred Stock pursuant to this Section 5. Such notice need not be sent in advance of the occurrence of the Mandatory Conversion Time. Upon receipt of such notice, each holder of shares of Preferred Stock in certificated form shall surrender his, her or its certificate or certificates for all such shares (or, if such holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation at the place designated in such notice. If so required by the Corporation, any certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his, her or its attorney duly authorized in writing. All rights with respect to the Preferred Stock converted pursuant to Subsection 5.1, including the rights, if any, to receive notices and vote (other than as a holder of Common Stock), will terminate at the Mandatory Conversion Time (notwithstanding the failure of the holder or holders thereof to surrender any certificates at or prior to such time), except only the rights of the holders thereof, upon surrender of any certificate or certificates of such holders (or lost certificate affidavit and agreement) therefor, to receive the items provided for in the next sentence of this Subsection 5.2. As soon as practicable after the Mandatory Conversion Time and, if applicable, the surrender of any certificate or certificates (or lost certificate affidavit and agreement) for Preferred Stock, the Corporation shall (a) issue and deliver to such holder, or to his, her or its nominees, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and (b) pay cash as provided in Subsection 4.2 in lieu of any fraction of a share of Common Stock otherwise issuable upon such conversion and the payment of any declared but unpaid dividends on the shares of Preferred Stock converted. Such converted Preferred Stock shall be retired and cancelled and may not be reissued as shares of such series, and the Corporation may thereafter take such appropriate action (without the need for stockholder action) as may be necessary to reduce the authorized number of shares of Preferred Stock accordingly.
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6. Redemption. The shares of Preferred Stock shall be non-redeemable.
7. Redeemed or Otherwise Acquired Shares. Any shares of Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries shall be automatically and immediately cancelled and retired and shall not be reissued, sold or transferred. Neither the Corporation nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Preferred Stock following redemption.
8. Waiver. Any of the rights, powers, preferences and other terms of the Preferred Stock set forth herein may be waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of holders of a majority of the outstanding shares of Preferred Stock.
9. Notices. Any notice required or permitted by the provisions of this Article IV to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the Delaware General Corporations Law, and shall be deemed sent upon such mailing or electronic transmission.
ARTICLE V.
The name and mailing address of the Sole Incorporator are as follows:
Roger C. Rappoport, Esq.
Procopio, Cory, Hargreaves & Savitch LLP
525 B Street, Suite 2200
San Diego CA 92101
ARTICLE VI.
Subject to any additional vote required by the Certificate of Incorporation or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors of the Corporation is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VII.
Subject to any additional vote required by the Certificate of Incorporation, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation.
ARTICLE VIII.
Elections for directors need not be by ballot unless the Bylaws of the Corporation shall so provide.
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ARTICLE IX.
Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors of the Corporation or in the Bylaws of the Corporation.
ARTICLE X.
To the fullest extent permitted under law, the Corporation renounces any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, or in being informed about, an Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of, (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any affiliate, partner, member, director, stockholder, employee, agent or other related person of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, “Covered Persons”), unless such matter, transaction or interest is presented to, or acquired, created or developed by, or otherwise comes into the possession of, a Covered Person expressly and solely in such Covered Person’s capacity as a director of the Corporation.
ARTICLE XI.
1. Limitation of Director Liability. The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. In furtherance of the foregoing, to the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director; provided, however, that this provision shall not eliminate or limit the liability of a Director: (i) for any breach of the Director’s duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve material misconduct or a knowing violation of law; (iii) under the Delaware General Corporation Law; or (iv) for any transaction from which the Director derived an improper personal benefit. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article XI to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended
2. Indemnification of Agents. To the fullest extent permitted by applicable law, this Corporation is authorized to provide indemnification of any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative, or investigative, by reason of the fact that such person, or his or her testator or testate, is or was a director, officer, employee, or agent of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer, employee, or agent at the request of the Corporation or any predecessor to the Corporation through bylaw provisions, agreements with the agents, vote of stockholders or disinterested directors, or otherwise in excess of the indemnification otherwise permitted by Section 145 of the Delaware General Corporations Law, subject only to applicable limits set forth in Sections 102(b)(7) and 145 of the Delaware General Corporations Law.
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3. Subsequent Amendment. No amendment, termination or repeal of this article or relevant provisions of the Delaware General Corporations Law or any other applicable laws shall affect or diminish in any way the rights of any person, as set forth in Article XI, Section 2 (above), to indemnification (nor increase the liability of any such person) under the provisions hereof in connection with any action or proceeding arising out of, or relating to, any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal.
4. Subsequent Legislation. If the Delaware General Corporations Law or any other applicable law is amended after approval by the stockholders of this article to further expand the indemnification permitted to directors or officers of the Corporation, then the Corporation shall indemnify such person to the fullest extent permissible under the Delaware General Corporations Law or other applicable law, as so amended.
ARTICLE XII.
Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (A) any derivative action or proceeding brought on behalf of the Corporation, (B) any action or proceeding asserting a claim of breach of a fiduciary duty owed by any director or officer of the Corporation to the Corporation or the Corporation’s stockholders, (C) any action or proceeding asserting a claim against the Corporation arising pursuant to any provision of the Delaware General Corporation Law or the Corporation’s Certificate of Incorporation or Bylaws, or (D) any action or proceeding asserting a claim against the Corporation governed by the internal affairs doctrine.
ARTICLE XIII.
For purposes of Section 500 of the California Corporations Code (to the extent applicable), in connection with any repurchase of shares of Common Stock permitted under this Certificate of Incorporation from employees, officers, directors or consultants of the Corporation in connection with a termination of employment or services pursuant to agreements or arrangements approved by the Board of Directors of the Corporation (in addition to any other consent required under this Certificate of Incorporation), such repurchase may be made without regard to any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined in Section 500 of the California Corporations Code). Accordingly, for purposes of making any calculation under California Corporations Code Section 500 in connection with such repurchase, the amount of any “preferential dividends arrears amount” or “preferential rights amount” (as those terms are defined therein) shall be deemed to be zero (0).
* * *
[Signature Page Follows]
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IN WITNESS WHEREOF, this Certificate of Incorporation has been subscribed this 3rd day of June, 2021, by the undersigned who affirms that the statements made hereto are true and correct.
| /s/ Roger C. Rappoport | |
| Roger C. Rappoport, Sole Incorporator |
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Exhibit 3.3
BYLAWS
OF
Tivic Health Systems, Inc.
(A DELAWARE CORPORATION)
TABLE OF CONTENTS
| Page | ||
| ARTICLE I | OFFICES | 3 |
| Section 1. | Registered Office | 3 |
| Section 2. | Other Offices | 3 |
| ARTICLE II | CORPORATE SEAL | 3 |
| Section 1. | Corporate Seal | 3 |
| ARTICLE III | STOCKHOLDERS’ MEETINGS | 3 |
| Section 1. | Place of Meetings | 3 |
| Section 2. | Annual Meeting | 3 |
| Section 3. | Special Meetings | 4 |
| Section 4. | Notice of Meetings | 4 |
| Section 5. | Quorum | 5 |
| Section 6. | Adjournment and Notice of Adjourned Meetings | 5 |
| Section 7. | Voting Rights | 5 |
| Section 8. | Joint Owners of Stock | 6 |
| Section 9. | List of Stockholders | 6 |
| Section 10. | Action Without Meeting | 6 |
| Section 11. | Organization | 7 |
| ARTICLE IV | DIRECTORS | 8 |
| Section 1. | Number of Directors | 8 |
| Section 2. | Powers | 8 |
| Section 3. | Term of Directors | 8 |
| Section 4. | Vacancies | 9 |
| Section 5. | Resignation | 9 |
| Section 6. | Removal | 10 |
| Section 7. | Meetings | 10 |
| Section 8. | Quorum and Voting | 11 |
| Section 9. | Action Without Meeting | 11 |
| Section 10. | Fees and Compensation | 11 |
| Section 11. | Committees | 11 |
| Section 12. | Organization | 12 |
| ARTICLE V | OFFICERS | 13 |
| Section 1. | Officers Designated | 13 |
| Section 2. | Tenure and Duties of Officers | 13 |
| Section 3. | Delegation of Authority | 14 |
| Section 4. | Resignations | 14 |
| Section 5. | Removal | 15 |
| ARTICLE VI | EXECUTION OF CORPORATE INSTRUMENTS AND VOTINGOF SECURITIES OWNED BY THE CORPORATION | 15 |
| Section 1. | Execution of Corporate Instruments | 15 |
| Section 2. | Voting of Securities Owned by the Corporation | 15 |
| ARTICLE VII | SHARES OF STOCK | 15 |
| Section 1. | Form and Execution of Certificates | 15 |
| Section 2. | Lost Certificates | 16 |
| Section 3. | Transfers | 16 |
| Section 4. | Fixing Record Dates | 16 |
| Section 5. | Registered Stockholders | 17 |
| ARTICLE VIII | OTHER SECURITIES OF THE CORPORATION | 18 |
| Section 1. | Execution of Other Securities | 18 |
| ARTICLE IX | DIVIDENDS | 18 |
| Section 1. | Declaration of Dividends | 18 |
| Section 2. | Dividend Reserve | 18 |
| ARTICLE X | FISCAL YEAR | 19 |
| Section 1. | Fiscal Year | 19 |
| ARTICLE XI | INDEMNIFICATION | 19 |
| Section 1. | Indemnification of Directors, Officers, Employees and Other Agents | 19 |
| ARTICLE XII | NOTICES | 22 |
| Section 1. | Notices | 22 |
| ARTICLE XIII | AMENDMENTS | 24 |
| Section 1. | Amendments | 24 |
| ARTICLE XIV | RIGHT OF FIRST REFUSAL | 24 |
| Section 1. | Right of First Refusal | 24 |
| ARTICLE XV | LOANS TO OFFICERS | 27 |
| Section 1. | Loans to Officers | 27 |
| ARTICLE XVI | MISCELLANEOUS | 27 |
| Section 1. | Annual Report | 27 |
2
BYLAWS
OF
Tivic Health Systems, Inc.
(A DELAWARE CORPORATION)
ARTICLE
I
OFFICES
Section 1. Registered Office. The registered office and registered agent the corporation will be as set forth in the corporation’s certificate of incorporation. The corporation may change its registered office, registered agent, or both by filing a certificate of change of registered agent and/or office with the secretary of state of the State of Delaware.
Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require.
ARTICLE
II
CORPORATE SEAL
Section 1. Corporate Seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, “Corporate Seal Delaware.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE
III
STOCKHOLDERS’ MEETINGS
Section 1. Place of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the principal office of the corporation required to be maintained pursuant to Article I, Section 2 hereof. The Board of Directors may determine that any meeting may be held solely by remote communication in accordance with Delaware law.
Section 2. Annual Meeting. The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors.
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Section 3. Special Meetings.
(a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption), or (iv) by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors shall fix. At any time or times that the corporation is subject to Section 2115(b) of the California General Corporation Law (“CGCL”), stockholders holding five percent (5%) or more of the outstanding shares shall have the right to call a special meeting of stockholders as set forth in Article IV, Section 4(c) herein. If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Article III, Section 4 of these Bylaws. If the notice is not given within sixty (60) days after the receipt of the request, the person or persons properly requesting the meeting may set the time and place of the meeting and give the notice. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held.
Section 4. Notice of Meetings. Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, date and hour and purpose or purposes of the meeting. Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.
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Section 5. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of a majority of shares present in person or represented by proxy duly authorized at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy duly authorized at the meeting and entitled to vote on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of the outstanding shares of such class or classes or series present in person or represented by proxy duly authorized at the meeting shall be the act of such class or classes or series.
Section 6. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares casting votes. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 7. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Article III, Section 9 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.
Except as may be otherwise provided in the Certificate of Incorporation or applicable law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the stockholders. Any holder of shares entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or may vote them against the proposal other than elections to office, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the shareholder is entitled to vote.
The affirmative vote of the majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the stockholder, unless the vote of a greater number or voting by classes is required by the Delaware General Corporation Law or by the Certificate of Incorporation.
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Section 8. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the Delaware General Corporation Law, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.
Section 9. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder and the class of such shares. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall be produced and kept at the time and place of meeting during the whole time thereof and may be inspected by any stockholder who is present.
Section 10. Action Without Meeting.
(a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested.
(b) No written consent shall be effective to take the corporate action referred to therein unless written consents signed by a sufficient number of stockholders to take action are delivered to the corporation in the manner required by Section (a) within sixty (60) days of the first date on which a written consent is so delivered to the corporation.
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(c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take action were delivered to the corporation as provided in Section (a). If the action which is consented to is such as would have required the filing of a certificate under any section of the Delaware General Corporation Law if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the Delaware General Corporation Law.
(d) An Electronic Transmission consenting to an action to be taken and transmitted by a stockholder or proxy holder, or by a person or persons authorized to act for a stockholder or proxy holder, shall be deemed to be written and signed for purposes of this section, provided that any such Electronic Transmission sets forth or is delivered with information from which the corporation can determine (i) that the Electronic Transmission was transmitted by the stockholder or proxy holder or by a person or persons authorized to act for the stockholder or proxy holder, and (ii) the date on which such stockholder or proxy holder or authorized person or persons transmitted such Electronic Transmission. In the event that the Board of Directors shall have instructed the officers of the corporation to solicit the vote or written consent of the stockholders of the corporation, an Electronic Transmission of a stockholder written consent given pursuant to such solicitation may be delivered to the Secretary or the President of the corporation or to a person designated by the Secretary or the President. The Secretary or the President of the corporation or a designee of the Secretary or the President shall cause any such written consent by Electronic Transmission to be reproduced in paper form and inserted into the corporate records.
Section 11. Organization.
(a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer, or, if the Chief Executive Officer is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his or her absence, an Assistant Secretary directed to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, voting at meetings of stockholders need not be by written ballot and, unless otherwise required by law, need not be conducted by inspectors of election unless so determined by the holders of shares of stock representing a majority of the votes which could be cast by the holders of all outstanding shares of stock entitled to vote thereon which are present in person or represented by proxy duly authorized at such meeting. If authorized by the Board of Directors, such requirement of a written ballot shall be satisfied by a ballot submitted by Electronic Transmission, provided that any such Electronic Transmission must either set forth or be submitted with information from which it can be determined that the Electronic Transmission was authorized by the stockholder or proxy holder.
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ARTICLE
IV
DIRECTORS
Section 1. Number of Directors.
(a) The exact number of directors of the corporation shall be fixed by the Certificate of Incorporation. If the Certificate of Incorporation does not fix the number of directors, the authorized number of directors of the corporation shall be fixed by the Board of Directors from time to time.
(b) Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient.
Section 2. Powers. Subject to the provisions of the Delaware General Corporation Law and limitations set forth in the Certificate of Incorporation and these Bylaws relating to action required to be approved by stockholders, the powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate direction of the Board of Directors.
Section 3. Term of Directors. Subject to the rights of the holders of any series of Preferred Stock, as set forth in the Certificate of Incorporation or otherwise, to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders. Each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.
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Section 4. Vacancies.
(a) Unless otherwise provided in the Certificate of Incorporation, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors may be filled by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director.
(b) If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the Delaware General Corporation Law
(c) At any time or times that the corporation is subject to §2115(b) of the CGCL, if, after the filling of any vacancy, the directors then in office who have been elected by stockholders shall constitute less than a majority of the directors then in office, then
(1) any holder or holders of an aggregate of five percent (5%) or more of the total number of shares at the time outstanding having the right to vote for those directors may call a special meeting of stockholders; or
(2) the Superior Court of the proper county shall, upon application of such stockholder or stockholders, summarily order a special meeting of the stockholders, to be held to elect the entire board, all in accordance with Section 305(c) of the CGCL. The term of office of any director shall terminate upon that election of a successor.
Section 5. Resignation. Any director may resign at any time by delivering his or her resignation to the Secretary, in writing or by Electronic Transmission, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his or her successor shall have been duly elected and qualified.
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Section 6. Removal.
(a) Subject to any limitations imposed by applicable law, and except as otherwise provided in Section 6(b) below, the Board of Directors or any director may be removed from office at any time with or without cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of voting stock of the corporation entitled to vote at an election of directors.
(b) During such time or times that the corporation is subject to Section 2115(b) of the CGCL, the Board of Directors or any individual director may be removed from office at any time without cause by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote on such removal; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against such director’s removal, or not consenting in writing to such removal, would be sufficient to elect that director if voted cumulatively at an election which the same total number of votes were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of such director’s most recent election were then being elected.
Section 7. Meetings.
(a) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors. No formal notice shall be required for a regular meeting of the Board of Directors.
(b) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer, the President or any two of the directors.
(c) Telephone Meetings. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.
(d) Notice of Meetings. Notice of the time and place of all meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting, or sent in writing to each director by first class mail, postage prepaid, at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.
(e) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.
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Section 8. Quorum and Voting.
(a) Unless the Certificate of Incorporation requires a greater number, a quorum of the Board of Directors shall consist of a majority of the total number of directors then serving; provided, however, that such number shall never be less than one-third (1/3) of the total number of directors authorized except that when one director is authorized, then one director shall constitute a quorum. At any meeting, whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws.
Section 9. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by Electronic Transmission, and such writing, writings or Electronic Transmission or Electronic Transmissions are filed with the minutes of proceedings of the Board of Directors or committee.
Section 10. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.
Section 11. Committees.
(a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation.
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(b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.
(c) Term. The Board of Directors, subject to any requirements of any outstanding series of Preferred Stock or the provisions of subsections (a) or (b) of this Bylaw, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his or her death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Article IV, Section 11 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.
Section 12. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer, or if the Chief Executive Officer is absent, the President, or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his or her absence, any Assistant Secretary directed to do so by the chairman of the meeting, shall act as secretary of the meeting.
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ARTICLE
V
OFFICERS
Section 1. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer, and the Treasurer, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers, and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.
Section 2. Tenure and Duties of Officers.
(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.
(b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President or other appointed Chief Executive Officer, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Article V, Section 2.
(c) Duties of Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The Chief Executive Officer shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The Chief Executive Officer shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time.
(d) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors or the Chief Executive Officer has been appointed and is present. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time.
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(e) Duties of Vice Presidents. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or the Chief Operating Officer or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time.
(f) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The Chief Executive Officer may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall designate from time to time.
(g) Duties of Chief Financial Officer/Treasurer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the Chief Executive Officer. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall designate from time to time. The Chief Executive Officer may direct the Treasurer or any Assistant Treasurer, or the Controller or any Assistant Controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each Controller and Assistant Controller shall perform other duties commonly incident to his or her office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer shall designate from time to time. Unless some other officer has been declared the Treasurer of the corporation, the Chief Financial Officer shall be the Treasurer.
Section 3. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.
Section 4. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors or to the Chief Executive Officer or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.
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Section 5. Removal. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors.
ARTICLE
VI
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES
OWNED BY THE CORPORATION
Section 1. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation.
All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.
Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.
Section 2. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.
ARTICLE
VII
SHARES OF STOCK
Section 1. Form and Execution of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President, Chief Executive Officer or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. Each certificate shall state upon the face or back thereof, in full or in summary, all of the powers, designations, preferences, and rights, and the limitations or restrictions of the shares authorized to be issued or shall, except as otherwise required by law, set forth on the face or back a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to this section or otherwise required by law or with respect to this section a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Except as otherwise expressly provided by law, the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
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Section 2. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or his legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.
| Section 3. | Transfers. |
(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a properly endorsed certificate or certificates for a like number of shares.
(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the Delaware General Corporation Law.
| Section 4. | Fixing Record Dates. |
(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.
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(b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.
(c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 5. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.
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ARTICLE
VIII
OTHER SECURITIES OF THE CORPORATION
Section 1. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Article VII, Section 1), may be signed by the Chairman of the Board of Directors, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.
ARTICLE
IX
DIVIDENDS
Section 1. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.
Section 2. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.
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ARTICLE
X
FISCAL YEAR
Section 1. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.
ARTICLE
XI
INDEMNIFICATION
| Section 1. | Indemnification of Directors, Officers, Employees and Other Agents. |
(a) Directors and Officers. The corporation shall indemnify its directors and officers to the fullest extent not prohibited by the Delaware General Corporation Law or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or any other applicable law, or (iv) such indemnification is required to be made under subsection (d).
(b) Employees and Other Agents. The corporation shall have power to indemnify its employees and other agents as set forth in the Delaware General Corporation Law or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person to such officers or other persons as the Board of Directors shall determine.
(c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under this Bylaw or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (d) of this Bylaw, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation, in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to the proceeding, or (ii) if such quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.
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(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Any right to indemnification or advances granted by this Bylaw to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting his claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation.
(e) Non Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the Delaware General Corporation Law or any other applicable law.
(f) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
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(g) Insurance. To the fullest extent permitted by the Delaware General Corporation Law, or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw.
(h) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation.
(i) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. If this Article XI, Section 1 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and officer to the full extent under applicable law.
(j) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply:
(1) The term “proceeding” shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.
(2) The term “expenses” shall be broadly construed and shall include, without limitation, court costs, attorneys’ fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding.
(3) The term the “corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.
(4) References to a “director,” “officer,” “employee,” or “agent” of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.
(5) References to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this Bylaw.
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ARTICLE
XII
NOTICES
| Section 1. | Notices. |
(a) Notice to Stockholders. Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, it shall be given (i) in writing, timely and duly deposited in the United States mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent, or (ii) by Electronic Transmission in accordance with Section 232 of the Delaware General Corporation Law. Without limiting the manner by which notice otherwise may be given effectively to stockholders pursuant to the Delaware General Corporation Law, the Certificate of Incorporation or these Bylaws, any notice to stockholders given by the corporation under any provision of the Delaware General Corporation Law, the Certificate of Incorporation or these Bylaws shall be effective if given by a form of Electronic Transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the corporation. Any such consent shall be deemed revoked if:
(1) the corporation is unable to deliver by Electronic Transmission two consecutive notices given by the corporation in accordance with such consent; and
(2) such inability becomes known to the Secretary or an Assistant Secretary of the corporation or to the transfer agent, or other person responsible for the giving of notice.
However, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
An “Electronic Transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved, and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
Notice by a form of Electronic Transmission shall not apply to Sections 164, 296, 311, 312 or 324 of the Delaware General Corporation Law.
(b) Notice to Directors. Any notice required to be given to any director may be given by personal delivery, by the method stated in subsection (a)(i) above, or by overnight delivery service, facsimile, or telegram, except that such notice other than one which is delivered personally shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.
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(c) Affidavit of Mailing or Electronic Transmission. An affidavit of mailing or Electronic Transmission, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.
(d) Time Notices Deemed Given. All notices given by mail or by overnight delivery service, as above provided, shall be deemed to have been given as at the time of mailing, and all notices given by Electronic Transmission or telegram shall be deemed to have been given as of the sending time recorded at time of transmission.
(e) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all directors or stockholders, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.
(f) Failure to Receive Notice. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such stockholder or such director to receive such notice.
(g) Notice to Person with Whom Communication is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.
(h) Notice to Person with Undeliverable Address. Whenever notice is required to be given, under any provision of law or the Certificate of Incorporation or Bylaws of the corporation, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this paragraph.
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ARTICLE
XIII
AMENDMENTS
Section 1. Amendments. Subject to paragraph (h) of Article XI, Section 1 of the Bylaws, these Bylaws may be amended or repealed and new Bylaws adopted by the stockholders entitled to vote. The Board of Directors shall also have the power, if such power is conferred upon the Board of Directors by the Certificate of Incorporation, to adopt, amend, or repeal Bylaws (including, without limitation, the amendment of any Bylaw setting forth the number of Directors who shall constitute the whole Board of Directors).
ARTICLE
XIV
RIGHT OF FIRST REFUSAL
Section 1. Right of First Refusal. No stockholder shall sell, assign, pledge, or in any manner transfer any of the shares of stock of the corporation or any right or interest therein, whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw:
(a) If the stockholder desires to sell or otherwise transfer any of his shares of stock, then the stockholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all or any number of the shares specified in the notice at the price and upon the terms set forth in such notice. In the event of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, and that is not otherwise exempted from the provisions of this Article XIV, Section 1, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase all or a portion of the shares, it shall give written notice to the transferring stockholder of its election and settlement for said shares shall be made as provided below in paragraph (d).
(c) The corporation may assign its rights hereunder.
(d) In the event the corporation and/or its assignee(s) elect to acquire any of the shares of the transferring stockholder as specified in said transferring stockholder’s notice, the Secretary of the corporation shall so notify the transferring stockholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said transferring stockholder’s notice; provided that if the terms of payment set forth in said transferring stockholder’s notice were other than cash against delivery, the corporation and/or its assignee(s) shall pay for said shares on the same terms and conditions set forth in said transferring stockholder’s notice.
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(e) In the event the corporation and/or its assignees(s) do not elect to acquire all of the shares specified in the transferring stockholder’s notice, said transferring stockholder may, within the sixty-day period following the expiration of the option rights granted to the corporation and/or its assignees(s) herein, transfer the shares specified in said transferring stockholder’s notice which were not acquired by the corporation and/or its assignees(s) as specified in said transferring stockholder’s notice. All shares so sold by said transferring stockholder shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer.
(f) Notwithstanding anything herein to the contrary, the following transactions shall be exempt from the provisions of this bylaw:
(1) A stockholder’s transfer of any or all shares held either during such stockholder’s lifetime or on death by will or intestacy to such stockholder’s immediate family or to any custodian or trustee for the account of such stockholder or such stockholder’s immediate family or to any limited partnership of which the stockholder, members of such stockholder’s immediate family or any trust for the account of such stockholder or such stockholder’s immediate family will be the general of limited partner(s) of such partnership. “Immediate family” as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the stockholder making such transfer.
(2) A stockholder’s bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw.
(3) A stockholder’s transfer of any or all of such stockholder’s shares to the corporation or to any other stockholder of the corporation.
(4) A stockholder’s transfer of any or all of such stockholder’s shares to a person who, at the time of such transfer, is an officer or director of the corporation.
(5) A corporate stockholder’s transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate stockholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate stockholder.
(6) A corporate stockholder’s transfer of any or all of its shares to any or all of its stockholders.
(7) A transfer by a stockholder which is a limited or general partnership or a limited liability company to any or all of its partners, members or former partners or members.
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(8) A transfer by a stockholder which is a trust to any or all of its trustees, trustors or beneficiaries or to an immediate family member, including step-children, of any such permitted transferee.
(9) A transfer by a stockholder of shares of the corporation’s Preferred Stock or Common Stock issued or issuable upon conversion of such Preferred Stock.
In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this bylaw, and there shall be no further transfer of such stock except as permitted by this bylaw.
(g) The provisions of this bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring stockholder). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the stockholders upon the express written consent of the owners of a majority of the voting power of the corporation.
(h) Any sale or transfer, or purported sale or transfer, of securities of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed.
(i) If and to the extent that there shall be a provision of this Article XIV, Section 1, and the terms of an agreement between the Company and a stockholder, the terms of such agreement shall prevail unless otherwise expressly therein set forth.
(j) Notwithstanding anything herein contained to the contrary, for so long as the corporation shall have elected to be treated as a subchapter S corporation pursuant to the Code, no stockholder shall transfer any security of the corporation to any person or entity or in any manner which would cause the S election theretofore made by corporation to be terminated or revoked. Any such transfer or attempted transfer shall be void ab initio.
(k) The certificates representing shares of stock of the corporation shall conspicuously bear the following legend so long as the foregoing right of first refusal remains in effect:
“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS WELL AS CERTAIN SHAREHOLDERS OF CORPORATION, AS PROVIDED IN THE BYLAWS OF THE CORPORATION. TRANSFER OR HYPOTHECATION OF SUCH SHARES MAY NOT BE EFFECTED OTHER THAN IN ACCORDANCE WITH THE PROVISIONS OF THE BYLAWS OF THE CORPORATION.”
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ARTICLE
XV
LOANS TO OFFICERS
Section 1. Loans to Officers. The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.
ARTICLE
XVI
MISCELLANEOUS
| Section 1. | Annual Report. |
(a) Subject to the provisions of paragraph (b) of this Bylaw, in the event the corporation is subject to Section 1501 of the CGCL, the Board of Directors shall cause an annual report to be sent to each stockholder of the corporation not later than one hundred twenty (120) days after the close of the corporation’s fiscal year. Such report shall include a balance sheet as of the end of such fiscal year and an income statement and statement of cash flows for such fiscal year, accompanied by any report thereon of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that such statements were prepared without audit from the books and records of the corporation. When there are more than 100 stockholders of record of the corporation’s shares, as determined by Section 605 of the CGCL, additional information as required by Section 1501(b) of the CGCL shall also be contained in such report, provided that if the corporation has a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Act”), that Act shall take precedence. Such report shall be sent to stockholders at least fifteen (15) days prior to the next annual meeting of stockholders after the end of the fiscal year to which it relates.
(b) If and so long as there are fewer than one hundred (100) holders of record of the corporation’s shares, the requirement of sending of an annual report to the stockholders of the corporation is hereby expressly waived.
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SECRETARY’S CERTIFICATE
OF ADOPTION OF BYLAWS
OF
Tivic Health Systems, Inc.
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of Tivic Health Systems, Inc., a Delaware corporation (the “Corporation”).
2. That the foregoing Bylaws constitute the Bylaws of the Corporation as adopted by the Board of Directors of the Corporation by unanimous written consent as of March 18, 2021, 2021.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of this 7th day of June, 2021.
| /s/ Jennifer Ernst | |
| Jennifer Ernst, Secretary |
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Exhibit 10.1
TIVIC HEALTH SYSTEMS INC.
SERIES SEED-1, SEED-2, SEED-3 AND SEED-4
PREFERRED STOCK INVESTMENT AGREEMENT
TIVIC HEALTH SYSTEMS INC.
SERIES SEED-1, SEED-2, SEED-3 AND SEED-4
PREFERRED STOCK INVESTMENT AGREEMENT
This Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement (this “Agreement”) is made as of July 16, 2019 by and among Tivic Health Systems Inc., a California corporation (the “Company”) and the investors listed on Exhibit A attached to this Agreement (each a “Purchaser” and together the “Purchasers”).
The parties hereby agree as follows.
1. PURCHASE AND SALE OF PREFERRED STOCK.
1.1 Sale and Issuance of Preferred Stock.
1.1.1 The Company shall adopt and file with the Secretary of State of the State of California on or before the Closing (as defined below) the Amended and Restated Articles of Incorporation in substantially the form of Exhibit B attached to this Agreement (as the same may be amended, restated, supplemented or otherwise modified from time to time, the “Restated Articles”).
1.1.2 Subject to the terms and conditions of this Agreement, each Purchaser agrees to purchase at the applicable Closing, and the Company agrees to sell and issue to each Purchaser at the applicable Closing, that number of shares of (w) Series Seed-4 Preferred Stock (the “Series Seed-4 Preferred Stock”) set forth opposite each Purchaser’s name on Exhibit A, at a purchase price of $1.1681 per share, (x) Series Seed-3 Preferred Stock (the “Series Seed-3 Preferred Stock”) set forth opposite each Purchaser’s name on Exhibit A, at a purchase price of $0.5841 per share, (y) Series Seed-2 Preferred Stock (the “Series Seed-2 Preferred Stock”) set forth opposite each Purchaser’s name on Exhibit A, at a purchase price of $1.1227 per share, and (z) Series Seed-1 Preferred Stock (the “Series Seed-1 Preferred Stock”) set forth opposite each Purchaser’s name on Exhibit A, at a purchase price of $1.4034 per share. The shares of Series Seed-1 Preferred Stock, shares of Series Seed-2 Preferred Stock, the shares of Series Seed-3 Preferred Stock and the shares of Series Seed-4 Preferred Stock issued to the Purchasers pursuant to this Agreement shall be referred to in this Agreement as the “Shares.” The rights, privileges and benefits of the Shares are as set forth in the Restated Articles.
1.2 Closing; Delivery.
1.2.1 The initial purchase and sale of the Shares shall take place remotely via the exchange of documents and signatures, on the date hereof (which time and place are designated as the (“Initial Closing”). At the Initial Closing, the Purchasers will purchase from the Company the total number of shares of Series Seed-1 Preferred Stock set forth opposite such Purchaser’s name on Exhibit A under “Initial Closing” and pay the purchase price therefor as set forth on Exhibit A, and the holders of SAFEs and Notes (each as herein below defined) shall receive shares of Series Seed-2 Preferred Stock, Series Seed-3 Preferred Stock, and/or Series Seed-4 Preferred Stock pursuant to Section 3.11. At the Initial Closing, each Purchaser shall become a party to this Agreement and the Voting Agreement attached hereto as Exhibit C (the “Voting Agreement”), by executing and delivering to the Company at the Initial Closing a counterpart signature page to this Agreement and the Voting Agreement.
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1.2.2 At any time and from time to time following the Initial Closing, the Company may sell, remotely via the exchange of documents and signatures, on the same terms and conditions as those contained in this Agreement, without obtaining the signature, consent or permission of any of the Purchasers, up to that number of shares Series Seed-1 Preferred Stock that remain unsold at the Initial Closing and Additional Closings (the “Additional Shares”), to one or more Purchasers acceptable to the Company in its sole discretion (the “Additional Purchasers”) in additional closings (each, an “Additional Closing” and together with the Initial Closing the “Closings”); provided, however, that in no event shall the aggregate number of Shares sold at all Closings exceed 9,676,396 shares. At each Additional Closing, the Purchasers will purchase from the Company the total number of shares of Series Seed-1 Preferred Stock set forth opposite such Purchaser’s name on Exhibit A under “Additional Closing” and pay the Purchase Price therefor as set forth on Exhibit A. At each Additional Closing, each Additional Purchaser who has not previously purchased Shares pursuant to this Agreement shall become a party to this Agreement and the Voting Agreement, by executing and delivering to the Company at such Additional Closing a counterpart signature page to this Agreement and the Voting Agreement. Upon each such Additional Purchaser’s execution and delivery to the Company of the counterpart signature pages and delivery of the purchase price to the Company, such Additional Purchaser shall become a party to, and bound by, this Agreement and the Voting Agreement to the same extent as if such Additional Purchaser had been a Purchaser at the Initial Closing and each such Additional Purchaser shall be deemed to be a Purchaser for all purposes under this Agreement as of the date of the applicable Additional Closing. Exhibit A shall be updated, without any action on the part of any Purchaser, to include such Additional Purchasers.
1.2.3 At each Closing, the Company shall update the Company’s stock ledger to reflect the issuance of the Shares to the Purchasers at such Closing against payment of the purchase price therefore by check payable to the Company, by wire transfer to a bank account designated by the Company, by cancellation or conversion of indebtedness of the Company to Purchaser, by conversion of Convertible Promissory Notes (each such instrument, a “Note”) and/or Simple Agreements for Future Equity (SAFEs) (each such agreement, a “SAFE”), or by any combination of such methods.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to each Purchaser that, except as set forth on the Disclosure Schedule attached as Exhibit D to this Agreement (the “Disclosure Schedule”), if any, the following representations are true and complete as of the date of the Initial Closing, except as otherwise indicated. The Disclosure Schedule shall be arranged in sections corresponding to the numbered and lettered sections and subsections contained in this Section 2, and the disclosures in any section or subsection of the Disclosure Schedule shall qualify other sections and subsections in this Section 2 to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections. Nothing in the Disclosure Schedule is intended to broaden the scope of any representation or warranty contained in this Agreement or to create any covenant. Inclusion of any item in the Disclosure Schedule (1) does not represent a determination that such item is material or establish a standard of materiality, (2) does not represent a determination that such item did not arise in the ordinary course of business, (3) does not represent a determination that the transactions contemplated by the Agreement require the consent of third parties, and (4) shall not constitute, or be deemed to be, an admission to any third party concerning such item.
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2.1 Organization, Good Standing, Corporate Power and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all corporate power and corporate authority required (a) to carry on its business as presently conducted and as presently proposed to be conducted and (b) to execute, deliver and perform its obligations under this Agreement. The Company is duly qualified to transact business as a foreign corporation and is in good standing under the laws of each jurisdiction in which the failure to so qualify or be in good standing would have a material adverse effect on the business, assets (including intangible assets), liabilities, financial condition, property, or results of operations of the Company.
2.2 Capitalization. The authorized capital of the Company consists, immediately prior to the Initial Closing (unless otherwise noted), of the following.
2.2.1 25,000,000 shares of the common stock of the Company (the “Common Stock”), 9,200,000 shares of which are issued and outstanding immediately prior to the Closing. All of the outstanding shares of Common Stock are duly authorized, validly issued, fully paid and nonassessable and were issued in material compliance with all applicable federal and state securities laws.
2.2.2 10,113,621 shares of the preferred stock of the Company (the “Preferred Stock”), (a) 4,000,000 shares of which are designated Series Seed-1 Preferred Stock, none of which are issued and outstanding as of the Initial Closing; (b) 774,894 shares of which are designated Series Seed-2 Preferred Stock, none of which are issued and outstanding as of the Initial Closing; (c) 3,615,580 shares of which are designated Series Seed-3 Preferred Stock, none of which are issued and outstanding as of the Initial Closing; and (d) 1,723,147 shares of which are designated Series Seed-4 Preferred Stock, none of which are issued and outstanding as of the Initial Closing.
2.2.3 3,925,073 shares of Common Stock are subject to issuance to officers, directors, employees and consultants of the Company pursuant to the Company’s 2017 Equity Incentive Plan duly adopted by the Board of Directors of the Company (the “Board”) and approved by the Company shareholders (as amended to date, the “Stock Plan”). Of such shares of Common Stock reserved under the Stock Plan, 2,785,000 have are subject to options that have been granted or have otherwise been promised by the Company, and 1,140,073 remain available for issuance to officers, directors, employees and consultants pursuant to the Stock Plan.
2.2.4 There are no outstanding preemptive rights, options, warrants, conversion privileges or rights (including but not limited to rights of first refusal or similar rights), orally or in writing, to purchase or acquire any securities from the Company including, without limitation, any shares of Common Stock or Preferred Stock, or any securities convertible into or exchangeable or exercisable for shares of Common Stock or Preferred Stock, except for (a) the conversion privileges of the Shares to be issued under this Agreement pursuant to the terms of the Restated Articles, (b) the conversion privileges of the Notes and/or the SAFEs, and (c) the securities and rights described in Section 2.2.4 of this Agreement.
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2.3 Subsidiaries. The Company does not currently own or control, directly or indirectly, any interest in any other corporation, partnership, trust, joint venture, limited liability company, association, or other business entity. The Company is not a participant in any joint venture, partnership or similar arrangement.
2.4 Authorization. All corporate action has been taken, or will be taken prior to the Closing, on the part of the Board and shareholders that is necessary for the authorization, execution and delivery of this Agreement by the Company and the performance by the Company of the obligations to be performed by the Company as of the date hereof under this Agreement. This Agreement, when executed and delivered by the Company, shall constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with its terms except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (b) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies.
2.5 Valid Issuance of Shares. The Shares, when issued, sold and delivered in accordance with the terms and for the consideration set forth in this Agreement, will be duly authorized, validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, applicable state and federal securities laws and liens or encumbrances created by or imposed by a Purchaser. Based in part on the accuracy of the representations of the Purchasers in Section 3 of this Agreement and subject to filings pursuant to Regulation D of the Securities Act of 1933, as amended (the “Securities Act”), and applicable state securities laws, the offer, sale and issuance of the Shares to be issued pursuant to and in conformity with the terms of this Agreement and the issuance of the Common Stock, if any, to be issued upon conversion thereof for no additional consideration and pursuant to the Restated Articles, will be issued in compliance with all applicable federal and state securities laws. The Common Stock issuable upon conversion of the Shares has been duly reserved for issuance, and upon issuance in accordance with the terms of the Restated Articles, will be duly authorized, validly issued, fully paid and nonassessable and free of restrictions on transfer other than restrictions on transfer under this Agreement, applicable federal and state securities laws and liens or encumbrances created by or imposed by a Purchaser. Based in part upon the representations of the Purchasers in Section 3 of this Agreement, and subject to filings pursuant to Regulation D of the Securities Act and applicable state securities laws, the Common Stock issuable upon conversion of the Shares will be issued in compliance with all applicable federal and state securities laws.
2.6 Litigation. There is no pending action, suit, proceeding, arbitration, mediation, complaint, claim, charge or investigation before any court, arbitrator, mediator or governmental body or, to the Company’s knowledge, currently threatened in writing (a) against the Company or (b) against any consultant, officer, director or key employee of the Company arising out of his or her consulting, employment or board relationship with the Company or that could otherwise materially impact the Company.
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2.7 Intellectual Property. The Company owns or possesses or believes it can acquire on commercially reasonable terms sufficient legal rights to all Intellectual Property (as defined below) that is necessary to the conduct of the Company’s business as now conducted and as presently proposed to be conducted (the “Company Intellectual Property”) without any violation or infringement (or in the case of third-party patents, patent applications, trademarks, trademark applications, service marks, or service mark applications, without any violation or infringement known to the Company) of the rights of others. No product or service marketed or sold (or proposed to be marketed or sold) by the Company violates or, to the Company’s knowledge, will violate any license or infringes or will infringe any rights to any patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, trade secrets, licenses, domain names, mask works, information and proprietary rights and processes (collectively, “Intellectual Property”) of any other party, except that with respect to third-party patents, patent applications, trademarks, trademark applications, service marks, or service mark applications the foregoing representation is made to the Company’s knowledge only. Other than with respect to commercially available software products under standard end-user object code license agreements, there is no outstanding option, license, agreement, claim, encumbrance or shared ownership interest of any kind relating to the Company Intellectual Property, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the Intellectual Property of any other person. The Company has not received any written communications alleging that the Company has violated or, by conducting its business, would violate any of the Intellectual Property of any other person.
2.8 Employee and Consultant Matters. Each current and former employee, consultant and officer of the Company has executed an agreement with the Company regarding confidentiality and proprietary information substantially in the form or forms made available to the Purchaser and/or counsel for the Purchasers. No current or former employee or consultant has excluded works or inventions from his or her assignment of inventions pursuant to such agreement. To the Company’s knowledge, no such employees or consultants is in violation thereof. To the Company’s knowledge, none of its employees is obligated under any judgment, decree, contract, covenant or agreement that would materially interfere with such employee’s ability to promote the interest of the Company or that would interfere with such employee’s ability to promote the interests of the Company or that would conflict with the Company’s business. To the Company’s knowledge, all individuals who have purchased unvested shares of the Company’s Common Stock have timely filed elections under Section 83(b) of the Internal Revenue Code of 1986, as amended.
2.9 Compliance with Other Instruments. The Company is not in violation or default (a) of any provisions of the Restated Articles or Bylaws, (b) of any judgment, order, writ or decree of any court or governmental entity, (c) under any agreement, instrument, contract, lease, note, indenture, mortgage or purchase order to which it is a party that is required to be listed on the Disclosure Schedule, or, (d) to its knowledge, of any provision of federal or state statute, rule or regulation materially applicable to the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement will not result in any such violation or default, or constitute, with or without the passage of time and giving of notice, either (i) a default under any such judgment, order, writ, decree, agreement, instrument, contract, lease, note, indenture, mortgage or purchase order or (ii) an event which results in the creation of any lien, charge or encumbrance upon any assets of the Company or the suspension, revocation, forfeiture, or nonrenewal of any material permit or license applicable to the Company.
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2.10 Title to Property and Assets. The Company owns its properties and assets free and clear of all mortgages, deeds of trust, liens, encumbrances and security interests except for statutory liens for the payment of current taxes that are not yet delinquent and liens, encumbrances and security interests which arise in the ordinary course of business and which do not affect material properties and assets of the Company. With respect to the property and assets it leases, the Company is in material compliance with each such lease.
2.11 Agreements. Except for this Agreement, there are no agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party that involve (a) obligations (contingent or otherwise) of, or payments to, the Company in excess of $100,000 (excluding, for avoidance of doubt, any Notes or SAFEs converting into Shares pursuant to this Agreement), (b) the license of any Intellectual Property to or from the Company other than licenses with respect to commercially available software products under standard end-user object code license agreements or standard customer terms of service and privacy policies for Internet sites, (c) the grant of rights to manufacture, produce, assemble, license, market, or sell its products to any other person, or that limit the Company’s exclusive right to develop, manufacture, assemble, distribute, market or sell its products, or (d) indemnification by the Company with respect to infringements of proprietary rights other than standard customer or channel agreements (each, a “Material Agreement”). The Company is not in material breach of any Material Agreement. Each Material Agreement is in full force and effect and is enforceable by the Company in accordance with its respective terms, except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or others laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (ii) the effect of rules of law governing the availability of equitable remedies.
2.12 Liabilities. The Company has no liabilities or obligations, contingent or otherwise, in excess of $100,000 individually or $500,000 in the aggregate (excluding, for avoidance of doubt, any Notes or SAFEs converting into Shares pursuant to this Agreement).
3. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each Purchaser hereby represents and warrants to the Company, severally and not jointly, as follows.
3.1 Authorization. The Purchaser has full power and authority to enter into this Agreement. This Agreement, when executed and delivered by the Purchaser, will constitute valid and legally binding obligations of the Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, and any other laws of general application relating to or affecting the enforcement of creditors’ rights generally, or (b) the effect of rules of law governing the availability of equitable remedies.
3.2 Purchase Entirely for Own Account. This Agreement is made with the Purchaser in reliance upon the Purchaser’s representation to the Company, which by the Purchaser’s execution of this Agreement, the Purchaser hereby confirms, that the Shares to be acquired by the Purchaser will be acquired for investment for the Purchaser’s own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that the Purchaser has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Agreement, the Purchaser further represents that the Purchaser does not presently have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Shares. The Purchaser has not been formed for the specific purpose of acquiring the Shares.
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3.3 Disclosure of Information. The Purchaser has had an opportunity to discuss the Company’s business, management, financial affairs and the terms and conditions of the offering of the Shares with the Company’s management. Nothing in this Section 3, including the foregoing sentence, limits or modifies the representations and warranties of the Company in Section 2 of this Agreement or the right of the Purchasers to rely thereon.
3.4 Restricted Securities. The Purchaser understands that the Shares have not been, and will not be, registered under the Securities Act, by reason of a specific exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Purchaser’s representations as expressed herein. The Purchaser understands that the Shares are “restricted securities” under applicable United States federal and state securities laws and that, pursuant to these laws, the Purchaser must hold the Shares indefinitely unless they are registered with the Securities and Exchange Commission and qualified by state authorities or an exemption from such registration and qualification requirements is available. The Purchaser acknowledges that the Company has no obligation to register or qualify the Shares, or the Common Stock into which it may be converted, for resale. The Purchaser further acknowledges that if an exemption from registration or qualification is available, it may be conditioned on various requirements including, but not limited to, the time and manner of sale, the holding period for the Shares, and on requirements relating to the Company which are outside of the Purchaser’s control, and which the Company is under no obligation and may not be able to satisfy.
3.5 No Public Market. The Purchaser understands that no public market now exists for the Shares, and that the Company has made no assurances that a public market will ever exist for the Shares.
3.6 Legends. The Purchaser understands that the Shares and any securities issued in respect of or exchange for the Shares, may bear any one or more of the following legends: (a) any legend set forth in, or required by, this Agreement; (b) any legend required by the securities laws of any state to the extent such laws are applicable to the Shares represented by the certificate so legended; and (c) the following legend:
“THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. NO TRANSFER MAY BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED.”
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3.7 Accredited and Sophisticated Investor. The Purchaser is an accredited investor as defined in Rule 501(a) of Regulation D promulgated under the Securities Act. The Purchaser is an investor in securities of companies in the development stage and acknowledges that Purchaser is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares. If other than an individual, Purchaser also represents it has not been organized for the purpose of acquiring the Shares.
3.8 No General Solicitation. Neither the Purchaser nor any of its officers, directors, employees, agents, shareholders or partners has either directly or indirectly, including through a broker or finder (a) engaged in any general solicitation with respect to the offer and sale of the Shares, or (b) published any advertisement in connection with the offer and sale of the Shares.
3.9 Exculpation Among Purchasers. The Purchaser acknowledges that it is not relying upon any person, other than the Company and its officers and directors, in making its investment or decision to invest in the Company. The Purchaser agrees that neither any Purchaser nor the respective controlling persons, officers, directors, partners, agents, or employees of any Purchaser shall be liable to any other Purchaser for any action heretofore taken or omitted to be taken by any of them in connection with the purchase of the Shares.
3.10 Residence. If the Purchaser is an individual, then the Purchaser resides in the state identified in the address of the Purchaser set forth on Exhibit A; if the Purchaser is a partnership, corporation, limited liability company or other entity, then the office or offices of the Purchaser in which its principal place of business is identified in the address or addresses of the Purchaser set forth on Exhibit A.
3.11 Consent to Convertible Security Conversion and Termination. Each Purchaser, to the extent that such Purchaser, as set forth on the Schedule of Purchasers, is a holder of any Note or SAFE being converted and/or cancelled in consideration of the issuance hereunder of Shares to such Purchaser, hereby agrees that the entire amount owed to such Purchaser under such Note and/or SAFE is being tendered to the Company in exchange for the applicable Shares set forth on the Schedule of Purchasers, and effective upon the Company’s and such Purchaser’s execution and delivery of this Agreement, without any further action required by the Company or such Purchaser, such Note and/or SAFE and all obligations set forth therein shall be immediately deemed repaid in full and terminated in their entirety, including, but not limited to, any security interest effected therein, notwithstanding anything to the contrary in such Note and/or SAFE.
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4. COVENANTS OF THE COMPANY.
4.1 Information Rights.
4.1.1 Basic Financial Information. The Company will furnish to each Purchaser which requires such information pursuant to its organizational documents when available (1) annual unaudited financial statements for each fiscal year of the Company (starting with the fiscal year ending December 31, 2019), including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such year, all prepared in accordance with generally accepted accounting principles and practices; and (2) quarterly unaudited financial statements for each fiscal quarter of the Company (except the last quarter of the Company’s fiscal year), including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such quarter, all prepared in accordance with generally accepted accounting principles and practices, subject to changes resulting from normal year-end audit adjustments. If the Company has audited records of any of the foregoing, it shall provide those in lieu of the unaudited versions.
4.1.2 Confidentiality. Anything in this Agreement to the contrary notwithstanding, no Purchaser by reason of this Agreement shall have access to any trade secrets or confidential information of the Company. The Company shall not be required to comply with any information rights in respect of any Purchaser whom the Company reasonably determines to be a competitor or an officer, employee, director or holder of one percent (1%) or more of a competitor. Each Purchaser agrees that such Purchaser will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement other than to (i) any of the Purchaser’s attorneys, accountants, consultants, and other professionals, to the extent necessary to obtain their services in connection with monitoring the Purchaser’s investment in the Company, or (ii) an Purchaser’s members, constituent partners or members who are bound by a written obligation of confidentiality.
4.2 Additional Rights and Obligations. If the Company issues securities in its next equity financing after the date hereof (the “Next Financing”) that provide all such future investors other contractual terms such as registration rights, the Company shall provide substantially equivalent rights to the Purchasers with respect to the Shares (with appropriate adjustment for economic terms or other contractual rights), subject to such Purchaser’s execution of any documents, including, if applicable, investor rights, co-sale, voting, and other agreements, executed by the investors purchasing securities in the Next Financing (such documents, the “Next Financing Documents”). Any Major Purchaser will remain a Major Purchaser for all purposes in the Next Financing Documents to the extent such concept exists. Notwithstanding anything herein to the contrary, subject to the provisions of Section 7.16, upon the execution and delivery of the Next Financing Documents by Purchasers holding a majority of the then-outstanding Shares held by all Purchasers, this Agreement (excluding any then-existing and outstanding obligations) shall be amended and restated by and into such Next Financing Documents and shall be terminated and of no further force or effect.
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4.3 Assignment of Company’s Preemptive Rights. The Company shall obtain at or prior to the Initial Closing, and shall maintain, a right of first refusal with respect to transfers of shares of Common Stock by each holder thereof, subject to certain standard exceptions.
4.4 Reservation of Common Stock. The Company shall at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Shares, regardless of whether or not all such Shares have been issued at such time.
5. RESTRICTIONS ON TRANSFER.
5.1 Limitations on Disposition. Each person owning of record shares of Common Stock of the Company issued or issuable pursuant to the conversion of the Shares and any shares of Common Stock of the Company issued as a dividend or other distribution with respect thereto or in exchange therefor or in replacement thereof (collectively, the “Securities”) or any assignee of record of Securities (each such person, a “Holder”) shall not make any disposition of all or any portion of any Securities unless:
(a) there is then in effect a registration statement under the Securities Act, covering such proposed disposition and such disposition is made in accordance with such registration statement; or
(b) such Holder has notified the Company of the proposed disposition and has furnished the Company with a statement of the circumstances surrounding the proposed disposition, and, at the expense of such Holder or its transferee, with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such securities under the Securities Act.
Notwithstanding the provisions of Sections 5.1(a) and (b), no such registration statement or opinion of counsel will be required: (i) for any transfer of any Securities in compliance with the Securities and Exchange Commission’s Rule 144 or Rule 144A, or (ii) for any transfer of any Securities by a Holder that is a partnership, limited liability company, a corporation, or a venture capital fund to (A) a partner of such partnership, a member of such limited liability company, or shareholder of such corporation, (B) an affiliate of such partnership, limited liability company or corporation (including, any affiliated investment fund of such Holder), (C) a retired partner of such partnership or a retired member of such limited liability company, (D) the estate of any such partner, member, or shareholder, or (iii) for the transfer without additional consideration or at no greater than cost by gift, will, or intestate succession by any Holder to the Holder’s spouse or lineal descendants or ancestors or any trust for any of the foregoing; provided that, in the case of clauses (ii) and (iii), the transferee agrees in writing to be subject to the terms of this Agreement to the same extent as if the transferee were an original Purchaser under this Agreement. Any disposition of Shares in violation of this Agreement shall be void.
5.2 “Market Stand-Off” Agreement. Each Holder hereby agrees that, during the Standoff Period, such Holder will not, without the prior written consent of the Company or the managing underwriter,
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(a) lend, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right, or warrant to purchase or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock, or any securities convertible into or exercisable or exchangeable (directly or indirectly) for Common Stock, held immediately before the effective date of the registration statement for such offering; or
(b) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of such securities, whether any such transaction described in clause (a) or (b) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise.
The foregoing provisions of this Section 5.2 shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, and shall be applicable to the Holders only if all officers, directors, and shareholders individually owning more than one percent (1%) of the Company’s outstanding Common Stock (after giving effect to conversion into Common Stock of all outstanding Preferred Stock) are similarly bound. For purposes of this Section 5.2, the term “Company” shall include any wholly-owned subsidiary of the Company into which the Company merges or consolidates. In order to enforce the foregoing covenant, the Company shall have the right to place restrictive legends on the certificates representing the shares subject to this Section 5.2 and to impose stop transfer instructions with respect to such shares until the end of such period. The underwriters in connection with such registration are intended third-party beneficiaries of this Section 5.2 and shall have the right, power, and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Section 5.2 or that are necessary to give further effect thereto. For the purposes hereof, “Standoff Period” means the period commencing on the date of the final prospectus relating to an underwritten public offering of the Company’s Common Stock under the Securities Act and ending on the date specified by the Company and the managing underwriter (such period not to exceed one hundred eighty (180) days) (or such other period as may be requested by the Company or an underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports and (ii) analyst recommendations and opinions, including, but not limited to, the restrictions contained in FINRA Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto).
6. Participation RIGHT.
6.1 General. Each Major Purchaser has the right of first refusal to purchase such Major Purchaser’s Pro Rata Share (as defined below) of all (or any part) of any New Securities (as defined in Section 6.2 below) that the Company may from time to time issue after the date of this Agreement, provided, however, such Major Purchaser shall have no right to purchase any such New Securities if such Major Purchaser cannot demonstrate to the Company’s reasonable satisfaction that such Major is at the time of the proposed issuance of such New Securities an “accredited investor” as such term is defined in Regulation D under the Securities Act. A Major Purchaser’s “Pro Rata Share” for purposes of this right of first refusal is the ratio of (a) the number of shares of the Company’s Common Stock issued or issuable upon conversion of the Shares owned by such Major Purchaser, to (b) a number of shares of Common Stock of the Company equal to the sum of (1) the total number of shares of Common Stock of the Company then outstanding plus (2) the total number of shares of Common Stock of the Company into which all then outstanding shares of Preferred Stock of the Company are then convertible plus (3) the number of shares of Common Stock of the Company reserved for issuance under any stock purchase and stock option plans of the Company and outstanding warrants. For the purposes hereof, a “Major Purchaser” shall mean that a Purchaser holds Shares with an aggregate original purchase price of at least $250,000 (as adjusted for stock splits and the like).
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6.2 New Securities. “New Securities” shall mean any Common Stock or Preferred Stock of the Company, whether now authorized or not, and rights, options or warrants to purchase such Common Stock or Preferred Stock, and securities of any type whatsoever that are, or may become, convertible or exchangeable into such Common Stock or Preferred Stock; provided, however, that the term “New Securities” does not include: (a) capital stock issued pursuant to stock dividends, stock splits or similar transactions; (b) capital stock issuable upon conversion, exchange or exercise of convertible, exchangeable or exercisable securities outstanding as of the date hereof including, without limitation, warrants, notes, Safes or options; (c) capital stock issued as a dividend or distribution with respect to the Preferred Stock (or any series thereof); (d) Common Stock issued or issuable to employees, consultants, officers or directors of the Company directly or pursuant to a stock option plan or restricted stock plan approved by the Board; (e) Common Stock issued in an initial public offering of the Company’s Common Stock to the public pursuant to an effective registration statement filed under the Securities Act; (f) capital stock, or warrants or options to purchase capital stock, issued in connection with bona fide acquisitions, mergers or similar transactions, provided that such issuances are approved by the Board; (g) capital stock, or options or warrants to purchase capital stock, issued to financial institutions, equipment lessors, brokers or similar persons in connection with commercial credit arrangements, equipment financings, commercial property lease transactions or similar transactions, that are approved by the Board; (h) capital stock issued or issuable to an entity as a component of any business relationship with such entity primarily for the purpose of (1) joint venture, technology licensing or development activities, (2) distribution, supply or manufacture of the Company’s products or services or (3) any other arrangements involving vendors, customers, or other corporate partners, the terms of which business relationship with such entity are approved by the Board; (i) Common Stock issued or issuable upon conversion of Preferred Stock; (j) Common Stock issued or issuable with the affirmative vote of the holders of at least a majority of the then outstanding Shares, voting together as a class on an as-converted basis; or (k) any securities issued pursuant to this Agreement, or any capital stock issued or issuable upon conversion thereof.
6.3 Procedures. If the Company proposes to undertake an issuance of New Securities, it shall give notice to each Major Purchaser of its intention to issue New Securities (the “Notice”), describing the type of New Securities and the price and the general terms upon which the Company proposes to issue the New Securities. Each Major Purchaser will have (10) days from the date of notice, to agree in writing to purchase such Major Purchaser’s Pro Rata Share of such New Securities for the price and upon the general terms specified in the Notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased (not to exceed such Major Purchaser’s Pro Rata Share).
6.4 Failure to Exercise. If the Major Purchasers fail to exercise in full the right of first refusal within the 10-day period, then the Company will have one hundred twenty (120) days thereafter to sell the New Securities with respect to which the Major Purchasers’ rights of first refusal hereunder were not exercised, at a price and upon general terms not materially more favorable to the purchasers thereof than specified in the Company’s Notice to the Major Purchasers. If the Company has not issued and sold the New Securities within the 120-day period, then the Company shall not thereafter issue or sell any New Securities without again first offering those New Securities to the Major Purchasers pursuant to this Section 6.
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7. GENERAL PROVISIONS.
7.1 Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties to this Agreement or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. No Purchaser may transfer Shares unless each transferee agrees to be bound by the terms of this Agreement.
7.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflicts of laws or choice of laws. Each party agrees that service of process on them in any such action, suit or proceeding may be effected by the means by which notices are to be given to it under this Agreement.
7.3 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
7.4 Titles and Subtitles. The titles, captions and headings of this Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Agreement.
7.5 Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their address as set forth on the signature page or on Exhibit A, or to such e-mail address, facsimile number or address as subsequently modified by written notice given in accordance with this Section 7.5. If notice is given to the Company, a copy (which shall not constitute notice) shall also be sent to Procopio, Cory, Hargreaves & Savitch LLP, 1117 S. California Avenue, Suite 200, Palo Alto, CA 94304, Attn: Roger C. Rappoport, Esq., email roger.rappoport@procopio.com.
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7.6 No Finder’s Fees. Each party severally represents to the other parties that it neither is nor will be obligated for any finder’s fee or commission in connection with this transaction. Each Purchaser shall indemnify, defend, and hold harmless the Company from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Purchaser or any of its officers, employees, or representatives is responsible. The Company shall indemnify, defend, and hold harmless each Purchaser from any liability for any commission or compensation in the nature of a finder’s or broker’s fee arising out of this transaction (and the costs and expenses of defending against such liability or asserted liability) for which the Company or any of its officers, employees or representatives is responsible.
7.7 Attorneys’ Fees. If any action at law or in equity (including arbitration) is necessary to enforce or interpret the terms of this Agreement, the prevailing party will be entitled to reasonable attorneys’ fees, costs, and necessary disbursements in addition to any other relief to which the party may be entitled. Each party shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery, and performance of the Agreement.
7.8 Amendments and Waivers. Except as specified in Section 1.2.2, any term of this Agreement may be amended, terminated or waived only with the written consent of the Company and the Purchasers holding a majority of the then-outstanding Shares (or Common Stock issued on conversion thereof). Any amendment or waiver effected in accordance with this Section 7.8 will be binding upon the Purchasers, each transferee of the Shares (or the Common Stock issuable upon conversion thereof) or Common Stock from a Purchaser and each future holder of all such securities, and the Company.
7.9 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be judicially determined to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
7.10 Delays or Omissions. No delay or omission to exercise any right, power or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, will impair any such right, power or remedy of such non-breaching or non-defaulting party nor will it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor will any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party, are cumulative and not alternative.
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7.11 Entire Agreement. This Agreement (and the Exhibits hereto), constitutes the entire agreement of the parties with regard to the subject matter hereof and supercedes any and all prior negotiations, correspondence, understandings and agreements among the parties regarding the subject matter hereof, whether oral or written, including, without limitation, that certain Summary of Terms For Private Placement of Series Seed Preferred Stock of Tivic Health Systems Inc. delivered, or made available, to Investors.
7.12 Adjustments for Stock Splits, Etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Stock of the Company of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement shall automatically be proportionally adjusted to reflect the effect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend.
7.13 Construction. The Company and the Purchasers have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party because of the authorship of any provision of this Agreement. The words “include,” “includes,” and “including” shall be deemed to be followed by “without limitation.” Pronouns in masculine, feminine, and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. The words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Any reference herein to “day” or “days” shall, unless otherwise provided for, mean a calendar day or calendar days.
7.14 Waiver of Conflicts. Each party to this Agreement acknowledges that Procopio, Cory, Hargreaves & Savitch LLP (“Procopio”), outside general counsel to the Company, has in the past performed and is or may now or in the future represent one or more of the Purchasers or their affiliates in matters unrelated to the transactions contemplated by this Agreement (the “Financing”), including representation of such Purchasers or their affiliates in matters of a similar nature to the Financing. The applicable rules of professional conduct require that Procopio inform the parties hereunder of this representation and obtain their consent. Procopio has served as outside general counsel to the Company and has negotiated the terms of the Financing solely on behalf of the Company. It is the belief of Procopio that these terms and conditions represent an arm’s length transaction between the Company and the Purchasers. Purchasers have been, or have been granted the opportunity to be, represented by independent legal counsel regarding the terms of the Financing. The Company and each Purchaser hereby (a) acknowledge that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation; (b) acknowledge that with respect to the Financing, Procopio has represented solely the Company, and not any Purchaser or any shareholder, director or employee of the Company or any Purchaser; and (c) gives its informed consent to Procopio’s representation of the Company in the Financing.
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7.15 Separability of Agreements. The Company’s agreement with each of the Purchasers is a separate agreement and the sale of the Shares to each of the Purchasers is a separate sale. Unless otherwise expressly provided herein, the rights of each Purchaser hereunder are several rights, not rights jointly held with any of the other Purchasers. Any invalidity, illegality or limitation on the enforceability of the Agreement or any part thereof, by any Purchaser, whether arising by reason of the law of the respective Purchaser’s domicile or otherwise, shall in no way affect or impair the validity, legality or enforceability of this Agreement with respect to other Purchasers.
7.16 Termination. Unless terminated earlier pursuant to the terms of this Agreement, (x) the rights, duties and obligations under Sections 4 and 6 will terminate immediately prior to the closing of the Company’s initial public offering of Common Stock pursuant to an effective registration statement filed under the Securities Act, (y) notwithstanding anything to the contrary herein, this Agreement (excluding any then-existing obligations) will terminate upon the closing of a Deemed Liquidation Event as defined in the Company’s Restated Articles, as amended from time to time and (z) notwithstanding anything to the contrary herein, Section 1, Section 4.1.2 and Section 7 will survive any termination of this Agreement.
[Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof.
| COMPANY: | ||
| TIVIC HEALTH SYSTEMS INC. | ||
| a California corporation | ||
| By: | /s/ Jennifer Ernst | |
| Jennifer Ernst | ||
| Chief Executive Officer | ||
| Address: 750 Menlo Ave. Suite 200 | ||
| Menlo Park, California 94025 | ||
| Attn: Chief Executive Officer | ||
| Email Address: jennifer.ernst@tivichealth.com | ||
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof.
PURCHASERS:
| If Purchaser is a Corporation, Partnership or Other Entity | If Purchaser is an Individual: | |||
| Name of Entity | Print Name of Individual | |||
| Signature of Authorized Person | Signature of Individual | |||
| Print Name of Authorized Person | Print Name of Individual (If more than one signatory) | |||
| Title | Signature of Individual (If more than one signatory) | |||
| Telephone (Day): | Telephone (Day): | |||
| Facsimile: | Facsimile: | |||
| Email Address: | Email Address: | |||
EXHIBIT A
SCHEDULE OF PURCHASERS
Initial Closing
EXHIBIT B
RESTATED ARTICLES
[Attached]
EXHIBIT C
VOTING AGREEMENT
[Attached]
EXHIBIT D
DISCLOSURE SCHEDULE
This Disclosure Schedule (this “Disclosure Schedule”) is delivered by the Company in connection with the sale of the Shares on or about the date of the Agreement by the Company.
This Disclosure Schedule is arranged in sections corresponding to the numbered and lettered sections and subsections contained in Section 2 of the Agreement, and the disclosures in any section or subsection of this Disclosure Schedule shall qualify other sections and subsections in Section 2 of the Agreement to the extent it is readily apparent from a reading of the disclosure that such disclosure is applicable to such other sections and subsections. Nothing in this Disclosure Schedule is intended to broaden the scope of any representation or warranty contained in the Agreement or to create any covenant. Inclusion of any item in this Disclosure Schedule (1) does not represent a determination that such item is material or establish a standard of materiality, (2) does not represent a determination that such item did not arise in the ordinary course of business, (3) does not represent a determination that the transactions contemplated by the Agreement require the consent of third parties, and (4) shall not constitute, or be deemed to be, an admission to any third party concerning such item.
Unless otherwise defined herein, any capitalized terms in this Disclosure Schedule have the same meanings assigned to those terms in the Agreement. Nothing in this Disclosure Schedule constitutes an admission of any liability or obligation of the Company to any third party, or an admission against the Company’s interests.
Exhibit 10.2
TIVIC HEALTH SYSTEMS INC.
FIRST AMENDMENT
TO
SERIES SEED-1, SEED-2, SEED-3 AND SEED-4
PREFERRED STOCK INVESTMENT AGREEMENT
This First Amendment to Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement (this “Amendment”) is entered into as of July 18, 2019 (the “Effective Date”), by and among Tivic Health Systems Inc., a California corporation (the “Company”), and the undersigned Purchasers. Defined terms used herein but not otherwise herein defined shall have the meanings ascribed to them in that certain Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated as of July 16, 2019, by and among the Company and the Purchasers listed on Exhibit A thereto (the “Series Seed Preferred Stock Investment Agreement”).
RECITALS
A. The Company and the undersigned Purchasers wish to amend the Series Seed Preferred Stock Investment Agreement in order to modify certain requirements regarding information rights thereunder.
B. Pursuant to Section 7.8 thereof, the Series Seed Preferred Stock Investment Agreement may be amended by agreement of the Company and the Purchasers holding a majority of the then-outstanding Shares (or Common Stock issued on conversion thereof) (collectively, the “Requisite Parties”).
C. The undersigned, constituting the Requisite Parties, desire to effect an amendment of the Series Seed Preferred Stock Investment Agreement as herein set forth.
NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions herein set forth, the parties agree as follows:
AGREEMENT
1. Amendment of Series Seed Preferred Stock Investment Agreement. Section 4.1.1 of the Series Seed Preferred Stock Investment Agreement is hereby amended and restated in its entirety to read as follows:
“4.1.1 Basic Financial Information. The Company will furnish to each Purchaser when available (1) annual unaudited financial statements for each fiscal year of the Company (starting with the fiscal year ending December 31, 2019), including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such year, all prepared in accordance with generally accepted accounting principles and practices; and (2) quarterly unaudited financial statements for each fiscal quarter of the Company (except the last quarter of the Company’s fiscal year), including an unaudited balance sheet as of the end of such fiscal year, an unaudited statement of operations and an unaudited statement of cash flows of the Company for such quarter, all prepared in accordance with generally accepted accounting principles and practices, subject to changes resulting from normal year-end audit adjustments. If the Company has audited records of any of the foregoing, it shall provide those in lieu of the unaudited versions.”
2. Amendment Effect. Except as expressly amended and modified herein, all terms and conditions set forth in the Series Seed Preferred Stock Investment Agreement shall remain in full force and effect.
3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to principles of conflicts of laws or choice of laws. Each party agrees that service of process on them in any such action, suit or proceeding may be effected by the means by which notices are to be given to it under this Agreement.
4. Headings. The headings and captions used in this Amendment are used for convenience only and are not to be considered in construing or interpreting this Amendment. All references in this Amendment to Sections shall, unless otherwise provided, refer to Sections hereof.
5. Amendments. No amendment or modification of this Amendment shall be deemed effective unless made in writing and signed by the parties who are required to amend the Series Seed Preferred Stock Investment Agreement pursuant to Section 7.8 of the Series Seed Preferred Stock Investment Agreement.
6. Entire Agreement. The Series Seed Preferred Stock Investment Agreement, as supplemented and modified by this Amendment, contains the entire agreement among the parties with respect to the subject matter thereof and amends, restates and supersedes all prior and contemporaneous arrangements or understandings with respect thereto.
7. Reference to the Agreement. Upon the effectiveness of this Amendment, on and after the date hereof, each reference in the Series Seed Preferred Stock Investment Agreement to “this Agreement,” “hereunder,” “hereof,” “herein” or words of like import, shall mean and be a reference to the Series Seed Preferred Stock Investment Agreement, as amended hereby. Except as specifically amended above, the Series Seed Preferred Stock Investment Agreement shall remain in full force and effect and it is hereby ratified and confirmed.
8. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
[Signatures Follow]
2
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the Effective Date.
COMPANY:
| TIVIC HEALTH SYSTEMS INC. | ||
| By: | /s/ Jennifer Ernst | |
| Name: Jennifer Ernst | ||
| Title: Chief Executive Officer | ||
PURCHASERS:
If Purchaser is a Corporation, Partnership or Other Entity:
|
|
If Purchaser is an Individual: |
Name of Entity
|
|
Print Name of Individual |
Signature of Authorized Person
|
|
Signature of Individual |
Print Name of Authorized Person
|
|
Print Name of Individual (If more than one signatory) |
Title |
|
Signature of Individual (If more than one signatory) |
Signature Page to First Amendment to Series Seed Preferred Stock Investment Agreement
Exhibit 10.3(a)
2017 EQUITY INCENTIVE PLAN
OF
Tivic Health Systems Inc.
Adopted April 13, 2017
TABLE OF CONTENTS
Page
| 1. | GENERAL | 1 |
| 2. | DEFINITIONS | 1 |
| 3. | ADMINISTRATION | 5 |
| 4. | SHARES SUBJECT TO THE PLAN | 7 |
| 5. | ELIGIBILITY | 7 |
| 6. | OPTION AGREEMENT PROVISIONS | 8 |
| 7. | PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS | 11 |
| 8. | COVENANTS OF THE COMPANY | 12 |
| 9. | USE OF PROCEEDS | 13 |
| 10. | ADJUSTMENTS UPON CHANGE IN COMMON STOCK | 13 |
| 11. | ADJUSTMENTS UPON CHANGE IN CONTROL | 13 |
| 12. | ACCELERATION OF EXERCISABILITY AND VESTING | 14 |
| 13. | DISSOLUTION OR LIQUIDATION | 14 |
| 14. | MISCELLANEOUS | 14 |
| 15. | AMENDMENT OF THE PLAN | 16 |
| 16. | TERMINATION OR SUSPENSION OF THE PLAN | 17 |
| 17. | EFFECTIVE DATE OF PLAN | 17 |
| 18. | NON-EXCLUSIVITY OF THE PLAN | 17 |
| 19. | LIABILITY OF THE COMPANY | 17 |
| 20. | CHOICE OF LAW; ARBITRATION; VENUE | 18 |
i
Tivic Health Systems Inc.
2017 EQUITY INCENTIVE PLAN
Adopted by the Board: April 13, 2017
Approved by the Shareholders: August 9, 2017
Amended: November 30, 2018
Further Amended: July 10, 2019
Termination Date: April 12, 2027
1. General.
(a) Purposes. The purposes of the Plan are as follows:
(i) To provide additional incentive for selected Employees, Directors and Consultants to further the growth, development and financial success of the Company by providing a means by which such persons can personally benefit through the ownership of capital stock of the Company; and
(ii) To enable the Company to secure and retain key Employees, Directors and Consultants considered important to the long-term success of the Company by offering such persons an opportunity to own capital stock of the Company.
(b) Eligible Stock Award Recipients. The persons eligible to receive Stock Awards under the Plan are the Employees, Directors and Consultants of the Company and its Affiliates.
(c) Available Stock Awards. The following Stock Awards are available under the Plan: (i) Incentive Stock Options; (ii) Nonstatutory Stock Options; (iii) stock bonuses; and (iv) rights to acquire restricted stock.
2. Definitions.
(a) “Affiliate” means:
(i) with respect to Incentive Stock Options, any “parent corporation” or “subsidiary corporation” of the Company, whether now existing or hereafter created or acquired, as those terms are defined in Sections 424(e) and 424(f) of the Code, respectively; and
(ii) with respect to Stock Awards other than Incentive Stock Options, any entity described in paragraph (a) of this Section 2(a), plus any other corporation, limited liability company, partnership or joint venture, whether now existing or hereafter created or acquired, with respect to which the Company beneficially owns more than fifty percent (50%) of: (1) the total combined voting power of all outstanding voting securities or (2) the capital or profits interests of a limited liability company, partnership or joint venture.
(b) “Award Shares” means the shares of Common Stock of the Company issued or issuable pursuant to a Stock Award, including Option Shares issued or issuable pursuant to an Option.
(c) “Board” means the Board of Directors of the Company.
(d) “Change in Control” shall mean:
(i) The direct or indirect sale or transfer, in a single transaction or a series of related transactions, by the shareholders of the Company of voting securities, in which the holders of the outstanding voting securities of the Company immediately prior to such transaction or series of transactions hold, as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than twenty percent (20%) of the total combined voting power all outstanding voting securities of the Company or of the acquiring entity immediately after such transaction or series of related transactions;
(ii) A merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity (or the parent of the surviving entity) immediately after such merger or consolidation;
(iii) A reverse merger in which the Company is the surviving entity but in which the holders of the outstanding voting securities of the Company immediately prior to such merger hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such merger; or
(iv) The sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such transaction(s) receive as a distribution with respect to securities of the Company, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the acquiring entity immediately after such transaction(s).
(e) “Code” means the Internal Revenue Code of 1986, as amended.
(f) “Committee” means a committee appointed by the Board in accordance with Section 3(c).
(g) “Common Stock” means the shares of common stock of the Company.
(h) “Company” means Tivic Health Systems Inc., a California corporation.
(i) “Consultant” means any natural person, including an advisor, engaged by the Company or an Affiliate to render bona fide services and who is providing such services at the time a Stock Award is granted; provided that the term “Consultant” shall not include a person who provides services in connection with the offer and sale of securities in a capital-raising transaction or in connection with promoting or maintaining a market for the Company’s securities.
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(j) “Director” means a member of the Board.
(k) “Disability” means total and permanent disability as defined in Section 22(e)(3) of the Code and as interpreted by the Board in each case.
(l) “Effective Date” shall have the meaning given in Section 17 herein.
(m) “Employee” means a regular employee of the Company or an Affiliate, including an Officer or Director, who is treated as an employee in the personnel records of the Company or an Affiliate, but not individuals who are classified by the Company or an Affiliate as: (i) leased from or otherwise employed by a third party, (ii) independent contractors, or (iii) intermittent or temporary workers. The Company’s or an Affiliate’s classification of an individual as an “Employee” (or as not an “Employee”) for purposes of this Plan shall not be altered retroactively even if that classification is changed retroactively for another purpose as a result of an audit, litigation or otherwise. Neither service as a Director nor receipt of a director’s fee shall be sufficient to make a Director an “Employee.”
(n) “Fair Market Value” means, as of any date, the value of the Common Stock of the Company determined as follows:
(i) If the Common Stock is then listed or admitted to trading on a Nasdaq market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the closing sale price on the date of valuation on such Nasdaq market system or principal stock exchange on which the Common Stock is then listed or admitted to trading, or, if no closing sale price is quoted on such day, then the Fair Market Value shall be the closing sale price of the Common Stock on such Nasdaq market system or such exchange on the next preceding day for which a closing sale price is reported;
(ii) If the Common Stock is not then listed or admitted to trading on a Nasdaq market system or a stock exchange which reports closing sale prices, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the date of valuation; or
(iii) If neither (i) nor (ii) is applicable as of the date of valuation, then the Fair Market Value shall be determined by the Board in good faith using any reasonable method of valuation, which determination shall be conclusive and binding on all interested parties.
(o) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder.
(p) “Nonstatutory Stock Option” means an Option not intended to qualify as an Incentive Stock Option.
(q) “Officer” means any person designated by the Board as an officer.
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(r) “Option” means a stock option granted pursuant to the Plan.
(s) “Option Agreement” means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan and any rules and regulations adopted by the Board and incorporated therein.
(t) “Optionee” means the Participant to whom an Option is granted or, if applicable, such other person who holds an outstanding Option.
(u) “Option Shares” means the shares of Common Stock of the Company issued or issuable pursuant to the exercise of an Option.
(v) “Participant” means an Optionee or any other person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.
(w) “Plan” means this 2017 Equity Incentive Plan.
(x) “Securities Act” means the Securities Act of 1933, as amended.
(y) “Stock Award” means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock.
(z) “Stock Award Agreement” means a written agreement, including an Option Agreement, between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan and any additional rules and regulations adopted by the Board and incorporated therein.
(aa) “Ten Percent Shareholder” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates.
(bb) “Termination of Service” means:
(i) With respect to Stock Awards granted to a Participant in his or her capacity as an Employee, the time when the employer-employee relationship between the Participant and the Company (or an Affiliate) is terminated for any reason, including, without limitation a termination by resignation, discharge, death or retirement;
(ii) With respect to Stock Awards granted to a Participant in his or her capacity as a Director, the time when the Participant ceases to be a Director for any reason, including without limitation a cessation by resignation, removal, failure to be reelected, death or retirement, but excluding cessations where there is a simultaneous or continuing employment of the former Director by the Company (or an Affiliate) and the Board expressly deems such cessation not to be a Termination of Service;
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(iii) With respect to Stock Awards granted to a Participant in his or her capacity as a Consultant, the time when the contractual relationship between the Participant and the Company (or an Affiliate) is terminated for any reason; and
(iv) With respect to Stock Awards granted to a Participant in his or her capacity as an Employee, Director or Consultant of an Affiliate, when such entity ceases to qualify as an Affiliate under this Plan, unless earlier terminated as set forth above.
Notwithstanding anything to the contrary herein set forth, a change in status from an Employee to a Consultant or from a Consultant to an Employee shall not constitute a Termination of Service for the purposes hereof, if and to the extent so determined by the Board. The Board, in its sole and absolute discretion, shall determine the effect of all other matters and issues relating to a Termination of Service.
3. Administration.
(a) Administration by Board. The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in Section 3(c) below.
(b) Powers of the Board. The Board shall have the power, except as otherwise provided in the Plan:
(i) To determine from time to time (A) which of the persons eligible under the Plan shall be granted Stock Awards; (B) when and how the Stock Awards shall be granted; (C) what type or combination of types of Stock Awards will be granted; (D) the terms and conditions of each Stock Award granted (which need not be identical), including, without limitation, the transferability or repurchase of such Stock Awards or Award Shares issuable thereunder, as applicable, and the circumstances under which Stock Awards become exercisable or vested or are forfeited or expire, which terms may but need not be conditioned upon the passage of time, continued employment, the satisfaction of performance criteria, the occurrence of certain events, or other factors; and (E) the number of Award Shares subject to a Stock Award that shall be granted to a Participant.
(ii) To construe and interpret the Plan and Stock Awards granted under it, and to make exceptions to any such provisions in good faith and for the benefit of the Company, and to establish, amend and revoke rules and regulations for the Plan’s administration. The Board, in the exercise of its power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective.
(iii) To settle all controversies regarding the Plan and Stock Awards granted under it.
(iv) To accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.
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(v) To suspend or terminate the Plan at any time. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.
(vi) To submit any amendment to the Plan for shareholder approval.
(vii) To amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options or to bring the Plan or Incentive Stock Options granted under it into compliance therewith.
(viii) To amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable than previously provided in the Stock Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (a) the Company requests the consent of the affected Participant, and (b) such Participant consents in writing. Notwithstanding the foregoing, subject to the limitations of applicable law, if any, and without the affected Participant’s consent, the Board may amend the terms of any one or more Stock Awards if necessary to maintain the qualified status of the Stock Award as an Incentive Stock Option or to bring the Stock Award into compliance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder.
(ix) To amend the Plan as provided in Section 15.
(x) To prescribe and amend the terms of the agreements or other documents evidencing Stock Awards made under this Plan (which need not be identical).
(xi) To place such restrictions on the sale or other disposition of Award Shares as may be deemed appropriate by the Board.
(xii) To determine whether, and the extent to which, adjustments are required pursuant to Section 10.
(xiii) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company.
(c) Delegation to a Committee. The Board may delegate administration of the Plan to a committee of the Board composed of not fewer than two (2) members (the “Committee”). If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in the Plan to the Board shall thereafter be deemed to be references to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan.
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(d) Effect of Change in Status. The Board shall have the absolute discretion to determine the effect upon a Stock Award, and upon an individual’s status as an Employee, Consultant or Director under the Plan, including whether a Participant shall be deemed to have experienced a Termination of Service or other change in status, and upon the vesting, expiration or forfeiture of a Stock Award or Award Shares issuable in respect thereof, in the case of (i) a Termination of Service for Cause, (ii) any leave of absence approved by the Company or an Affiliate, (iii) any transfer between the Company and any Affiliate or between any Affiliates, (iv) any change in the Participant’s status from an Employee to a Consultant or member of the Board, or vice versa, and (v) any Employee who becomes employed by any partnership, joint venture, corporation or other entity not meeting the requirements of an Affiliate.
(e) Determinations of the Board. All decisions, determinations and interpretations by the Board regarding this Plan shall be final and binding on all Participants or other persons claiming rights under the Plan or any Stock Award. The Board shall consider such factors as it deems relevant to making such decisions, determinations and interpretations including, without limitation, the recommendations or advice of any Director, Officer or Employee of the Company and such attorneys, consultants and accountants as it may select. A Participant or other holder of a Stock Award may contest a decision or action by the Board with respect to such person or Stock Award only on the grounds that such decision or action was arbitrary or capricious or was unlawful, and any review of such decision or action shall be limited to determining whether the Board’s decision or action was arbitrary or capricious or was unlawful.
(f) Arbitration. Any dispute or claim concerning any Stock Awards granted (or not granted) pursuant to the Plan or any disputes or claims relating to or arising out of the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc. (“JAMS”) in the County of Santa Clara, California. In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs. By accepting a Stock Award, Participants and the Company waive their respective rights to have any such disputes or claims tried by a judge or jury.
4. Shares Subject to the Plan.
Subject to the provisions of Section 10 relating to adjustments upon changes in stock, the Award Shares that may be issued pursuant to Stock Awards shall not exceed in the aggregate up to 3,925,073 shares of the Company’s Common Stock. Of such amount, up to 3,925,073 Award Shares may be issued under the Plan pursuant to Incentive Stock Options. In the event that (a) all or any portion of any Stock Award granted or offered under the Plan can no longer under any circumstances be exercised or otherwise become vested, or (b) any Award Shares or other shares of the Company’s Common Stock are reacquired by the Company which were the subject of a Stock Award Agreement under the Plan, the shares or Award Shares allocable to the unexercised or unvested portion of such Stock Award, or the shares or Award Shares so reacquired, shall again be available for grant or issuance under the Plan.
5. Eligibility.
(a) General. Incentive Stock Options may be granted only to Employees; all other Stock Awards may be granted only to Employees, Directors and Consultants. In the event a Participant is both an Employee and a Director, or a Participant is both a Director and a Consultant, the Stock Award Agreement shall specify the capacity in which the Participant is granted the Stock Award; provided, however, if the Stock Award Agreement is silent as to such capacity, the Stock Award shall be deemed to be granted to the Participant as an Employee or as a Consultant, as applicable.
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(b) Ten Percent Shareholders. A Ten Percent Shareholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.
(c) Consultants. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Company’s securities to such Consultant is not exempt under Rule 701 of the Securities Act (“Rule 701”) because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other provision of Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions.
6. Option Agreement Provisions.
Each Option shall be granted pursuant to a written Option Agreement, signed by an Officer of the Company and by the Optionee, which shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Option Agreements need not be identical, but each Option Agreement shall include (through incorporation of the provisions hereof by reference in the Option Agreement or otherwise) the substance of each of the following provisions (except to the extent that any such provision indicates it is permissible rather than mandatory):
(a) Term. No Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Option Agreement; provided, however, that an Incentive Stock Option granted to a Ten Percent Shareholder shall be subject to the provisions of Section 5(b).
(b) Exercise Price of an Option. Subject to the provisions of Section 5(b) regarding Incentive Stock Options granted to Ten Percent Shareholders, the exercise price of each Incentive Stock Option shall be not less than the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. The Board shall determine the exercise price of each Nonstatutory Stock Option. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an exercise price lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option if such Incentive Stock Option is granted pursuant to an assumption of or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code.
(c) Consideration. The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment. The methods of payment permitted by this Section 6(c) are:
(i) by cash or check;
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(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;
(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;
(iv) by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, however, that shares of Common Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (A) shares are used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations; or
(v) in any other form of legal consideration that may be acceptable to the Board.
(d) Transferability. The following restrictions on the transferability of Options shall apply:
(i) Restrictions on Transfer. An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionee only by the Optionee; provided, however, that the Board may, in its sole discretion, permit transfer of the Option to a revocable trust or as otherwise permitted by Rule 701 of the Securities Act. Notwithstanding the foregoing, however, an Incentive Stock Option shall not be transferable other than by will or the laws of descent and distribution, and shall be exercisable only by the Optionee during the Optionee’s lifetime, except as otherwise permitted by the Board and by Sections 421, 422 and 424 of the Code and the regulations and other guidance thereunder. Notwithstanding anything herein contained to the contrary, for so long as the Company shall have elected to be treated as a subchapter S corporation pursuant to the Code, no Participant shall transfer any Stock Award or any Stock Award Shares to any person or entity or in any manner which would cause the S election theretofore made by Company to be terminated or revoked. Any such transfer or attempted transfer shall be void ab initio.
(ii) Domestic Relations Orders. Notwithstanding the foregoing, an Option may be transferred pursuant to a domestic relations order; provided, however, that if an Option is an Incentive Stock Option, such Option shall be deemed to be a Nonstatutory Stock Option as a result of such transfer.
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(iii) Beneficiary Designation. Notwithstanding the foregoing, the Optionee may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be the beneficiary of an Option with the right to exercise the Option and receive the Common Stock or other consideration resulting from an Option exercise. In the absence of such a designation, the executor or administrator of the Optionee’s estate shall be entitled to exercise the Option and receive the Common Stock or other consideration resulting from an Option exercise.
(e) Vesting. Each Option shall vest and become exercisable in one or more installments, at such time or times and subject to such conditions, including without limitation the achievement of specified performance goals or objectives established with respect to one or more performance criteria, as shall be determined by the Board.
(f) Termination of Service. In the event of the Termination of Service of an Optionee for any reason (other than for “Cause,” as defined in a Stock Option Agreement, or upon the Optionee’s death or Disability), the Optionee may exercise his or her Option, but only within such period of time as is set forth in the Option Agreement (and in no event later than the expiration of the term of such Option as set forth in the Option Agreement). In the case of an Incentive Stock Option, such exercise period provided in the Option Agreement shall not exceed three (3) months from the date of termination.
(g) Disability of Optionee. In the event of a Termination of Service of an Optionee as a result of the Optionee’s Disability, the Optionee may exercise his or her Option within the period specified in the Option Agreement (in no event to exceed twelve (12) months from the date of such termination in the case of an Incentive Stock Option), and only to the extent that the Optionee was entitled to exercise the Option at the date of such termination (but in no event later than the expiration of the term of such Option as set forth in the Option Agreement).
(h) Death of Optionee. In the event that (i) an Optionee’s Termination of Service occurs as a result of the Optionee’s death, or (ii) an Optionee dies within the period (if any) specified in the Option Agreement after the Optionee’s Termination of Service for a reason other than death, then, notwithstanding Section 6(f) above, the Option may be exercised (to the extent the Optionee was entitled to exercise such Option as of the date of death) by the Optionee’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee’s death, but only within the period ending on the earlier of (i) the date that is twelve (12) months after the date of Termination of Service, or (ii) the expiration of the term of such Option as set forth in the Option Agreement.
(i) Termination for Cause. In the event of the Termination of Service of an Optionee for Cause, except as otherwise determined by the Board in the specific situation, all Options granted to such Optionee shall expire as set forth in the Stock Option Agreement.
(j) Extension of Termination Date. An Optionee’s Option Agreement may provide that if the exercise of the Option following an Optionee’s Termination of Service (other than for Cause or upon the Optionee’s death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Optionee’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the Option Agreement.
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(k) Non-Exempt Employees. Unless otherwise determined by the Board, no Option granted to an Employee that is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable for any shares of Common Stock until at least six months following the date of grant of the Option. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option will be exempt from his or her regular rate of pay.
(l) Early Exercise. The Option may, but need not, include a provision whereby the Optionee may elect at any time prior to a Termination of Service to exercise the Option as to any part or all of the Option Shares prior to the full vesting of the Option. Any unvested Option Shares so purchased may be subject to an unvested share repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate.
(m) Right of Repurchase. The Option Agreement may, but need not, include a provision whereby the Company may elect to repurchase all or any part of the vested shares of Common Stock acquired by the Optionee pursuant to the exercise of the Option.
(n) Right of First Refusal. The Option Agreement may, but need not, include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Optionee of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option.
7. Provisions of Stock Awards Other Than Options.
(a) Stock Bonus Awards. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions (except to the extent that any such provision indicates it is permissible rather than mandatory):
(i) Consideration. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit, provided that the Participant remains eligible to receive Stock Awards hereunder at the time of the award.
(ii) Vesting. Award Shares issued pursuant to a stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iii) Termination of Service. In the event of a Termination of Service, the Company may reacquire any or all of the Award Shares held by the Participant which have or have not vested as of the date of termination under the terms of the stock bonus agreement.
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(iv) Transferability. Unless otherwise determined by the Board, rights to acquire Award Shares under the stock bonus agreement shall not be transferable except by will or by the laws of descent and distribution, or, to the extent permitted by the Board, to a revocable trust or as otherwise permitted by Rule 701 of the Securities Act.
(b) Restricted Stock Purchase Awards. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions (except to the extent that any such provision indicates it is permissible rather than mandatory):
(i) Purchase Price. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement, including no consideration or such minimum consideration as may be required by applicable law.
(ii) Consideration. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement, if any, shall be paid either: (a) in cash at the time of purchase; (b) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (c) in any other form of legal consideration that may be acceptable to the Board in its discretion.
(iii) Vesting. Award Shares acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board.
(iv) Termination of Service. In the event of a Participant’s Termination of Service, the Company may repurchase or otherwise reacquire any or all of the Award Shares held by the Participant which have or have not vested as of the date of termination under the terms of the restricted stock purchase agreement.
(v) Transferability. Unless otherwise determined by the Board, rights to acquire Award Shares under the restricted stock purchase agreement shall not be transferable except by will, by the laws of descent and distribution, or, to the extent permitted by the Board, to a revocable trust or as otherwise permitted by Rule 701 of the Securities Act.
8. Covenants of the Company.
(a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards.
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(b) Compliance with Laws and Regulations. This Plan, the grant and exercise of Stock Awards thereunder, and the obligation of the Company to sell, issue or deliver Award Shares under such Stock Awards, shall be subject to all applicable federal, state and local laws, rules and regulations and to such approvals by any governmental or regulatory agency as may be required. The Company shall not be required to register in a Participant’s name or deliver any Award Shares prior to the completion of any registration or qualification of such Shares under any federal, state or local law or any ruling or regulation of any government body which the Board shall determine to be necessary or advisable. To the extent the Company is unable to or the Board deems it infeasible to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary or advisable for the lawful issuance and sale of any Award Shares hereunder, the Company shall be relieved of any liability with respect to the failure to issue or sell such Award Shares as to which such requisite authority shall not have been obtained. No Option shall be exercisable and no Award Shares shall be issued and/or transferable under any other Stock Award unless a registration statement with respect to the Award Shares underlying such Stock Award is effective and current or the Company has determined that such registration is unnecessary.
9. Use of Proceeds.
Proceeds from the sale of Award Shares shall constitute general funds of the Company and shall be used for general operating capital of the Company.
10. Adjustments Upon Change in Common Stock.
If any change is made in the Common Stock subject to the Plan or subject to any Stock Award without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, dividend in property other than cash, stock split, reverse stock split, liquidating dividend, exchange of shares, change in corporate structure or other distribution of the Company’s equity securities), the Plan and all outstanding Stock Awards will be appropriately adjusted in the class and maximum number of shares subject to the Plan and the class and number of shares and price per share of Common Stock subject to outstanding Stock Awards. Such adjustment shall be made by the Board, the determination of which shall be final, binding and conclusive.
11. Adjustments Upon Change in Control.
(a) The Board shall have the discretion to provide in each Stock Award Agreement the terms and conditions that relate to (i) vesting of such Stock Award in the event of a Change in Control, and (ii) assumption of such Stock Award Agreements or issuance of comparable securities under an incentive program in the event of a Change in Control. The aforementioned terms and conditions may vary in each Stock Award Agreement.
(b) If the terms of an outstanding Option Agreement provide for accelerated vesting in the event of a Change in Control, or to the extent that an Option is vested and not yet exercised, the Board in its discretion may provide, in connection with the Change in Control transaction, for the purchase or exchange of each Option for an amount of cash or other property having a value equal to the difference (or “spread”) between: (x) the value of the cash or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the vested Option Shares issuable upon exercise of the Option had the Option been exercised immediately prior to the Change in Control, and (y) the aggregate exercise price of the vested Option Shares. If in such case the aggregate exercise price of the vested Option Shares is greater than or equal to the value of the cash or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the vested Option Shares had the Option been exercised immediately prior to the Change in Control, then the Option shall be cancelled and Optionee shall receive no payment for such Option Shares. Upon such purchase, exchange or cancellation, the Option shall be terminated and Optionee shall have no further rights with respect to such Option.
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(c) Outstanding Options shall terminate and cease to be exercisable upon consummation of a Change in Control except to the extent that the Options are assumed by the successor entity (or parent thereof) pursuant to the terms of the Change in Control transaction.
12. Acceleration of Exercisability and Vesting.
The Board shall have the power to accelerate the time at which any or all Stock Awards may first be exercised or the time during which any or all Stock Awards or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in any Stock Award stating the time at which it may first be exercised or the time during which it will vest. By approval of the Plan, the Company’s shareholders consent to any such accelerations in the Board’s sole discretion.
13. Dissolution or Liquidation.
In the event of a dissolution or liquidation of the Company, then all outstanding Stock Awards shall terminate immediately prior to such event.
14. Miscellaneous.
(a) Shareholder Rights. Neither a Participant nor any person to whom a Stock Award is transferred shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any Award Shares unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms and the Company has duly issued a stock certificate for such Award Shares.
(b) No Employment or Other Service Rights. Nothing in the Plan or any Stock Award Agreement shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without Cause; (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate; or (iii) the service of a Director pursuant to the Bylaws or Certificate of Incorporation of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.
(c) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company and any Affiliates) exceeds One Hundred Thousand Dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).
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(d) Investment Assurances. The Company may require a Participant, as a condition of exercising an Option or otherwise acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (x) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act; or (y) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.
(e) Withholding Obligations. The Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award, provided that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of the Stock Award as a liability); or (iii) by such other method as may be set forth in the Stock Award Agreement.
(f) Compliance with Section 409A of the Code. To the extent applicable, the Plan and Stock Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date (as defined in Section 17 below). Notwithstanding any provision of the Plan or Stock Award to the contrary, in the event that following the Effective Date the Board determines that any Stock Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Board may adopt such amendments to the Plan and the applicable Stock Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board determines are necessary or appropriate to (i) exempt the Stock Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Stock Award; or (ii) comply with the requirements of Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date. If the exercise period of an Option subject to Code Section 409A (e.g., an Option which is granted with a per share exercise price less than the Fair Market Value on the date of grant) spans two calendar years, any valid exercise will be deemed to occur at the expiration of the exercise period regardless of when exercise actually occurs. This rule of construction shall not apply to any Option which is not subject to Code Section 409A (i.e., an Option which is granted with a per share exercise price not less than the Fair Market Value on the date of grant and the Option otherwise qualifies for exemption from Code Section 409A).
15
15. Amendment of the Plan.
(a) In General. The Board at any time, and from time to time, may amend the Plan. However, no amendment shall be effective unless approved by the shareholders of the Company within twelve (12) months before or after the adoption of the amendment where the amendment will:
(i) Increase the number of shares reserved for Stock Awards under the Plan, except as provided in Section 10 relating to adjustments upon changes in Common Stock;
(ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or
(iii) Modify the Plan in any other way if such modification requires shareholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code.
(b) Amendment to Maximize Benefits. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide Participants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under the Plan into compliance therewith.
(c) No Impairment. The rights and obligations under any Stock Award granted before any amendment of the Plan shall not be altered or impaired by such amendment unless the Company requests the consent of the person to whom the Stock Award was granted and such person consents in writing; provided, however, that notwithstanding anything to the contrary in this Section 15 or elsewhere in this Plan, no such consent shall be required with respect to any amendment or alteration if the Board determines in its sole discretion that such amendment or alteration either (i) is required or advisable in order for the Company, the Plan or the Stock Award to satisfy or conform to any law or regulation or to meet the requirements of any accounting standard, or (ii) is not reasonably likely to significantly diminish the benefits provided under such Award, or that any such diminishment has been adequately compensated.
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16. Termination or Suspension of the Plan.
(a) Termination or Suspension. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on April 12, 2027 (which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the shareholders of the Company, whichever is earlier), and no Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated, but Stock Awards and Stock Award Agreements then outstanding shall continue in effect in accordance with their respective terms.
(b) No Impairment. Rights and obligations under any Stock Award granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except as otherwise provided herein or with the consent of the person to whom the Stock Award was granted.
17. Effective Date of Plan.
The Plan shall become effective on April 13, 2017, which is the date that the Plan was adopted by the Board (the “Effective Date”), provided that the shareholders of the Company approve or have approved the Plan within twelve (12) months of such date. No Options granted under the Plan shall be exercised unless and until the Plan has been approved by the shareholders of the Company, and all Stock Awards granted under the Plan shall be rescinded if shareholder approval of the Plan is not obtained within such 12-month period.
18. Non-Exclusivity of the Plan.
Neither the adoption of this Plan by the Board nor the submission of this Plan to the shareholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as either may deem desirable, including, without limitation, the granting of stock options or restricted stock otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases.
19. Liability of the Company.
The Company and the members of the Board shall not be liable to a Participant or any other persons as to: (a) the non-issuance or non-transfer, or any delay of issuance or transfer, of any Award Shares which results from the inability of the Company to comply with, or to obtain, or from any delay in obtaining from any regulatory body having jurisdiction, all requisite authority to issue or transfer Award Shares if counsel for the Company deems such authority reasonably necessary for lawful issuance or transfer of any such shares and, in furtherance thereof, appropriate legends may be placed on the stock certificates evidencing Award Shares to reflect such transfer restrictions; and (b) any tax consequence expected, but not realized, by any Participant or other person due to the receipt, exercise or settlement of any Option or other Stock Award granted hereunder.
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20. Choice of Law; Arbitration; Venue.
The laws of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of laws rules. Any dispute or claim concerning the Plan or any Stock Award Agreement or any disputes or claims relating to or arising out of any Stock Award Agreement or the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc., in Santa Clara County, California, pursuant to its employment arbitration rules and procedures (attached hereto in their current form as Annex A), as may be updated, amended or modified form time to time (with such updated, amended or modified rules available at http://www.jamsadr.com/rules-employment-arbitration/). In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs. By executing a Stock Award Agreement, the Company and the recipient of such Stock Award Agreement waive their respective rights to have any such disputes or claims tried by a judge or jury. The Company and all recipients of Stock Awards acknowledge and agree that questions concerning, or any dispute arising in connection with the construction, interpretation or validity of, or otherwise arising out of, the Plan, will, to the extent that arbitration shall not be contemplated pursuant to the Stock Award Agreement by which the holder of a Stock Award is bound, be subject to the exclusive jurisdiction of the state and federal courts in and for the county encompassing the Company’s principal place of business. The parties hereby agree to submit to the personal and exclusive jurisdiction and venue of such courts and agree that process may be served in the manner provided herein for the giving of notices or otherwise as allowed by applicable law. Each party hereto waives any defense of inconvenient forum to the maintenance of any action so brought and waives any bond, surety, or other security that might be required of any other party with respect thereto.
18
ANNEX A
JAMS RULES
19
Exhibit 10.3(b)
Tivic Health Systems Inc.
Stock Option Grant Notice
2017 Equity Incentive Plan
FOR GOOD AND VALUABLE CONSIDERATION, Tivic Health Systems Inc., a California corporation (the “Company”), hereby grants to the Optionee named below, a stock option (the “Option”) to purchase any part or all of the specified number of shares of its Common Stock (“Option Shares”), upon the terms and subject to the conditions set forth in this Stock Option Grant Notice (the “Grant Notice”), at the specified purchase price per share without commission or other charge. The Option is granted pursuant to the Company’s 2017 Equity Incentive Plan (the “Plan”), attached hereto, and the Stock Option Agreement (the “Option Agreement”), attached hereto and promulgated under the Plan and in effect as of the date of this Grant Notice.
| Optionee: | |
| Date of Grant: | |
| Vesting Commencement Date: | |
| Number of Option Shares: | |
| Exercise Price (Per Share): | $ |
| Total Exercise Price: | $ |
| Expiration Date: | Ten years after Date of Grant* |
| 1. | Type of Grant: | x Incentive Stock Option1 | ¨ Nonstatutory Stock Option | |
| 2. | Exercise Schedule: | x Same as Vesting Schedule | ¨ Early Exercise Permitted |
3. Vesting Schedule: Except as otherwise herein provided or as set forth in the Option Agreement, the number of Option Shares that are vested (disregarding any resulting fractional share) as of any date shall be determined as follows: (i) no Option Shares will be vested prior to the Vesting Commencement Date; (ii) twenty-five percent (25%) of the Option Shares will be vested and exercisable upon the one (1) year anniversary of the Vesting Commencement Date; and (iii) the remaining Option Shares will vest and become exercisable in a series of thirty-six (36) successive equal monthly installments, rounded downward to the nearest whole share, measured from the thirteen (13) month anniversary of the Vesting Commencement Date, such that 100% of the Option Shares will be vested and exercisable upon the fourth (4th) anniversary of the Vesting Commencement Date; provided, however, that there has not been a Termination of Service (as defined in the Plan), as of each such date. In no event will the Option become exercisable for any additional Option Shares after a Termination of Service.
4. Acceleration on Change in Control. Notwithstanding the provisions of Section 3 hereof, in the event of a Change in Control (as defined in the Plan):
(a) Provided that there has not been a Termination of Services as of such date, the right to exercise this Option shall accelerate automatically and vest in full, and this Option shall become exercisable as to all of the Option Shares, effective as of immediately prior to the consummation of the Change in Control unless this Option is to be assumed by the acquiring or successor entity (or parent thereof) or a new option or New Incentives are to be issued in exchange therefor, as provided in Section 4(b) below. If the vesting of this Option will accelerate pursuant to this Section 4(a), then the Board shall cause written notice of the Change in Control transaction to be given to the Optionee not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction.
(b) The vesting of this Option shall not accelerate if and to the extent that: (i) this Option (including the unvested portion thereof) is to be assumed by the acquiring or successor entity (or parent thereof) or a new option of comparable value is to be issued in exchange therefor pursuant to the terms of the Change in Control transaction, or (ii) this Option (including the unvested portion thereof) is to be replaced by the acquiring or successor entity (or parent thereof) with other incentives of comparable value under a new incentive program (“New Incentives”) containing such terms and provisions as the Board in its discretion may consider equitable. If this Option is assumed, or if a new option of comparable value is issued in exchange therefor, then this Option or the new option shall be appropriately adjusted, concurrently with the Change in Control, to apply to the number and class of securities or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the Shares issuable upon exercise of this Option had this Option been exercised immediately prior to the Change in Control, and appropriate adjustment also shall be made to the Exercise Price such that the aggregate Exercise Price of this Option or the new option shall remain the same as nearly as practicable.
1 If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.
(c) If the provisions of Section 4(b) above apply, then this Option, the new option or the New Incentives shall continue to vest in accordance with the provisions of Section 3 hereof and shall continue in effect for the remainder of the term of this Option in accordance with the provisions hereof. However, in the event of an Involuntary Termination (as defined below), which results in Optionee’s Termination of Service, in connection with or within twenty-four (24) months following such Change in Control, then vesting of this Option, the new option or the New Incentives shall accelerate in full automatically effective upon such Involuntary Termination.
(d) “Involuntary Termination” shall mean Optionee’s Termination of Service by reason of:
(A) Optionee’s involuntary dismissal or discharge by the Company, or by the acquiring or successor entity (or parent or any subsidiary thereof employing the Optionee) for reasons other than Cause (as defined in the Option Agreement), or
(B) Optionee’s voluntary resignation following (x) a change in Optionee’s position with the Company, the acquiring or successor entity (or parent or any subsidiary thereof) which materially reduces Optionee’s duties and responsibilities, (y) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and target bonus under any performance based bonus or incentive programs) by more than ten percent (10%), or (z) a relocation of Optionee’s principal place of employment by more than thirty (30) miles, provided and only if such change, reduction or relocation is effected without Optionee’s written consent.
(e) The provisions of this Section shall not limit the grounds for the dismissal or discharge of Optionee or any other individual in the service of the Company, the acquiring or successor entity (or parent or any subsidiary thereof).
| 5. | Payment: | By one or a combination of the following items (described in the Plan): |
| x | By cash or check |
| ¨ | By net exercise, if the Company has established procedures for net exercise |
6. Additional Terms/Acknowledgements: The undersigned Optionee acknowledges receipt of, and understands and agrees to, this Grant Notice, the Option Agreement, and the Plan. Further, by their signatures below, the Company and the Optionee agree that the Option is governed by this Grant Notice and by the provisions of the Plan and Option Agreement, both of which are attached to and made a part of this Grant Notice. Optionee acknowledges receipt of copies of the Plan and the Option Agreement, represents that the Optionee has read and is familiar with their provisions, and hereby accepts the Option subject to all of their terms and conditions. Optionee further acknowledges that, as of the Date of Grant, this Grant Notice, the Option Agreement and the Plan set forth the entire understanding between Optionee and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject, with the exception of options previously granted under the Plan.
The Exercise Price (Per Share) has been set at no less than one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant based on what the Company regards as good faith compliance with the applicable guidance issued by the Internal Revenue Service (“IRS”) under Section 409A of the Code (“Section 409A”) in order to avoid the Option being treated as deferred compensation under Section 409A. However, the Company can give no assurance that the IRS will agree that the Exercise Price (Per Share) is at least one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant. Accordingly, by signing below, Optionee agrees and acknowledges that the Company and each of its officers, employees, directors and stockholders shall not be liable to Optionee or any other person for any applicable taxes, interest, penalties or other costs associated with the Option if the IRS were to determine that the Option constitutes deferred compensation under Section 409A. The undersigned Optionee should consult with his or her own tax advisor concerning the tax consequences of the Option as deferred compensation under Section 409A.
*Optionee understands and acknowledges that: (i) the vesting of the Option Shares will terminate upon a Termination of Service (as defined in the Plan) to the Company; (ii) the Option may generally only be exercisable for a short period of time following a Termination of Service, and will thereafter terminate; and (iii) the Option Shares are subject to a Right of Repurchase and a Right of First Refusal in favor of the Company as set forth in the Option Agreement.
| Tivic Health Systems Inc. | Optionee: |
| By: | |||
| Signature | Signature |
| Title: | Date: |
| Date: | Date: |
| Attachments: | (I) Option Agreement |
(II) 2017 Equity Incentive Plan
(III) Notice of Exercise
Attachment I
Option Agreement
Attachment II
2017 Equity Incentive Plan
Attachment III
Notice Of Exercise
Tivic Health Systems Inc.
___________________
___________________
| Date of Exercise: |
Ladies and Gentlemen:
This constitutes notice under my Option that I elect to purchase the number of shares for the price set forth below.
| Type of option (check one): | Incentive ¨ | Nonstatutory ¨ | ||
| Stock option dated: | ||||
| Number of shares as to which option is exercised: | ||||
| Certificates to be issued in name of: | ||||
| Total exercise price: | $_____________________ | $_____________________ | ||
| Cash or check payment delivered herewith: | $_____________________ | $_____________________ |
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Tivic Health Systems Inc. 2017 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this Option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this Option that occurs within two (2) years after the date of grant of this Option or within one (1) year after such shares of Common Stock are issued upon exercise of this Option.
I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the “Shares”), which are being acquired by me for my own account upon exercise of the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and are deemed to constitute “restricted securities” under Rule 701 and Rule 144 promulgated under the Securities Act. I warrant and represent to the Company that I have no present intention of distributing or selling said Shares, except as permitted under the Option Agreement (as defined in the Stock Option Grant Notice executed by me), Securities Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares except as otherwise permitted in the Option Agreement, and for at least ninety days (90) after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Option Agreement, the Company’s Certificate of Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance the FINRA Rule of Conduct or Rule 472(f)(4) of the New York Stock Exchange, as amended, or any similar or successor regulatory rules and regulations (the “Lock Up Period”). I further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Lock Up Period.
| Very truly yours, | |
Tivic Health Systems Inc.
Stock Option Grant Notice
2017 Equity Incentive Plan
FOR GOOD AND VALUABLE CONSIDERATION, Tivic Health Systems Inc., a California corporation (the “Company”), hereby grants to the Optionee named below, a stock option (the “Option”) to purchase any part or all of the specified number of shares of its Common Stock (“Option Shares”), upon the terms and subject to the conditions set forth in this Stock Option Grant Notice (the “Grant Notice”), at the specified purchase price per share without commission or other charge. The Option is granted pursuant to the Company’s 2017 Equity Incentive Plan (the “Plan”), attached hereto, and the Stock Option Agreement (the “Option Agreement”), attached hereto and promulgated under the Plan and in effect as of the date of this Grant Notice.
| Optionee: | |
| Date of Grant: | |
| Vesting Commencement Date: | |
| Number of Option Shares: | |
| Exercise Price (Per Share): | |
| Total Exercise Price: | |
| Expiration Date: | Ten years after Date of Grant* |
| 1. | Type of Grant: | ¨ Incentive Stock Option2 | ¨ Nonstatutory Stock Option | |
| 2. | Exercise Schedule: | xSame as Vesting Schedule | ¨ Early Exercise Permitted |
3. Vesting Schedule: Except as otherwise herein provided or as set forth in the Option Agreement, the number of Option Shares that are vested (disregarding any resulting fractional share) as of any date shall be determined as follows: (i) no Option Shares will be vested prior to the Vesting Commencement Date; (ii) twenty-five percent (25%) of the Option Shares will be vested and exercisable upon the one (1) year anniversary of the Vesting Commencement Date; and (iii) the remaining Option Shares will vest and become exercisable in a series of thirty-six (36) successive equal monthly installments, rounded downward to the nearest whole share, measured from the thirteen (13) month anniversary of the Vesting Commencement Date, such that 100% of the Option Shares will be vested and exercisable upon the fourth (4th) anniversary of the Vesting Commencement Date; provided, however, that there has not been a Termination of Service (as defined in the Plan), as of each such date. In no event will the Option become exercisable for any additional Option Shares after a Termination of Service.
| 4. | Payment: | By one or a combination of the following items (described in the Plan): |
| x | By cash or check |
| ¨ | By net exercise, if the Company has established procedures for net exercise |
5. Additional Terms/Acknowledgements: The undersigned Optionee acknowledges receipt of, and understands and agrees to, this Grant Notice, the Option Agreement, and the Plan. Further, by their signatures below, the Company and the Optionee agree that the Option is governed by this Grant Notice and by the provisions of the Plan and Option Agreement, both of which are attached to and made a part of this Grant Notice. Optionee acknowledges receipt of copies of the Plan and the Option Agreement, represents that the Optionee has read and is familiar with their provisions, and hereby accepts the Option subject to all of their terms and conditions. Optionee further acknowledges that, as of the Date of Grant, this Grant Notice, the Option Agreement and the Plan set forth the entire understanding between Optionee and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject, with the exception of options previously granted under the Plan.
2 If this is an Incentive Stock Option, it (plus other outstanding Incentive Stock Options) cannot be first exercisable for more than $100,000 in value (measured by exercise price) in any calendar year. Any excess over $100,000 is a Nonstatutory Stock Option.
The Exercise Price (Per Share) has been set at no less than one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant based on what the Company regards as good faith compliance with the applicable guidance issued by the Internal Revenue Service (“IRS”) under Section 409A of the Code (“Section 409A”) in order to avoid the Option being treated as deferred compensation under Section 409A. However, the Company can give no assurance that the IRS will agree that the Exercise Price (Per Share) is at least one hundred percent (100%) of the fair market value of the Common Stock on the Date of Grant. Accordingly, by signing below, Optionee agrees and acknowledges that the Company and each of its officers, employees, directors and stockholders shall not be liable to Optionee or any other person for any applicable taxes, interest, penalties or other costs associated with the Option if the IRS were to determine that the Option constitutes deferred compensation under Section 409A. The undersigned Optionee should consult with his or her own tax advisor concerning the tax consequences of the Option as deferred compensation under Section 409A.
*Optionee understands and acknowledges that: (i) the vesting of the Option Shares will terminate upon a Termination of Service (as defined in the Plan) to the Company; (ii) the Option may generally only be exercisable for a short period of time following a Termination of Service, and will thereafter terminate; and (iii) the Option Shares are subject to a Right of Repurchase and a Right of First Refusal in favor of the Company as set forth in the Option Agreement.
| Tivic Health Systems Inc. | Optionee: |
| By: | |||
| Signature | Signature |
| Title: | Date: |
| Date: |
| Attachments: | (I) Option Agreement |
(II) 2017 Equity Incentive Plan
(III) Notice of Exercise
Attachment I
Option Agreement
Attachment II
2017 Equity Incentive Plan
Attachment III
Notice Of Exercise
Tivic Health Systems Inc.
___________________
___________________
| Date of Exercise: |
Ladies and Gentlemen:
This constitutes notice under my Option that I elect to purchase the number of shares for the price set forth below.
| Type of option (check one): | Incentive ¨ | Nonstatutory ¨ | ||
| Stock option dated: | ||||
| Number of shares as to which option isexercised: | ||||
| Certificates to be issued in name of: | ||||
| Total exercise price: | $_____________________ | $_____________________ | ||
| Cash or check payment deliveredherewith: | $_____________________ | $_____________________ |
By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the Tivic Health Systems Inc. 2017 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this Option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this Option that occurs within two (2) years after the date of grant of this Option or within one (1) year after such shares of Common Stock are issued upon exercise of this Option.
I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the “Shares”), which are being acquired by me for my own account upon exercise of the Option as set forth above:
I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and are deemed to constitute “restricted securities” under Rule 701 and Rule 144 promulgated under the Securities Act. I warrant and represent to the Company that I have no present intention of distributing or selling said Shares, except as permitted under the Option Agreement (as defined in the Stock Option Grant Notice executed by me), Securities Act and any applicable state securities laws.
I further acknowledge that I will not be able to resell the Shares except as otherwise permitted in the Option Agreement, and for at least ninety days (90) after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144.
I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Option Agreement, the Company’s Certificate of Incorporation, Bylaws and/or applicable securities laws.
I further agree that, if required by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Securities Act, I will not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance the FINRA Rule of Conduct or Rule 472(f)(4) of the New York Stock Exchange, as amended, or any similar or successor regulatory rules and regulations (the “Lock Up Period”). I further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such Lock Up Period.
| Very truly yours, | |
Stock Option Agreement
(Incentive Stock Option or Nonstatutory Stock Option)
Tivic Health Systems Inc. 2017 Equity Incentive Plan
Effective as of:
Pursuant to the Stock Option Grant Notice (“Grant Notice”) and this Stock Option Agreement (“Option Agreement”), Tivic Health Systems Inc., a California corporation (the “Company”), has granted to Optionee an option under its 2017 Equity Incentive Plan (the “Plan”), to purchase the number of shares of the Company’s Common Stock indicated in Optionee’s Grant Notice, at the exercise price indicated in such Grant Notice. This Option Agreement is incorporated by reference into and made a part of the Grant Notice. Whenever capitalized terms are used in this Option Agreement, they shall have the meaning specified (i) in the Plan, (ii) in the relevant Grant Notice, or (iii) below, unless the context clearly indicates to the contrary.
The details of the Option granted to Optionee are as follows:
1. Term of Option. Subject to the maximum time limitations in Sections 5(b) and 6(a) of the Plan, the term of the Option shall be the period commencing on the Date of Grant and ending on the Expiration Date (as defined in the Grant Notice), unless terminated earlier as provided herein or in the Plan.
2. Exercise Price. The Exercise Price of the Option granted hereby shall be as provided in the Grant Notice.
3. Exercise of Option.
(a) The Grant Notice sets forth the rate at which the Option Shares shall become subject to purchase (“vest”) by Optionee.
(b) In the event of a Change in Control of the Company, except as otherwise may be provided in the Plan or Grant Notice, the vesting of the Option shall not accelerate, and the Option shall terminate if not exercised (to the extent then vested and exercisable) at or prior to such Change in Control.
(c) Optionee shall exercise the Option, to the extent exercisable, in whole or in part, by sending written notice to the Company on a Notice of Exercise in the form attached to the Grant Notice of his or her intention to purchase Option Shares hereunder, together with a check in the amount of the full purchase price of the Option Shares to be purchased, or such other form of payment as permitted by the Grant Notice. Except as otherwise consented to by the Company, Optionee shall not exercise the Option at any one time with respect to less than five percent (5%) of the total Option Shares set forth in the Grant Notice unless Optionee exercises all of the Option then vested and exercisable.
(d) If the Option is an Incentive Stock Option, by Optionee’s exercise of the Option, Optionee agrees that he or she will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of the Option that occurs within two (2) years after the date of the Date of Grant or within one (1) year after such shares of Common Stock are transferred upon exercise of the Option.
(e) Optionee agrees to complete and execute any additional documents which the Company reasonably requests that Optionee complete in order to comply with applicable federal, state and local securities laws, rules and regulations.
(f) Subject to the Company’s compliance with all applicable laws, rules and regulations relating to the issuance of such Option Shares and Optionee’s compliance with all the terms and conditions of the Grant Notice, this Option Agreement, and the Plan, the Company shall promptly deliver the Option Shares to Optionee.
(g) Except as otherwise provided herein or in the Plan, the Option may be exercised during the lifetime of Optionee only by Optionee.
(h) In the event that Optionee is an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a “Non-Exempt Employee”), Optionee may not exercise his or her Option until the later date (i) that he or she shall have completed at least six (6) months of service to the Company measured from the Date of Grant specified in Optionee’s Grant Notice, or (ii) the date set forth in the Grant Notice.
4. Exercise Prior to Vesting (“Early Exercise”). If expressly permitted by the Grant Notice and subject to the provisions of this Option Agreement, Optionee may, at any time that is both (i) prior to a Termination of Service; and (ii) prior to the Expiration Date, elect to exercise all or part of the Option, including the nonvested portion of the Option; provided, however, that:
(a) a partial exercise of the Option shall be deemed to cover first any vested Option Shares and then the earliest vesting installment(s) of unvested Option Shares;
(b) any Option Shares so purchased from installments which have not vested as of the date of exercise shall be subject to a purchase option in favor of the Company, pursuant to an Early Exercise Stock Purchase Agreement in form satisfactory to the Company;
(c) Optionee shall enter into the Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and
(d) as provided in the Plan, if the Option is an Incentive Stock Option, to the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which the Option plus all other Incentive Stock Options held by Optionee are exercisable for the first time during any calendar year (under all plans of the Company and its Affiliates) exceeds One Hundred Thousand Dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.
5. Option Not Transferable. The Option granted hereunder shall not be transferable in any manner other than as provided in Section 6(d) of the Plan. More particularly (but without limiting the foregoing), the Option may not be assigned, transferred (except as expressly provided in the Plan), pledged or hypothecated in any way, shall not be assignable by operation of law and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions hereof, or the levy of any execution, attachment or similar process upon the Option, shall be null and void and without effect.
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6. Termination of Option.
(a) To the extent not previously exercised, the Option shall terminate on the Expiration Date; provided, however, that except as otherwise provided in this Section 6, the Option may not be exercised more than sixty (60) days after the Termination of Service of Optionee for any reason (other than for Cause, as defined in the Plan, or upon Optionee’s death or Disability). Within such sixty (60)-day period, except as may otherwise be specifically provided in this Option Agreement or any other agreement between Optionee and the Company which has been approved by the Board, Optionee may exercise the Option only to the extent the same was exercisable on the date of such termination and said right to exercise shall terminate at the end of such period.
(b) In the event of the Termination of Service of Optionee as a result of Optionee’s Disability, the Option shall be exercisable for a period of six (6) months from the date of such termination, but in no event later than the Expiration Date and only to the extent that the Option was exercisable on the date of such termination.
(c) In the event of the Termination of Service of Optionee as a result of Optionee’s death, the Option shall be exercisable by Optionee’s estate (or by the person who acquires the right to exercise the Option by will or by the laws of descent and distribution) for a period of twelve (12) months from the date of such termination, but in no event later than the Expiration Date and only to the extent that Optionee was entitled to exercise the Option on the date of death.
(d) In the event of the Termination of Service of Optionee for Cause (as defined below), unless otherwise determined by the Board, (A) the Option shall expire as of the date of the first occurrence giving rise to such termination or upon the Expiration Date, whichever is earlier; (B) Optionee shall have no rights with respect to any unexercised portion of the Option; and (C) any Option Shares issued in respect of the exercise of the Option on or after the date of the first act and/or event constituting Cause shall have occurred shall be deemed to have been issued in respect of an expired option, and shall thereupon be deemed null and void ab initio, and Optionee shall have no claims to, or rights in, any such Option Shares. “Cause” means with respect to Optionee, the occurrence of any of the following events, as reasonably determined by the Board in each case: (i) Optionee’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) Optionee’s commission, or attempted commission, of, or participation in, a fraud or act of dishonesty against the Company or any Affiliate, or any of their respective employees, officers or directors; (iii) Optionee’s intentional, material violation of any contract or agreement between the Optionee and the Company or any Affiliate or of any statutory duty owed to the Company or any Affiliate; (iv) Optionee’s unauthorized use or disclosure of the Company’s or an Affiliate’s material confidential information or trade secrets; (v) Optionee’s gross misconduct in connection with Optionee’s service to the Company or an Affiliate; or (vi) Optionee’s failure to promptly return all documents and other tangible items belonging to the Company or its Affiliates in the Participant’s possession or control, including all complete or partial copies, recordings, abstracts, notes or reproductions of any kind made from or about such documents or information contained therein, upon a Termination of Service for any reason. “Cause” shall not require that a civil judgment or criminal conviction have been entered against, or guilty plea shall have been made by, Optionee regarding any of the matters referred to in clauses (i) through (vi). Accordingly, the Board shall be entitled to determine “Cause” based on its good faith belief. If the Optionee is criminally charged with a felony or similar offense, that shall be a sufficient, but not a necessary, basis for such a belief. Unless otherwise specifically provided in the Grant Notice, the foregoing definition of “Cause” shall apply for all purposes relating to the Option, notwithstanding any employment or other agreement by and between Optionee and the Company or any Affiliate thereof that defines a termination on account of “Cause” (or a term having similar meaning). Any determination by the Board that an Optionee’s Termination of Service is for Cause may be made following a Termination of Service and shall be communicated by written notice to Optionee within 30 days after a Termination of Service; provided, however, that after such 30-day period, the Board may make a determination that a Termination of Service is for “Cause” based upon clear and convincing evidence subsequently received by the Board, that an event or events constituting Cause have occurred on or prior the date of the Termination of Service and, in such event, any Option Shares issued in respect of the exercise of the Option on or after the date that the first act and/or event constituting Cause shall have occurred, shall be deemed to have been issued in respect of an expired option and shall thereupon be deemed null and void ab initio, and Optionee shall have no claims to, or rights in, any such Option Shares.
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(e) Notwithstanding the foregoing, the Option is subject to earlier termination upon a Change in Control, as provided in Section 3(b) above and in Section 11 of the Plan, or upon the dissolution of the Company. If the Option will terminate in connection with a Change in Control, the Company shall provide written notice to Optionee of a proposed transaction constituting a Change in Control, not less than ten (10) days prior to the anticipated effective date of the proposed transaction.
(f) Notwithstanding anything herein to the contrary, no portion of any Option which is not exercisable by Optionee upon the Termination of Service of such Optionee shall thereafter become exercisable, regardless of the reason for such termination, except as may otherwise be specifically provided in this Option Agreement or any other agreement between Optionee and the Company which has been approved by the Board.
7. No Right to Continued Service. The Option does not confer upon Optionee any right to continue as an Employee or Director of, or Consultant to, the Company or an Affiliate, nor does it limit in any way the right of the Company or an Affiliate to terminate Optionee’s employment or other relationship with the Company or an Affiliate, at any time, with or without Cause.
8. Right of Repurchase of Option Shares.
(a) In furtherance of, and not in limitation of Section 5, the Option Shares issued pursuant to the Option shall be subject to a right, but not an obligation, of repurchase by the Company and/or its assignee(s) (the “Right of Repurchase”), at the price determined under Section 8(b) below, if prior to the termination of the Right of Repurchase as provided in Section 10(d) below, a Termination of Service occurs for any reason, including as a result of Optionee’s death or Disability. Without the Company’s prior written consent, Option Shares issued by the Company shall not be transferable by Optionee during the period during which the Right of Repurchase applies, and the Company may take such steps as it deems necessary to ensure compliance with this restriction.
(b) The price per share at which the Company may exercise the Right of Repurchase (the “Repurchase Price”) shall be the Fair Market Value of an Option Share on the date the Company exercises its Right of Repurchase, except as otherwise provided in an Early Exercise Stock Purchase Agreement referred to in Section 4.
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(c) The Company’s Right of Repurchase shall terminate if not exercised by written notice from the Company to Optionee within ninety (90) days after the Termination of Service (or within 90 days after the date of exercise in the case of Option Shares purchased after the Termination of Service). If the Company exercises its Right of Repurchase, it shall give notice thereof to Optionee within such ninety (90)-day period, and, upon receipt of such notice, Optionee shall immediately endorse and deliver to the Company the stock certificate(s) representing the Option Shares being repurchased, and the Company shall then promptly pay, pursuant to the provisions of Section 8(d) below, the total Repurchase Price to Optionee. If the Company exercises its Right of Repurchase, it may exercise its right with respect to all or part of such Option Shares.
(d) The Repurchase Price shall be paid first by cancellation of any obligation for accrued but unpaid interest outstanding under notes issued by Optionee upon purchase of the Option Shares (if any), next by cancellation of principal outstanding under such notes (if any), and finally by payment in cash of the balance due.
(e) In the event the Company does not elect to exercise its Right of Repurchase within the ninety (90)-day period, the Option Shares shall no longer be subject to repurchase by the Company pursuant to this Section 8.
9. Right of First Refusal. Optionee agrees that he or she will not sell or otherwise transfer any Option Shares (including transfer by operation of law) at any time before or after the expiration of the Right of Repurchase and prior to the termination of this Section 9 pursuant to Section 10(d) below unless such Option Shares shall first be offered to the Company as follows:
(a) Optionee shall deliver a notice (the “Notice”) to the Company, stating (i) Optionee’s bona fide intention to sell or transfer such Option Shares, to a third party purchaser in a bona fide arms length transaction, pursuant to a written agreement in respect thereof; (ii) the number of such Option Shares to be sold or transferred; (iii) the consideration for which Optionee proposes to sell or transfer such Option Shares; (iv) the terms of payment of such consideration and any other terms and conditions of sale; and (v) the name of the proposed purchaser or transferee.
(b) Within sixty (60) days after receipt of the Notice, the Company may elect to purchase any or all of the Option Shares to which the Notice refers, for the consideration per share and upon the terms and conditions specified in the Notice, except as set forth in Section 9(e) below for transfers involving non-cash consideration. If the Company elects not to purchase all such Option Shares, the Company may assign its right to purchase the remaining Option Shares. The Company’s assignees may elect, within sixty (60) days after receipt by the Company of the Notice, to purchase any or all Option Shares to which the Notice refers which the Company has not elected to purchase, for the consideration per share and upon the terms and conditions specified in the Notice, except as set forth in Section 9(e) below. An election to purchase shall be made by written notice to Optionee, specifying the number of Option Shares to be purchased. If the Company and/or its assignees elect to purchase the offered Option Shares, they shall complete the purchase within ninety (90) days after receipt by the Company of the Notice, unless a longer period is set forth in the Notice.
(c) If the Company and/or its assignees do not elect to so purchase all of such offered Option Shares within such sixty (60)-day period, Optionee shall have no obligation to transfer such Option Shares to the Company and/or its assignees and Optionee shall have a period of thirty (30) days thereafter to transfer all (but not less than all) of such Option Shares to the transferee referred to in the Notice and for the same consideration and on the other terms as set forth therein; provided, however, that prior to any transfer of such Option Shares, the proposed transferee shall execute and deliver to the Company an agreement with the Company, in form and substance satisfactory to the Company, pursuant to which such transferee agrees to be subject to the relevant provisions of this Option Agreement.
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(d) In the event that such Option Shares are not transferred to the transferee referred to in the Notice and in accordance with the terms of this Option Agreement within such 30-day period, the restrictions on transfer provided in this Section 9 shall again become applicable to the Option Shares.
(e) If part or all of the purchase consideration specified in a Notice delivered by Optionee pursuant to this Section 9 is other than cash or purchaser’s promissory note or other evidence of indebtedness, the Company and its assignee(s) shall have the right to purchase the Option Shares specified in the Notice for a cash price equal to the Fair Market Value of the number of Option Shares to be so purchased by the Company and/or its assignee(s). The Fair Market Value of any Option Shares shall be as determined in good faith by the Company’s Board of Directors.
(f) Notwithstanding anything in this Section 9 or elsewhere in this Agreement to the contrary, if at any time following the exercise of all or a portion of this Option, the Company’s Bylaws contain provisions regarding the right of the Company to repurchase its securities from stockholders holding Option Share, then such provisions shall govern the rights of the Company and/or any other party to repurchase shares of the Company’s stock from any stockholder, including the Option Shares, and the provisions of this Section 9 shall be inapplicable. Optionee agrees to be bound by all of the provisions of the Bylaws granting the Company a right to repurchase its securities, if any.
10. Other Provisions Regarding Transfer.
(a) Optionee, as a condition for accepting any Option Shares, shall not sell, transfer or pledge any Option Shares subject to the Right of Repurchase described in Section 8 or the right of first refusal described in Section 9 hereof, other than in the manner expressly permitted in this Option Agreement, and any such sale, transfer or pledge of the Option Shares in violation of this Agreement shall be void. The Company shall not be required (i) to transfer on its books any Option Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Option Agreement or (ii) to treat as the owner of such Option Shares or accord the right to vote or pay dividends to any transferee to whom such Option Shares shall have been so transferred.
(b) Notwithstanding anything to the contrary contained herein, Optionee is under no restrictions as to the transfer by him or her of any or all of the issued Option Shares to his or her Related Transferees (as defined herein), provided that each such Related Transferee shall first (i) execute a written consent to be bound by all of the relevant provisions of this Option Agreement in form and substance satisfactory to the Company; and (ii) give a duplicate original of such consent to the Company. The “Related Transferees” of Optionee as used herein shall consist of Optionee’s spouse, his or her adult lineal descendants, the adult spouses of his or her lineal descendants and trusts for the benefit of any of the foregoing, Optionee and/or his or her minor lineal descendants. In the event of any transfer by Optionee to his or her Related Transferees of all or any part of the Option Shares (or in the event of any subsequent transfer by any such Related Transferee to another Related Transferee of Optionee), such Related Transferees shall receive and hold the Option Shares subject to the relevant terms of this Option Agreement and Optionee’s rights and obligations hereunder as though the Option Shares were still owned by Optionee and shall together with Optionee continue to be deemed to be the “Optionee” for purposes of this Option Agreement, including without limitation restrictions on the transfer of Option Shares. There shall be no further transfer of the Option Shares by a Related Transferee except between and among such Related Transferee, the Optionee and other Related Transferees of Optionee, or except as permitted by this Option Agreement. The Company advises Optionee to seek independent tax counsel prior to transferring any Option Shares to any Related Transferee.
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(c) Optionee hereby grants to the Company a security interest in the Option Shares for the purpose of ensuring that a transfer in violation of the restrictions set forth in Sections 8, 9 and 10 of this Agreement does not occur. In furtherance of such security interest, the Company may, at its option, retain the certificate(s) evidencing the Option Shares, together with stock assignments executed in blank by Optionee, until such transfer restrictions terminate in accordance with Section 10(d). Optionee hereby grants to any officer(s) of the Company the power of attorney to cause the Option Shares to be transferred on the books of the Company in the event the Company and/or its assignees repurchase some or all of the Option Shares in accordance with this Option Agreement.
(d) Notwithstanding anything herein contained to the contrary, for so long as the Company shall have elected to be treated as a subchapter S corporation pursuant to the Code, no Optionee shall transfer any Option or any Option Shares to any person or entity or in any manner which would cause the S election theretofore made by Company to be terminated or revoked. Any such transfer or attempted transfer shall be void ab initio.
(e) The transfer restrictions provided in Sections 8, 9 and 10 hereof may be terminated on such conditions as the Board may determine in its sole discretion.
11. Notice of Tax Election. If Optionee makes any tax election relating to the treatment of the Option Shares under the Internal Revenue Code of 1986, as amended, Optionee shall promptly notify the Company of such election.
12. Market Stand-Off.
(a) By Optionee exercising his or her Option, Optionee agrees not to sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by Optionee, for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance with the FINRA Rule of Conduct or Rule 472(f)(4) of the New York Stock Exchange, as amended, and similar or successor regulatory rules and regulations (the “Lock-Up Period”); provided, however, that nothing contained in this section shall prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock-Up Period. Optionee further agrees to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to Optionee’s shares of Common Stock until the end of such period. The underwriters of the Company’s stock are intended third party beneficiaries of this Section 12(a) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
(b) In order to enforce the provisions of this Section 12, the Company may impose stop-transfer instructions with respect to the Option Shares until the end of the applicable Lock-Up Period.
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13. Acknowledgments of Optionee. Optionee acknowledges and agrees that:
(a) Although the Company has made a good faith attempt to qualify the Option as an incentive stock option within the meaning of Sections 421, 422 and 424 of the Code (if the Grant Notice provides that the Option is an Incentive Stock Option), the Company does not warrant that the Option granted herein constitutes an “incentive stock option” within the meaning of such sections, or that the transfer of Option Shares will be treated for federal income tax purposes as specified in Section 421 of the Code.
(b) In the event the Option is not an incentive stock option within the meaning of Sections 421, 422 and 424 of the Code (whether or not the Grant Notice provides that the Option is an Incentive Stock Option) and it is determined that the per share Exercise Price of the Option (as set forth in the Notice of Grant of Option) is less than the fair market value of a share of the Company’s Common Stock as of the date of grant of the Option, Optionee could have deferred compensation pursuant to Section 409A of the Code in an amount equal to the difference between the fair market value of a share of the Company's Common Stock as of the date that the Option vests and the per share Exercise Price multiplied by the number of Option Shares then vesting (the “spread”). As a result, because the Option likely will not be compliant with the rules in respect of deferred compensation under Section 409A, Optionee could have taxable income (taxed at ordinary income tax rates) in an amount equal to the spread on each vesting date. Optionee would also incur a tax equal to 20% of the spread (and to the extent that Optionee is a California resident, Optionee could incur an additional tax equal to 20% of the spread). The Company does not warrant that the Exercise Price of the Option is equal to or greater than the fair market value of the Common Stock as of the date of grant. Because the issues relating to Section 409A are complex, the Company recommends that Optionee consult with his or her tax advisors as to the possible tax consequences arising from the grant of the Option.
(c) Optionee shall notify the Company in writing within fifteen (15) days of each disposition (including a sale, exchange, gift or a transfer of legal title) of the Option Shares made within three years after the issuance of such Option Shares.
(d) If the Grant Notice provides that the Option is an Incentive Stock Option, Optionee understands that if, among other things, he or she disposes of any Option Shares granted within two years of the granting of the Option to him or her or within one year of the issuance of such shares to him or her, then such Option Shares will not qualify for the beneficial treatment which Optionee might otherwise receive under Sections 421 and 422 of the Code.
(e) Optionee and his or her transferees shall have no rights as a stockholder with respect to any Option Shares until the date of the issuance of a stock certificate evidencing such Option Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 of the Plan.
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(f) All certificates representing the Option Shares shall have endorsed thereon the following legends, the provisions of which are hereby incorporated into this Option Agreement by this reference, and such other legends as the Company deems necessary or appropriate:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR THE SECURITIES LAWS OF ANY STATE AND HAVE BEEN ISSUED AND SOLD PURSUANT TO AN EXEMPTION FROM THE ACT AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED BY THE HOLDERS THEREOF AT ANY TIME EXCEPT (1) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE ACT COVERING THE SECURITIES, OR (2) IF, IN THE REASONABLE OPINION OF COUNSEL TO THE CORPORATION, SUCH SHARES MAY BE TRANSFERRED WITHOUT SUCH REGISTRATION.
IN ADDITION, THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION, AND THE SALE, TRANSFER OR HYPOTHECATION OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED BY THE PROVISIONS OF A STOCK OPTION AGREEMENT ENTERED INTO BY THE CORPORATION AND THIS STOCKHOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE CORPORATION AND ALL OF THE PROVISIONS OF WHICH ARE INCORPORATED HEREIN.
14. Investment Representations. As an inducement to the Company to grant the Option and issue the Option Shares to Optionee, Optionee hereby makes the following representations and warranties, and authorizes the Company to rely upon the same:
(a) Optionee will acquire the Option Shares for investment for his or her own account, not for resale, without any intention of or view toward or for participating, directly or indirectly, in a distribution of the Option Shares or any portion thereof.
(b) Optionee understands that an investment in the Company is speculative, that any possible profits therefrom are uncertain, and that he or she must bear the economic risks of the investment in the Company for an indefinite period of time.
(c) Optionee understands that the Option Shares have not been registered under the Securities Act in reliance on the exemption provided by Rule 701 promulgated thereunder for compensatory benefit plans; and that the Option Shares have not been registered or qualified under the “blue sky” laws of any state.
(d) Optionee understands that the Option Shares may have to be held indefinitely unless they are subsequently registered under the Securities Act and qualified or registered under other applicable securities laws, rules and regulations, which is unlikely, or unless an exemption from such qualification or registration is available.
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(e) Optionee understands and agrees that (i) the legends set forth in Section 13(f) hereof will be placed on the certificate(s) evidencing the Option Shares and, except as otherwise herein provided for, on certificate(s) issued to transferees; (ii) the stock records of the Company will be noted with respect to such restrictions; (iii) the Company will not be under any obligation to register the Option Shares or to comply with any exemption available for sale of the Option Shares without registration; and (iv) the information or conditions necessary to permit routine sales of securities of the Company under Rule 144 of the Securities Act are not now available and it is not likely that they will become available in the foreseeable future.
(f) Optionee is a bona fide resident and domiciliary of, not a temporary transient resident of, and has his or her principal residence in, the state or other jurisdiction set forth under Optionee’s signature in the Grant Notice, and Optionee does not have any present intention of moving his or her principal residence from such state or jurisdiction.
15. Withholding Obligations. Whenever Option Shares are to be issued under the Option Agreement, the Company shall have the right to require Optionee to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to issuance and/or delivery of any certificate or certificates for such Option Shares.
16. No Obligation to Notify. The Company shall have no duty or obligation to Optionee to advise Optionee as to the time or manner of exercising the Option. Furthermore, except as specifically set forth herein or in the Plan, the Company shall have no duty or obligation to warn or otherwise advise Optionee of a pending termination or expiration of the Option or a possible period in which the Option may not be exercised. The Company has no duty or obligation to minimize the tax consequences of the Option granted to Optionee.
17. Miscellaneous.
(a) This Option Agreement shall bind and inure to the benefit of the parties’ heirs, legal representatives, successors and permitted assigns.
(b) This Option Agreement, the Grant Notice and the Plan, constitute the entire agreement between the parties pertaining to the subject matter contained herein and they supersede all prior and contemporaneous agreements, representations and understandings of the parties. No supplement, modification or amendment of this Option Agreement shall be binding unless executed in writing by all of the parties. No waiver of any of the provisions of this Option Agreement shall be deemed or shall constitute a waiver of any other provisions, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. In the event there exists any conflict or discrepancy between any of the terms in the Plan and this Option Agreement, the terms of the Plan shall be controlling. A copy of the Plan has been delivered to Optionee and also may be inspected by Optionee at the principal office of the Company.
(c) Should any portion of the Plan, the Grant Notice or this Option Agreement be declared invalid and unenforceable, then such portion shall be deemed to be severable from this Option Agreement and shall not affect the remainder hereof.
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(d) All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified; (ii) three (3) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iii) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at its principal executive office, and to Optionee at the address set forth in the Option Agreement, or at such other address as the Company or Optionee may designate by ten (10) days advance written notice to the other party hereto.
(e) Any dispute or claim concerning the Option Agreement or the Plan or any disputes or claims relating to or arising out of the Option Agreement or the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc. in the county encompassing the Company’s principal place of business pursuant, to its employment arbitration rules and procedures (attached hereto in their current form as Annex A), as may be updated, amended or modified form time to time (with such updated, amended or modified rules available at http://www.jamsadr.com/rules-employment-arbitration/). In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs. By executing the Option Agreement, the Company and Optionee waive their respective rights to have any such disputes or claims tried by a judge or jury.
(f) This Option Agreement shall be construed according to the laws of the State of California.
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ANNEX A
JAMS RULES
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Exhibit 10.7
TIVIC HEALTH SYSTEMS INC.
NOTE PURCHASE AGREEMENT
JUNE 17, 2020
TABLE OF CONTENTS
| Page | |||
| 1. | Issuance of Notes | 1 | |
| 1.1 | Issuance of Notes | 1 | |
| 2. | Closings | 1 | |
| 2.1 | Initial Closing | 1 | |
| 2.2 | Subsequent Closings | 1 | |
| 2.3 | Conditions of Investors’ Obligations at Closing | 1 | |
| 2.4 | Conditions of the Company’s Obligations at Closing | 2 | |
| 2.5 | Delivery | 2 | |
| 3. | Representations, Warranties and Covenants of Investors | 2 | |
| 3.1 | Purchase for Own Account | 2 | |
| 3.2 | Disclosure of Information | 3 | |
| 3.3 | Investment Experience | 3 | |
| 3.4 | Accredited Investor; Non-U.S. Persons | 3 | |
| 3.5 | Restrictions on Transfer | 3 | |
| 3.6 | Further Limitations on Disposition | 4 | |
| 3.7 | Confidentiality | 4 | |
| 3.8 | Investment Entity | 5 | |
| 3.9 | Validity | 5 | |
| 3.10 | No Tax Advice | 5 | |
| 3.11 | Risks | 5 | |
| 3.12 | Disclosure of Information | 5 | |
| 4. | Representations and Warranties of the Company | 5 | |
| 4.1 | Organization, Good Standing and Qualification | 5 | |
| 4.2 | Authorization, Enforceability | 5 | |
| 4.3 | Litigation | 6 | |
| 4.4 | Absence of Required Consents; No Violations | 6 | |
| 4.5 | Valid Issuance of Securities | 6 | |
| 4.6 | Approvals | 6 | |
| 4.7 | Intellectual Property | 6 | |
| 4.8 | Financial Statements | 7 | |
| 4.9 | No “Bad Actor” Disqualification | 7 | |
| 5. | Legends | 7 | |
| 5.1 | Federal Legends | 7 | |
| 5.2 | Other Legends | 7 | |
| 5.3 | Market Stand-Off | 8 | |
| 5.4 | Stop-Transfer Notices | 8 | |
| 5.5 | Refusal to Transfer | 8 | |
| 5.6 | Removal of Legend and Transfer Restrictions | 8 | |
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| 6. | Miscellaneous | 8 | |
| 6.1 | Successors and Assigns | 8 | |
| 6.2 | Governing Law | 9 | |
| 6.3 | Titles and Subtitles | 9 | |
| 6.4 | Notices | 9 | |
| 6.5 | Amendments and Waivers | 10 | |
| 6.6 | Severability | 10 | |
| 6.7 | Finder’s Fee | 10 | |
| 6.8 | Further Assurances | 10 | |
| 6.9 | Survival of Representations Warranties and Covenants | 10 | |
| 6.10 | Separability | 10 | |
| 6.11 | Acknowledgment | 11 | |
| 6.12 | Construction | 11 | |
| 6.13 | Entire Agreement | 11 | |
| 6.14 | Attorney’s Fees | 11 | |
| 6.15 | Waiver of Conflicts | 11 | |
| 6.16 | Expenses | 11 | |
| 6.18 | Counterparts | 12 | |
| 6.19 | California Securities Laws | 12 | |
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TIVIC HEALTH SYSTEMS INC.
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT (this “Agreement”) is made as of June 17 2020, by and among Tivic Health Systems Inc., a California corporation (the “Company”), and the investors listed on Exhibit A hereto who become signatories to this Agreement (each an “Investor” and, collectively, the “Investors”).
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Issuance of Notes.
1.1 Issuance of Notes. Subject to the terms and conditions of this Agreement, at each Closing (as defined below), the Company shall issue and sell to each Investor participating in such Closing, an unsecured convertible promissory note (each such note, a “Note” and collectively, the “Notes”) in the principal amount set forth opposite each such Investor’s name on Exhibit A attached hereto (the “Principal Amount”), against payment by such Investor to the Company of the Principal Amount. The Company may issue and sell Notes with an aggregate Principal Amount of up to $1,500,000 under this Agreement. The Notes shall each be in substantially the form of Exhibit B attached hereto, except as may otherwise be agreed upon by the Company and an Investor.
2. Closings.
2.1 Initial Closing. The initial closing of the purchase and sale of the Notes shall take place at the offices of Procopio, Cory, Hargreaves & Savitch LLP (“Procopio”), 1117 California Avenue, Palo Alto, California, on June 17, 2020, at 10:00 a.m. (the “Initial Closing”), or at such other place and time as the Company and the Investors scheduled to purchase at least a majority in Principal Amount mutually agree.
2.2 Subsequent Closings. Subsequent to the Initial Closing, until the earlier of the date that is 120 days following the date of the Initial Closing or such time as the aggregate Principal Amount evidenced by all of the Notes equals a total of $1,500,000, the Company may sell additional Notes to such persons or entities as determined by the Company (each such closing, a “Subsequent Closing” and, together with the Initial Closing, each a “Closing”). For purposes of this Agreement, and all other agreements contemplated hereby, any additional purchaser so acquiring Notes shall be deemed to be an “Investor” for purposes of this Agreement, and any Notes so acquired by such additional purchaser shall be deemed to be “Notes” for all purposes hereunder. Exhibit A shall be revised by the Company, without the consent of any other person or entity, to reflect the sale of Notes at all Subsequent Closings. The closing of the purchase and sale of such additional Notes hereunder shall take place on such date as is mutually agreeable to the Company and Investors that are identified on Exhibit A as purchasing Notes representing a majority of the aggregate Principal Amounts of all Notes to be issued at such Subsequent Closing (or at such other time and place as is mutually agreed upon by the Company and such parties).
2.3 Conditions of Investors’ Obligations at Closing. The several obligations of each Investor to purchase the Notes at a Closing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 2.3, any of which may be waived in writing by such Investor.
(a) Representations and Warranties. The representations and warranties made by the Company in Section 4 hereof shall be true and correct in all material respects on and as of the date of such Closing (except as to such representations and warranties made as of a specific date, which shall be measured as of such date).
(b) Conditions. All agreements and conditions contained in this Agreement to be performed by the Company on or prior to such Closing shall have been performed or complied with in all material respects.
(c) Delivery of Notes. The Company shall have executed and delivered to each Investor a Note evidencing the Company’s indebtedness to such Investor in the amount next to such Investor’s name on Exhibit A.
2.4 Conditions of the Company’s Obligations at Closing. The obligations of the Company to sell and issue Notes to each Investor at a Closing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 2.4, any of which may be waived in writing by the Company.
(a) Representations and Warranties. The representations and warranties of such Investors contained in Section 3 of this Agreement shall be true and correct in all material respects on and as of the date of such Closing, with the same effect as if made on and as of such Closing.
(b) Conditions. All agreements and conditions contained in this Agreement to be performed by the Investor on or prior to such Closing shall have been performed or complied with in all material respects.
(c) Delivery of Notes. Each Investor shall have executed and delivered to the Company the Note issued by the Company to such Investor which such Note evidences the Company’s indebtedness to such Investor in the amount next to such Investor’s name on Exhibit A.
2.5 Delivery. At each Closing, the Company shall deliver to each Investor a Note in the Principal Amount designated opposite such Investor’s name on Exhibit A, against delivery of (1) payment of the purchase price therefor by a wire transfer of immediately available funds, to a bank designated by the Company or by conversion of indebtedness, as applicable, and (2) delivery of counterpart signature pages to this Agreement and the Note (collectively, the “Transaction Documents”). Each Investor purchasing a Note through conversion of indebtedness at any Closing agrees that the applicable convertible note held by such Investor is cancelled as of such Closing and all principal and interest outstanding thereunder shall be converted as contemplated by the applicable Note.
3. Representations, Warranties and Covenants of Investors. Each Investor, severally and not jointly, hereby represents, warrants and covenants to the Company as follows:
3.1 Purchase for Own Account. Such Investor represents that it is acquiring the Notes, the equity securities issuable upon conversion of the Notes and any Common Stock issuable upon conversion of any such equity securities (collectively, the “Securities”) solely for investment for such Investor’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. The acquisition by such Investor of any of the Securities shall constitute confirmation of the representation by such Investor that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.
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3.2 Disclosure of Information. Such Investor has had an opportunity to discuss the terms of this offering and the Company’s business, management and financial affairs with the Company’s management, and the opportunity to inspect the Company’s facilities and such books and records and material contracts as such Investor deemed necessary to its determination to purchase the Securities.
3.3 Investment Experience. Either (i) such Investor or its officers, directors, managers or controlling persons has a preexisting personal or business relationship with the Company or its officers, directors or controlling persons, or (ii) such Investor, by reason of its own business and financial experience, has the capacity to protect its own interests in connection with the investment contemplated hereby. Such Investor represents that it is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities.
3.4 Accredited Investor; Non-U.S. Persons. Such Investor either (a) is an “accredited investor” within the meaning of Securities and Exchange Commission (“SEC”) Rule 501 of Regulation D, as presently in effect, or (b) (i) certifies that such Investor is not a “U.S. person” within the meaning of SEC Rule 902 of Regulation S, as presently in effect, and that such Investor is not acquiring the Securities for the account or benefit of any such U.S. person, (ii) agrees to resell the Securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration and agrees not to engage in hedging transactions with regard to such Securities unless in compliance with the Act, (iii) agrees that any certificates for any Securities issued to such Investor shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration and that hedging transactions involving such Securities may not be conducted unless in compliance with the Act, and (iv) agrees that the Company is hereby required to refuse to register any transfer of any Securities issued to such Investor not made in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration.
3.5 Restrictions on Transfer. Such Investor understands that the Securities are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the “Act”), only in certain limited circumstances. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. Such Investor understands that the Securities have not been and will not be registered under the Act and have not been and will not be registered or qualified in any state in which they are offered, and thus the Investor will not be able to resell or otherwise transfer his, her or its Securities unless they are registered under the Act and registered or qualified under applicable state securities laws, or an exemption from such registration or qualification is available. Such Investor has no immediate need for liquidity in connection with this investment and does not anticipate that it will need to sell his, her or its Securities in the foreseeable future. INVESTOR UNDERSTANDS AND ACKNOWLEDGES HEREIN THAT AN INVESTMENT IN THE COMPANY’S SECURITIES INVOLVES AN EXTREMELY HIGH DEGREE OF RISK AND MAY RESULT IN A COMPLETE LOSS OF HIS, HER OR ITS INVESTMENT.
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3.6 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and any other agreement that the purchasers of such Securities are required to execute and deliver in connection with the purchase of such Securities, and:
(a) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or
(b) (i) such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144.
Notwithstanding the provisions of subsections (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership or limited liability company to a partner of such partnership or a member of such limited liability company or a retired partner of such partnership who retires after the date hereof or a retired member of such limited liability company who retires after the date hereof, or to the estate of any Investor or the transfer by gift, will or intestate succession by any Investor to his or her spouse or to the siblings, lineal descendants or ancestors of such Investor or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder.
3.7 Confidentiality. Such Investor agrees that he, she or it shall keep confidential and shall not use, disclose or divulge any information which such Investor may obtain from the Company, pursuant to financial statements, reports and other materials submitted by the Company as required hereunder or under any other documents, or pursuant to information rights granted to an Investor unless such information is known, or until such information becomes known, to the public through no fault of such Investor or its agents, or unless the Company’s President or Chief Executive Officer gives written consent to such Investor’s release of such information, except that no such written consent shall be required (and Investor shall be free to release such information) if such information is to be provided to such Investor’s counsel or accountant, or to an officer, director, general partner, limited partner, shareholder, investment counselor or advisor, or employee of an Investor with a need to know such information; provided that any such counsel, accountant, officer, director, general partner, limited partner, shareholder, investment counselor or advisor, or employee shall be bound by the provisions of this Section 3.7. Notwithstanding the foregoing, this Section 3.7 shall not apply (a) to information which an Investor learns from a third party with the right to make such disclosure, provided Investor complies with the restrictions imposed by the third party, (b) to information which is in such Investor’s possession prior to the time of disclosure by the Company and not acquired by Investor under a confidentiality obligation, (c) to the minimum extent Investor is required to disclose such information by law or a governmental regulatory authority, (d) to the minimum extent (after requesting and pursuing confidential treatment to the extent reasonably possible) such Investor is required to disclose such information by court order. For the purposes of this Agreement: (A) a Person shall be deemed an “Affiliate” of another Person who, directly or indirectly, controls, is controlled by or is under common control with such Person, including, without limitation, any general partner, managing member, officer or director of such Person or any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person; and (B) “Person” shall mean any individual, corporation (including any nonprofit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity, unincorporated organization or government or political subdivision thereof, or any other entity.
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3.8 Investment Entity. Such Investor, if a corporation, partnership, trust or other entity, is authorized and otherwise duly qualified to purchase and hold the Securities; such entity has made its investment decision to purchase the Notes and other Securities at its office address for Investor as set forth on the signature page hereto; and such entity has not been formed for the specific purpose of acquiring the Securities. Such Investor, if a natural person, resides in the state identified in the address of Investor set forth on the signature page hereto.
3.9 Validity. When executed and delivered by such Investor, and assuming execution and delivery by the Company, this Agreement constitutes such Investor’s valid and legally binding obligations, enforceable in accordance with its respective terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, and (ii) the effect of rules of law governing the availability of equitable remedies. Investor has full power and authority to enter into this Agreement and any and all consents required in connection herewith and the transactions contemplated hereby have been obtained.
3.10 No Tax Advice. Such Investor understands that such Investor may suffer adverse tax consequences as a result of such Investor’s purchase or disposition of the Securities. Such Investor represents that he, she or it has consulted any tax consultants that such Investor deems advisable in connection with the purchase or disposition of the Securities and that such Investor is not relying on the Company or the Company’s counsel for any tax advice.
3.11 Risks. Such Investor is aware that the Notes and other Securities are highly speculative and that there can be no assurance as to what return, if any, there may be. Investor acknowledges the inherent risks of purchasing the Notes and other Securities.
3.12 Disclosure of Information. Such Investor has received or has had full access to all the information such Investor considers necessary or appropriate to make an informed investment decision with respect to the Securities. Such Investor further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to such Investor or to which such Investor had access.
4. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, on and as of the date of such Closing, except as set forth on the Schedule of Exceptions attached hereto as Exhibit C (which the Company may, at its election, update at any Closing; provided however, such updated Schedule of Exceptions relates solely to matters, conditions or occurrences that arose after the date of the applicable Closing):
4.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a material adverse effect on the Company.
4.2 Authorization, Enforceability. All action on the part of the Company necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Notes, has been taken or will be taken prior to such Closing. Each of the Transaction Documents to which the Company is a party constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.
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4.3 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company’s knowledge, currently threatened against the Company or any of its officers or directors. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or Governmental Authority. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. For the purposes hereof, “Governmental Authority” means any federal, state, local or other governmental department, commission, board, bureau, agency or other instrumentality or authority, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative authority or functions of or pertaining to government.
4.4 Absence of Required Consents; No Violations. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority on the part of the Company is required in connection with the consummation of the transactions contemplated by the Transaction Documents, except for such filing(s) pursuant to applicable federal or state securities laws as may be necessary, which filings will be timely effected after the relevant Closing. The Company is not in violation or default (i) of any provision of its Articles of Incorporation or Bylaws, or (ii) in any material respect of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract.
4.5 Valid Issuance of Securities. The Securities, when issued, sold and delivered in accordance with the terms of the Notes for the consideration expressed therein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, any agreement required to be executed in connection with the conversion of the Notes, and under applicable state and federal securities laws. The Common Stock issuable upon conversion of any equity securities issued or issuable upon conversion of the Notes will be duly and validly reserved for issuance upon the creation of such equity securities and, upon issuance in accordance with the terms of the Company’s Articles of Incorporation will be duly and validly issued, fully paid, nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, any agreement required to be executed in connection with the conversion of the Notes, and under applicable state and federal securities laws.
4.6 Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Transaction Documents executed by the Company and the performance and consummation of the transactions contemplated thereby, other than such as have been obtained and remain in full force and effect and other than such qualifications or filings under applicable securities laws as may be required in connection with the transactions contemplated by this Agreement.
4.7 Intellectual Property. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights necessary for its business as now conducted and as proposed to be conducted.
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4.8 Financial Statements. The financial statements of the Company that have been delivered to the Investors (i) are in accordance with the books and records of the Company and have been maintained in accordance with good business practice; (ii) have been prepared in conformity with U.S. generally accepted accounting practices, except for the absence of footnotes and subject to normal year-end adjustments; and (iii) fairly present the financial position of the Company as of the dates presented therein and the results of operations, changes in financial positions or cash flows, as the case may be, for the periods presented therein.
4.9 No “Bad Actor” Disqualification. The Company has exercised reasonable care, in accordance with Securities and Exchange Commission rules and guidance, to determine whether any Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii) under the Securities Act (“Disqualification Events”). To the Company’s knowledge, no Covered Person is subject to a Disqualification Event, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act. The Company has complied, to the extent applicable, with any disclosure obligations under Rule 506(e) under the Securities Act. “Covered Persons” are those persons specified in Rule 506(d)(1) under the Securities Act, including the Company; any predecessor or affiliate of the Company; any director, executive officer, other officer participating in the offering, general partner or managing member of the Company; any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power; any promoter (as defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of the sale of the Notes; and any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Notes (a “Solicitor”), any general partner or managing member of any Solicitor, and any director, executive officer or other officer participating in the offering of any Solicitor or general partner or managing member of any Solicitor.
5. Legends.
5.1 Federal Legends. The Notes and stock certificates evidencing the other Securities shall bear such restrictive legends as the Company and the Company’s counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following:
“THE SECURITIES EVIDENCED HEREBY AND ANY SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.”
5.2 Other Legends. The Notes and stock certificates evidencing the other Securities shall also bear any legend required by the Company’s Bylaws, the Commissioner of Corporations of the State of California or as may be required pursuant to any state, local, or foreign law governing such securities.
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5.3 Market Stand-Off. In connection with the Company’s initial public offering, each Investor or a transferee thereof, shall not, directly or indirectly, sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Securities without the prior written consent of the Company or its managing underwriter. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriter. In no event, however, shall such period exceed one hundred eighty (180) days plus such additional period as may reasonably be requested by the Company or such underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports, or (ii) analyst recommendations and opinions, including (without limitation) the restrictions set forth in FINRA Rule 2711(f)(4) and Rule 472(f)(4) of the New York Stock Exchange, as amended, or any similar successor rules. In the event of the declaration of a stock dividend, a spin off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Securities subject to the Market Stand-Off, or into which such Securities thereby become convertible, shall immediately be subject to the Market Stand-Off. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Section 5.3. This Section 5.3 shall not apply to securities registered in the public offering under the Act or to any securities issued by the Company that are purchased by Investors on the open market. All certificates evidencing the Securities (and any securities issued in substitution thereof or in respect thereof) shall bear such restrictive legends as the Company and the Company’s counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following:
“THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF UP TO 180 DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR AN OFFERING OF THE COMPANY’S SECURITIES PURSUANT TO THE MARKET STANDOFF PROVISIONS OF AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL PURCHASER OF SUCH SECURITIES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.”
5.4 Stop-Transfer Notices. Each Investor agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
5.5 Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Securities that have been sold or otherwise transferred in violation of any of the provisions of this Agreement, or (ii) to treat as owner of such Securities or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Securities shall have been so transferred.
5.6 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate pursuant to Sections 5.1 and 5.3 and the stop transfer instructions with respect to such legended securities shall be removed, and the Company shall issue a certificate without such legend to the holder of such securities, if such securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available with respect to such Securities (or securities into which they have been converted) or if such holder satisfies the requirements of Rule 144.
6. Miscellaneous.
6.1 Successors and Assigns. Except as otherwise provided therein, the terms and conditions of this Agreement and the other Transaction Documents shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities); provided that the Company may not assign or transfer its rights or obligations hereunder or under the other Transaction Documents without the prior written consent of the holders of a majority of the aggregate Principal Amount under all Notes. The Securities shall be transferable upon obtaining the prior written consent of the Company and subject to compliance with applicable securities laws and Section 3. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
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6.2 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. In addition, each of the parties hereto irrevocably and unconditionally (a) consents to submit itself to the exclusive personal jurisdiction of the state and Federal courts located in Santa Clara County, California, in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from such court or assert that such court is an inconvenient forum, (c) agrees that it will not bring any action relating to this Agreement or any of the acts and transactions contemplated by this Agreement in any forum other than the state and Federal courts located in Santa Clara County, California, and (d) to the fullest extent permitted by law, consents to service being made through the notice procedures contemplated pursuant to Section 6.4 hereof. Each party hereto hereby agrees that, to the fullest extent permitted by law, service of any process, summons, notice or document by U.S. registered mail to the respective addresses contemplated pursuant to Section 6.4 hereof shall be effective service of process for any suit or proceeding in connection with this Agreement or the transactions contemplated hereby.
6.3 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
6.4 Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when sent by electronic transmission (email) to the email address set forth below if sent between 8:00 a.m. and 5:00 p.m. recipient’s local time on a Business Day, or on the next Business Day if sent by email set forth below if sent other than between 8:00 a.m. and 5:00 p.m. recipient’s local time on a Business Day; (c) three Business Days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party at the address set forth below; or (d) the next Business Day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next Business Day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. Each Person making a communication hereunder by email shall promptly confirm by telephone to the Person to whom such communication was addressed each communication made by it by email pursuant hereto but the absence of such confirmation shall not affect the validity of any such communication. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 6.4 by giving the other party written notice of the new address in the manner set forth above. “Business Day” shall mean any day other than a Saturday, Sunday, U.S. federal holiday or any other day upon which banks in New York and San Francisco are not open for business. Any communication to an Investor shall be sent to such Investor at the address set forth on the signature page hereto, and if to the Company, at the following address:
Tivic Health Systems Inc.
750 Menlo Ave. Suite 200
Menlo Park, California 94025
Attn: Chief Executive Officer
Email Address:
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With a copy to (which such copy shall not constitute notice):
Procopio, Cory, Hargreaves & Savitch LLP
1117 California Avenue
Palo Alto, CA 94304
Attention: Roger C. Rappoport, Esq.
Tel:
Email:
6.5 Amendments and Waivers. Any term of this Agreement may be amended or modified, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of, or a written instrument signed by (x) the Company; and (y) Investors who then hold Notes in an aggregate Principal Amount equal to more than fifty-percent (50%) of the aggregate Principal Amount of all then outstanding Notes. Any waiver or amendment effected in accordance with this Section 6.5 shall be binding upon each holder of any Securities acquired under this Agreement at the time outstanding (including securities into which such Securities are convertible), each future holder of all such Securities, and the Company, and its and their respective successors and assigns. Notwithstanding the foregoing, the Company may unilaterally amend Exhibit A of this Agreement to the extent necessary to add new Investors at Subsequent Closings, in accordance with Section 2.2 of this Agreement.
6.6 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be judicially determined to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
6.7 Finder’s Fee. Each party represents that it neither is nor will be obligated for any finders’ fee or commission in connection with this transaction.
6.8 Further Assurances. Each Investor and the Company shall from time to time and at all times hereafter make, do, execute, or cause or procure to be made, done and executed such further acts, deeds, conveyances, consents and assurances without further consideration, which may reasonably be required to effect the transactions contemplated by the Transaction Documents.
6.9 Survival of Representations Warranties and Covenants. The representations and warranties of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and each Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Investors or the Company.
6.10 Separability. The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document. Each Investor shall be responsible only for its own representations, warranties, agreements and covenants hereunder. Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Except as otherwise provided in any Transaction Document, each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose. Any invalidity, illegality or limitation on the enforceability of the Agreement or any part thereof, by any Investor, whether arising by reason of the law of the respective Investor’s domicile or otherwise, shall in no way affect or impair the validity, legality or enforceability of this Agreement with respect to other Investors.
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6.11 Acknowledgment. Each Investor acknowledges that: (a) he, she or it has read the Transaction Documents; (b) it has been represented in the preparation, negotiation and execution of the Transaction Documents by legal counsel of its own choice or has voluntarily declined to seek such counsel; and (c) it understands the terms and consequences of the Transaction Documents and is fully aware of the legal and binding effect of the Transaction Documents.
6.12 Construction. The Company and Investors have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party because of the authorship of any provision of this Agreement. The words “include,” “includes,” and “including” shall be deemed to be followed by “without limitation.” Pronouns in masculine, feminine, and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. The words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Any reference herein to “day” or “days” shall, unless otherwise provided for, mean a calendar day or calendar days.
6.13 Entire Agreement. This Agreement and the Transaction Documents (and the Exhibits hereto and thereto) constitute the entire understanding between the Company and the Investors relative to the subject matter hereof. Any prior and contemporaneous agreement, discussion, understanding, correspondence and/or communication between the Company and such Investors regarding the purchase of securities, capital stock of the Company or otherwise, whether written or oral, is superseded by this Agreement.
6.14 Attorney’s Fees. If, in any action at law or in equity (including arbitration), it is necessary to enforce or interpret the terms of any of the Transaction Documents, the prevailing party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief that such party may be entitled.
6.15 Waiver of Conflicts. Each Investor acknowledges that Procopio, outside general counsel to the Company, has in the past performed and is or may now or in the future represent one or more of Investors or their Affiliates in matters unrelated to the transactions contemplated by this Agreement (the “Bridge Financing”), including representation of such Investors or their Affiliates in matters of a similar nature to the Bridge Financing. The applicable rules of professional conduct require that Procopio inform the parties hereunder of this representation and obtain their consent. Procopio has served as outside general counsel to the Company and has negotiated the terms of the Bridge Financing solely on behalf of the Company. It is the belief of Procopio that these terms and conditions represent an arm’s length transaction between the Company and Investors. Investors have been, or have been granted the opportunity to be, represented by independent legal counsel regarding the terms of the Bridge Financing. The Company and each Investor hereby (a) acknowledge that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation; (b) acknowledge that with respect to the Bridge Financing, Procopio has represented solely the Company, and not any Investor or any shareholder, director or employee of the Company or any Investor; and (c) gives its informed consent to Procopio’s representation of the Company in the Bridge Financing.
6.16 Expenses. Each party shall pay their own fees and expenses, including attorney’s fees and expenses in connection with the preparation, execution and delivery of this Agreement and the other Transaction Documents.
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6.18 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
6.19 California Securities Laws. THE SALE OF THE SECURITIES, WHICH ARE THE SUBJECT OF THIS AGREEMENT, HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Note Purchase Agreement as of the date first above written.
| Company: | Tivic Health Systems Inc. | |
| a California corporation | ||
| By: | ||
| Jennifer Ernst, Chief Executive Officer | ||
INVESTORS:
| If Investor is a Corporation, Partnership or Other Entity: | If Investor is an Individual: | |
| Name of Entity | Print Name of Individual | |
| Signature of Authorized Person | Signature of Individual | |
| Print Name of Authorized Person | Print Name of Individual (If more than one signatory) | |
Title : |
Signature of Individual (If more than one signatory) |
| Telephone (Day): | Telephone (Day): | |||
| Email Address: | ||||
| Email Address: | Address: | |||
| Address: | ||||
EXHIBITS
Exhibits
| Exhibit A | Schedule of Investors |
| Exhibit B | Form of Note |
| Exhibit C | Schedule of Exceptions |
EXHIBIT A
Schedule Of Investors
| Investor | Principal Amount of Note | Date of Purchase |
EXHIBIT B
Form Of Unsecured Convertible Promissory Note
[Attached]
EXHIBIT C
Schedule of Exceptions
None
Exhibit 10.8
THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION. THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THAT CERTAIN NOTE PURCHASE AGREEMENT, DATED JUNE 17, 2020, WHICH RESTRICTIONS ON TRANSFER ARE INCORPORATED HEREIN BY REFERENCE.
UNSECURED CONVERTIBLE PROMISSORY NOTE
$________
_________, 202_
FOR VALUE RECEIVED, TIVIC HEALTH SYSTEMS INC., a California corporation (the “Company”), promises to pay to the order of ________________, or his, her or its permitted registered assigns (“Holder”) the principal sum of ________________ Dollars ($__________.00) (the “Principal Amount”) with simple interest thereon at the rate of the lesser of (i) 3.0% per annum (computed on the basis of actual calendar days elapsed and a year of 365 days) or (ii) the highest rate of interest then permitted under applicable law. Interest shall commence with the date hereof and shall continue on the outstanding Principal Amount of this Unsecured Convertible Promissory Note (this “Note”) until paid or converted in accordance with the provisions hereof.
The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:
1. Definitions. For purposes of this Note, capitalized terms used herein but not otherwise defined herein shall have the meaning set forth in this Section 1:
1.1 “Business Day” means any day which is not a Saturday or Sunday or a legal holiday on which banks are authorized or required to be closed in California.
1.2 “Cap” means an amount of $40,000,000.
1.3 “Change in Control” means, unless otherwise determined by the Company and the holders of at least a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes:
(a) The direct or indirect sale or transfer, in a single transaction or a series of related transactions, by the shareholders of the Company of voting securities, in which the holders of the outstanding voting securities of the Company immediately prior to such transaction or series of transactions hold, as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such transaction or series of related transactions;
(b) A merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity (or the parent of the surviving entity) immediately after such merger or consolidation;
(c) A reverse merger in which the Company is the surviving entity but in which the holders of the outstanding voting securities of the Company immediately prior to such merger hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such merger; or
(d) The sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such transaction(s) receive as a distribution with respect to securities of the Company, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the acquiring entity immediately after such transaction(s), provided however, that the term “Change in Control” shall not include, for the purposes of this Note, (A) a merger of the Company effected exclusively for the purpose of changing the domicile of the Company, or (B) the transfer of more than fifty percent (50%) of the total combined voting power of all outstanding voting securities in an equity financing for bona fide capital raising purposes.
1.4 “Common Stock” means the Common Stock of the Company.
1.5 “Conversion” means any conversion of this Note in connection with a Qualified Financing, Change in Control or Mandatory Conversion, as the case may be, in accordance with the provisions hereof.
1.6 “Convertible Securities” means evidences of convertible indebtedness, shares of Preferred Stock of the Company, or other securities or instruments (other than Options) which are, directly or indirectly, convertible into or exchangeable for shares of Common Stock, either immediately or upon the arrival of a specified date or the occurrence of a specified event.
1.7 “Fully Diluted Basis” means the sum of (i) the total number of shares of Common Stock issued and outstanding immediately prior to the applicable Conversion, and (ii) the total number of shares of Common Stock issuable, directly or indirectly, upon conversion of all outstanding Options and Convertible Securities (other than the Bridge Notes and other Convertible Securities that will convert into Qualified Securities, Shadow Preferred or Preferred Conversion Stock, as the case may be, in connection with a Conversion), and (iii) shares of Common Stock reserved and available for future grant under the Company’s equity incentive or similar plans, in each case, immediately prior to such Conversion
1.8 “Options” means any rights, warrants, options or similar rights to subscribe for or to purchase Common Stock or Convertible Securities, whether vested or unvested.
1.9 “Preferred Conversion Price” means a price per share of Preferred Conversion Stock of $1.4034, as adjusted for as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like.
1.10 “Preferred Conversion Stock” means Series Seed-1 Preferred.
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1.11 “Qualified Financing” means the closing of an equity financing undertaken by the Company after the date hereof and before the Maturity Date, principally for capital raising purposes, in which the aggregate amount of gross proceeds (not including cancellation of the indebtedness represented by all Bridge Notes and other Convertible Securities that will convert into shares of Qualified Securities or Shadow Preferred, as the case may be, in connection with such Conversion) received by the Company from the sale of any series of its equity securities totals at least $2,000,000 in the aggregate.
1.12 “Qualified Securities” means the securities sold by the Company, and purchased by investors, in a Qualified Financing (other than Shadow Preferred).
1.13 “Series Seed-1 Preferred” means the shares of Series Seed-1 Preferred stock of the Company.
1.14 “Series Seed Transaction Documents” means, collectively (i) the Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated as of July 16, 2019, by and among the Company and the investors who are a party thereto, and (ii) the Voting Agreement, dated as of July 16, 2019, by and among the Company and the investors who are a party thereto.
1.15 “Shadow Preferred” means the shares of a series of Preferred Stock issued to Holder and the holders of the other Bridge Notes in the Qualified Financing, having identical rights, privileges, preferences and restrictions as the shares of Qualified Securities, 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 applicable conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof; and (ii) the basis used to determine any dividend rights, which shall be the same percentage of the conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof as applied to determine the per share dividend rights of purchasers of Qualified Securities, relative the purchase price paid by the purchasers thereof.
1.16 “Transaction Documents” means the Note Purchase Agreement and the Bridge Notes.
2. Note. This Note is issued pursuant to the terms of that certain Note Purchase Agreement dated as of June 17, 2020, by and among the Company and the investors who are parties thereto (the “Note Purchase Agreement”). This Note is one of a series of convertible promissory notes (the “Bridge Notes”) having like tenor and effect (except for variations necessary to express the name of the holder thereof, the principal amount of each of the Bridge Notes the dates upon which each Bridge Note is issued by the Company in accordance with the terms of the Note Purchase Agreement and such variations as may be agreed upon by the Company and the holder of a Bridge Note).
3. Maturity. Unless sooner paid or converted in accordance with the terms hereof, the entire unpaid Principal Amount and all unpaid accrued interest shall become fully due and payable on June 1, 2022 (the “Maturity Date”).
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4. Payments.
4.1 Form of Payment. All payments of interest and principal (other than payment by way of conversion) shall be in lawful money of the United States of America to Holder, at the address specified in the Note Purchase Agreement, or at such other address as may be specified from time to time by Holder in a written notice delivered to the Company. All payments shall be applied first to accrued interest, and thereafter to the Principal Amount.
4.2 Prepayment. The Principal Amount may not be prepaid by the Company prior to the Maturity Date without the consent of Holder.
5. Automatic Conversion Upon Qualified Financing.
5.1 Conversion. This Note shall be automatically canceled on the date of the initial closing of a Qualified Financing, and the outstanding Principal Amount and all accrued but unpaid interest thereon shall be automatically converted, at the initial closing and on the same terms and conditions of the Qualified Financing (including compliance with securities laws), into shares of Qualified Securities (or Shadow Preferred, as applicable) (which, in each case, will be rounded down to the closest whole number), at a conversion price per share equal to the lesser of (x) seventy-five percent (75%) of the price per share of Qualified Securities sold to the investors in a Qualified Financing (other than the holders of Bridge Notes or Convertible Securities converting into Qualified Securities or Shadow Preferred, as applicable), and (y) the quotient resulting from dividing (A) the Cap, by (B) the Company’s capitalization on a Fully Diluted Basis, as of immediately prior to such conversion of this Note. Notwithstanding the foregoing or anything herein contained to the contrary, in the event of a conversion of the Notes in connection with a Qualified Financing in accordance with the provisions of this Section 5.1, the Company may, solely at its option, elect to convert the Notes into Shadow Preferred.
5.2 Ancillary Documents. In connection with any conversion of this Note pursuant to a Qualified Financing, Holder agrees to execute and deliver to the Company any documents reasonably requested by the Company to be executed by the investors purchasing Qualified Securities (that are not otherwise the holders of Bridge Notes), including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
6. Conversion Upon Change in Control. In the event of a Change in Control prior to the Maturity Date or prior to the conversion of this Note pursuant to Section 5.1, at the election of the holders of a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes (the “Requisite Holders”), (i) the outstanding Principal Amount and all accrued but unpaid interest thereon, as of the date of conversion pursuant to this Section 6, will be converted, immediately prior to the consummation of the transaction constituting a Change in Control, into that number of shares of Preferred Conversion Stock (which will be rounded down to the closest whole number) equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon, immediately prior to such Conversion, by (y) the Preferred Conversion Price, or (ii) Holder shall receive an amount equal to one and one half times (1.5X) the Principal Amount outstanding as of the date thereof concurrent with the consummation of the transaction constituting a Change in Control (the “Cash Distribution”). Notwithstanding the foregoing or anything herein contained to the contrary, to the extent that the consideration received as part of a Change in Control consists, in whole or in part, of stock or other non-cash consideration (“Other Consideration”), and Holder elects to receive a Cash Distribution as herein contemplated, the Company may, at its option, pay such Cash Distribution in cash or Other Consideration in the same proportion as such Other Consideration is being paid to other holders of the Company’s securities. If any of the Company’s securityholders are given a choice as to the form and amount of consideration to be received in a Change in Control, the Holder will be given the same choice, provided that the Holder may not choose to receive a form of consideration that the Holder would be ineligible to receive as a result of the Holder’s failure to satisfy any requirement or limitation generally applicable to the Company’s securityholders, or under any applicable laws.
6.1 Ancillary Agreements. In connection with a Conversion in connection with a Change in Control, other than in the case of the Cash Distribution, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
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7. Conversion at Maturity Date.
7.1 Maturity Date Conversion. In the event that neither a Qualified Financing nor a Change in Control shall have occurred on or before the Maturity Date then, notwithstanding anything herein contained to the contrary, the outstanding Principal Amount and all accrued but unpaid interest thereon as of the Maturity Date shall be automatically converted into shares of Preferred Conversion Stock as of the Maturity Date (the “Mandatory Conversion”). The number of shares (which will be rounded down to the closest whole number) of Preferred Conversion Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon immediately prior to the Maturity Date, by (y) the Preferred Conversion Price.
7.2 Ancillary Agreements. In connection with the Mandatory Conversion, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
8. Conversion Mechanics.
8.1 Issuance of Certificates. As soon as is reasonably practicable after a Conversion has been effected, the Company shall deliver to Holder a certificate or certificates representing the number of shares of capital stock (excluding any fractional share) issuable by reason of such conversion in such name or names and such denomination or denominations as Holder has specified. In furtherance of, and not in limitation of any of the provisions of this Note, Holder acknowledges and agrees that, upon conversion of this Note as herein contemplated, this Note shall be cancelled, and of no further force and effect, whether or not the Company received this Note or instructions for the cancelation of this Note from Holder and neither the Company nor any successor in interest shall have any obligations hereunder or in respect hereof.
8.2 No Fractional Shares. If any fractional share of capital stock would, except for the provisions hereof, be deliverable upon conversion of this Note, the Company, in lieu of delivering such fractional share, shall pay an amount equal to the value of such fractional share, as determined by the per share conversion price used to effect such conversion.
8.3 Compliance with Laws and Regulations. The Company shall take all such actions as may be necessary to assure that all shares of capital stock issued upon conversion may be so issued without violation of any applicable law or governmental regulation or any requirement of any domestic securities exchange upon which such shares of capital stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon such issuance).
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9. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Transaction Documents:
9.1 Failure to Pay. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest payment or other payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five (5) Business Days of the Company’s receipt of written notice to the Company of such failure to pay.
9.2 Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its or any of its creditors, (iii) be dissolved or liquidated, (iv) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (v) take any action for the purpose of effecting any of the foregoing.
9.3 Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company, or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 45 days of commencement; or
9.4 Judgments. A final judgment or order for the payment of money in excess of $500,000 (exclusive of amounts covered by insurance) shall be rendered against the Company and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within 30 days after issue or levy.
10. Rights of Holder upon Default. Upon the occurrence of any Event of Default (other than an Event of Default described in Section 9.2 or Section 9.3) and at any time thereafter during the continuance of such Event of Default, Holder may, with the written consent of the Requisite Holders, by written notice to the Company, declare all outstanding obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence of any Event of Default described in Section 9.2 and Section 9.3, immediately and without notice, all outstanding obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence and during the continuance of any Event of Default, Holder may, with the written consent of the Requisite Holders, exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.
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11. Lost, Stolen, Destroyed or Mutilated Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Note and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Note, the Company, at its expense, will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
12. Governing Law; Jurisdiction; Venue. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. In addition, each of the parties hereto irrevocably and unconditionally (a) consents to submit itself to the exclusive personal jurisdiction of the state and Federal courts located in Santa Clara County, California, in the event any dispute arises out of this Note or any of the transactions contemplated by this Note, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from such court or assert that such court is an inconvenient forum, (c) agrees that it will not bring any action relating to this Note or any of the acts and transactions contemplated by this Note in any forum other than the state and Federal courts located in Santa Clara County, California, and (d) to the fullest extent permitted by law, consents to service being made through the notice procedures contemplated pursuant to Section 6.4 of the Note Purchase Agreement. Each party hereto hereby agrees that, to the fullest extent permitted by law, service of any process, summons, notice or document by U.S. registered mail to the respective addresses contemplated pursuant to Section 6.4 of the Note Purchase Agreement shall be effective service of process for any suit or proceeding in connection with this Note or the transactions contemplated hereby.
13. Amendment and Waiver. Any provision of this Note may be amended, waived or modified (either generally or in a particular instance and either retroactively or prospectively) only upon the written consent of, or a written instrument signed by, the Company and Holder; provided, however, that this Note may be amended, together with all other Bridge Notes, by agreement of the Company, and the Requisite Holders, so long as such amendment and/or waivers (i) are applicable to all Bridge Notes; (ii) do not modify this Section 13; or (iii) do not reduce the Principal Amount of this Note or the rate of interest thereon.
14. Unsecured, Subordination. Holder acknowledges and agrees that this Note (i) is not secured by any of the assets of the Company, and (ii) will be subordinate in right of payment to all current and future indebtedness, including bank (and other financial institutions of a similar nature) indebtedness, of the Company, but excluding any indebtedness convertible into equity securities of the Company.
15. Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Note shall be made in accordance with Section 6.4 of the Note Purchase Agreement.
16. Severability. In case any one or more of the provisions contained in this Note shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
17. Remedies Cumulative; Failure or Indulgence Not a Waiver. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents. No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
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18. Entire Agreement. This Note and the Note Purchase Agreement represents the entire agreement between the parties hereto with respect to this Note and its terms and conditions.
19. Headings; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
20. Restrictions on Transfer; Assignment. Except as otherwise set forth in the Note Purchase Agreement, Holder may not transfer or assign all or any part of this Note without the approval of the Company. This Note may only be transferred in compliance with applicable state and federal laws. Holder shall notify the Company in writing in advance of any proposed transfer. All rights and obligations of the Company and Holder shall be binding upon and benefit the successors, assigns, heirs, and administrators of the parties. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Requisite Holders.
21. Excessive Interest. Notwithstanding any other provision herein to the contrary, this Note is hereby expressly limited so that the interest rate charged hereunder shall at no time exceed the maximum rate permitted by applicable law. If, for any circumstance whatsoever, the interest rate charged exceeds the maximum rate permitted by applicable law, the interest rate shall be reduced to the maximum rate permitted, and if Holder shall have received an amount that would cause the interest rate charged to be in excess of the maximum rate permitted, such amount that would be excessive interest shall be applied to the reduction of the Principal Amount owing hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal, such excess shall be refunded to the Company.
22. Pari Passu Notes. The Holder acknowledges and agrees that the payment of all or any portion of the outstanding Principal Amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Bridge Notes. In the event the Holder receives payments in excess of the Holder’s pro rata share of the Company’s payments to the holders of all of the Bridge Notes, then the Holder shall hold in trust all such excess payments for the benefit of the holders of the other Bridge Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.
23. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the other Transaction Documents.
24. Fees and Expenses. All expenses incurred in connection with this Note, including attorneys’ fees, shall be paid by the parties incurring such expenses.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Company has caused this Unsecured Convertible Promissory Note to be issued as of the date first set forth above.
| COMPANY: | Tivic Health Systems Inc., | |
| a California corporation | ||
| By: | ||
| Jennifer Ernst | ||
| Chief Executive Officer | ||
AGREED AND ACCEPTED BY HOLDER:
| If Holder is an Individual | If Holder is a Corporation, Partnership or Other Entity: | |
| Name of Entity | ||
| Signature | Signature of Authorized Person | |
| Print Name | Print Name of Authorized Person | |
| Telephone ( Day ): | Title |
| Email Address: | Telephone ( Day ): | |||
| Address: | Email Address: | |||
| Address: | ||||
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Exhibit 10.9
AMENDMENT Agreement
This Amendment Agreement (this “Amendment”) is made and entered into with intended effectiveness as of October 14, 2020, by and among Tivic Health Systems Inc., a California corporation (the “Company”), and the parties who are signatories hereto (the “Investors”).
Recitals
| A. | The Company and certain investors (including the Investors) have entered into a Note Purchase Agreement dated as of June 17, 2020 (the “Purchase Agreement”), pursuant to which the Company issued Notes (as such term is defined in the Purchase Agreement) to certain investors. |
| B. | Section 6.5 of the Purchase Agreement provides that the Purchase Agreement may be amended with the written consent of the Company and holders of Notes representing more than 50% of the aggregate principal amount of all Notes (the “Requisite Holders”). The undersigned Investors constitute the Requisite Holders. |
| C. | The Company and the undersigned Investors desire to amend the Purchase Agreement so as to, among other things, increase the aggregate principal amount of Notes that can be issued under the Purchase Agreement. |
Agreement
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and conditions set forth below, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties to this Amendment hereby agree as follows:
1. Amendment of Aggregate Note Amount.
(a) Section 1.1 of the Purchase Agreement is hereby amended and restated in its entirety and shall read as follows:
“1.1 Issuance of Notes. Subject to the terms and conditions of this Agreement, at each Closing (as defined below), the Company shall issue and sell to each Investor participating in such Closing, an unsecured convertible promissory note (each such note, a “Note” and collectively, the “Notes”) in the principal amount set forth opposite each such Investor’s name on Exhibit A attached hereto (the “Principal Amount”), against payment by such Investor to the Company of the Principal Amount. The Company may issue and sell Notes with an aggregate Principal Amount of up to $2,000,000 under this Agreement. The Notes shall each be in substantially the form of Exhibit B attached hereto, except as may otherwise be agreed upon by the Company and an Investor.”
(b) Section 2.2 of the Purchase Agreement is hereby amended and restated in its entirety and shall read as follows:
“2.2 Subsequent Closings. Subsequent to the Initial Closing, until such time as the aggregate Principal Amount evidenced by all of the Notes equals a total of $2,000,000, the Company may sell additional Notes to such persons or entities as determined by the Company (each such closing, a “Subsequent Closing” and, together with the Initial Closing, each a “Closing”). For purposes of this Agreement, and all other agreements contemplated hereby, any additional purchaser so acquiring Notes shall be deemed to be an “Investor” for purposes of this Agreement, and any Notes so acquired by such additional purchaser shall be deemed to be “Notes” for all purposes hereunder. Exhibit A shall be revised by the Company, without the consent of any other person or entity, to reflect the sale of Notes at all Subsequent Closings. The closing of the purchase and sale of such additional Notes hereunder shall take place on such date as is mutually agreeable to the Company and Investors that are identified on Exhibit A as purchasing Notes representing a majority of the aggregate Principal Amounts of all Notes to be issued at such Subsequent Closing (or at such other time and place as is mutually agreed upon by the Company and such parties)).”
2. Miscellaneous.
(a) The parties hereto agree that this Amendment will be governed by and construed under the internal laws of the State of California, as applicable to agreements made and to be performed in such state, without regard to principles of conflicts of law. The parties hereto agree that any dispute arising in connection with the interpretation or validity of, or otherwise arising out of, this Amendment, will be subject to the exclusive jurisdiction of the California State and Federal Courts in and for Santa Clara County, California. The parties hereto hereby agree to submit to the personal and exclusive jurisdiction and venue of such courts and agree that process may be served in the manner provided herein for the giving of notices or otherwise as allowed by applicable law. Each party hereto waives any defense of inconvenient forum to the maintenance of any action so brought and waives any bond, surety, or other security that might be required of any other party hereto with respect thereto. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Amendment or any transaction contemplated hereunder, the prevailing party shall recover all of such party’s costs and attorneys’ fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom.
(b) Except as specifically amended by this Amendment, the terms and conditions of the Purchase Agreement shall remain in full force and effect.
(c) From and after the date hereof, all references in the Notes or the Purchase Agreement to the Purchase Agreement shall mean, and be a reference to, the Purchase Agreement, as amended by this Amendment, and as may be further amended from time to time in accordance with the provisions thereof.
(d) Each party hereto agrees to execute and deliver, or cause to be executed and delivered, such further instruments or documents or take such other actions as may be reasonably necessary to consummate the transactions contemplated by this Amendment.
(e) This Amendment may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
[Remainder of Page Left Blank Intentionally]
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In Witness Whereof, the parties hereto have executed this Amendment Agreement with intended effectiveness as of the date set forth in the first paragraph hereof.
| Company: | TIVIC HEALTH SYSTEMS, INC., | |
| a California corporation | ||
| By: | ||
| Name: Jennifer Ernst | ||
| Title: Chief Executive Officer | ||
INVESTORS:
|
If Investor is a Corporation, Partnership or Other Entity:
|
IF INVESTOR IS AN INDIVIDUAL: | |
|
Name of Entity
|
Print Name of Individual | |
|
Signature of Authorized Person
|
Signature of Individual | |
|
Print Name of Authorized Person
|
Print Name of Individual (If more than one signatory) | |
|
Title |
Signature of Individual (If more than one signatory) |
[SIGNATURE PAGE TO AMENDMENT AGREEMENT]
Exhibit 10.13
TIVIC HEALTH SYSTEMS, INC.
NOTE PURCHASE AGREEMENT
June 17, 2021
TABLE OF CONTENTS
| Page | |||
| 1. | Issuance of Notes | 1 | |
| 1.1 | Issuance of Notes | 1 | |
| 2. | Closings | 1 | |
| 2.1 | Initial Closing | 1 | |
| 2.2 | Subsequent Closings | 1 | |
| 2.3 | Conditions of Investors’ Obligations at Closing | 1 | |
| 2.4 | Conditions of the Company’s Obligations at Closing | 2 | |
| 2.5 | Delivery | 2 | |
| 3. | Representations, Warranties and Covenants of Investors | 2 | |
| 3.1 | Purchase for Own Account | 2 | |
| 3.2 | Disclosure of Information | 3 | |
| 3.3 | Investment Experience | 3 | |
| 3.4 | Accredited Investor; Non-U.S. Persons | 3 | |
| 3.5 | Restrictions on Transfer | 3 | |
| 3.6 | Further Limitations on Disposition | 3 | |
| 3.7 | Confidentiality | 4 | |
| 3.8 | Investment Entity | 5 | |
| 3.9 | Validity | 5 | |
| 3.10 | No Tax Advice | 5 | |
| 3.11 | Risks | 5 | |
| 3.12 | Disclosure of Information | 5 | |
| 4. | Representations and Warranties of the Company | 5 | |
| 4.1 | Organization, Good Standing and Qualification | 5 | |
| 4.2 | Authorization, Enforceability | 6 | |
| 4.3 | Litigation | 6 | |
| 4.4 | Absence of Required Consents; No Violations | 6 | |
| 4.5 | Valid Issuance of Securities | 6 | |
| 4.6 | Approvals | 6 | |
| 4.7 | Intellectual Property | 7 | |
| 4.8 | Financial Statements | 7 | |
| 4.9 | No “Bad Actor” Disqualification | 7 | |
| 5. | Legends | 7 | |
| 5.1 | Federal Legends | 7 | |
| 5.2 | Other Legends | 8 | |
| 5.3 | Market Stand-Off | 8 | |
| 5.4 | Stop-Transfer Notices | 8 | |
| 5.5 | Refusal to Transfer | 8 | |
| 5.6 | Removal of Legend and Transfer Restrictions | 8 | |
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| 6. | Miscellaneous | 9 | |
| 6.1 | Successors and Assigns | 9 | |
| 6.2 | Governing Law | 9 | |
| 6.3 | Titles and Subtitles | 9 | |
| 6.4 | Notices | 9 | |
| 6.5 | Amendments and Waivers | 10 | |
| 6.6 | Severability | 10 | |
| 6.7 | Finder’s Fee | 10 | |
| 6.8 | Further Assurances | 10 | |
| 6.9 | Survival of Representations Warranties and Covenants | 10 | |
| 6.10 | Separability | 10 | |
| 6.11 | Acknowledgment | 11 | |
| 6.12 | Construction | 11 | |
| 6.13 | Entire Agreement | 11 | |
| 6.14 | Attorney’s Fees | 11 | |
| 6.15 | Waiver of Conflicts | 11 | |
| 6.16 | Expenses | 12 | |
| 6.18 | Counterparts | 12 | |
| 6.19 | California Securities Laws | 12 | |
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TIVIC HEALTH SYSTEMS, INC.
NOTE PURCHASE AGREEMENT
THIS NOTE PURCHASE AGREEMENT (this “Agreement”) is made as of June 17, 2021, by and among Tivic Health Systems, Inc., a Delaware corporation (the “Company”), and the investors listed on Exhibit A hereto who become signatories to this Agreement (each an “Investor” and, collectively, the “Investors”).
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Issuance of Notes.
1.1 Issuance of Notes. Subject to the terms and conditions of this Agreement, at each Closing (as defined below), the Company shall issue and sell to each Investor participating in such Closing, an unsecured convertible promissory note (each such note, a “Note” and collectively, the “Notes”) in the principal amount set forth opposite each such Investor’s name on Exhibit A attached hereto (the “Principal Amount”), against payment by such Investor to the Company of the Principal Amount. The Company may issue and sell Notes with an aggregate Principal Amount of up to $3,000,000 under this Agreement. The Notes shall each be in substantially the form of Exhibit B attached hereto, except (i) as may be amended to provide for an original issue discount, at the discretion of the Company; or (ii) as may otherwise be agreed upon by the Company and an Investor.
2. Closings.
2.1 Initial Closing. The initial closing of the purchase and sale of the Notes shall take place at the offices of Procopio, Cory, Hargreaves & Savitch LLP (“Procopio”), 1117 California Avenue, Palo Alto, California, on June 17, 2021, at 10:00 a.m. (the “Initial Closing”), or at such other place and time as the Company and the Investors scheduled to purchase at least a majority in Principal Amount mutually agree.
2.2 Subsequent Closings. Subsequent to the Initial Closing, until the earlier of the date that is 120 days following the date of the Initial Closing or such time as the aggregate Principal Amount evidenced by all of the Notes equals a total of $3,000,000, the Company may sell additional Notes to such persons or entities as determined by the Company (each such closing, a “Subsequent Closing” and, together with the Initial Closing, each a “Closing”). For purposes of this Agreement, and all other agreements contemplated hereby, any additional purchaser so acquiring Notes shall be deemed to be an “Investor” for purposes of this Agreement, and any Notes so acquired by such additional purchaser shall be deemed to be “Notes” for all purposes hereunder. Exhibit A shall be revised by the Company, without the consent of any other person or entity, to reflect the sale of Notes at all Subsequent Closings. The closing of the purchase and sale of such additional Notes hereunder shall take place on such date as is mutually agreeable to the Company and Investors that are identified on Exhibit A as purchasing Notes representing a majority of the aggregate Principal Amounts of all Notes to be issued at such Subsequent Closing (or at such other time and place as is mutually agreed upon by the Company and such parties).
2.3 Conditions of Investors’ Obligations at Closing. The several obligations of each Investor to purchase the Notes at a Closing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 2.3, any of which may be waived in writing by such Investor.
(a) Representations and Warranties. The representations and warranties made by the Company in Section 4 hereof shall be true and correct in all material respects on and as of the date of such Closing (except as to such representations and warranties made as of a specific date, which shall be measured as of such date).
(b) Conditions. All agreements and conditions contained in this Agreement to be performed by the Company on or prior to such Closing shall have been performed or complied with in all material respects.
(c) Delivery of Notes. The Company shall have executed and delivered to each Investor a Note evidencing the Company’s indebtedness to such Investor in the amount next to such Investor’s name on Exhibit A.
2.4 Conditions of the Company’s Obligations at Closing. The obligations of the Company to sell and issue Notes to each Investor at a Closing shall be subject to the prior or concurrent satisfaction of each of the conditions precedent set forth in this Section 2.4, any of which may be waived in writing by the Company.
(a) Representations and Warranties. The representations and warranties of such Investors contained in Section 3 of this Agreement shall be true and correct in all material respects on and as of the date of such Closing, with the same effect as if made on and as of such Closing.
(b) Conditions. All agreements and conditions contained in this Agreement to be performed by the Investor on or prior to such Closing shall have been performed or complied with in all material respects.
(c) Delivery of Notes. Each Investor shall have executed and delivered to the Company the Note issued by the Company to such Investor which such Note evidences the Company’s indebtedness to such Investor in the amount next to such Investor’s name on Exhibit A.
2.5 Delivery. At each Closing, the Company shall deliver to each Investor a Note in the Principal Amount designated opposite such Investor’s name on Exhibit A, against delivery of (1) payment of the purchase price therefor by a wire transfer of immediately available funds, to a bank designated by the Company or by conversion of indebtedness, as applicable, and (2) delivery of counterpart signature pages to this Agreement and the Note (collectively, the “Transaction Documents”). Each Investor purchasing a Note through conversion of indebtedness at any Closing agrees that the applicable convertible note held by such Investor is cancelled as of such Closing and all principal and interest outstanding thereunder shall be converted as contemplated by the applicable Note.
3. Representations, Warranties and Covenants of Investors. Each Investor, severally and not jointly, hereby represents, warrants and covenants to the Company as follows:
3.1 Purchase for Own Account. Such Investor represents that it is acquiring the Notes, the equity securities issuable upon conversion of the Notes and any Common Stock issuable upon conversion of any such equity securities (collectively, the “Securities”) solely for investment for such Investor’s own account and not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Investor has no present intention of selling, granting any participation in, or otherwise distributing the same. The acquisition by such Investor of any of the Securities shall constitute confirmation of the representation by such Investor that such Investor does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.
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3.2 Disclosure of Information. Such Investor has had an opportunity to discuss the terms of this offering and the Company’s business, management and financial affairs with the Company’s management, and the opportunity to inspect the Company’s facilities and such books and records and material contracts as such Investor deemed necessary to its determination to purchase the Securities.
3.3 Investment Experience. Either (i) such Investor or its officers, directors, managers or controlling persons has a preexisting personal or business relationship with the Company or its officers, directors or controlling persons, or (ii) such Investor, by reason of its own business and financial experience, has the capacity to protect its own interests in connection with the investment contemplated hereby. Such Investor represents that it is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Securities.
3.4 Accredited Investor; Non-U.S. Persons. Such Investor either (a) is an “accredited investor” within the meaning of Securities and Exchange Commission (“SEC”) Rule 501 of Regulation D, as presently in effect, or (b) (i) certifies that such Investor is not a “U.S. person” within the meaning of SEC Rule 902 of Regulation S, as presently in effect, and that such Investor is not acquiring the Securities for the account or benefit of any such U.S. person, (ii) agrees to resell the Securities only in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration and agrees not to engage in hedging transactions with regard to such Securities unless in compliance with the Act, (iii) agrees that any certificates for any Securities issued to such Investor shall contain a legend to the effect that transfer is prohibited except in accordance with the provisions of Regulation S, pursuant to registration under the Act or pursuant to an available exemption from registration and that hedging transactions involving such Securities may not be conducted unless in compliance with the Act, and (iv) agrees that the Company is hereby required to refuse to register any transfer of any Securities issued to such Investor not made in accordance with the provisions of Regulation S, pursuant to registration under the Act, or pursuant to an available exemption from registration.
3.5 Restrictions on Transfer. Such Investor understands that the Securities are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act of 1933, as amended (the “Act”), only in certain limited circumstances. In this connection, such Investor represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. Such Investor understands that the Securities have not been and will not be registered under the Act and have not been and will not be registered or qualified in any state in which they are offered, and thus the Investor will not be able to resell or otherwise transfer his, her or its Securities unless they are registered under the Act and registered or qualified under applicable state securities laws, or an exemption from such registration or qualification is available. Such Investor has no immediate need for liquidity in connection with this investment and does not anticipate that it will need to sell his, her or its Securities in the foreseeable future. INVESTOR UNDERSTANDS AND ACKNOWLEDGES HEREIN THAT AN INVESTMENT IN THE COMPANY’S SECURITIES INVOLVES AN EXTREMELY HIGH DEGREE OF RISK AND MAY RESULT IN A COMPLETE LOSS OF HIS, HER OR ITS INVESTMENT.
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3.6 Further Limitations on Disposition. Without in any way limiting the representations set forth above, such Investor further agrees not to make any disposition of all or any portion of the Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 3 and any other agreement that the purchasers of such Securities are required to execute and deliver in connection with the purchase of such Securities, and:
(a) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or
(b) (i) such Investor shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Investor shall have furnished the Company with an opinion of counsel reasonably satisfactory to the Company that such disposition will not require registration of such shares under the Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144.
Notwithstanding the provisions of subsections (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by an Investor that is a partnership or limited liability company to a partner of such partnership or a member of such limited liability company or a retired partner of such partnership who retires after the date hereof or a retired member of such limited liability company who retires after the date hereof, or to the estate of any Investor or the transfer by gift, will or intestate succession by any Investor to his or her spouse or to the siblings, lineal descendants or ancestors of such Investor or his or her spouse, if the transferee agrees in writing to be subject to the terms hereof to the same extent as if he or she were an original Investor hereunder.
3.7 Confidentiality. Such Investor agrees that he, she or it shall keep confidential and shall not use, disclose or divulge any information which such Investor may obtain from the Company, pursuant to financial statements, reports and other materials submitted by the Company as required hereunder or under any other documents, or pursuant to information rights granted to an Investor unless such information is known, or until such information becomes known, to the public through no fault of such Investor or its agents, or unless the Company’s President or Chief Executive Officer gives written consent to such Investor’s release of such information, except that no such written consent shall be required (and Investor shall be free to release such information) if such information is to be provided to such Investor’s counsel or accountant, or to an officer, director, general partner, limited partner, shareholder, investment counselor or advisor, or employee of an Investor with a need to know such information; provided that any such counsel, accountant, officer, director, general partner, limited partner, shareholder, investment counselor or advisor, or employee shall be bound by the provisions of this Section 3.7. Notwithstanding the foregoing, this Section 3.7 shall not apply (a) to information which an Investor learns from a third party with the right to make such disclosure, provided Investor complies with the restrictions imposed by the third party, (b) to information which is in such Investor’s possession prior to the time of disclosure by the Company and not acquired by Investor under a confidentiality obligation, (c) to the minimum extent Investor is required to disclose such information by law or a governmental regulatory authority, (d) to the minimum extent (after requesting and pursuing confidential treatment to the extent reasonably possible) such Investor is required to disclose such information by court order. For the purposes of this Agreement: (A) a Person shall be deemed an “Affiliate” of another Person who, directly or indirectly, controls, is controlled by or is under common control with such Person, including, without limitation, any general partner, managing member, officer or director of such Person or any venture capital fund now or hereafter existing that is controlled by one or more general partners or managing members of, or shares the same management company with, such Person; and (B) “Person” shall mean any individual, corporation (including any nonprofit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity, unincorporated organization or government or political subdivision thereof, or any other entity.
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3.8 Investment Entity. Such Investor, if a corporation, partnership, trust or other entity, is authorized and otherwise duly qualified to purchase and hold the Securities; such entity has made its investment decision to purchase the Notes and other Securities at its office address for Investor as set forth on the signature page hereto; and such entity has not been formed for the specific purpose of acquiring the Securities. Such Investor, if a natural person, resides in the state identified in the address of Investor set forth on the signature page hereto.
3.9 Validity. When executed and delivered by such Investor, and assuming execution and delivery by the Company, this Agreement constitutes such Investor’s valid and legally binding obligations, enforceable in accordance with its respective terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors’ rights generally, and (ii) the effect of rules of law governing the availability of equitable remedies. Investor has full power and authority to enter into this Agreement and any and all consents required in connection herewith and the transactions contemplated hereby have been obtained.
3.10 No Tax Advice. Such Investor understands that such Investor may suffer adverse tax consequences as a result of such Investor’s purchase or disposition of the Securities. Such Investor represents that he, she or it has consulted any tax consultants that such Investor deems advisable in connection with the purchase or disposition of the Securities and that such Investor is not relying on the Company or the Company’s counsel for any tax advice.
3.11 Risks. Such Investor is aware that the Notes and other Securities are highly speculative and that there can be no assurance as to what return, if any, there may be. Investor acknowledges the inherent risks of purchasing the Notes and other Securities.
3.12 Disclosure of Information. Such Investor has received or has had full access to all the information such Investor considers necessary or appropriate to make an informed investment decision with respect to the Securities. Such Investor further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Securities and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to such Investor or to which such Investor had access.
4. Representations and Warranties of the Company. The Company hereby represents and warrants to each Investor that, on and as of the date of such Closing, except as set forth on the Schedule of Exceptions attached hereto as Exhibit C (which the Company may, at its election, update at any Closing; provided however, such updated Schedule of Exceptions relates solely to matters, conditions or occurrences that arose after the date of the applicable Closing):
4.1 Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of California and has all requisite corporate power and authority to carry on its business as now conducted. The Company is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed could reasonably be expected to have a material adverse effect on the Company.
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4.2 Authorization, Enforceability. All action on the part of the Company necessary for the authorization, execution and delivery of this Agreement, the performance of all obligations of the Company hereunder, and the authorization, issuance (or reservation for issuance), sale and delivery of the Notes, has been taken or will be taken prior to such Closing. Each of the Transaction Documents to which the Company is a party constitutes the valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies.
4.3 Litigation. There is no action, suit, proceeding or investigation pending or, to the Company’s knowledge, currently threatened against the Company or any of its officers or directors. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or Governmental Authority. There is no action, suit, proceeding or investigation by the Company currently pending or that the Company intends to initiate. For the purposes hereof, “Governmental Authority” means any federal, state, local or other governmental department, commission, board, bureau, agency or other instrumentality or authority, domestic or foreign, exercising executive, legislative, judicial, regulatory or administrative authority or functions of or pertaining to government.
4.4 Absence of Required Consents; No Violations. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority on the part of the Company is required in connection with the consummation of the transactions contemplated by the Transaction Documents, except for such filing(s) pursuant to applicable federal or state securities laws as may be necessary, which filings will be timely effected after the relevant Closing. The Company is not in violation or default (i) of any provision of its Articles of Incorporation or Bylaws, or (ii) in any material respect of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound. The execution, delivery and performance of the Transaction Documents and the consummation of the transactions contemplated thereby will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract.
4.5 Valid Issuance of Securities. The Securities, when issued, sold and delivered in accordance with the terms of the Notes for the consideration expressed therein, will be duly and validly issued, fully paid, and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, any agreement required to be executed in connection with the conversion of the Notes, and under applicable state and federal securities laws. The Common Stock issuable upon conversion of any equity securities issued or issuable upon conversion of the Notes will be duly and validly reserved for issuance upon the creation of such equity securities and, upon issuance in accordance with the terms of the Company’s Articles of Incorporation will be duly and validly issued, fully paid, nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement, any agreement required to be executed in connection with the conversion of the Notes, and under applicable state and federal securities laws.
4.6 Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any governmental authority or other Person (including, without limitation, the shareholders of any Person) is required in connection with the execution and delivery of the Transaction Documents executed by the Company and the performance and consummation of the transactions contemplated thereby, other than such as have been obtained and remain in full force and effect and other than such qualifications or filings under applicable securities laws as may be required in connection with the transactions contemplated by this Agreement.
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4.7 Intellectual Property. To its knowledge, the Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information, processes and other intellectual property rights necessary for its business as now conducted and as proposed to be conducted.
4.8 Financial Statements. The financial statements of the Company that have been made available to the Investors (i) are in accordance with the books and records of the Company and have been maintained in accordance with good business practice; (ii) have been prepared in conformity with U.S. generally accepted accounting practices, except for the absence of footnotes and subject to normal year-end adjustments; and (iii) fairly present the financial position of the Company as of the dates presented therein and the results of operations, changes in financial positions or cash flows, as the case may be, for the periods presented therein.
4.9 No “Bad Actor” Disqualification. The Company has exercised reasonable care, in accordance with Securities and Exchange Commission rules and guidance, to determine whether any Covered Person (as defined below) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii) under the Securities Act (“Disqualification Events”). To the Company’s knowledge, no Covered Person is subject to a Disqualification Event, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3) under the Securities Act. The Company has complied, to the extent applicable, with any disclosure obligations under Rule 506(e) under the Securities Act. “Covered Persons” are those persons specified in Rule 506(d)(1) under the Securities Act, including the Company; any predecessor or affiliate of the Company; any director, executive officer, other officer participating in the offering, general partner or managing member of the Company; any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power; any promoter (as defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of the sale of the Notes; and any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with the sale of the Notes (a “Solicitor”), any general partner or managing member of any Solicitor, and any director, executive officer or other officer participating in the offering of any Solicitor or general partner or managing member of any Solicitor.
5. Legends.
5.1 Federal Legends. The Notes and stock certificates evidencing the other Securities shall bear such restrictive legends as the Company and the Company’s counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following:
“THE SECURITIES EVIDENCED HEREBY AND ANY SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION.”
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5.2 Other Legends. The Notes and stock certificates evidencing the other Securities shall also bear any legend required by the Company’s Bylaws, the Commissioner of Corporations of the State of California or as may be required pursuant to any state, local, or foreign law governing such securities.
5.3 Market Stand-Off. In connection with the Company’s initial public offering, each Investor or a transferee thereof, shall not, directly or indirectly, sell, make any short sale of, loan, hypothecate, pledge, offer, grant or sell any option or other contract for the purchase of, purchase any option or other contract for the sale of, or otherwise dispose of or transfer, or agree to engage in any of the foregoing transactions with respect to, any Securities without the prior written consent of the Company or its managing underwriter. Such restriction (the “Market Stand-Off”) shall be in effect for such period of time following the date of the final prospectus for the offering as may be requested by the Company or such underwriter. In no event, however, shall such period exceed one hundred eighty (180) days plus such additional period as may reasonably be requested by the Company or such underwriter to accommodate regulatory restrictions on (i) the publication or other distribution of research reports, or (ii) analyst recommendations and opinions, including (without limitation) the restrictions set forth in FINRA Rule 2711(f)(4) and Rule 472(f)(4) of the New York Stock Exchange, as amended, or any similar successor rules. In the event of the declaration of a stock dividend, a spin off, a stock split, an adjustment in conversion ratio, a recapitalization or a similar transaction affecting the Company’s outstanding securities without receipt of consideration, any new, substituted or additional securities which are by reason of such transaction distributed with respect to any Securities subject to the Market Stand-Off, or into which such Securities thereby become convertible, shall immediately be subject to the Market Stand-Off. The Company’s underwriters shall be beneficiaries of the agreement set forth in this Section 5.3. This Section 5.3 shall not apply to securities registered in the public offering under the Act or to any securities issued by the Company that are purchased by Investors on the open market. All certificates evidencing the Securities (and any securities issued in substitution thereof or in respect thereof) shall bear such restrictive legends as the Company and the Company’s counsel deem necessary or advisable under applicable law or pursuant to this Agreement, including, without limitation, the following:
“THE SECURITIES REPRESENTED HEREBY ARE SUBJECT TO RESTRICTIONS ON TRANSFER FOR A PERIOD OF UP TO 180 DAYS FOLLOWING THE EFFECTIVE DATE OF A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR AN OFFERING OF THE COMPANY’S SECURITIES PURSUANT TO THE MARKET STANDOFF PROVISIONS OF AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL PURCHASER OF SUCH SECURITIES, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.”
5.4 Stop-Transfer Notices. Each Investor agrees that, in order to ensure compliance with the restrictions referred to herein, the Company may issue appropriate “stop transfer” instructions to its transfer agent, if any, and that, if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records.
5.5 Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Securities that have been sold or otherwise transferred in violation of any of the provisions of this Agreement, or (ii) to treat as owner of such Securities or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Securities shall have been so transferred.
5.6 Removal of Legend and Transfer Restrictions. Any legend endorsed on a certificate pursuant to Sections 5.1 and 5.3 and the stop transfer instructions with respect to such legended securities shall be removed, and the Company shall issue a certificate without such legend to the holder of such securities, if such securities are registered under the Act and a prospectus meeting the requirements of Section 10 of the Act is available with respect to such Securities (or securities into which they have been converted) or if such holder satisfies the requirements of Rule 144.
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6. Miscellaneous.
6.1 Successors and Assigns. Except as otherwise provided therein, the terms and conditions of this Agreement and the other Transaction Documents shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of any Securities); provided that the Company may not assign or transfer its rights or obligations hereunder or under the other Transaction Documents without the prior written consent of the holders of a majority of the aggregate Principal Amount under all Notes. The Securities shall be transferable upon obtaining the prior written consent of the Company and subject to compliance with applicable securities laws and Section 3. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement.
6.2 Governing Law. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. In addition, each of the parties hereto irrevocably and unconditionally (a) consents to submit itself to the exclusive personal jurisdiction of the state and Federal courts located in Santa Clara County, California, in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from such court or assert that such court is an inconvenient forum, (c) agrees that it will not bring any action relating to this Agreement or any of the acts and transactions contemplated by this Agreement in any forum other than the state and Federal courts located in Santa Clara County, California, and (d) to the fullest extent permitted by law, consents to service being made through the notice procedures contemplated pursuant to Section 6.4 hereof. Each party hereto hereby agrees that, to the fullest extent permitted by law, service of any process, summons, notice or document by U.S. registered mail to the respective addresses contemplated pursuant to Section 6.4 hereof shall be effective service of process for any suit or proceeding in connection with this Agreement or the transactions contemplated hereby.
6.3 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement.
6.4 Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Agreement shall be in writing and shall be conclusively deemed to have been duly given (a) when hand delivered to the other party; (b) when sent by electronic transmission (email) to the email address set forth below if sent between 8:00 a.m. and 5:00 p.m. recipient’s local time on a Business Day, or on the next Business Day if sent by email set forth below if sent other than between 8:00 a.m. and 5:00 p.m. recipient’s local time on a Business Day; (c) three Business Days after deposit in the U.S. mail with first class or certified mail receipt requested postage prepaid and addressed to the other party at the address set forth below; or (d) the next Business Day after deposit with a national overnight delivery service, postage prepaid, addressed to the parties as set forth below with next Business Day delivery guaranteed, provided that the sending party receives a confirmation of delivery from the delivery service provider. Each Person making a communication hereunder by email shall promptly confirm by telephone to the Person to whom such communication was addressed each communication made by it by email pursuant hereto but the absence of such confirmation shall not affect the validity of any such communication. A party may change or supplement the addresses given above, or designate additional addresses, for purposes of this Section 6.4 by giving the other party written notice of the new address in the manner set forth above. “Business Day” shall mean any day other than a Saturday, Sunday, U.S. federal holiday or any other day upon which banks in New York and San Francisco are not open for business. Any communication to an Investor shall be sent to such Investor at the address set forth on the signature page hereto, and if to the Company, at the following address:
Tivic Health Systems, Inc.
750 Menlo Ave. Suite 200
Menlo Park, California 94025
Attn: Chief Executive Officer
Email Address:
With a copy to (which such copy shall not constitute notice):
Procopio, Cory, Hargreaves & Savitch LLP
1117 California Avenue
Palo Alto, CA 94304
Attention: Roger C. Rappoport, Esq.
Tel:
Email:
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6.5 Amendments and Waivers. Any term of this Agreement may be amended or modified, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of, or a written instrument signed by (x) the Company; and (y) Investors who then hold Notes in an aggregate Principal Amount equal to more than fifty-percent (50%) of the aggregate Principal Amount of all then outstanding Notes. Any waiver or amendment effected in accordance with this Section 6.5 shall be binding upon each holder of any Securities acquired under this Agreement at the time outstanding (including securities into which such Securities are convertible), each future holder of all such Securities, and the Company, and its and their respective successors and assigns. Notwithstanding the foregoing, the Company may unilaterally amend Exhibit A of this Agreement to the extent necessary to add new Investors at Subsequent Closings, in accordance with Section 2.2 of this Agreement.
6.6 Severability. In case any one or more of the provisions contained in this Agreement shall, for any reason, be judicially determined to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
6.7 Finder’s Fee. Each party represents that it neither is nor will be obligated for any finders’ fee or commission in connection with this transaction.
6.8 Further Assurances. Each Investor and the Company shall from time to time and at all times hereafter make, do, execute, or cause or procure to be made, done and executed such further acts, deeds, conveyances, consents and assurances without further consideration, which may reasonably be required to effect the transactions contemplated by the Transaction Documents.
6.9 Survival of Representations Warranties and Covenants. The representations and warranties of the Company and the Investors contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and each Closing and shall in no way be affected by any investigation or knowledge of the subject matter thereof made by or on behalf of the Investors or the Company.
6.10 Separability. The obligations of each Investor under any Transaction Document are several and not joint with the obligations of any other Investor, and no Investor shall be responsible in any way for the performance of the obligations of any other Investor under any Transaction Document. Each Investor shall be responsible only for its own representations, warranties, agreements and covenants hereunder. Nothing contained herein or in any other Transaction Document, and no action taken by any Investor pursuant hereto or thereto, shall be deemed to constitute the Investors as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Investors are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by the Transaction Documents. Except as otherwise provided in any Transaction Document, each Investor shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be necessary for any other Investor to be joined as an additional party in any proceeding for such purpose. Any invalidity, illegality or limitation on the enforceability of the Agreement or any part thereof, by any Investor, whether arising by reason of the law of the respective Investor’s domicile or otherwise, shall in no way affect or impair the validity, legality or enforceability of this Agreement with respect to other Investors.
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6.11 Acknowledgment. Each Investor acknowledges that: (a) he, she or it has read the Transaction Documents; (b) it has been represented in the preparation, negotiation and execution of the Transaction Documents by legal counsel of its own choice or has voluntarily declined to seek such counsel; and (c) it understands the terms and consequences of the Transaction Documents and is fully aware of the legal and binding effect of the Transaction Documents.
6.12 Construction. The Company and Investors have participated jointly in the negotiation and drafting of this Agreement. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party because of the authorship of any provision of this Agreement. The words “include,” “includes,” and “including” shall be deemed to be followed by “without limitation.” Pronouns in masculine, feminine, and neuter genders shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa, unless the context otherwise requires. The words “this Agreement,” “herein,” “hereof,” “hereby,” “hereunder,” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. Any reference herein to “day” or “days” shall, unless otherwise provided for, mean a calendar day or calendar days.
6.13 Entire Agreement. This Agreement and the Transaction Documents (and the Exhibits hereto and thereto) constitute the entire understanding between the Company and the Investors relative to the subject matter hereof. Any prior and contemporaneous agreement, discussion, understanding, correspondence and/or communication between the Company and such Investors regarding the purchase of securities, capital stock of the Company or otherwise, whether written or oral, is superseded by this Agreement.
6.14 Attorney’s Fees. If, in any action at law or in equity (including arbitration), it is necessary to enforce or interpret the terms of any of the Transaction Documents, the prevailing party shall be entitled to reasonable attorney’s fees, costs and necessary disbursements in addition to any other relief that such party may be entitled.
6.15 Waiver of Conflicts. Each Investor acknowledges that Procopio, outside general counsel to the Company, has in the past performed and is or may now or in the future represent one or more of Investors or their Affiliates in matters unrelated to the transactions contemplated by this Agreement (the “Bridge Financing”), including representation of such Investors or their Affiliates in matters of a similar nature to the Bridge Financing. The applicable rules of professional conduct require that Procopio inform the parties hereunder of this representation and obtain their consent. Procopio has served as outside general counsel to the Company and has negotiated the terms of the Bridge Financing solely on behalf of the Company. It is the belief of Procopio that these terms and conditions represent an arm’s length transaction between the Company and Investors. Investors have been, or have been granted the opportunity to be, represented by independent legal counsel regarding the terms of the Bridge Financing. The Company and each Investor hereby (a) acknowledge that they have had an opportunity to ask for and have obtained information relevant to such representation, including disclosure of the reasonably foreseeable adverse consequences of such representation; (b) acknowledge that with respect to the Bridge Financing, Procopio has represented solely the Company, and not any Investor or any shareholder, director or employee of the Company or any Investor; and (c) gives its informed consent to Procopio’s representation of the Company in the Bridge Financing.
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6.16 Expenses. Each party shall pay their own fees and expenses, including attorney’s fees and expenses in connection with the preparation, execution and delivery of this Agreement and the other Transaction Documents.
6.18 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
6.19 California Securities Laws. THE SALE OF THE SECURITIES, WHICH ARE THE SUBJECT OF THIS AGREEMENT, HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
[Signature Page Follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Note Purchase Agreement as of the date first above written.
| Company: | Tivic Health Systems, Inc. | |
| a Delaware corporation | ||
| By: | ||
| Jennifer Ernst, Chief Executive Officer | ||
INVESTORS:
| If Investor is a Corporation, Partnership or Other Entity: | If Investor is an Individual: |
| Name of Entity | Print Name of Individual | ||
| Signature of Authorized Person | Signature of Individual | ||
| Print Name of Authorized Person | Print Name of Individual (If more than one signatory) | ||
| Title | Signature of Individual (If more than one signatory) | ||
| Telephone (Day): | Telephone (Day): | ||||
| Email Address: | |||||
| Email Address: | Address: | ||||
| Address: | |||||
EXHIBITS
Exhibits
| Exhibit A | Schedule of Investors |
| Exhibit B | Form of Note |
| Exhibit C | Schedule of Exceptions |
EXHIBIT A
Schedule Of Investors
| Investor | Principal Amount of Note | Date of Purchase |
EXHIBIT B
Form Of Unsecured Convertible Promissory Note
[Attached]
EXHIBIT C
Schedule of Exceptions
Exhibit 10.14
THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION. THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THAT CERTAIN NOTE PURCHASE AGREEMENT, DATED JUNE 17, 2021, WHICH RESTRICTIONS ON TRANSFER ARE INCORPORATED HEREIN BY REFERENCE.
UNSECURED CONVERTIBLE PROMISSORY NOTE
| _________,2021 | $________ |
FOR VALUE RECEIVED, TIVIC HEALTH SYSTEMS, INC., a Delaware corporation (the “Company”), promises to pay to the order of ________________, or his, her or its permitted registered assigns (“Holder”) the principal sum of ________________ Dollars ($__________.00) (the “Principal Amount”) with simple interest thereon at the rate of the lesser of (i) 3.0% per annum (computed on the basis of actual calendar days elapsed and a year of 365 days) or (ii) the highest rate of interest then permitted under applicable law. Interest shall commence with the date hereof and shall continue on the outstanding Principal Amount of this Unsecured Convertible Promissory Note (this “Note”) until paid or converted in accordance with the provisions hereof.
The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:
1. Definitions. For purposes of this Note, capitalized terms used herein but not otherwise defined herein shall have the meaning set forth in this Section 1:
1.1 “Business Day” means any day which is not a Saturday or Sunday or a legal holiday on which banks are authorized or required to be closed in California.
1.2 “Cap” means an amount of $40,000,000.
1.3 “Change in Control” means, unless otherwise determined by the Company and the holders of at least a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes:
(a) The direct or indirect sale or transfer, in a single transaction or a series of related transactions, by the shareholders of the Company of voting securities, in which the holders of the outstanding voting securities of the Company immediately prior to such transaction or series of transactions hold, as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such transaction or series of related transactions;
(b) A merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity (or the parent of the surviving entity) immediately after such merger or consolidation;
(c) A reverse merger in which the Company is the surviving entity but in which the holders of the outstanding voting securities of the Company immediately prior to such merger hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such merger; or
(d) The sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such transaction(s) receive as a distribution with respect to securities of the Company, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the acquiring entity immediately after such transaction(s), provided however, that the term “Change in Control” shall not include, for the purposes of this Note, (A) a merger of the Company effected exclusively for the purpose of changing the domicile of the Company, or (B) the transfer of more than fifty percent (50%) of the total combined voting power of all outstanding voting securities in an equity financing for bona fide capital raising purposes.
1.4 “Common Stock” means the Common Stock of the Company.
1.5 “Conversion” means any conversion of this Note in connection with a Qualified Financing, Change in Control, Mandatory Conversion or IPO Conversion, as the case may be, in accordance with the provisions hereof.
1.6 “Convertible Securities” means evidences of convertible indebtedness, shares of Preferred Stock of the Company, or other securities or instruments (other than Options) which are, directly or indirectly, convertible into or exchangeable for shares of Common Stock, either immediately or upon the arrival of a specified date or the occurrence of a specified event.
1.7 “Fully Diluted Basis” means the sum of (i) the total number of shares of Common Stock issued and outstanding immediately prior to the applicable Conversion, and (ii) the total number of shares of Common Stock issuable, directly or indirectly, upon conversion of all outstanding Options and Convertible Securities (other than the Bridge Notes and other Convertible Securities that will convert into Qualified Securities, Shadow Preferred or Preferred Conversion Stock, as the case may be, in connection with a Conversion), and (iii) shares of Common Stock reserved and available for future grant under the Company’s equity incentive or similar plans, in each case, immediately prior to such Conversion.
1.8 “IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act of 1933, as amended.
1.9 “IPO Conversion Price” shall mean a conversion price per share equal to the lesser of (x) seventy-five percent (75%) of the per share public offering price stated on the front cover of the final prospectus for the IPO (before deduction of any underwriting commissions, expenses or other amounts), and (y) the quotient resulting from dividing (A) the Cap, by (B) the Company’s capitalization on a Fully Diluted Basis, as of immediately prior to the IPO Closing Date.
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1.10 “Options” means any rights, warrants, options or similar rights to subscribe for or to purchase Common Stock or Convertible Securities, whether vested or unvested.
1.11 “Preferred Conversion Price” means a price per share of Preferred Conversion Stock of $1.4034, as adjusted for as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like.
1.12 “Preferred Conversion Stock” means, at the election of the Company, Series Seed-1 Preferred or a newly designated series of Preferred Stock that has substantially the same rights, preferences and privileges as the Series Seed-1 Preferred.
1.13 “Qualified Financing” means the closing of an equity financing undertaken by the Company after the date hereof and before the Maturity Date, principally for capital raising purposes, in which the aggregate amount of gross proceeds (not including cancellation of the indebtedness represented by all Bridge Notes and other Convertible Securities that will convert into shares of Qualified Securities or Shadow Preferred, as the case may be, in connection with such Conversion) received by the Company from the sale of any series of its equity securities totals at least $2,000,000 in the aggregate.
1.14 “Qualified Securities” means the securities sold by the Company, and purchased by investors, in a Qualified Financing (other than Shadow Preferred).
1.15 “Series Seed-1 Preferred” means the shares of Series Seed-1 Preferred stock of the Company.
1.16 “Series Seed Transaction Documents” means, collectively (i) the Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated as of July 17, 2019, by and among the Company and the investors who are a party thereto, and (ii) the Voting Agreement, dated as of July 17, 2019, by and among the Company and the investors who are a party thereto.
1.17 “Shadow Preferred” means the shares of a series of Preferred Stock issued to Holder and the holders of the other Bridge Notes in the Qualified Financing, having identical rights, privileges, preferences and restrictions as the shares of Qualified Securities, 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 applicable conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof; and (ii) the basis used to determine any dividend rights, which shall be the same percentage of the conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof as applied to determine the per share dividend rights of purchasers of Qualified Securities, relative the purchase price paid by the purchasers thereof.
1.18 “Transaction Documents” means the Note Purchase Agreement and the Bridge Notes.
2. Note. This Note is issued pursuant to the terms of that certain Note Purchase Agreement dated as of June 17, 2021, by and among the Company and the investors who are parties thereto (the “Note Purchase Agreement”). This Note is one of a series of convertible promissory notes (the “Bridge Notes”) having like tenor and effect (except for variations necessary to express the name of the holder thereof, the principal amount of each of the Bridge Notes the dates upon which each Bridge Note is issued by the Company in accordance with the terms of the Note Purchase Agreement and such variations as may be agreed upon by the Company and the holder of a Bridge Note).
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3. Maturity. Unless sooner paid or converted in accordance with the terms hereof, the entire unpaid Principal Amount and all unpaid accrued interest shall become fully due and payable on June 1, 2023 (the “Maturity Date”).
4. Payments.
4.1 Form of Payment. All payments of interest and principal (other than payment by way of conversion) shall be in lawful money of the United States of America to Holder, at the address specified in the Note Purchase Agreement, or at such other address as may be specified from time to time by Holder in a written notice delivered to the Company. All payments shall be applied first to accrued interest, and thereafter to the Principal Amount.
4.2 Prepayment. The Principal Amount may not be prepaid by the Company prior to the Maturity Date without the consent of Holder.
5. Automatic Conversion Upon Qualified Financing.
5.1 Conversion. This Note shall be automatically canceled on the date of the initial closing of a Qualified Financing, and the outstanding Principal Amount and all accrued but unpaid interest thereon shall be automatically converted, at the initial closing and on the same terms and conditions of the Qualified Financing (including compliance with securities laws), into shares of Qualified Securities (or Shadow Preferred, as applicable) (which, in each case, will be rounded down to the closest whole number), at a conversion price per share equal to the lesser of (x) seventy-five percent (75%) of the price per share of Qualified Securities sold to the investors in a Qualified Financing (other than the holders of Bridge Notes or Convertible Securities converting into Qualified Securities or Shadow Preferred, as applicable), and (y) the quotient resulting from dividing (A) the Cap, by (B) the Company’s capitalization on a Fully Diluted Basis, as of immediately prior to such conversion of this Note. Notwithstanding the foregoing or anything herein contained to the contrary, in the event of a conversion of the Notes in connection with a Qualified Financing in accordance with the provisions of this Section 5.1, the Company may, solely at its option, elect to convert the Notes into Shadow Preferred.
5.2 Ancillary Documents. In connection with any conversion of this Note pursuant to a Qualified Financing, Holder agrees to execute and deliver to the Company any documents reasonably requested by the Company to be executed by the investors purchasing Qualified Securities (that are not otherwise the holders of Bridge Notes), including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
6. Conversion Upon Change in Control. In the event of a Change in Control prior to the Maturity Date or prior to the conversion of this Note pursuant to Section 5.1, at the election of the holders of a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes (the “Requisite Holders”), (i) the outstanding Principal Amount and all accrued but unpaid interest thereon, as of the date of conversion pursuant to this Section 6, will be converted, immediately prior to the consummation of the transaction constituting a Change in Control, into that number of shares of Preferred Conversion Stock (which will be rounded down to the closest whole number) equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon, immediately prior to such Conversion, by (y) the Preferred Conversion Price, or (ii) Holder shall receive an amount equal to one and one half times (1.5X) the Principal Amount outstanding as of the date thereof concurrent with the consummation of the transaction constituting a Change in Control (the “Cash Distribution”). Notwithstanding the foregoing or anything herein contained to the contrary, to the extent that the consideration received as part of a Change in Control consists, in whole or in part, of stock or other non-cash consideration (“Other Consideration”), and Holder elects to receive a Cash Distribution as herein contemplated, the Company may, at its option, pay such Cash Distribution in cash or Other Consideration in the same proportion as such Other Consideration is being paid to other holders of the Company’s securities. If any of the Company’s securityholders are given a choice as to the form and amount of consideration to be received in a Change in Control, the Holder will be given the same choice, provided that the Holder may not choose to receive a form of consideration that the Holder would be ineligible to receive as a result of the Holder’s failure to satisfy any requirement or limitation generally applicable to the Company’s securityholders, or under any applicable laws.
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6.1 Ancillary Agreements. In connection with a Conversion in connection with a Change in Control, other than in the case of the Cash Distribution, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
7. Conversion at Maturity Date; IPO.
7.1 Maturity Date Conversion. In the event that neither a Qualified Financing nor a Change in Control shall have occurred on or before the Maturity Date then, notwithstanding anything herein contained to the contrary, the outstanding Principal Amount and all accrued but unpaid interest thereon as of the Maturity Date shall be automatically converted into shares of Preferred Conversion Stock as of the Maturity Date (the “Mandatory Conversion”). The number of shares (which will be rounded down to the closest whole number) of Preferred Conversion Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon immediately prior to the Maturity Date, by (y) the Preferred Conversion Price.
7.2 Ancillary Agreements. In connection with the Mandatory Conversion, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
7.3 IPO Conversion. In the event that the Company shall consummate an IPO prior to a Qualified Financing, a Change in Control or the Maturity Date, then, notwithstanding anything herein contained to the contrary, the outstanding Principal Amount and, at the election of the Company all accrued but unpaid interest thereon to the date of conversion pursuant to this Section 7.3, shall be automatically converted into shares of Common Stock as of immediately prior to the consummation of an IPO (the “IPO Closing Date”), at a per share price equal to the IPO Conversion Price (the “IPO Conversion”). The number of shares (which will be rounded down to the closest whole number) of Common Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the outstanding the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon (calculated through the date that is not more than seven (7) days prior to the IPO Closing Date), by (y) the IPO Conversion Price. Accrued interest which is not converted into Common Stock in accordance with the provisions hereof, shall be paid to Holder as soon as practicable following the IPO Conversion.
7.4 IPO Ancillary Agreements. In connection with the IPO Conversion, Holder agrees to execute and deliver to the Company such documents and agreements as may be reasonably be requested by the Company and/or its underwriter, including, without limitation, a lockup agreement.
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8. Conversion Mechanics.
8.1 Issuance of Certificates. As soon as is reasonably practicable after a Conversion has been effected, the Company shall deliver to Holder a certificate or certificates representing the number of shares of capital stock (excluding any fractional share) issuable by reason of such conversion in such name or names and such denomination or denominations as Holder has specified. In furtherance of, and not in limitation of any of the provisions of this Note, Holder acknowledges and agrees that, upon conversion of this Note as herein contemplated, this Note shall be cancelled, and of no further force and effect, whether or not the Company received this Note or instructions for the cancelation of this Note from Holder and neither the Company nor any successor in interest shall have any obligations hereunder or in respect hereof.
8.2 No Fractional Shares. If any fractional share of capital stock would, except for the provisions hereof, be deliverable upon conversion of this Note, the Company, in lieu of delivering such fractional share, shall pay an amount equal to the value of such fractional share, as determined by the per share conversion price used to effect such conversion.
8.3 Compliance with Laws and Regulations. The Company shall take all such actions as may be necessary to assure that all shares of capital stock issued upon conversion may be so issued without violation of any applicable law or governmental regulation or any requirement of any domestic securities exchange upon which such shares of capital stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon such issuance).
9. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Transaction Documents:
9.1 Failure to Pay. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest payment or other payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five (5) Business Days of the Company’s receipt of written notice to the Company of such failure to pay.
9.2 Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its or any of its creditors, (iii) be dissolved or liquidated, (iv) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (v) take any action for the purpose of effecting any of the foregoing.
9.3 Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company, or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 45 days of commencement; or
9.4 Judgments. A final judgment or order for the payment of money in excess of $500,000 (exclusive of amounts covered by insurance) shall be rendered against the Company and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within 30 days after issue or levy.
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10. Rights of Holder upon Default. Upon the occurrence of any Event of Default (other than an Event of Default described in Section 9.2 or Section 9.3) and at any time thereafter during the continuance of such Event of Default, Holder may, with the written consent of the Requisite Holders, by written notice to the Company, declare all outstanding obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence of any Event of Default described in Section 9.2 and Section 9.3, immediately and without notice, all outstanding obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence and during the continuance of any Event of Default, Holder may, with the written consent of the Requisite Holders, exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.
11. Lost, Stolen, Destroyed or Mutilated Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Note and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Note, the Company, at its expense, will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
12. Governing Law; Jurisdiction; Venue. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. In addition, each of the parties hereto irrevocably and unconditionally (a) consents to submit itself to the exclusive personal jurisdiction of the state and Federal courts located in Santa Clara County, California, in the event any dispute arises out of this Note or any of the transactions contemplated by this Note, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from such court or assert that such court is an inconvenient forum, (c) agrees that it will not bring any action relating to this Note or any of the acts and transactions contemplated by this Note in any forum other than the state and Federal courts located in Santa Clara County, California, and (d) to the fullest extent permitted by law, consents to service being made through the notice procedures contemplated pursuant to Section 6.4 of the Note Purchase Agreement. Each party hereto hereby agrees that, to the fullest extent permitted by law, service of any process, summons, notice or document by U.S. registered mail to the respective addresses contemplated pursuant to Section 6.4 of the Note Purchase Agreement shall be effective service of process for any suit or proceeding in connection with this Note or the transactions contemplated hereby.
13. Amendment and Waiver. Any provision of this Note may be amended, waived or modified (either generally or in a particular instance and either retroactively or prospectively) only upon the written consent of, or a written instrument signed by, the Company and Holder; provided, however, that this Note may be amended, together with all other Bridge Notes, by agreement of the Company, and the Requisite Holders, so long as such amendment and/or waivers (i) are applicable to all Bridge Notes; (ii) do not modify this Section 13; or (iii) do not reduce the Principal Amount of this Note or the rate of interest thereon.
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14. Unsecured, Subordination. Holder acknowledges and agrees that this Note (i) is not secured by any of the assets of the Company, and (ii) will be subordinate in right of payment to all current and future indebtedness, including bank (and other financial institutions of a similar nature) indebtedness of the Company, but excluding any indebtedness convertible into equity securities of the Company. Notwithstanding the foregoing or anything herein contained to the contrary, the Bridge Notes shall rank pari passu with all other convertible promissory notes outstanding as of the date hereof.
15. Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Note shall be made in accordance with Section 6.4 of the Note Purchase Agreement.
16. Severability. In case any one or more of the provisions contained in this Note shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
17. Remedies Cumulative; Failure or Indulgence Not a Waiver. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents. No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
18. Entire Agreement. This Note and the Note Purchase Agreement represents the entire agreement between the parties hereto with respect to this Note and its terms and conditions.
19. Headings; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
20. Restrictions on Transfer; Assignment. Except as otherwise set forth in the Note Purchase Agreement, Holder may not transfer or assign all or any part of this Note without the approval of the Company. This Note may only be transferred in compliance with applicable state and federal laws. Holder shall notify the Company in writing in advance of any proposed transfer. All rights and obligations of the Company and Holder shall be binding upon and benefit the successors, assigns, heirs, and administrators of the parties. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Requisite Holders.
21. Excessive Interest. Notwithstanding any other provision herein to the contrary, this Note is hereby expressly limited so that the interest rate charged hereunder shall at no time exceed the maximum rate permitted by applicable law. If, for any circumstance whatsoever, the interest rate charged exceeds the maximum rate permitted by applicable law, the interest rate shall be reduced to the maximum rate permitted, and if Holder shall have received an amount that would cause the interest rate charged to be in excess of the maximum rate permitted, such amount that would be excessive interest shall be applied to the reduction of the Principal Amount owing hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal, such excess shall be refunded to the Company.
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22. Pari Passu Notes. The Holder acknowledges and agrees that the payment of all or any portion of the outstanding Principal Amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Bridge Notes. In the event the Holder receives payments in excess of the Holder’s pro rata share of the Company’s payments to the holders of all of the Bridge Notes, then the Holder shall hold in trust all such excess payments for the benefit of the holders of the other Bridge Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.
23. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the other Transaction Documents.
24. Fees and Expenses. All expenses incurred in connection with this Note, including attorneys’ fees, shall be paid by the parties incurring such expenses.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Company has caused this Unsecured Convertible Promissory Note to be issued as of the date first set forth above.
| COMPANY: | Tivic Health Systems, Inc., | |
| a Delaware corporation | ||
| By: | ||
| Jennifer Ernst Chief Executive Officer | ||
Agreed and Accepted by Holder:
| If Holder is an Individual: | If Holder is a Corporation, Partnership or Other Entity: | |
| Name of Entity | ||
| Signature | Signature of Authorized Person | |
| Print Name | Print Name of Authorized Person |
| Telephone (Day): | Title | ||
| Email Address: |
| Telephone (Day): |
| Address: |
| Email Address: |
| Address: |
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Exhibit 10.15
THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, (II) IN COMPLIANCE WITH RULE 144, OR (III) PURSUANT TO AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER OR DISTRIBUTION. THIS UNSECURED CONVERTIBLE PROMISSORY NOTE AND ANY SECURITIES INTO WHICH THIS UNSECURED CONVERTIBLE PROMISSORY NOTE IS CONVERTIBLE ARE SUBJECT TO RESTRICTIONS ON TRANSFER CONTAINED IN THAT CERTAIN NOTE PURCHASE AGREEMENT, DATED JUNE 17, 2021, WHICH RESTRICTIONS ON TRANSFER ARE INCORPORATED HEREIN BY REFERENCE.
UNSECURED CONVERTIBLE PROMISSORY NOTE
| , 2021 | $ |
FOR VALUE RECEIVED, TIVIC HEALTH SYSTEMS, INC., a Delaware corporation (the “Company”), promises to pay to the order of ________________, or his, her or its permitted registered assigns (“Holder”) the principal sum of ________________ Dollars ($__________.00) (the “Principal Amount”) with simple interest thereon at the rate of the lesser of (i) 3.0% per annum (computed on the basis of actual calendar days elapsed and a year of 365 days) or (ii) the highest rate of interest then permitted under applicable law. Interest shall commence with the date hereof and shall continue on the outstanding Principal Amount of this Unsecured Convertible Promissory Note (this “Note”) until paid or converted in accordance with the provisions hereof.
The Principal Amount consists of the purchase price paid at closing of $_________ and a ___% original issue discount (“OID”) of $________.
The following is a statement of the rights of Holder and the conditions to which this Note is subject, and to which the Holder, by the acceptance of this Note, agrees:
1. Definitions. For purposes of this Note, capitalized terms used herein but not otherwise defined herein shall have the meaning set forth in this Section 1:
1.1 “Business Day” means any day which is not a Saturday or Sunday or a legal holiday on which banks are authorized or required to be closed in California.
1.2 “Cap” means an amount of $40,000,000.
1.3 “Change in Control” means, unless otherwise determined by the Company and the holders of at least a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes:
(a) The direct or indirect sale or transfer, in a single transaction or a series of related transactions, by the shareholders of the Company of voting securities, in which the holders of the outstanding voting securities of the Company immediately prior to such transaction or series of transactions hold, as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such transaction or series of related transactions;
(b) A merger or consolidation in which the Company is not the surviving entity, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such merger or consolidation hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the surviving entity (or the parent of the surviving entity) immediately after such merger or consolidation;
(c) A reverse merger in which the Company is the surviving entity but in which the holders of the outstanding voting securities of the Company immediately prior to such merger hold as a result of holding Company securities prior to such transaction, in the aggregate, securities possessing less than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the Company or of the acquiring entity immediately after such merger; or
(d) The sale, transfer or other disposition (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company, except for a transaction in which the holders of the outstanding voting securities of the Company immediately prior to such transaction(s) receive as a distribution with respect to securities of the Company, in the aggregate, securities possessing more than fifty percent (50%) of the total combined voting power of all outstanding voting securities of the acquiring entity immediately after such transaction(s), provided however, that the term “Change in Control” shall not include, for the purposes of this Note, (A) a merger of the Company effected exclusively for the purpose of changing the domicile of the Company, or (B) the transfer of more than fifty percent (50%) of the total combined voting power of all outstanding voting securities in an equity financing for bona fide capital raising purposes.
1.4 “Common Stock” means the Common Stock of the Company.
1.5 “Conversion” means any conversion of this Note in connection with a Qualified Financing, Change in Control, Mandatory Conversion or IPO Conversion, as the case may be, in accordance with the provisions hereof.
1.6 “Convertible Securities” means evidences of convertible indebtedness, shares of Preferred Stock of the Company, or other securities or instruments (other than Options) which are, directly or indirectly, convertible into or exchangeable for shares of Common Stock, either immediately or upon the arrival of a specified date or the occurrence of a specified event.
1.7 “Fully Diluted Basis” means the sum of (i) the total number of shares of Common Stock issued and outstanding immediately prior to the applicable Conversion, and (ii) the total number of shares of Common Stock issuable, directly or indirectly, upon conversion of all outstanding Options and Convertible Securities (other than the Bridge Notes and other Convertible Securities that will convert into Qualified Securities, Shadow Preferred or Preferred Conversion Stock, as the case may be, in connection with a Conversion), and (iii) shares of Common Stock reserved and available for future grant under the Company’s equity incentive or similar plans, in each case, immediately prior to such Conversion.
1.8 “IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act of 1933, as amended.
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1.9 “IPO Conversion Price” shall mean a conversion price per share equal to the lesser of (x) seventy-five percent (75%) of the per share public offering price stated on the front cover of the final prospectus for the IPO (before deduction of any underwriting commissions, expenses or other amounts), and (y) the quotient resulting from dividing (A) the Cap, by (B) the Company’s capitalization on a Fully Diluted Basis, as of immediately prior to the IPO Closing Date.
1.10 “Options” means any rights, warrants, options or similar rights to subscribe for or to purchase Common Stock or Convertible Securities, whether vested or unvested.
1.11 “Preferred Conversion Price” means a price per share of Preferred Conversion Stock of $1.4034, as adjusted for as adjusted for any stock splits, stock dividends, combinations, subdivisions, recapitalizations or the like.
1.12 “Preferred Conversion Stock” means, at the election of the Company, Series Seed-1 Preferred or a newly designated series of Preferred Stock that has substantially the same rights, preferences and privileges as the Series Seed-1 Preferred.
1.13 “Qualified Financing” means the closing of an equity financing undertaken by the Company after the date hereof and before the Maturity Date, principally for capital raising purposes, in which the aggregate amount of gross proceeds (not including cancellation of the indebtedness represented by all Bridge Notes and other Convertible Securities that will convert into shares of Qualified Securities or Shadow Preferred, as the case may be, in connection with such Conversion) received by the Company from the sale of any series of its equity securities totals at least $2,000,000 in the aggregate.
1.14 “Qualified Securities” means the securities sold by the Company, and purchased by investors, in a Qualified Financing (other than Shadow Preferred).
1.15 “Series Seed-1 Preferred” means the shares of Series Seed-1 Preferred stock of the Company.
1.16 “Series Seed Transaction Documents” means, collectively (i) the Series Seed-1, Seed-2, Seed-3 and Seed-4 Preferred Stock Investment Agreement, dated as of July 16, 2019, by and among the Company and the investors who are a party thereto, and (ii) the Voting Agreement, dated as of July 16, 2019, by and among the Company and the investors who are a party thereto.
1.17 “Shadow Preferred” means the shares of a series of Preferred Stock issued to Holder and the holders of the other Bridge Notes in the Qualified Financing, having identical rights, privileges, preferences and restrictions as the shares of Qualified Securities, 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 applicable conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof; and (ii) the basis used to determine any dividend rights, which shall be the same percentage of the conversion price determined to effect a Conversion of this Note in accordance with the provisions hereof as applied to determine the per share dividend rights of purchasers of Qualified Securities, relative the purchase price paid by the purchasers thereof.
1.18 “Transaction Documents” means the Note Purchase Agreement and the Bridge Notes.
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2. Note. This Note is issued pursuant to the terms of that certain Note Purchase Agreement dated as of June 17, 2021, by and among the Company and the investors who are parties thereto (the “Note Purchase Agreement”). This Note is one of a series of convertible promissory notes (the “Bridge Notes”) having like tenor and effect (except for variations necessary to express the name of the holder thereof, the principal amount of each of the Bridge Notes the dates upon which each Bridge Note is issued by the Company in accordance with the terms of the Note Purchase Agreement and such variations as may be agreed upon by the Company and the holder of a Bridge Note).
3. Maturity. Unless sooner paid or converted in accordance with the terms hereof, the entire unpaid Principal Amount and all unpaid accrued interest shall become fully due and payable on June 1, 2023 (the “Maturity Date”).
4. Payments.
4.1 Form of Payment. All payments of interest and principal (other than payment by way of conversion) shall be in lawful money of the United States of America to Holder, at the address specified in the Note Purchase Agreement, or at such other address as may be specified from time to time by Holder in a written notice delivered to the Company. All payments shall be applied first to accrued interest, and thereafter to the Principal Amount.
4.2 Prepayment. The Principal Amount may not be prepaid by the Company prior to the Maturity Date without the consent of Holder.
5. Automatic Conversion Upon Qualified Financing.
5.1 Conversion. This Note shall be automatically canceled on the date of the initial closing of a Qualified Financing, and the outstanding Principal Amount and all accrued but unpaid interest thereon shall be automatically converted, at the initial closing and on the same terms and conditions of the Qualified Financing (including compliance with securities laws), into shares of Qualified Securities (or Shadow Preferred, as applicable) (which, in each case, will be rounded down to the closest whole number), at a conversion price per share equal to the lesser of (x) seventy-five percent (75%) of the price per share of Qualified Securities sold to the investors in a Qualified Financing (other than the holders of Bridge Notes or Convertible Securities converting into Qualified Securities or Shadow Preferred, as applicable), and (y) the quotient resulting from dividing (A) the Cap, by (B) the Company’s capitalization on a Fully Diluted Basis, as of immediately prior to such conversion of this Note. Notwithstanding the foregoing or anything herein contained to the contrary, in the event of a conversion of the Notes in connection with a Qualified Financing in accordance with the provisions of this Section 5.1, the Company may, solely at its option, elect to convert the Notes into Shadow Preferred.
5.2 Ancillary Documents. In connection with any conversion of this Note pursuant to a Qualified Financing, Holder agrees to execute and deliver to the Company any documents reasonably requested by the Company to be executed by the investors purchasing Qualified Securities (that are not otherwise the holders of Bridge Notes), including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
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6. Conversion Upon Change in Control. In the event of a Change in Control prior to the Maturity Date or prior to the conversion of this Note pursuant to Section 5.1, at the election of the holders of a majority of the aggregate Principal Amount of all of the then issued and outstanding Bridge Notes (the “Requisite Holders”), (i) the outstanding Principal Amount and all accrued but unpaid interest thereon, as of the date of conversion pursuant to this Section 6, will be converted, immediately prior to the consummation of the transaction constituting a Change in Control, into that number of shares of Preferred Conversion Stock (which will be rounded down to the closest whole number) equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon, immediately prior to such Conversion, by (y) the Preferred Conversion Price, or (ii) Holder shall receive an amount equal to one and one half times (1.5X) the Principal Amount outstanding as of the date thereof concurrent with the consummation of the transaction constituting a Change in Control (the “Cash Distribution”). Notwithstanding the foregoing or anything herein contained to the contrary, to the extent that the consideration received as part of a Change in Control consists, in whole or in part, of stock or other non-cash consideration (“Other Consideration”), and Holder elects to receive a Cash Distribution as herein contemplated, the Company may, at its option, pay such Cash Distribution in cash or Other Consideration in the same proportion as such Other Consideration is being paid to other holders of the Company’s securities. If any of the Company’s securityholders are given a choice as to the form and amount of consideration to be received in a Change in Control, the Holder will be given the same choice, provided that the Holder may not choose to receive a form of consideration that the Holder would be ineligible to receive as a result of the Holder’s failure to satisfy any requirement or limitation generally applicable to the Company’s securityholders, or under any applicable laws.
6.1 Ancillary Agreements. In connection with a Conversion in connection with a Change in Control, other than in the case of the Cash Distribution, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
7. Conversion at Maturity Date; IPO.
7.1 Maturity Date Conversion. In the event that neither a Qualified Financing nor a Change in Control shall have occurred on or before the Maturity Date then, notwithstanding anything herein contained to the contrary, the outstanding Principal Amount and all accrued but unpaid interest thereon as of the Maturity Date shall be automatically converted into shares of Preferred Conversion Stock as of the Maturity Date (the “Mandatory Conversion”). The number of shares (which will be rounded down to the closest whole number) of Preferred Conversion Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the outstanding Principal Amount and all accrued but unpaid interest thereon immediately prior to the Maturity Date, by (y) the Preferred Conversion Price.
7.2 Ancillary Agreements. In connection with the Mandatory Conversion, Holder agrees to execute and deliver to the Company the Series Seed Transaction Documents and/or any documents reasonably requested by the Company, including without limitation, a stock purchase agreement, an investors’ rights agreement, a right of first refusal and co-sale agreement and a voting agreement, thereby agreeing to be bound by all obligations and receive all rights thereunder.
7.3 IPO Conversion. In the event that the Company shall consummate an IPO prior to a Qualified Financing, a Change in Control or the Maturity Date, then, notwithstanding anything herein contained to the contrary, the outstanding Principal Amount and, at the election of the Company all accrued but unpaid interest thereon to the date of conversion pursuant to this Section 7.3, shall be automatically converted into shares of Common Stock as of immediately prior to the consummation of an IPO (the “IPO Closing Date”), at a per share price equal to the IPO Conversion Price (the “IPO Conversion”). The number of shares (which will be rounded down to the closest whole number) of Common Stock to be issued upon such conversion shall be equal to the quotient obtained by dividing (x) the outstanding the outstanding Principal Amount and, at the election of the Company, all accrued but unpaid interest thereon (calculated through the date that is not more than seven (7) days prior to the IPO Closing Date), by (y) the IPO Conversion Price. Accrued interest which is not converted into Common Stock in accordance with the provisions hereof, shall be paid to Holder as soon as practicable following the IPO Conversion.
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7.4 IPO Ancillary Agreements. In connection with the IPO Conversion, Holder agrees to execute and deliver to the Company such documents and agreements as may be reasonably be requested by the Company and/or its underwriter, including, without limitation, a lockup agreement.
8. Conversion Mechanics.
8.1 Issuance of Certificates. As soon as is reasonably practicable after a Conversion has been effected, the Company shall deliver to Holder a certificate or certificates representing the number of shares of capital stock (excluding any fractional share) issuable by reason of such conversion in such name or names and such denomination or denominations as Holder has specified. In furtherance of, and not in limitation of any of the provisions of this Note, Holder acknowledges and agrees that, upon conversion of this Note as herein contemplated, this Note shall be cancelled, and of no further force and effect, whether or not the Company received this Note or instructions for the cancelation of this Note from Holder and neither the Company nor any successor in interest shall have any obligations hereunder or in respect hereof.
8.2 No Fractional Shares. If any fractional share of capital stock would, except for the provisions hereof, be deliverable upon conversion of this Note, the Company, in lieu of delivering such fractional share, shall pay an amount equal to the value of such fractional share, as determined by the per share conversion price used to effect such conversion.
8.3 Compliance with Laws and Regulations. The Company shall take all such actions as may be necessary to assure that all shares of capital stock issued upon conversion may be so issued without violation of any applicable law or governmental regulation or any requirement of any domestic securities exchange upon which such shares of capital stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon such issuance).
9. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note and the other Transaction Documents:
9.1 Failure to Pay. The Company shall fail to pay (i) when due any principal payment on the due date hereunder or (ii) any interest payment or other payment required under the terms of this Note or any other Transaction Document on the date due and such payment shall not have been made within five (5) Business Days of the Company’s receipt of written notice to the Company of such failure to pay.
9.2 Voluntary Bankruptcy or Insolvency Proceedings. The Company shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its or any of its creditors, (iii) be dissolved or liquidated, (iv) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (v) take any action for the purpose of effecting any of the foregoing.
9.3 Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of the Company, or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to the Company or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within 45 days of commencement; or
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9.4 Judgments. A final judgment or order for the payment of money in excess of $500,000 (exclusive of amounts covered by insurance) shall be rendered against the Company and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed, or any judgment, writ, assessment, warrant of attachment, or execution or similar process shall be issued or levied against a substantial part of the property of the Company and such judgment, writ, or similar process shall not be released, stayed, vacated or otherwise dismissed within 30 days after issue or levy.
10. Rights of Holder upon Default. Upon the occurrence of any Event of Default (other than an Event of Default described in Section 9.2 or Section 9.3) and at any time thereafter during the continuance of such Event of Default, Holder may, with the written consent of the Requisite Holders, by written notice to the Company, declare all outstanding obligations payable by the Company hereunder to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. Upon the occurrence of any Event of Default described in Section 9.2 and Section 9.3, immediately and without notice, all outstanding obligations payable by the Company hereunder shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived, anything contained herein or in the other Transaction Documents to the contrary notwithstanding. In addition to the foregoing remedies, upon the occurrence and during the continuance of any Event of Default, Holder may, with the written consent of the Requisite Holders, exercise any other right power or remedy granted to it by the Transaction Documents or otherwise permitted to it by law, either by suit in equity or by action at law, or both.
11. Lost, Stolen, Destroyed or Mutilated Notes. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Note and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation, upon surrender and cancellation of such Note, the Company, at its expense, will make and deliver a new Note, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Note.
12. Governing Law; Jurisdiction; Venue. This Note and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California, without giving effect to principles of conflicts of law. In addition, each of the parties hereto irrevocably and unconditionally (a) consents to submit itself to the exclusive personal jurisdiction of the state and Federal courts located in Santa Clara County, California, in the event any dispute arises out of this Note or any of the transactions contemplated by this Note, (b) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from such court or assert that such court is an inconvenient forum, (c) agrees that it will not bring any action relating to this Note or any of the acts and transactions contemplated by this Note in any forum other than the state and Federal courts located in Santa Clara County, California, and (d) to the fullest extent permitted by law, consents to service being made through the notice procedures contemplated pursuant to Section 6.4 of the Note Purchase Agreement. Each party hereto hereby agrees that, to the fullest extent permitted by law, service of any process, summons, notice or document by U.S. registered mail to the respective addresses contemplated pursuant to Section 6.4 of the Note Purchase Agreement shall be effective service of process for any suit or proceeding in connection with this Note or the transactions contemplated hereby.
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13. Amendment and Waiver. Any provision of this Note may be amended, waived or modified (either generally or in a particular instance and either retroactively or prospectively) only upon the written consent of, or a written instrument signed by, the Company and Holder; provided, however, that this Note may be amended, together with all other Bridge Notes, by agreement of the Company, and the Requisite Holders, so long as such amendment and/or waivers (i) are applicable to all Bridge Notes; (ii) do not modify this Section 13; or (iii) do not reduce the Principal Amount of this Note or the rate of interest thereon.
14. Unsecured, Subordination. Holder acknowledges and agrees that this Note (i) is not secured by any of the assets of the Company, and (ii) will be subordinate in right of payment to all current and future indebtedness, including bank (and other financial institutions of a similar nature) indebtedness of the Company, but excluding any indebtedness convertible into equity securities of the Company. Notwithstanding the foregoing or anything herein contained to the contrary, the Bridge Notes shall rank pari passu with all other convertible promissory notes outstanding as of the date hereof.
15. Notices. Except as may be otherwise provided herein, all notices, requests, waivers and other communications made pursuant to this Note shall be made in accordance with Section 6.4 of the Note Purchase Agreement.
16. Severability. In case any one or more of the provisions contained in this Note shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, (i) the remaining terms and provisions hereof shall be unimpaired and shall remain in full force and effect, and (ii) the invalid or unenforceable provision or term shall be replaced by a term or provision that is valid and enforceable and that comes closest to expressing the intention of such invalid or unenforceable term or provision, and, if the foregoing provision of this clause (ii) is not permitted pursuant to applicable law, then (iii) this Note shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.
17. Remedies Cumulative; Failure or Indulgence Not a Waiver. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents. No failure or delay on the part of Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.
18. Entire Agreement. This Note and the Note Purchase Agreement represents the entire agreement between the parties hereto with respect to this Note and its terms and conditions.
19. Headings; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.
20. Restrictions on Transfer; Assignment. Except as otherwise set forth in the Note Purchase Agreement, Holder may not transfer or assign all or any part of this Note without the approval of the Company. This Note may only be transferred in compliance with applicable state and federal laws. Holder shall notify the Company in writing in advance of any proposed transfer. All rights and obligations of the Company and Holder shall be binding upon and benefit the successors, assigns, heirs, and administrators of the parties. Neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of the Requisite Holders.
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21. Excessive Interest. Notwithstanding any other provision herein to the contrary, this Note is hereby expressly limited so that the interest rate charged hereunder shall at no time exceed the maximum rate permitted by applicable law. If, for any circumstance whatsoever, the interest rate charged exceeds the maximum rate permitted by applicable law, the interest rate shall be reduced to the maximum rate permitted, and if Holder shall have received an amount that would cause the interest rate charged to be in excess of the maximum rate permitted, such amount that would be excessive interest shall be applied to the reduction of the Principal Amount owing hereunder and not to the payment of interest, or if such excessive interest exceeds the unpaid balance of principal, such excess shall be refunded to the Company.
22. Pari Passu Notes. The Holder acknowledges and agrees that the payment of all or any portion of the outstanding Principal Amount of this Note and all interest hereon shall be pari passu in right of payment and in all other respects to the other Bridge Notes. In the event the Holder receives payments in excess of the Holder’s pro rata share of the Company’s payments to the holders of all of the Bridge Notes, then the Holder shall hold in trust all such excess payments for the benefit of the holders of the other Bridge Notes and shall pay such amounts held in trust to such other holders upon demand by such holders.
23. Waiver of Notice. To the extent permitted by law, the Company hereby waives demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note and the other Transaction Documents.
24. Fees and Expenses. All expenses incurred in connection with this Note, including attorneys’ fees, shall be paid by the parties incurring such expenses.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the Company has caused this Unsecured Convertible Promissory Note to be issued as of the date first set forth above.
| COMPANY: | Tivic Health Systems, Inc., | |
| a Delaware corporation | ||
| By: | ||
| Jennifer Ernst | ||
| Chief Executive Officer | ||
Agreed and Accepted by Holder:
| If Holder is an Individual: | If Holder is a Corporation, Partnership or Other Entity: | |
| Name of Entity | ||
| Signature | Signature of Authorized Person | |
| Print Name | Print Name of Authorized Person |
| Telephone (Day): | Title | ||
| Email Address: |
| Telephone (Day): |
| Address: |
| Email Address: |
| Address: |
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Exhibit 23.1
consent of independent registered public accouNting firm
We consent to the use in this Registration Statement on Form S-1 of our report dated May 14, 2021, except for the change in par value of convertible preferred and common stock referenced in Note 1, as to which the date is July 2, 2021, relating to the financial statements of Tivic Health Systems, Inc. (which report expresses an unqualified opinion and includes an explanatory paragraph that describes the substantial doubt about Tivic Health Systems, Inc.’s ability to continue as a going concern) appearing in this Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the caption “Experts” in the Registration Statement.
/s/ Rosenberg Rich Baker Berman, P.A.
Somerset, NJ
August 3, 2021