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As confidentially submitted to the Securities and Exchange Commission on February 26, 2021. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains confidential.

Registration No. 333-          

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

TALARIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		2836		83-2377352
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

570 S. Preston St

Louisville, KY 40202

(502) 398-9250

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

 

 

Scott Requadt

570 S. Preston St

Louisville, KY 40202

(502) 398-9250

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

 

 

Copies to:

 

Arthur R. McGivern, Esq. Sarah Ashfaq, Esq. Gabriela Morales-Rivera, Esq. Goodwin Procter LLP 100 Northern Avenue Boston, MA 02210 (617) 570-1000		Mary Kay Fenton Talaris Therapeutics, Inc. 570 S. Preston St Louisville, KY 40202 (502) 398-9250		Divakar Gupta, Esq. Marc A. Recht, Esq. Richard Segal, Esq. Cooley LLP 500 Boylston Street Boston, MA 02116 (617) 937-2300

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please 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		☒		Smaller Reporting Company		☒
				Emerging Growth Company		☒

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

 

 

CALCULATION OF REGISTRATION FEE

 

Title of each Class of Securities to be Registered		Amount to be Registered		Proposed Maximum Aggregate Offering Price(1)(2)		Amount of Registration Fee(3)
Common Stock, par value $0.0001 per share				$		$

(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)	Includes the offering price of shares that the underwriters may purchase pursuant to an option to purchase additional shares.

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

 

 

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

 

 

 

 

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The information in this preliminary prospectus is not complete and may be changed. 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 nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED FEBRUARY 26, 2021

PRELIMINARY PROSPECTUS

                    Shares

 

 

Common Stock

 

 

We are offering                shares of our common stock. This is our initial public offering and no public market currently exists for our common stock. We expect the initial public offering price to be between $                and $                per share. We intend to apply to list our common stock on The Nasdaq Global Market under the symbol “TALS.”

 

 

We are an “emerging growth company” and “smaller reporting company” as defined under the U.S. federal securities laws and will be subject to reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company and a Smaller Reporting Company.”

 

 

Investing in our common stock involves a high degree of risk. Please see “Risk Factors” beginning on page 14 of this prospectus.

 

 

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, before expenses, to us			$				$

 

(1)	See “Underwriting” beginning on page 202 of this prospectus for additional information regarding underwriting compensation.

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase an additional                shares of common stock.

The underwriters expect to deliver the shares of common stock against payment in New York, New York on or about                 , 2021.

 

 

 

MORGAN STANLEY		SVB LEERINK		EVERCORE ISI		GUGGENHEIM SECURITIES

Prospectus dated                , 2021.

 

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Neither we nor the underwriters have authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations, and prospects may have changed since that date.

For investors outside of the United States: We have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. Persons outside of the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

The market data and certain other statistical information used throughout this prospectus are based on independent industry publications, governmental publications, reports by market research firms, or other independent sources that we believe to be reliable sources. Industry publications and third-party research, surveys, and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. We are responsible for all of the disclosure contained in this prospectus, and we believe that these sources are reliable; however, we have not independently verified the information contained in such publications. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, their estimates, in particular, as they relate to projections, involve numerous assumptions, are subject to risks and uncertainties, and are subject to change based on various factors, including those discussed under the section entitled “Risk Factors” and elsewhere in this prospectus. Some data are also based on our good faith estimates.

 

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RISK FACTORS

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 thereto and the section of this prospectus titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” before you make an investment decision. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations and prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. As a result, the market price of our common stock could decline, and you may lose all or part of your investment in our common stock.

Risks Related to Our Financial Condition and Capital Needs

We are a late-stage clinical biotechnology company and we have incurred net losses since our inception. We anticipate that we will continue to incur significant net losses for the foreseeable future, and may never achieve or maintain profitability.

We are a late-stage clinical biotechnology company with a limited operating history. Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that any potential product candidate will fail to demonstrate adequate effect or an acceptable safety profile, gain regulatory approval and become commercially viable. We have no products approved for commercial sale and have not generated any revenue to date, and we will continue to incur significant research and development and other expenses related to our clinical development and ongoing operations. As a result, we are not profitable and have incurred net losses in each period since our inception. Since our inception, we have devoted substantially all of our resources to developing our lead product, FCR001, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. Our financial condition and operating results, including net losses, may fluctuate significantly from quarter to quarter and year to year. Accordingly, you should not rely upon the results of any quarterly or annual periods as indications of future operating performance. Additionally, net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. Our net losses were $22.7 million and $18.2 million for the years ended December 31, 2020 and December 31, 2019. As of December 31, 2020, we had an accumulated deficit of $43.0 million. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses and capital expenditures to continue to increase.

We anticipate that our expenses will increase substantially if and as we:

 

•

continue to initiate and conduct clinical trials for our lead product candidate, FCR001, in our initial and potential additional indications;

 

•

seek to identify additional product candidates and initiate research, preclinical and clinical development efforts for any future product candidates;

 

•

seek regulatory approvals for FCR001 or any future product candidates that successfully complete clinical development;

 

•

scale our in-house manufacturing process to address anticipated commercial needs;

 

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seek to meet regulatory requirements for our in-house manufacturing process;

 

•

add operational, financial and management information systems and personnel, including personnel to help us comply with our obligations as a public company;

 

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hire and retain additional personnel, such as clinical, quality control, scientific, manufacturing, commercial and administrative personnel, to support our product candidate development;

 

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maintain, expand and protect our intellectual property portfolio;

 

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establish sales, marketing, distribution, manufacturing, supply chain and other commercial infrastructure in the future to commercialize any product candidates for which we may obtain regulatory approval;

 

•

adapt our regulatory compliance efforts to incorporate requirements applicable to marketed products;

 

•

add equipment and physical infrastructure to support our research and development; and

 

•

acquire or in-license other product candidates and technologies.

Our expenses could increase beyond our expectations if we are required by the U.S. Food and Drug Administration (FDA) or other regulatory authorities to perform clinical trials in addition to those that we currently expect, if there are any delays in establishing appropriate manufacturing arrangements for our product candidates, or if we experience delays in the initiation or completion of our clinical trials or the development of any of our product candidates for any reason, including as a result of the COVID-19 pandemic.

We have not yet completed any registrational trials and have no history of commercializing products, which may make it difficult to evaluate the success of our business to date and to assess our future viability.

We were first formed in February 2002 under the name Regenerex LLC, and engaged in operations with non-dilutive funding, or in collaboration with Novartis International AG (Novartis) from 2013 to 2016, until October 2018 when we closed our first external financing round, converted into a corporation and changed our name to Regenerex, Inc. and subsequently to Talaris Therapeutics, Inc. Since we commenced our operations, we have devoted substantially all of our resources to raising capital, organizing and staffing our company, business planning, conducting discovery and research activities, establishing and protecting our intellectual property portfolio, developing and progressing FCR001 and preparing for clinical trials, and manufacturing initial quantities of FCR001. As an organization, we have not yet demonstrated an ability to successfully complete any Phase 3 clinical trials, obtain regulatory approval, consistently manufacture a commercial scale product or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for the successful commercialization of any of our product candidates. In addition, our Facilitated Allo-HSCT Therapy is novel and has only been evaluated in a limited number of patients to date. Any predictions about our future success, performance or viability, particularly in view of the rapidly evolving immunotherapy field, may not be accurate given the limits of our operating history and lack of approved products.

In addition, given the limits of our operating history, we may encounter unforeseen expenses, difficulties, complications, delays and other known and unknown factors. We will need to transition from a company with a research and development focus to a company capable of supporting commercial activities and may not be successful in such a transition. We expect our financial condition and operating results to continue to fluctuate significantly from quarter to quarter and year to year due to a variety of factors, many of which are beyond our control. Accordingly, our financial results for any quarterly or annual periods may not be indicative of future operating performance.

Even if we consummate this offering, we will need substantial additional funding, and if we are unable to raise capital when needed, we could be forced to delay, reduce or eliminate our product discovery and development programs or commercialization efforts.

Developing biopharmaceutical products, including conducting preclinical studies and clinical trials, is a very time-consuming, expensive and uncertain process that takes years to complete. We expect to continue to spend substantial amounts of capital to continue the preclinical and clinical development of our current and future programs. If we are able to gain marketing approval for any product candidate we develop, including for any indication for which we are developing or may develop FCR001, we will require substantial additional funding in

 

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order to launch and commercialize such product candidates, to the extent that such launch and commercialization are not the responsibility of a collaborator that we may contract with in the future. We may also invest in preparations for launch and commercialization in advance of receiving regulatory approval for a product candidate, and such approval may not be received on a timely basis or at all. In addition, other unanticipated costs may arise in the course of our development efforts. Because the design and outcome of our planned and anticipated clinical trials is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development and commercialization of any product candidate we develop. Additionally, any COVID-19-related program setbacks or delays due to changes in federal, state, or local laws and regulations or clinical site policies could impact the timing and cost of the development of our product candidates. Under the terms of our amended and restated exclusive license agreement with the University of Louisville Research Foundation, Inc. (ULRF) or the ULRF license, we are also obligated to make payments upon the achievement of certain development, regulatory and commercial milestones.

Our future capital requirements depend on many factors, including:

 

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the scope, progress, results and costs of researching and developing FCR001 for our initial and potential additional indications, as well as any other product candidates we may develop, including any COVID-19-related delays or other effects on our development programs;

 

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the timing of, and the costs involved in, obtaining marketing approvals for FCR001 for our initial and potential additional indications, and any other product candidates we may develop;

 

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if approved, the costs of commercialization activities for FCR001 for any approved indications, or any other product candidate that receives regulatory approval to the extent such costs are not the responsibility of a collaborator that we may contract with in the future, including the costs and timing of scaling our manufacturing and establishing product sales, marketing, distribution and manufacturing capabilities;

 

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subject to receipt of regulatory approval, revenue, if any, received from commercial sales of FCR001 for any approved indications or any other product candidates;

 

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the extent to which we in-license or acquire rights to other products, product candidates or technologies;

 

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our headcount growth and associated costs as we expand our research and development, increase our office space, and establish a commercial infrastructure;

 

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the costs of preparing, filing and prosecuting patent applications, maintaining and protecting our intellectual property rights, including enforcing and defending intellectual property related claims; and

 

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the ongoing costs of operating as a public company.

As of December 31, 2020, we had cash, cash equivalents and marketable securities of approximately $149.8 million. We cannot be certain that additional funding will be available on acceptable terms, or at all. Further, our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If we are unable to raise sufficient additional capital, we could be forced to curtail our planned operations and the pursuit of our growth strategy. We have no committed source of additional capital and if we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our product candidates or other research and development initiatives. Any of our current or future license agreements may also be terminated if we are unable to meet the payment or other obligations under the agreements.

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This estimate may prove to be wrong, and we could use our available capital resources earlier than we currently expect. Further, changing circumstances, some of which may be beyond our control, could cause us to consume capital significantly faster than we currently anticipate, and we may need to seek additional funds earlier than planned.

Raising additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights to our product candidates on terms that are unfavorable to us.

We may seek additional capital through a variety of means, including through private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, including incurring additional debt, making capital expenditures, entering into licensing arrangements or declaring dividends. If we raise additional funds from third parties, we may have to relinquish valuable rights to our technologies or product candidates or grant licenses on terms that are not favorable to us. Market volatility resulting from the COVID-19 pandemic or other factors may further adversely impact our ability to access capital as and when needed. If we are unable to raise additional funds through equity or debt financing when needed, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts for our product candidates, grant to others the rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or take other actions that are adverse to our business.

Risks Related to Our Business and the Clinical Development, Regulatory Review and Approval of Our Product Candidates

Our business substantially depends upon the successful development and regulatory approval of FCR001, our lead product candidate. If we are unable to obtain regulatory approval for FCR001, our business may be materially harmed.

We currently have no products approved for sale and are investing the substantially all of our efforts and financial resources in the development of our Facilitated Allo-HSCT Therapy, specifically in our lead product candidate, FCR001. Successful continued development and ultimate regulatory approval of FCR001 for our initial and potential additional indications is critical to the future success of our business. We will need to raise sufficient funds for, and successfully enroll and complete, our clinical development programs of FCR001 for LDKT and additional indications.

There is no guarantee that any of our product candidates will proceed in clinical development or achieve regulatory approval. The process for obtaining marketing approval for any product candidate is very long and risky and there will be significant challenges for us to address in order to obtain marketing approval as planned or, if at all. The potential regulatory approval of FCR001 or any other product candidate we may develop is subject to a number of risks, including the following:

 

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successful initiation and completion of clinical trials;

 

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successful patient enrollment in clinical trials;

 

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successful data from our clinical trials that supports an acceptable risk-benefit profile of our product candidates in the intended populations; and

 

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receipt and maintenance of marketing approvals from applicable regulatory authorities.

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platform, manufacturing process. development process, and cell therapy is the same for all of our current programs in development. Accordingly, a failure in any one program may affect the ability to obtain regulatory approval to continue or conduct our other clinical programs.

In addition, because we have limited financial and personnel resources and are placing significant focus on the development of our lead product candidate and our lead indications, we may forgo or delay pursuit of opportunities with other future product candidates and indications that later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and other future product candidates for specific indications may not yield any commercially viable future product candidates. If we do not accurately evaluate the commercial potential or target market for a particular future product candidate or indication, we may relinquish valuable rights to those future product candidates or indications through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such future product candidates or indications.

Many of these risks are beyond our control, including the risks related to clinical development, our proprietary manufacturing process and the regulatory submission process. If we are unable to develop and receive regulatory approval for FCR001 for the indications we are developing it for, or if we experience delays as a result of any of these risks or otherwise, our business could be materially harmed.

We may not successfully identify, develop or commercialize new indications for FCR001 or identify any additional product candidates and may be unable to expand our product pipeline through acquisition or in-licensing.

A key part of our business strategy is to leverage FCR001 by identifying and validating new indications, including other transplant settings and patients with autoimmune or immune-mediated diseases. In the event that FCR001 does not receive regulatory approval or is not successfully commercialized in our currently planned indications, then the success of our business will depend on our ability to expand FCR001 into additional indications or our product pipeline to include other product candidates through our own internal research and discovery efforts, in-licensing or other acquisitions. We may be unable to identify relevant product candidates or indications. If we do identify such product candidates or indications, we may be unable to develop these programs for a number of reasons, including insufficient capital or other resources.

Our product candidates represent a novel therapeutic approach that could result in heightened regulatory scrutiny. The regulatory landscape that applies to our Facilitated Allo-HSCT Therapy is rigorous, complex, uncertain and subject to change.

Given that our single-dose cell therapy represents a novel combination of nonmyeloablative conditioning, our investigational FCR001 product, and stem cell transplant-oriented treatment protocols, developing and commercializing our product candidates subjects us to a number of challenges, including obtaining regulatory approval from the FDA and other regulatory authorities, which have limited experience with regulating the development and commercialization of stem cell therapies.

Regulatory requirements governing the development of cell therapy products have changed frequently and may continue to change in the future. The FDA has established the Office of Tissues and Advanced Therapies within the Center for Biologics Evaluation and Research (CBER), to consolidate the review of cell therapy, and related products, and to advise the CBER on its review. Moreover, serious adverse events or developments in clinical trials of cell therapy product candidates conducted by others may cause the FDA or other regulatory bodies to initiate a clinical hold on our clinical trials or otherwise change the requirements for approval of any of our product candidates. Although the FDA decides whether individual cell therapy protocols may proceed, the review process and determinations of other reviewing bodies can impede or delay the initiation of a clinical trial, even if the FDA has reviewed the trial and approved its initiation.

 

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Adverse developments in preclinical studies or clinical trials conducted by others in the field of cell therapy may cause the FDA, the European Medicines Agency (EMA), and other regulatory bodies to amend the requirements for approval of any product candidates we may develop or limit the use of products utilizing cell therapies, either of which could harm our business. In addition, the clinical trial requirements of the FDA, the EMA, and other regulatory authorities and the criteria these regulators use to determine the safety and efficacy of a product candidate vary substantially according to the type, complexity, novelty, and intended use and market of the potential products. The regulatory approval process for product candidates such as ours can be more expensive and take longer than for other, better known, or more extensively studied pharmaceutical or other product candidates. Further, as we are developing novel potential treatments for conditions in which there is little clinical experience with new endpoints and methodologies, there is heightened risk that the FDA, the EMA or other regulatory bodies may not consider the clinical trial endpoints to provide clinically meaningful results, and the resulting clinical data and results may be more difficult to analyze. For example, we are utilizing transplant recipient chimerism as a surrogate marker for long-term immune tolerance in our ongoing Phase 3 trial of FCR001 in living donor kidney transplantation (LDKT). We are evaluating this as a secondary endpoint, but it has not yet been validated by the FDA, EMA or other regulatory agencies, and as result, such agencies could reject such an endpoint or interpret its significance differently than we do. Regulatory agencies administering existing or future regulations or legislation may not allow production and marketing of products utilizing cell therapies in a timely manner or under technically or commercially feasible conditions. In addition, regulatory action or private litigation could result in expenses, delays, or other impediments to our research programs or the commercialization of resulting products.

Clinical drug development involves a lengthy and expensive process with an uncertain outcome, and the inability to successfully and timely conduct clinical trials and obtain regulatory approval for our product candidates would substantially harm our business.

We cannot commercialize product candidates in the United States without first obtaining regulatory approval from the FDA; similarly, we cannot commercialize product candidates outside of the United States without obtaining regulatory approval from comparable foreign regulatory authorities. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate with substantial evidence gathered in preclinical studies and clinical trials, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate with respect to such product candidate to assure safety, purity and potency.

Clinical testing is expensive and can take many years to complete, and its outcome is inherently uncertain. Failure can occur at any time during the clinical trial process. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy traits despite having progressed through preclinical studies and clinical trials.

The time required to obtain approval by the FDA and comparable foreign regulatory authorities is unpredictable but typically takes many years following the commencement of preclinical studies and clinical trials and depends upon numerous factors, including the study designs and substantial discretion of the regulatory authorities. In addition, approval policies, regulations, or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. We have not obtained regulatory approval for any product candidate and it is possible that none of our existing product candidates or any future product candidates will ever obtain regulatory approval.

Our product candidates could fail to receive regulatory approval from the FDA or a comparable foreign regulatory authority for many reasons, including:

 

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disagreement with the design or conduct of our clinical trials;

 

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failure to demonstrate to the satisfaction of regulatory agencies that FCR001, our lead product candidate, is safe and effective, or has a positive benefit/risk profile for its proposed indications;

 

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failure of clinical trials to meet the level of statistical significance required for approval;

 

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disagreement with our interpretation of data from preclinical studies or clinical trials;

 

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the insufficiency of data collected from clinical trials of our product candidates to support the submission and filing of a Biologics License Application (BLA) or other submission or to obtain regulatory approval;

 

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failure to obtain approval of our manufacturing processes, our own manufacturing facility, or facilities of third-party manufacturers with whom we may in the future contract for clinical and commercial supplies; or

 

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changes in the approval policies or regulations that render our preclinical and clinical data insufficient for approval.

This lengthy approval process, as well as the unpredictability of future clinical trial results, may result in our failing to obtain regulatory approval to market our product candidates, which would significantly harm our business, results of operations and prospects. The FDA or a comparable foreign regulatory authority may require more information, including additional preclinical or clinical data to support approval, which may delay or prevent approval and our commercialization plans, or we may decide to abandon the development program. If we were to obtain approval, regulatory authorities may approve any of our product candidates for fewer or more limited indications than we request (including failing to approve the most commercially promising indications), may grant approval contingent on the performance of costly post-marketing clinical studies, or may approve a product candidate with a label that does not include the labeling claims necessary or desirable for the successful commercialization of that product candidate.

If we experience delays or difficulties in the enrollment of patients in clinical trials, development of our product candidate may be delayed or prevented, which would have a material adverse effect on our business.

We may not be able to initiate or continue clinical trials for our product candidate if we are unable to locate and enroll a sufficient number of eligible patients to participate in these trials as required by the FDA or comparable foreign regulatory authorities. Patient enrollment is a significant factor in the timing of clinical trials. In particular, because certain of our clinical trials are focused on indications with relatively small patient populations, our ability to enroll eligible patients may be limited or may result in slower enrollment than we anticipate. For example, our initial indications focus on orphan diseases, which affect fewer than 200,000 individuals in the United Stated. Specifically, approximately 6,500 LDKT are performed on an annual basis in the United States and, in addition, we have prioritized development of FCR001 in a severe form of scleroderma known as diffuse cutaneous systemic sclerosis with a prevalence of approximately 70,000 to 80,000 individuals in the United States.

Patient enrollment may be affected if our competitors have ongoing clinical trials for product candidates that are under development for the same indications as our product candidates, and patients who would otherwise be eligible for our clinical trials instead enroll in clinical trials of our competitors’ product candidates.

Furthermore, because we are investigating the treatment of complex indications that require specialized medical care by means of an HSCT procedure, which is itself a complex procedure performed by specialized physicians and treatment centers, we face inherent challenges in recruiting clinical trial sites to participate in our trials and to complete our trials on a timely basis. For LDKT, each site that participates in our trial will need to identify a lead clinician from each of the solid organ transplant and HSCT departments, who are willing and able to coordinate closely on the care and follow-up of our patients. We rely on our relationships with transplant centers of excellence to assist in identifying eligible patients and carrying out our clinical trials, and any inability to secure or deterioration of those relationships could impede our ability to successfully enroll patients in a timely manner, if at all.

 

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Patient enrollment may also be affected by other factors, including:

 

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size and nature of the patient population;

 

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severity of the disease under investigation;

 

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patient eligibility criteria for the trial in question;

 

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nature of the trial protocol;

 

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our ability to recruit clinical trial investigators with the appropriate competencies and experience;

 

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perceived risks and benefits of the product candidate under study;

 

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the occurrence of adverse events attributable to our lead product candidate;

 

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efforts to facilitate timely enrollment in clinical trials;

 

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the number and nature of competing products or product candidates and ongoing clinical trials of competing product candidates for the same indication;

 

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patient referral practices of physicians;

 

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risk that enrolled subjects will drop out or die before completion;

 

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competition for patients from other clinical trials;

 

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the ability to monitor patients adequately during and after treatment;

 

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travel restrictions and other potential limitations by federal, state, or local governments affecting the workforce or affecting clinical research site policies implemented in response to the COVID-19 pandemic;

 

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delays in or temporary suspension of the enrollment of patients in our ongoing and planned clinical trials due to the COVID-19 pandemic;

 

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proximity and availability of clinical trial sites for prospective patients; and

 

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continued enrollment of prospective patients by clinical trial sites.

If we experience delays or difficulties in the enrollment of patients in clinical trials, our clinical trials may be delayed or terminated. We have already experienced meaningful delays to our clinical trials as a result of the impact of COVID-19 on both our clinical sites and the willingness of stem cell donors and transplant recipients to travel to our clinical sites. Even if we are able to enroll a sufficient number of patients in our clinical trials, if the pace of enrollment is slower than we expect, the development costs for our product candidates may increase and the completion of our trials may be delayed or our trials could become too expensive to complete. Any delays in completing our clinical trials will increase our costs, delay or prevent our product candidate development and approval process and jeopardize our ability to commence product sales and generate revenue. Any delays in completing our clinical studies for our product candidates may also decrease the period of commercial exclusivity. Any of these occurrences may significantly harm our business, financial condition and prospects.

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

We face competition from numerous pharmaceutical and biotechnology enterprises, as well as from academic institutions, government agencies and private and public research institutions. Our commercial opportunities will be significantly impacted if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are less expensive or obtain more significant acceptance in the market than any product candidates that we develop. Additionally, our commercial opportunities will be significantly

 

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impacted if novel upstream products or changes in treatment protocols reduce the overall incidence or prevalence of diseases in our current or future target population. Competition could result in reduced sales and pricing pressure on our product candidates, if approved by applicable regulatory authorities. In addition, significant delays in the development of our product candidates could allow our competitors to bring products to market before us and impair any ability to commercialize our product candidates.

While there are currently no FDA- or EMA-approved cell-based therapies for the indications we are currently targeting, other approved or commonly used drugs and therapies for our current or future target diseases, such as use of tacrolimus and MMF for prevention of organ transplant rejection, or nintedanib to slow the rate of decline in lung function in patients with scleroderma-associated interstitial lung disease, are more well established and are accepted by physicians, patients and third-party payors. Some of these drugs are branded and subject to patent protection, and other drugs are available on a generic basis. Insurers and other third-party payors may encourage the use of generic products or specific branded products. In addition, a number of companies, academic institutions and government agencies are seeking to address limitations of existing therapies that we are also seeking to address. For example, a number of third parties are seeking to develop conditioning regimens for HSCT that have lower toxicities, morbidities and mortalities than the current standard of care. A number of other companies are also seeking to decrease the incidence and severity of GvHD in HSCT. If any of these endeavors prove to be successful, the anticipated advantages of our Facilitated Allo-HSCT Therapy in comparison to the then existing standard of care could be eliminated and the demand for our Facilitated Allo-HSCT Therapy could be materially impacted.

We expect that, if our one-time investigational therapy is approved, it will be priced in a manner that will reflect its long-term clinical, economic, and humanistic value. Such a pricing model may entail a single upfront cost or multiple installments contingent upon demonstration of continued benefit that will likely be more expensive than the upfront cost or initial annual costs of competitive generic products that must be taken chronically. Absent differentiated and compelling clinical evidence, pricing premiums may impede the adoption of our products over currently approved or commonly used therapies, which may adversely impact our business. In addition, many companies are developing new therapeutics, and we cannot predict what the standard of care will become as our products continue in clinical development. Many of our competitors or potential competitors have significantly greater market presence, financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do, and as a result may have a competitive advantage over us. Smaller or early-stage companies may also prove to be significant competitors, including through collaborative arrangements or mergers with large and established companies. These third parties compete with us in recruiting and retaining qualified scientific, commercial and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies and technology licenses complementary to our programs or advantageous to our business.

As a result of these factors, these competitors may obtain regulatory approval of their products before we are able to, which will limit our ability to develop or commercialize our product candidates. Our competitors may also develop products that are safer, more effective, more widely used and cheaper than ours, and may also be more successful than us in manufacturing and marketing their products. These appreciable advantages could render our product candidates obsolete or noncompetitive before we can recover the expenses of development and commercialization.

Delays in the clinical development or delays in or our ability to achieve regulatory approval, if at all, and commercialization of our product candidates, if approved, would have a material adverse effect on our business.

We may experience delays in our ongoing or future clinical trials and we do not know whether clinical trials will begin or enroll subjects on time, will need to be redesigned or will be completed on schedule, if at all, such as on account of the COVID-19 pandemic and its impact at clinical trials sites or on the third-party service

 

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providers on whom we rely. Clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, such as:

 

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delay or failure in reaching agreement with the FDA or a comparable foreign regulatory authority on the design and implementation of clinical trials;

 

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delay or failure in obtaining authorization to commence a trial, including the delay or ability to generate sufficient preclinical data to support initiation of clinical trials, or inability to comply with conditions imposed by a regulatory authority regarding the scope or design of a trial;

 

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

 

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the inability of CROs to perform under these agreements, including due to impacts from the COVID-19 pandemic on their workforce;

 

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delay or failure in obtaining institutional review board (IRB) approval or the approval of other reviewing entities, including comparable foreign regulatory authorities, to conduct a clinical trial at each site;

 

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withdrawal of clinical trial sites from our clinical trials or the ineligibility of a site to participate in our clinical trials;

 

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delay or failure in recruiting and enrolling suitable subjects to participate in a trial;

 

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delay or failure in subjects completing a trial or returning for post-treatment follow-up;

 

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inability to identify and maintain a sufficient number of trial sites, including because potential trial sites may not have the capabilities required for the indication that we are treating;

 

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failure of our third-party clinical trial managers to satisfy their contractual duties, meet expected deadlines or return trustworthy data;

 

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delay or failure in adding new trial sites, including due to changes in policies of the clinical research sites or local IRBs;

 

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interim results or data that are ambiguous or negative or are inconsistent with earlier results or data;

 

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feedback from the FDA, the IRB, data safety monitoring boards (DSMBs) or comparable foreign authorities, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol for a trial;

 

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unacceptable benefit/risk profile, unforeseen safety issues or adverse side effects;

 

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failure to demonstrate a benefit from using a product candidate;

 

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lack of adequate funding to continue a trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional trials or increased expenses associated with the services of our CROs and other third parties; or

 

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changes in governmental regulations or administrative actions, failure by us or third parties to comply with regulatory requirements, or lack of adequate funding to continue a clinical trial.

Furthermore, clinical trials may be delayed, suspended or prematurely terminated for a variety of reasons, including as a result of clinical sites, investigators or other third parties deviating from the trial protocol, failing to conduct the trial in accordance with regulatory and contractual requirements, and/or dropping out of a trial. For example, we rely on a single clinical investigator at Northwestern Medical Center (Northwestern) to provide ongoing data from our Phase 2 clinical trial. This investigator is our lead principal investigator for FREEDOM-1, and we anticipate that this investigator and site will be our highest enroller in our FREEDOM-1 and

 

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FREEDOM-2 clinical trials. In the event that our lead investigator at Northwestern or that site deviates materially from our trial protocol or our or the clinical site’s regulatory or contractual obligations, our clinical trials could be adversely affected.

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

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

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

In response to the COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most inspections of foreign manufacturing facilities while local, national and international conditions warrant. Since March 2020, foreign and domestic inspections by the FDA have largely been on hold with prioritized domestic inspections resuming in July 2020. FDA may not be able to continue its current pace for reviews of applications for medical products and approval timelines could be extended, including where a pre-approval inspection or an inspection of clinical sites is required and due to the COVID-19 pandemic and travel restrictions FDA is unable to complete such required inspections during the review period. Should FDA determine that an inspection is necessary for approval and an inspection cannot be completed during the review cycle due to restrictions on travel, FDA has stated that it generally intends to issue a complete response letter. Further, if there is inadequate information to make a determination on the acceptability of a facility, FDA may defer action on the application until an inspection can be completed. In 2020, several companies announced receipt of complete response letters due to the FDA’s inability to complete required inspections for their applications. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic and may experience delays in their regulatory activities. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.

 

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The results of preclinical studies or earlier clinical trials are not necessarily predictive of future results. Our existing product candidates in clinical trials, and any other product candidate we advance into clinical trials, may not have favorable results in later clinical trials or receive regulatory approval.

Success in preclinical studies and our Phase 2 trial in LDKT does not ensure that later clinical trials, including our ongoing Phase 3 clinical trial of FCR001 in LDKT, will generate adequate data to demonstrate the efficacy and safety of FCR001 or any of other product candidates we may develop. Likewise, a number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in clinical trials, even after seeing promising results in earlier preclinical studies or clinical trials. Despite the results reported in earlier preclinical studies or clinical trials for our product candidates, to date, results may not be replicated in subsequent trials, and we do not know whether the clinical trials we may conduct will demonstrate adequate efficacy and safety to result in regulatory approval of FCR001 or any future product candidates we develop. Moreover, later audits of our earlier clinical data, such as from our Phase 2 clinical trial, may reveal inaccuracies or deviations impacting the integrity of those data. Additionally, certain of our clinical trial endpoints also may not be adequately powered in a particular subpopulation of our trial population. Our Phase 2 trial was a “single arm” trial for which there was no comparator arm to permit a comparison of our investigational therapy against standard of care treatment. Furthermore, all of our ongoing and planned clinical trials to date have been or will be open-label trials. This means that both the patient and investigator know whether the patient is receiving our FCR001 therapy or standard of care therapy. Open-label clinical trials can be subject to various limitations that may exaggerate any therapeutic effect, as patients in open-label clinical trials are aware when they are receiving treatment. Open-label clinical trials may be subject to a “patient bias”. Moreover, patients selected for early clinical studies often include the most severe sufferers and their symptoms may have been bound to improve notwithstanding the new treatment. In addition, open-label clinical trials may be subject to an “investigator bias” where those assessing and reviewing the physiological outcomes of the clinical trials are aware of which patients have received treatment and may interpret the information of the treated group more favorably given this knowledge. Given that each of our planned and ongoing clinical trials include an open-label dosing design, while we believe our trials utilize objective assessment measures for measuring our primary endpoints and therefore are unlikely to be influenced in any manner by patient or investigator bias, our trials may utilize secondary endpoint patient reported outcome measures and, it is unknown whether the open-label design may not be predictive of future clinical trial results with this or other product candidates for which we conduct an open-label clinical trial when studied in a controlled environment or with only objective endpoints. In addition, clinical data obtained from a clinical trial with an allogeneic product candidate such as FCR001 may not yield the same or better results on certain relevant outcome measures as compared to an autologous product candidate. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates performed satisfactorily in such trials nonetheless failed to obtain FDA, EMA or other necessary regulatory agency approval.

If later-stage clinical trials such as our FREEDOM-1 trial do not produce favorable results, our ability to achieve regulatory approval for any of our product candidates may be adversely impacted. Even if we believe that we have adequate data to support an application for regulatory approval to market any of our product candidates, no therapies for inducing immune tolerance to a transplanted organ or restoring tolerance to self in an autoimmune disease have been approved to date, and the FDA or other regulatory authorities may not agree with our interpretation and may require that we conduct additional clinical trials to support the regulatory approval of our product candidates. If we fail to obtain results in our planned and future preclinical and clinical activities and studies sufficient to meet the requirements of the relevant regulatory agencies, the development timeline and regulatory approval and commercialization prospects for any potential product candidate, and, correspondingly, our business and financial prospects, would be materially adversely affected.

 

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Interim, “top line” or preliminary data from our clinical trials that we may announce or share with regulatory authorities from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we expect to announce clinical updates or share with regulatory authorities interim “top line” or preliminary data from our clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data.

As a result, the top-line or preliminary results that we report may differ from future results of the same trials, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. Preliminary or “top line” data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously announced. As a result, interim, “top-line,” and preliminary data should be viewed with caution until the final data are available. Adverse differences between preliminary, “top-line,” or interim data and final data could impact the regulatory approval of, and significantly harm the prospects for any product candidate that is impacted by the applicable data.

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

Our product candidates, or associated conditioning regimens or treatment protocols, may cause undesirable side effects or have other properties that could delay or prevent their regulatory approval, limit the commercial profile of an approved label or result in significant negative consequences following any regulatory approval.

Undesirable side effects caused or risks exacerbated by our product candidates or associated conditioning regimens or treatment protocols could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restrictive label or the delay or denial of regulatory approval by the FDA or other comparable foreign regulatory authority. As a result of safety or toxicity issues that we may experience in our clinical trials, we may not receive approval to market any product candidates, which could prevent us from ever generating revenues or achieving profitability. Results of our trials could reveal an unacceptably high severity and incidence of side effects, or side effects outweighing the benefits of our product candidates. Such side effects could include known side effects or safety risks that are exacerbated by the combination of HSCT and LDKT in our clinical trials. In such an event, our trials could be delayed, suspended or terminated and the FDA or comparable foreign regulatory authorities could order us to cease further development of or deny approval of our product candidates for any or all targeted indications. Additionally, during the course of our product development

 

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programs, FDA or comparable foreign regulatory authority review teams may change and new agency personnel may view the risk-benefit profile of any product candidates we may develop differently than prior agency review teams. Any negative views as to the risk-benefit profile of FCR001 or any product candidates we may develop in the future could lead FDA or comparable foreign regulatory authorities to require that we conduct additional clinical trials or could require more onerous clinical trial designs for any ongoing or future clinical trials. The drug-related side effects could affect patient recruitment or the ability of enrolled subjects to complete the trial or result in potential product liability claims. In addition, while we note the summary of safety findings we have gathered to date, certain populations of patients receiving our Facilitated Allo-HSCT Therapy may experience side effects in greater frequency or severity than others who may receive our product candidates and additional clinical research is planned to more fully understand the safety profile of our product candidates in our patient populations and indications of focus. Furthermore, we or others may later identify undesirable side effects caused by our products, including during any long-term follow-up observation period, such as that involved in our FREEDOM-1 trial and previous trials of FCR001 in LDTK.

In particular, LDKT and HSCT involve certain known potential post-procedure complications that may manifest several weeks or months after a transplant and which may be more common in certain patient populations. For example, up to 20% of patients with inherited metabolic diseases treated with HSCT experience primary engraftment failure, resulting in severe complications, including death. Graft vs. host disease (GvHD) also accounts for approximately 10% of deaths following allogeneic HSCT. In LDKT, certain severe complications, such as severe infection requiring discontinuation of immunosuppression, graft rejection or loss, or even death, can occur. If these or other serious adverse events, undesirable side effects, or unexpected characteristics are identified during the development of any of our product candidates, it may be difficult to determine whether these complications were or were not related to our investigational therapy, and we may need to limit, delay or abandon our further clinical development of those product candidates, even if such events, effects or characteristics were potentially the result of HSCT, LDKT or related procedures generally, and not directly or specifically caused or exacerbated by our product candidates. All serious adverse events or unexpected side effects are continually monitored per the clinical trial’s approved protocol. If serious adverse events are determined to be directly or specifically caused or exacerbated by our product candidates, we would follow the trial protocol’s requirements, which include certain pre-specified stopping requirements, and which call for our DSMB to review all available clinical data in making a recommendation regarding the trial’s continuation. However, there may be a failure by trial sites to effectively execute our clinical trial protocols, including during any long-term follow-up period for our clinical trials during the conduct of future clinical trials or following any product approval we may receive.

Additionally, if any of our product candidates receives regulatory approval, and we or others later identify undesirable side effects caused or risks exacerbated by such product, a number of potentially significant negative consequences could result. For example, the FDA could require us to adopt a Risk Evaluation and Mitigation Strategy (REMS) to ensure that the benefits of treatment with such product candidate outweigh the risks for each potential patient, which may include, among other things, a communication plan to health care practitioners, patient education, extensive patient monitoring or distribution systems and processes that are highly controlled, restrictive and more costly than what is typical for the industry. We or our collaborators may also be required to adopt a REMS or engage in similar actions, such as patient education, certification of health care professionals or specific monitoring, if we or others later identify undesirable side effects caused by any product that we develop alone or with collaborators. Other potentially significant negative consequences include that:

 

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we may be forced to suspend marketing of that product, or decide to remove the product form the marketplace;

 

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regulatory authorities may withdraw or change their approvals of that product;

 

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regulatory authorities may require additional warnings on the label or limit access of that product to selective specialized centers with additional safety reporting and with requirements that patients be geographically close to these centers for all or part of their treatment;

 

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we may be required to create a medication guide outlining the risks of the product for patients, or to conduct post-marketing studies;

 

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we may be required to change the way the product is administered;

 

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we could be subject to fines, injunctions, or the imposition of criminal or civil penalties, or to sued and held liable for harm caused to subjects or patients; and

 

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the product may become less competitive, and our reputation may suffer.

Any of these events could diminish the usage or otherwise limit the commercial success of our product candidates and prevent us from achieving or maintaining market acceptance of the affected product candidate, if approved by applicable regulatory authorities.

We intend to develop FCR001, and potentially future product candidates, in other indications and in combination with other therapies, which exposes us to additional risks. Combination therapies and additional indications involve additional complexity and risk that could delay or cause our programs to stall or fail; development of such programs may be more costly, may take longer to achieve regulatory approval and may be associated with unanticipated adverse events.

We intend to develop FCR001, and may develop future product candidates, for use in combination with nonmyeloablative conditioning and related conditioning drugs, and in our LDKT trials, we will administer FCR001 to patients taking standard of care immunosuppressive therapies. Clinical development and commercialization of combination therapies involve additional complexity and risk, including without limitation, those involving drug-drug interactions, dose selection, unanticipated adverse events, clinical design and approvals of regulatory bodies and therapeutic development networks of patient advocacy groups. Even if any product candidate we develop were to receive marketing approval or be commercialized for use in combination with other existing therapies, we would continue to bear the risks that the FDA or similar foreign regulatory authorities could revoke approval of the therapy used in combination with our product candidate or that safety, efficacy, manufacturing or supply issues could arise with these existing therapies. If we are unable to manage the additional complexities and risks of the development and commercialization of combination therapies, the development of FCR001 or any other current or future product candidate could be delayed, halted or otherwise fail to receive or maintain approval and may be less successful commercially.

We also intend to develop FCR001 or related product candidates for a number of different indications, including solid organ transplant, severe autoimmune diseases and other severe non-malignant disorders for which allo-HSCT has previously been observed to provide potential clinical benefit. Depending on the indication, patients may manifest a variety of differing co-morbidities, may be more or less vulnerable to our conditioning regimen, and may be more or less susceptible to certain severe adverse events or complications in the near or longer term, including cancer, infection, blood disorders and other life-threatening conditions. If any of these conditions or complications were to affect a patient who is participating in one of our clinical trials, it may be difficult or impossible to determine whether these adverse events or complications are related to the original or underlying condition or to our Facilitated Allo-HSCT Therapy. Given that our trials will enroll a relatively small number of patients, even a small number of severe adverse events or serious complications could result in the delay or halt of development of our product candidates in one or more of our targeted indications.

If clinical trials of our product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA or similar regulatory authorities outside the United States or do not otherwise produce positive results, we may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of such product candidates.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct extensive clinical trials to demonstrate the safety and efficacy of such product candidates in humans. Clinical testing is

 

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expensive, difficult to design and implement, can take many years to complete and the outcome is uncertain. Despite preclinical and early clinical trial data, any product candidate can unexpectedly fail at any stage of further development. The historical failure rate for product candidates is high. The outcome of preclinical studies and early clinical trials may not be predictive of the success of later clinical trials, and interim results of a clinical trial do not necessarily predict final results. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our proposed indications. In particular, we have conducted a Phase 2 trial of FCR001 in LDKT. We do not know whether FCR001 will perform in our subsequent planned clinical trials, including in diffuse systemic sclerosis and deceased donor kidney transplant, as it has performed in our initial LDKT Phase 2 trial. In addition, if our clinical results are not successful, we may terminate clinical trials for a product candidate and abandon any further research or studies of the product candidate. Any delay in, or termination of, our clinical trials will delay and possibly preclude the filing of any NDAs with the FDA and, ultimately, our ability to commercialize our product candidates and generate product revenues.

We may not be able to maintain orphan drug designation for FCR001 or obtain orphan drug designation for our future product candidates, or to obtain and maintain the benefits associated with orphan drug designation.

Regulatory authorities in some jurisdictions, including the United States and Europe, may designate drugs or therapies for relatively small patient populations as orphan drugs. Under the Orphan Drug Act, the FDA may designate a product as an orphan drug if it is intended to treat a rare disease or condition, which is generally defined as a patient population of fewer than 200,000 individuals annually in the United States. In the European Union, the prevalence of the condition must not be more than five in 10,000. The FDA has granted FCR001 orphan drug designation for the prophylaxis of organ rejection without the need for chronic immunosuppression in patients receiving living donor kidney transplantation. Orphan drug designation neither shortens the development time or regulatory review time of a drug nor gives the drug any advantage in the regulatory review or approval process.

If a product that has orphan drug designation from the FDA subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a BLA, to market the same biologic for the same indication, for seven years, except in limited circumstances such as a showing of clinical superiority to the product with orphan product exclusivity or if FDA finds that the holder of the orphan exclusivity has not shown that it can ensure the availability of sufficient quantities of the orphan product to meet the needs of patients with the disease or condition for which the product was designated. Even if we or our collaborators obtain orphan designation to a product candidate, we may not be the first to obtain marketing approval for any particular orphan indication due to the uncertainties associated with developing pharmaceutical products. The scope of exclusivity is limited to the scope of any approved indication, even if the scope of the orphan designation is broader than the approved indication. Additionally, exclusive marketing rights may be limited if we or our collaborators seek approval for an indication broader than the orphan designated indication and may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition. Further, even if a product obtains orphan drug exclusivity, that exclusivity may not effectively protect the product from competition because different drugs with different active moieties can be approved for the same condition. Even after an orphan drug is approved, the FDA can subsequently approve a product with the same active moiety for the same condition if the FDA concludes that the later product is safer, more effective, or makes a major contribution to patient care. Furthermore, the FDA can waive orphan exclusivity if we or our collaborators are unable to manufacture sufficient supply of the product.

Similarly, in Europe, a medicinal product may receive orphan designation under Article 3 of Regulation (EC) 141/2000. This applies to products that are intended for a life-threatening or chronically debilitating condition and either (1) such condition affects no more than five in 10,000 persons in the E.U. when the application is made, or (2) the product, without the benefits derived from orphan status, would be unlikely to

 

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generate sufficient returns in the E.U. to justify the necessary investment. Moreover, in order to obtain orphan designation in the E.U. it is necessary to demonstrate that there exists no satisfactory method of diagnosis, prevention or treatment of such condition authorized for marketing in the E.U. or, if such a method exists, the product will be of significant benefit to those affected by the condition. In the E.U., orphan medicinal products are eligible for financial incentives such as reduction of fees or fee waivers and applicants can benefit from specific regulatory assistance and scientific advice. Products receiving orphan designation in the E.U. can receive ten years of market exclusivity, during which time no similar medicinal product for the same indication may be placed on the market. An orphan product can also obtain an additional two years of market exclusivity in the E.U. for pediatric studies. However, the ten-year market exclusivity may be reduced to six years if, at the end of the fifth year, it is established that the product no longer meets the criteria for orphan designation—for example, if the product is sufficiently profitable not to justify maintenance of market exclusivity. Additionally, marketing authorization may be granted to a similar product for the same indication at any time if:

 

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the second applicant can establish that its product, although similar, is safer, more effective or otherwise clinically superior;

 

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the first applicant consents to a second orphan medicinal product application; or

 

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the first applicant cannot supply enough orphan medicinal product.

If we do not receive or maintain orphan drug designation to product candidates for which we seek such designation, it could limit our ability to realize revenues from such product candidates.

The incidence and prevalence of the target patient population for FCR001 are based on estimates and third-party sources. If the market opportunity for FCR001 or our other product candidates is smaller than we estimate or if any approval that we obtain is based on a narrower definition of the patient population, our revenue and ability to achieve profitability might be materially and adversely affected.

Periodically, we make estimates regarding the incidence and prevalence of target patient populations based on various third-party sources and internally generated analysis. These estimates may be inaccurate or based on imprecise data. For example, the total addressable market opportunity for FCR001 in any given indication will depend on, among other things, acceptance of FCR001 by the medical community and patient access, drug pricing and reimbursement. The number of patients in the addressable markets may turn out to be lower than expected, patients may not be otherwise amenable to treatment with FCR001, or new patients may become increasingly difficult to identify or gain access to, all of which may significantly harm our business, financial condition, results of operations and prospects.

We have received Regenerative Medicine Advanced Therapy (RMAT) designation for FCR001 for LDKT. This designation may not necessarily lead to a faster development or regulatory review or approval process, and will not necessarily increase the likelihood that FCR001 will receive marketing approval.

We have received RMAT designation from the FDA for FCR001 for the prophylaxis of organ rejection without the need for chronic immunosuppression in patients receiving LDKT. A company may request RMAT designation of its product candidate, which designation may be granted if the product meets the following criteria: (1) it is a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies or products, with limited exceptions; (2) it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition; and (3) preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a disease or condition. RMAT designation provides potential benefits that include more frequent meetings with FDA to discuss the development plan for the product candidate, and potential eligibility for rolling review and priority review. Products granted RMAT designation may also be eligible for accelerated approval on the basis of a surrogate or intermediate endpoint reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful number of sites, including through expansion to additional sites post-approval, if appropriate. RMAT-designated products

 

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that receive accelerated approval may, as appropriate, fulfill their post-approval requirements through the submission of clinical evidence, clinical studies, patient registries, or other sources of real world evidence (such as electronic health records); through the collection of larger confirmatory data sets; or via post-approval monitoring of all patients treated with such therapy prior to approval of the therapy.

RMAT designation does not change the standards for product approval, and there is no assurance that any such designation or eligibility will result in expedited review or approval or that the approved indication will not be narrower than the indication covered by the RMAT designation. Additionally, RMAT designation can be revoked if the criteria for eligibility cease to be met as clinical data emerges.

We may never obtain FDA approval for any of our product candidates in the United States, and even if we do, we may never obtain approval for or commercialize any of our product candidates in any other jurisdiction, which would limit our ability to realize their full market potential.

In addition to regulations in the United States, to market and sell our product candidates in the European Union, many Asian countries and other jurisdictions, we must obtain separate regulatory approvals and comply with numerous and varying regulatory requirements, both from a clinical and manufacturing perspective. The approval procedure varies among countries and can involve additional testing and validation and additional administrative review periods. The time required to obtain approval may differ substantially from that required to obtain FDA approval. The regulatory approval process outside the United States generally includes all of the risks associated with obtaining FDA approval. Clinical trials accepted in one country may not be accepted by regulatory authorities in other countries. In addition, many countries outside the United States require that a product be approved for reimbursement before it can be approved for sale in that country. A product candidate that has been approved for sale in a particular country may not receive reimbursement approval in that country. We may not be able to obtain approvals from regulatory authorities or payor authorities outside the United States on a timely basis, if at all. Approval by the FDA does not ensure approval by regulatory or payor authorities in other countries or jurisdictions, and approval by one regulatory or payor authority outside the United States does not ensure approval by regulatory authorities in other countries or jurisdictions or by the FDA. We may not be able to file for regulatory approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval of any of our product candidates by regulatory or payor authorities in the European Union, Asia or elsewhere, the commercial prospects of that product candidate may be significantly diminished. We do not have any product candidates approved for sale in any jurisdiction, including international markets, and we do not have experience in obtaining regulatory approval in international markets. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be unrealized.

Even if our product candidates receive regulatory approval, we will still face extensive ongoing regulatory requirements and continued regulatory review, which may result in significant additional expense, and our products may still face future development and regulatory difficulties.

Even if we obtain regulatory approval for a product candidate, it would be subject to ongoing requirements by the FDA and comparable foreign regulatory authorities governing the manufacture, quality control, further development, labeling, packaging, storage, distribution, adverse event reporting, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of safety and other post-marketing information. These requirements include submissions of safety and other post-marketing information and reports, establishment registration and product listing, as well as continued compliance by us and/or any future contract manufacturing organizations (CMOs) and CROs for any post-approval clinical trials that we conduct. The safety profile of any product will continue to be closely monitored by the FDA and comparable foreign regulatory authorities after approval. If the FDA or comparable foreign regulatory authorities become aware of new safety information after approval of any of our product candidates, they may require labeling changes or establishment of a REMS, impose significant restrictions on a product’s indicated uses or marketing or impose ongoing requirements for potentially costly post-approval studies or post-market surveillance.

 

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In addition, manufacturers of cell therapies and their facilities are subject to initial and continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices (cGMP), Good Clinical Practices (GCP), current good tissue practices (cGTP), and other regulations. If we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:

 

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issue warning letters or untitled letters;

 

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mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners, or require other restrictions on the labeling or marketing of such products;

 

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require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;

 

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seek an injunction or impose civil or criminal penalties or monetary fines;

 

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suspend, withdraw or modify regulatory approval;

 

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suspend or modify any ongoing clinical trials;

 

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refuse to approve pending applications or supplements to applications filed by us;

 

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suspend or impose restrictions on operations, including costly new manufacturing requirements; or

 

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seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.

The occurrence of any event or penalty described above may inhibit our ability to successfully commercialize our products.

Advertising and promotion of any product candidate that obtains approval in the United States will be heavily scrutinized by the FDA, the U.S. Federal Trade Commission, the Department of Justice (DOJ), the Office of Inspector General of the HHS, state attorneys general, members of the U.S. Congress and the public. Additionally, advertising and promotion of any product candidate that obtains approval outside of the United States will be heavily scrutinized by comparable foreign entities and stakeholders. Violations, including actual or alleged promotion of our products for unapproved or off-label uses, are subject to enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA or comparable foreign bodies. Any actual or alleged failure to comply with labeling and promotion requirements may result in fines, warning letters, mandates to corrective information to healthcare practitioners, injunctions, or civil or criminal penalties.

The FDA and other regulatory authorities’ policies may change and additional government regulations may be enacted that could prevent, limit or delay regulatory approval of any current or future product candidate. We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we are slow or unable to adapt to changes in existing requirements or to the adoption of new requirements or policies, or if we are not able to maintain regulatory compliance, we may lose any marketing approval that we may have obtained. Non-compliance by us or any future collaborator with regulatory requirements, including safety monitoring or pharmacovigilance, and with requirements related to the development of products for the pediatric population can also result in significant financial penalties.

 

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Our relationships with customers, third-party payors, physicians and healthcare providers will be subject to applicable anti-kickback, fraud and abuse, and other laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits.

Healthcare providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates for which we obtain regulatory approval. Physicians, hospitals and third-party payors are often slow to adopt new products, technologies and treatment practices that require additional upfront costs and training. Additionally, third-party payors may not cover, or provide adequate reimbursement for, long-term follow-up evaluations required following the use of our products. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Because our product candidates have a higher cost of goods than conventional therapies, and may require long-term follow-up evaluations, the risk that coverage and reimbursement rates may be inadequate for us to achieve profitability may be greater. Based on these and other factors, hospitals and payors may decide that the benefits of this new therapy do not or will not outweigh its costs. Our current and future arrangements with third-party payors and customers may expose us to broadly applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which we conduct research and would market, sell and distribute our products. As a pharmaceutical company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or other third-party payors, federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’ rights are and will be applicable to our business. Restrictions under applicable federal and state healthcare laws and regulations that may affect our ability to operate include the following:

 

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the federal healthcare Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, offering, receiving, paying or providing remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or reward, or in return for, either the referral of an individual for, or the purchase, lease, order, arrangement, or recommendation of, any good, facility, item or service, for which payment may be made, in whole or in part, under a federal healthcare program such as the Medicare and Medicaid programs. A person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. This statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on the one hand, and prescribers, purchasers and formulary managers, among others, on the other;

 

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federal civil and criminal false claims laws, including the False Claims Act, and the civil monetary penalties law, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by, Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or obligation to pay or transmit money or property to the federal government, or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the federal government. Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act. The False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the False Claims Act and to share in any monetary recovery;

 

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the federal beneficiary inducement statute, includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental program;

 

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the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA) which created additional federal criminal statutes that prohibit knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious, or fraudulent statements in connection with the delivery of or payment for healthcare benefits, items or services relating to healthcare matters. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009 (HITECH) and their respective implementing regulations, including the Final Omnibus Rule published in January 2013, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses as well as their respective business associates, independent contractors or agents of covered entities, that perform services for them that involve the creation, maintenance, receipt, use, or disclosure of, individually identifiable health information as well as their covered subcontractors relating to the privacy, security and transmission of individually identifiable health information. HITECH also created new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, there may be additional federal, state and non-U.S. laws which govern the privacy and security of health and other personal information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;

 

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the federal transparency requirements under the Affordable Care Act (ACA), including the provision commonly referred to as the Physician Payments Sunshine Act, and its implementing regulations, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made to physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives during the previous year;

 

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federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs;

 

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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers; and

 

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analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers or patients; state laws that require pharmaceutical companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state and local laws that require the licensure of sales representatives; and state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures and pricing information.

 

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In addition to the above, on November 20, 2020, OIG finalized further modifications to the federal Anti-Kickback Statute. Under the final rules, OIG added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others. These rules (with exceptions) were scheduled to became effective January 19, 2021, but their effective date has been delayed pending review by the Biden administration. We continue to evaluate what effect, if any, these rules will have on our business.

Efforts to ensure that our current and future business arrangements with third parties, and our business generally, continue to comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that our business practices do not comply with any such laws and regulations. If our operations, including our arrangements with physicians and other healthcare providers, are found to be in violation of any such laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, reputational harm, exclusion from government-funded healthcare programs, such as Medicare and Medicaid, disgorgement, additional reporting requirements, and/or the curtailment or restructuring of our operations, as well as additional reporting obligations oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws. If any physicians or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable laws, they may be subject to similar penalties.

We are subject to stringent and changing privacy and data security laws, contractual obligations, self-regulatory schemes, government regulation, and standards related to data privacy and security. The actual or perceived failure by us, our collaborators, vendors or other relevant third parties to comply with such obligations could harm our reputation, subject us to significant fines and liability, or otherwise adversely affect our business, operations and financial performance.

We collect, receive, store, process, use, generate, transfer, disclose, make accessible, protect and share personal information and other information, including information we collect about patients and healthcare providers in connection with clinical trials.

There are numerous federal, state, local and international laws, regulations and guidance regarding privacy, information security and processing, the number and scope of which is changing, subject to differing applications and interpretations, and which may be inconsistent among jurisdictions, or in conflict with other rules, laws or data protection obligations. Data protection laws and data protection worldwide is, and is likely to remain, uncertain for the foreseeable future, and our failure or perceived failure to address or comply with these laws could: increase our compliance and operational costs; expose us to regulatory scrutiny, actions, fines and penalties; result in reputational harm; lead to a loss of customers; reduce the use of our products; result in litigation and liability; and otherwise result in other material harm to our business.

For example, in the United States, HIPAA, as amended by HITECH, imposes privacy, security and breach reporting obligations with respect to individually identifiable health information upon “covered entities” (health plans, health care clearinghouses and certain health care providers), and their respective business associates, individuals or entities that create, receive, maintain or transmit protected health information in connection with providing a service for or on behalf of a covered entity, as well as their covered subcontractors. HIPAA mandates the reporting of certain breaches of health information to HHS, affected individuals and, if the breach is large enough, the media. Entities that are found to be in violation of HIPAA as the result of a breach of unsecured protected health information, a complaint about privacy practices or an audit by HHS, may be subject to significant civil, criminal and administrative fines and penalties and/or additional reporting and oversight obligations if required to enter into a resolution agreement and corrective action plan with HHS to settle allegations of HIPAA non-compliance. Even when HIPAA does not apply, according to the Federal Trade Commission (FTC), 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

 

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Act (FTCA), 15 U.S.C. § 45(a). 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. The FTC’s guidance for appropriately securing consumers’ personal information is similar to what is required by the HIPAA security regulations.

Additionally, US States have begun introducing privacy legislation. For example, California recently enacted the California Consumer Privacy Act (CCPA), which creates new individual privacy rights for California consumers (as defined in the law) and places increased privacy and security obligations on entities handling personal data of consumers or households. The CCPA, which went into effect on January 1, 2020, will require covered companies to provide certain disclosures to consumers about its data collection, use and sharing practices, and to provide affected California residents with ways to opt-out of certain sales or transfers of personal information. The CCPA also provides for civil penalties for violations, as well as a private right of action for data breaches that may increase our risk to data breach class action litigation. The CCPA will be expanded substantially on January 1, 2023, when the California Privacy Rights Act of 2020 (CPRA) becomes fully operative. The CPRA will, among other things, give California residents the ability to limit use of certain sensitive personal information, establish restrictions on the retention of personal information, expand the types of data breaches subject to the CCPA’s private right of action, and establish a new California Privacy Protection Agency to implement and enforce the new law. The CCPA and the CPRA could substantially impact our business.

We may also be subject to additional privacy restrictions in various foreign jurisdiction around the world in which we operate or process personal information. The collection, use, storage, disclosure, transfer, or other processing of personal information regarding individuals in the European Economic Area (EEA), including personal health data, is subject to the General Data Protection Regulation 2016/679 (GDPR). The GDPR is wide-ranging and imposes numerous requirements on companies that process personal data, including requirements relating to processing health and other sensitive data, obtaining consent of the individuals to whom the personal data relates, providing information to individuals regarding data processing activities, implementing safeguards to protect the security and confidentiality of personal data, providing notification of data breaches, and taking certain measures when engaging third-party processors. The GDPR also imposes strict rules on the transfer of personal data to countries outside the European Union, including the United States, and permits data protection authorities to impose large penalties for violations of the GDPR, including potential fines of up to €20 million or 4% of annual global revenues, whichever is greater. The GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies, and obtain compensation for damages resulting from violations of the GDPR. Compliance with the GDPR is a rigorous and time-intensive process that may increase our cost of doing business or require us to change our business practices, and despite those efforts, there is a risk that we may be subject to fines and penalties, litigation, and reputational harm in connection with our European activities. Further, the United Kingdom’s decision to leave the E.U., often referred to as Brexit, has created uncertainty with regard to data protection regulation in the United Kingdom. In addition, various jurisdictions around the world continue to propose new laws that regulate the privacy and/or security of certain types of personal data. Complying with these laws, if enacted, would require significant resources and leave us vulnerable to possible fines and penalties if we are unable to comply.

In addition, the GDPR includes restrictions on cross-border data transfers. A recent decision by the Court of Justice of the European Union (the “Schrems II” ruling), however, has invalidated the E.U.-U.S. Privacy Shield Framework, which was one of the primary mechanisms used by U.S. Companies to import personal information from Europe, and raised questions about whether the European Commission’s Standard Contractual Clauses (SCCs), one of the primary alternatives to the Privacy Shield, can lawfully be used for personal information transfers from Europe to the United States or most other countries. Similarly, the Swiss Federal Data Protection and Information Commissioner recently opined that the Swiss-U.S. Privacy Shield is inadequate for transfers of

 

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data from Switzerland to the U.S. The United Kingdom, whose data protection laws are similar to those of the European Union, may similarly determine that the E.U.-U.S. Privacy Shield is not a valid mechanism for lawfully transferring personal information from the U.K. to the United States. The European Commission recently proposed updates to the SCCs, and additional regulatory guidance has been released that seeks to impose additional obligations on companies seeking to rely on the SCCs. Given that, at present, there are few, if any, viable alternatives to the E.U.-U.S. Privacy Shield and the SCCs, any transfers by us or our vendors of personal data from Europe may not comply with European data protection law, which may increase our exposure to the GDPR’s heightened sanctions for violations of its cross-border data transfer restrictions and may prohibit our transfer of E.U. personal data outside of the E.U. (including clinical trial data), and may adversely impact our operations, product development and ability to provide our products.

We are also subject to the terms of our external and internal privacy and security policies, representations, certifications, standards, publications and frameworks, and contractual obligations to third parties related to privacy, information security and processing.

With applicable data protection laws, privacy policies and data protection obligations imposing complex and burdensome obligations, and with substantial uncertainty over the interpretation and application of these requirements, we have faced and may face additional challenges in addressing and complying with them, and making necessary changes to our privacy policies and practices, and may incur material costs and expenses in an effort to do so, any of which could materially adversely affect our business operations and financial results, and may reduce the overall demand for our products.

We strive to comply with applicable data protection laws, privacy policies and data protection obligations to the extent possible, but we may at times fail to do so, or may be perceived to have failed to do so. Moreover, despite our efforts, we may not be successful in achieving compliance if our personnel, collaborators or vendors do not comply with applicable data protection laws, privacy policies and data protection obligations. Any failure or perceived failure by us or our collaborators, service providers and contractors to comply with federal or foreign laws or regulation, our internal policies and procedures, representations or our contracts governing the processing of personal data could result in negative publicity, disruptions or interruptions in our operations, fines, penalties, lawsuits, liability, inability to process personal data, diversion of time and effort, proceedings against us by governmental entities, or other adverse effects to our business.

Our employees, principal investigators, consultants and collaborators may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could cause significant liability for us and harm our reputation.

We are exposed to the risk of employee and third party fraud or other misconduct, including intentional failures to comply with FDA regulations or similar regulations of comparable foreign regulatory authorities, provide accurate information to the FDA or comparable foreign regulatory authorities, comply with manufacturing standards we have established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable foreign regulatory authorities, report financial information or data accurately or disclose unauthorized activities to us. Misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions, litigation and serious harm to our reputation. It is not always possible to identify and deter employee and third party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business and results of operations, including the imposition of significant fines or other sanctions, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, imprisonment, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, additional reporting requirements and oversight if we

 

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become subject to a corporate integrity agreement or similar agreement to resolve allegations of noncompliance with these laws, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could adversely affect our ability to operate our business, financial condition and results of operations.

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

We face an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. Product liability claims may be brought against us by subjects enrolled in our clinical trials, patients, healthcare providers or others using, administering or selling our products. If we cannot successfully defend ourselves against claims that our product candidates or products caused injuries, we could incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

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decreased demand for any product candidates or products that we may develop;

 

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termination of clinical trial sites or entire trial programs;

 

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injury to our reputation and significant negative media attention;

 

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withdrawal of clinical trial participants;

 

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significant costs to defend the related litigation;

 

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substantial monetary awards to study subjects or patients;

 

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loss of revenue;

 

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exhaustion of any available insurance and our capital resources;

 

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diversion of management and scientific resources from our business operations;

 

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the inability to commercialize any products that we may develop; and

 

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a decline in our share price.

We currently hold product liability insurance coverage at a level that we believe is customary for similarly situated companies and adequate to provide us with insurance coverage for foreseeable risks, but which may not be adequate to cover all liabilities that we may incur. We may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise. We intend to expand our insurance coverage for products to include the sale of commercial products if we obtain regulatory approval for our product candidate in development, but we may be unable to obtain commercially reasonable product liability insurance for any products that receive regulatory approval. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

Risks Related to Commercialization of Our Product Candidates

Our commercial success depends upon attaining significant market acceptance of our product candidates, if approved, among physicians, patients, healthcare payors and the medical community, including hospitals and outpatient clinics.

Even if we obtain regulatory approval for any of our product candidates that we may develop or acquire in the future, the product may not gain market acceptance among physicians, healthcare payors, patients or the medical community that supports our product development efforts, including hospitals and outpatient clinics.

 

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Market acceptance of any of our product candidates for which we receive approval depends on a number of factors, including:

 

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the efficacy and safety of our product candidates as demonstrated in clinical trials;

 

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the clinical indications and patient populations for which any product candidate is approved;

 

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acceptance by physicians and patients of the product candidate as a safe and effective treatment;

 

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the administrative and logistical burden of treating patients, including the availability and accessibility of healthcare provider sites for administering infusions to patients;

 

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the adoption of novel cellular therapies by physicians, hospitals and third-party payors;

 

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the potential and perceived advantages of our product candidates over alternative treatments;

 

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the safety of our product candidates seen in a broader patient group, including their use outside the approved indications;

 

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any contraindications or restrictions on use together with other medications;

 

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the prevalence and severity of any side effects;

 

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product labeling or product insert requirements of the FDA or other regulatory authorities;

 

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

 

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the development of manufacturing and distribution processes for our product candidates;

 

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the cost of our therapy in relation to alternative treatments;

 

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the availability of coverage and adequate reimbursement from, and our ability to negotiate pricing with, third-party payors, providers and government authorities;

 

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relative convenience and ease of administration; and

 

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the effectiveness of our sales and marketing efforts and those of our collaborators.

Even if we are able to commercialize our product candidates, the products may not receive coverage and adequate reimbursement from third-party payors in the United States and in other countries in which we seek to commercialize our products, which could harm our business.

Our ability to commercialize any product candidate successfully will depend, in part, on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations.

The pricing and reimbursement of our product candidates, if approved, must be adequate to support the necessary commercial infrastructure. If we are unable to obtain adequate levels of reimbursement, our ability to successfully market and sell any such product candidates will be adversely affected. In the United States and markets in other countries, patients generally rely on third-party payors to reimburse all or part of the costs associated with their treatment. The availability and extent of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive treatments, such as our therapies. Sales of our product candidates will depend substantially on the extent to which the costs of our product candidates will be covered and paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations, or reimbursed by government health administration authorities, private health coverage insurers and other payors.

Government authorities and third-party payors, such as private health insurers and health maintenance organizations, determine which medications they will cover and establish reimbursement levels. A primary trend in the healthcare industry is cost containment. Government authorities and third-party payors have attempted to

 

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control costs by limiting coverage and the amount of reimbursement for particular medications. Additionally, the process for determining whether a payor will provide coverage for a product may be separate from the process for setting the reimbursement rate that the payor will pay for the product. Payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication.

Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Third-party payors may also seek additional clinical evidence, beyond the data required to obtain regulatory approval, demonstrating clinical benefits and value in specific patient populations before covering our products for those patients. We cannot be sure that coverage and adequate reimbursement will be available for any product that we commercialize and, if reimbursement is available, what the level of reimbursement will be. Coverage and reimbursement may impact the demand for, or the price of, any product candidate for which we obtain regulatory approval, and ultimately our ability to successfully commercialize any product candidate for which we obtain regulatory approval. Further, due to the COVID-19 pandemic, millions of individuals have lost or will be losing employer-based insurance coverage, which may adversely affect our ability to commercialize our products.

We are initially targeting rare diseases with small patient populations. In order for products that are designed to treat smaller patient populations to be commercially viable, the reimbursement for such products must be higher, on a relative basis, to account for the lack of volume. Accordingly, we will need to implement a coverage and reimbursement strategy for any approved product candidate with a smaller patient population that accounts for the smaller potential market size. Even if we obtain coverage for a given product by a third-party payor, the resulting reimbursement payment rates may not be adequate. We are also initially developing products that are designed to be used one time. We expect the cost of one-time cell therapy products, such as those we are developing, to be substantial, when and if they achieve market approval. We believe a value-based price for our one-time therapies should encompass both short- and long-term clinical, health economic, and humanistic value. Recently approved one-time cell therapies can command prices that may expose payors to higher upfront costs than annual costs for existing therapies administered chronically. Accordingly, healthcare providers may face challenges securing reimbursement from payors for one-time therapies that necessitate higher upfront or near-term payments even if the long-term treatment cost with the one-time therapy is less expensive than the long-term cost for existing treatments. Ultimately, payors may not be willing to pay high prices for a one-time therapy.

In the United States, solid organ transplants and hematopoietic stem cell transplants are performed in tertiary hospitals, particularly high volume centers of excellence situated in major metropolitan areas. Most of these hospitals are part of large regional health systems and are likely to be the main adopters of FCR001 and our other Facilitated Allo-HSCT products. To ensure optimal adoption of our products at these hospitals, we will need to secure implementation of our novel treatment protocols at the facility, and in some cases, systemic level. Moreover, adoption at the hospital and health system level will depend heavily upon hospital administrators’ confidence they can be adequately reimbursed by payors for our product and any incremental costs they incur to administer our products.

Solid organ transplant and hematopoietic stem cell transplant (HSCT) procedures are currently reimbursed at capitated case rates for both commercial payers and Medicare (DRG) in the US. Whereas it takes time for CMS to approve a new DRG, we anticipate seeking outlier payments (typically billed under CPT Category III Codes—a set of temporary (T) codes assigned to emerging technologies, services, and procedures) plus a New Technology Add-on Payment (NTAP) to bridge any funding gaps between current transplant DRGs and the incremental cost for FCR001—akin to what was done for CAR-T therapies. As with CAR-T therapies, we anticipate that a new DRG will likely need to be issued to provide full reimbursement of our Facilitated Allo-HSCT Therapy to providers. If a new DRG is not granted within three years of the approval of FCR001 in the United States, this could compromise our or hospitals’ ability to obtain adequate reimbursement for FCR001,

 

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which in turn could negatively affect commercial adoption of our therapy. We also recognize that as one-time cell therapies become an increasingly prominent component of medical practice for a range of conditions, that manufacturers, hospitals, health systems and public and private payers may refine their pricing and reimbursement models to balance short-term costs with long-term potential systemic savings from such therapies. For example, some products have risk-sharing models in which the total cost is amortized over multiple installments that are contingent upon annual confirmation of continued benefit. We believe that a therapy such as FCR001 may be reimbursed under such models, given that there are objective measures of continued benefit (e.g., continued lack of need for immunosuppression evidenced by absence of signs of organ rejection). However, some payors, most notably Medicare, do not currently have reimbursement mechanisms in place for multi-year, risk-sharing pricing models. The lack of such mechanisms could pose constraints to the total treatment cost for our products.

There may be significant delays in obtaining coverage and reimbursement for newly approved therapies, and coverage may be more limited than the purposes for which the therapy is approved by the FDA or comparable foreign regulatory authorities. Moreover, eligibility for coverage and reimbursement does not imply that any therapy will be paid for in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Interim reimbursement levels for our therapies, if applicable, may also not be sufficient to cover our costs and may only be temporary. Reimbursement rates may vary according to the use of our therapy and the clinical setting in which it is used, and may be incorporated into existing payments for other services. For products administered under the supervision of a physician, obtaining coverage and adequate reimbursement may be particularly difficult because of the higher prices often associated with such products. Additionally, separate reimbursement for the product itself or the treatment or procedure in which the product is used may not be available, which may impact physician utilization. Net prices for our therapies may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors.

Further, third-party payors in the United States often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. It is difficult to predict what the CMS will decide with respect to reimbursement for fundamentally novel products such as ours, as there is no body of established practices and precedents for these new products. Factors payors consider in determining reimbursement are based on whether the product is:

 

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a covered benefit under its health plan;

 

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safe, effective and medically necessary;

 

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appropriate for the specific patient;

 

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cost-effective; and

 

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neither experimental nor investigational.

Our inability to promptly obtain coverage and profitable reimbursement rates from both government-funded and private payors for any approved products that we develop could have a material adverse effect on our operating results, our ability to raise the capital needed to commercialize products and our overall financial condition.

Current and future legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty and cost for us to obtain regulatory approval of and commercialize our product candidates and affect the prices we may obtain.

The regulations that govern, among other things, regulatory approvals, coverage, pricing and reimbursement for new drug products vary widely from country to country. In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay regulatory approval of our product candidates, restrict or regulate post-

 

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approval activities and affect our ability to successfully sell any product candidates for which we obtain regulatory approval. In particular, in March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively, the Affordable Care Act, was enacted, which substantially changes the way health care is financed by both governmental and private insurers, and significantly impacts the U.S. pharmaceutical industry. The Affordable Care Act and its implementing regulations, among other things, addressed a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics, including our product candidates, increased the minimum Medicaid rebates owed by manufacturers under the Medicaid Drug Rebate Program, extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care organizations, subjected manufacturers to new annual fees and taxes for certain branded prescription drugs, provided incentives to programs that increase the federal government’s comparative effectiveness research and established a new Medicare Part D coverage gap discount program.

Since its enactment, there have been judicial and Congressional challenges to numerous elements of the Affordable Care Act, as well as efforts by both the executive and legislative branches of the federal government to repeal or replace certain aspects of the Affordable Care Act. For example, the former President signed Executive Orders designed to delay the implementation of certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. In addition, the U.S. Congress has considered legislation that would repeal or repeal and replace all or part of the Affordable Care Act. While the U.S. Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the Affordable Care Act, such as removing penalties, starting January 1, 2019, for not complying with the Affordable Care Act’s individual mandate to carry health insurance, delaying the implementation of certain mandated fees, and increasing the point-of-sale discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D. On December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld a District Court ruling that the individual mandate was unconstitutional and remanded the case back to the Texas District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. On March 2, 2020, the U.S. Supreme Court granted the petitions for writs of certiorari to review the case and held oral arguments on November 10, 2020, although it is unclear when a decision will be made or how the Supreme Court will rule. Although the U.S. Supreme Court has yet ruled on the constitutionality of the Affordable Care Act, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the Affordable Care Act marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the Affordable Care Act. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the Affordable Care Act and our business.

Any other executive, legislative or judicial action to “repeal and replace” all or part of the Affordable Care Act may have the effect of limiting the amounts that government agencies will pay for healthcare products and services, which could result in reduced demand for our products or additional pricing pressure, or may lead to significant deregulation, which could make the introduction of competing products and technologies much easier. Policy changes, including potential modification or repeal of all or parts of the Affordable Care Act or the implementation of new health care legislation, could result in significant changes to the health care system which may adversely affect our business in unpredictable ways.

Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. In August 2011, the Budget Control Act of 2011, among other things, included aggregate reductions of Medicare payments to providers of 2% per fiscal year, which went into effect in April 2013, and, due to subsequent legislative amendments, will remain in effect through 2030 unless additional Congressional action is taken. COVID-19 pandemic relief legislation suspended these reductions from May 1, 2020 through

 

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March 31,2021, and extended the sequester by one year, through 2030. In addition, in January 2013, the American Taxpayer Relief Act of 2012 (ATRA) was enacted which, among other things, further reduced Medicare payments to several providers, including hospitals and outpatient clinics, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. In addition, there has been several changes to the 340B drug pricing program, which imposes ceilings on prices that drug manufacturers can charge for medications sold to certain health care facilities. On December 27, 2018, the District Court for the District of Columbia invalidated a reimbursement formula change under the 340B drug pricing program, and CMS subsequently altered the FYs 2019 and 2018 reimbursement formula on specified covered outpatient drugs (SCODs). The court ruled this change was not an “adjustment” which was within the Secretary’s discretion to make but was instead a fundamental change in the reimbursement calculation. However, most recently, on July 31, 2020, the U.S. Court of Appeals for the District of Columbia Circuit overturned the district court’s decision and found that the changes were within the Secretary’s authority. On September 14, 2020, the plaintiffs-appellees filed a Petition for Rehearing En Banc (i.e., before the full court), but was denied on October 16, 2020. It is unclear how these developments could affect covered hospitals who might purchase our future products and affect the rates we may charge such facilities for our approved products in the future, if any. While a number of these and other proposed measures will require authorization through additional legislation to become effective, Congress has indicated that it will continue to seek new legislative and/or administrative measures to control drug costs.

At the federal level, the Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive orders and policy initiatives. For example, on July 24, 2020 and September 13, 2020, former President Trump signed several Executive Orders aimed at lowering drug pricing that seek to implement several of the former administration’s proposals. On November 20 2020, CMS also issued an Interim Final Rule implementing the Most Favored Nation (MFN) Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. The Interim Final Rule has not been finalized and is subject to revision and challenge. For example, on December 28, 2020, the United States District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule. Additionally, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers the implementation of which have also been delayed pending review by the Biden administration until March 22, 2021. Although a number of these, and other proposed measures may require authorization through additional legislation to become effective, and the Biden administration may reverse or otherwise change these measures, Congress has indicated that it will continue to seek new legislative measures to control drug costs.

There have been, and likely will continue to be, legislative and regulatory proposals at the foreign, federal and state levels directed at broadening the availability of healthcare and containing or lowering the cost of healthcare. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of governments, insurance companies, managed care organizations and other payors of healthcare services to

 

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contain or reduce costs of healthcare, including by imposing price controls, may adversely affect the demand for our product candidates for which we obtain regulatory approval and our ability to set a price that we believe is fair for our products. Any reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payors.

Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether the FDA or foreign regulations, guidance or interpretations will be changed, or what the impact of these changes on the regulatory approvals of our product candidates, if any, may be. In the United States, the European Union and other potentially significant markets for our product candidates, government authorities and third-party payors are increasingly attempting to limit or regulate the price of medical products and services, particularly for new and innovative products and therapies, which has resulted in lower average selling prices for certain products in certain markets. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, to encourage importation from other countries and bulk purchasing. Furthermore, the increased emphasis on managed healthcare in the United States and on country and regional pricing and reimbursement controls in the European Union will put additional pressure on product pricing, reimbursement and usage, which may adversely affect our future product sales. These pressures can arise from rules and practices of managed care groups, judicial decisions and governmental laws and regulations related to Medicare, Medicaid and healthcare reform, pharmaceutical reimbursement policies and pricing in general.

In addition, there is significant uncertainty regarding the reimbursement status of newly approved healthcare products. We may need to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. If third-party payors do not consider our products to be cost-effective compared to other therapies, the payors may not cover our products after approved as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis. Further, it is possible that additional governmental action is taken in response to the COVID-19 pandemic.

We expect the product candidates we develop will be regulated as biological products, or biologics, and therefore they may be subject to competition sooner than anticipated.

The Biologics Price Competition and Innovation Act of 2009 (BPCIA) was enacted as part of the Affordable Care Act to establish an abbreviated pathway for the approval of biosimilar and interchangeable biological products. The regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible designation of a biosimilar as “interchangeable” based on its similarity to an approved biologic. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the reference product was approved under a BLA. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact, implementation, and meaning are subject to uncertainty. While it is uncertain when processes intended to implement BPCIA may be fully adopted by the FDA, any of these processes could have a material adverse effect on the future commercial prospects for our biological products.

Additionally, there is a risk that any granted exclusivity could be shortened due to congressional action or otherwise, or that the FDA will not consider our product candidates to be reference products for competing products, potentially creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of the reference products in a way that is similar to traditional generic substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

 

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In addition, the approval of a biologic product biosimilar to one of our products could have a material adverse impact on our business as it may be significantly less costly to bring to market and may be priced significantly lower than our products.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.

We are at an early stage of establishing an organization that would eventually be responsible for the sale, marketing and distribution of our therapy, if approved, and the cost of establishing and maintaining such an organization may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA and comparable foreign regulatory authorities, we will have to build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. There are significant risks involved in building and managing a sales organization, including our ability to hire, retain and incentivize qualified individuals, generate sufficient sales leads, provide adequate training to sales and marketing personnel and effectively manage a geographically dispersed sales and marketing team. Any failure or delay in the development of our internal sales, marketing and distribution capabilities would adversely impact the commercialization of these products. We may be competing with many companies that currently have extensive and well-funded sales and marketing operations. Without a sufficiently scaled, appropriately timed and trained internal commercial organization or the support of a third party to perform sales and marketing functions, we may be unable to compete successfully against these more established companies.

Risks Related to Manufacturing

We currently operate our own manufacturing facility and intend to scale-up our manufacturing and processing approaches to appropriately address our anticipated commercial needs for FCR001, which will require significant resources. We may fail to successfully operate our facility, which could adversely affect our clinical trials and the commercial viability of our product candidates.

We operate our own dedicated cGMP cell processing facility, located on the campus of the University of Louisville, where we manufacture our product candidates for our current and planned clinical trials. Although we are currently operating our manufacturing facility, our operations remain subject to review and oversight by the FDA, and the FDA could object to our use of our manufacturing facility or the processes used therein.

We have begun to scale-up our manufacturing and processing approaches to appropriately address our anticipated commercial needs for FCR001 for LDKT. In order to scale-up our manufacturing capabilities and facility, we will require substantial additional funds and will need to hire and retain significant additional personnel and comply with extensive cGMP regulations applicable to a commercial facility. If we fail to complete any construction in an efficient manner, recruit the required personnel and generally manage our growth effectively, the development and production of our product candidates could be curtailed or delayed. Our manufacturing facility would also need to be licensed for the production of our product candidates by the FDA. Even if our manufacturing facility is approved by the FDA, we would be subject to ongoing periodic unannounced inspection by the FDA, corresponding state agencies and potentially third party collaborators to ensure strict compliance with cGMPs and other government regulations. Our license to manufacture product candidates will be subject to continued regulatory review.

We expect to use the same manufacturing process and starting material for future programs as those that we have used in our Phase 2 and Phase 3 trials of FCR001 for LDKT, except that our starting materials and process may be different for programs where we derive our component cells from a deceased donor. However, our use of this manufacturing process in our Phase 2 and Phase 3 trials may not be successfully replicated in subsequent trials, which could adversely affect our ability to scale-up our manufacturing processes or obtain or maintain the requisite licenses and approvals from the FDA to commercialize our product candidates.

We believe that our manufacturing processes can be scaled-up to address our commercial needs. However, there can be no assurance that we will not encounter difficulties in scaling out our manufacturing processes.

 

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Significant scale-up of manufacturing may result in unanticipated technical challenges and may require additional FDA approvals. We may encounter difficulties in scaling out production, including problems involving raw material suppliers, production yields, technical difficulties, scaled-up product characteristics, quality control and assurance, shortage of qualified personnel, capacity constraints, compliance with FDA and foreign regulations, environmental compliance, production costs and development of advanced manufacturing techniques and process controls. The actual cost to manufacture and process our product candidates could also be greater than we expect and could materially and adversely affect the commercial viability of our product candidates. Any of these difficulties, if they occur and are not overcome to the satisfaction of the FDA or other regulatory agency, could lead to significant delays and possibly the termination of the development program for such product candidate. These risks become more acute as we scale-up for commercial quantities, where a reliable source of product becomes critical to commercial success. The commercial viability of any of our product candidates, if approved, will depend on our ability to produce our personalized cell therapy at a large scale. Failure to achieve this level of supply could jeopardize the successful commercialization of our therapy.

The manufacture of a cell therapy is complex and requires significant expertise, including the development of advanced manufacturing techniques and process controls. Manufacturers of cell therapy products often encounter difficulties in production, particularly in scaling out and validating initial production and ensuring the absence of contamination. These problems include difficulties with production costs and yields, quality control, including stability of the product, quality assurance testing, operator error, shortages of qualified personnel, shortages of raw materials, as well as compliance with strictly enforced federal, state and foreign regulations. Furthermore, if contaminants are discovered in our cell therapy or in the manufacturing facilities, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. We cannot ensure that any stability or other issues relating to the manufacture of our product candidates will not occur in the future.

We may fail to manage the logistics of collecting and shipping donor cell material to the manufacturing site and shipping the product candidate to the patient. Logistical and shipment delays and problems caused by us, our vendors or other factors not in our control, such as weather, could cause breakage or contamination of our products and prevent or delay the delivery of product candidates to patients. Additionally, we have to maintain a complex chain of identity and chain of custody with respect to donor material as it moves to the manufacturing facility, through the manufacturing process, and to the recipient. Failure to maintain chain of identity and chain of custody could result in patient death, loss of product or regulatory action.

Our manufacturing capabilities could be affected by cost-overruns, resource constraints, unexpected delays, equipment failures, labor shortages or disputes, natural disasters, power failures and numerous other factors that could prevent us from realizing the intended benefits of our manufacturing strategy, jeopardize our ability to provide our product candidates to patients, and have a material adverse effect on our business, financial condition, results of operations and prospects. For example, two vaccines for COVID-19 were granted Emergency Use Authorization by the FDA in late 2020, and more are likely to be authorized in the coming months. The resultant demand for vaccines and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign legislation, may make it more difficult to obtain materials or manufacturing supplies for, or timely manufacture, the products needed for our clinical trials, which could lead to delays in these trials.

Our product candidates are uniquely manufactured for each patient and we may encounter difficulties in production, particularly with respect to scaling our manufacturing capabilities.

The manufacturing process used to produce our product candidates is novel and has not been validated for commercial production. Our product candidates comprise a composition of hematopoietic stem cells (HSCs), facilitating cells (FCs) and Alpha Beta T-cell Receptor Cells (aßTCR+ T cells), the dose of each of which is tailored to the recipient using our proprietary manufacturing process. Due to the personalized nature of the product candidate, we expect the cost to manufacture our product candidates to be high.

 

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Although we have qualified and obtained positive initial FDA feedback on our potency assays for each of our active cell components in FCR001, we must validate the potency assays prior to submission of a marketing application for FCR001. Potency assays have traditionally proven difficult to develop for cell-based products and must be validated prior to approval. There can be no assurance that we will be able to validate our potency assays to FDA’s satisfaction, or that FDA will not want us to develop different or alternative potency assays for FCR001 or other product candidates. Any such development could delay or prevent approval of FCR001 or our other product candidates.

There is a risk of manufacturing issues associated with the differences in donor starting materials, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, and variability in product characteristics. Even minor deviations from our normal manufacturing processes could result in reduced production yields, lot failures, product defects, product delays, product recalls, product liability claims and other supply disruptions. If for any reason we lose a donor’s starting material or one of our custom-manufactured products at any point in the process, the manufacturing process for that recipient will need to be restarted and the resulting delay may adversely affect that recipient’s outcome. Because our product candidate is manufactured for each particular patient, we will be required to maintain a chain of identity with respect to materials as they move from the donor to the manufacturing facility, through the manufacturing process and on to the patient. Further, as our product candidate is developed through preclinical to later-stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered in an effort to optimize processes and results. If we make these types of changes, we may not achieve our intended objectives and any of these changes could cause our product candidates to perform differently than we expect, potentially affecting the results of clinical trials.

Although we continually attempt to optimize our manufacturing process, doing so is a difficult and uncertain task and there are risks associated with scaling to the level required for advanced clinical trials or commercialization, including, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability issues, lot consistency and timely availability of reagents or raw materials. If we are unable to adequately validate or scale-up our manufacturing processes, we may encounter lengthy delays in commercializing our product candidates. We may continue to manufacture our product ourselves or we may ultimately decide to outsource our manufacturing to a third party CMO. We may not be successful in transferring our production system to such manufacturer, or the manufacturer(s) on whom we rely may not have the necessary capabilities to complete the implementation and development process. If we are able to adequately validate and scale-up the manufacturing processes for our product candidates with a contract manufacturer, we will still need to negotiate an agreement for commercial supply with that contract manufacturer and it is not certain we will be able to come to agreement on terms acceptable to us. As a result, we may ultimately be unable to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are approved and commercialized.

The manufacturing process for any products that we may develop is subject to the FDA and foreign regulatory authority approval processes and, if we choose to outsource our commercial production, we will need to contract with manufacturers who we believe can meet applicable FDA and foreign regulatory authority requirements on an ongoing basis. If we are unable to reliably produce our cell therapy candidate to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the approvals we need to commercialize our products. Even if we obtain regulatory approval for any of our product candidates, there is no assurance that either we or any CMOs we may contract with in the future will be able to manufacture the approved product to specifications and under cGMPs acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities to meet the requirements for the potential launch of the product, or to meet potential future demand. Any of these challenges could delay completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods and have an adverse effect on our business, financial condition, results of operations and growth prospects.

 

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Our future success depends on our ability to manufacture our products on a timely basis with acceptable manufacturing costs, while at the same time maintaining good quality control and complying with applicable regulatory requirements. Our inability to do so could have a material adverse effect on our business, financial condition, prospects and results of operations. In addition, we could incur higher manufacturing costs if manufacturing processes or standards change and we could need to replace, modify, design or build and install equipment, all of which would require additional capital expenditures.

In addition, the FDA, the EMA and other foreign regulatory authorities may require us to submit samples of any personalized product lot, together with the protocols showing the results of applicable tests at any time. Under some circumstances, the FDA, the EMA or other foreign regulatory authorities may require that we not distribute a specific product lot until the relevant agency authorizes its release. Slight deviations in the manufacturing process, including those affecting quality attributes and stability, may result in unacceptable changes in the product that could result in lot failures or product recalls. Lot failures or product recalls could cause us to delay product launches or clinical trials, which could be costly to us and otherwise harm our business, financial condition, results of operations and prospects. Problems in our manufacturing process could restrict our ability to meet market demand for our products.

Any problems in our manufacturing process or facilities could make us a less attractive collaborator for potential partners, including larger pharmaceutical companies and academic research institutions, which could limit our access to additional attractive development programs.

Our product candidate requires specific shipping, storage, handling and administration at the clinical sites, including cold-chain logistics, which could subject our product candidates to risk of loss or damage.

Our product candidates are sensitive to temperature, storage and handling conditions. They must be stored at very low temperatures in specialized freezers or specialized shipping containers until immediately prior to use. For administration, the cryopreserved product container must be carefully removed from storage, and rapidly thawed under controlled temperature conditions in an area proximal to the patient’s bedside and administered into the patient. The handling, thawing and administration of the cryopreserved therapy product must be performed according to specific instructions, typically using specific disposables, specific bags and in some steps within specific time periods. Failure to correctly handle our product, including the potential breakage of the cryopreservation bags or to follow the instructions for thawing and administration and or failure to administer our product within the specified period post-thaw could negatively impact the efficacy and or safety of our product, or cause a loss of product.

In addition, our product candidates must be cryopreserved/frozen using specialized equipment and following specific procedures in order to be stored without damage in a cost-efficient manner and without degradation. We may encounter difficulties in further optimization of freezing and thawing methodologies, and also in obtaining the necessary regulatory approvals for using such methodologies in treatment. If we cannot adequately demonstrate similarity of our frozen product to the unfrozen or thawed form to the satisfaction of the FDA, we could face substantial delays in our regulatory approvals. If we are unable to freeze FCR001 or other cell-based therapies we may develop for storage and shipping purposes, our ability to promote adoption and standardization of our products, as well as achieve economies of scale by centralizing production facilities, will be limited.

Even if we are able to successfully freeze and thaw FCR001 without damage in a cost-efficient manner and without degradation to the satisfaction of the FDA to support regulatory approval, we will still need to scale-up a cost-effective and reliable cold-chain distribution and logistics network, which we may be unable to accomplish. Failure to effectively scale-up our cold-chain supply logistics, by us or third parties, could in the future lead to additional manufacturing costs and delays in our ability to supply required quantities for commercial supply. For these and other reasons, we may not be able to manufacture FCR001 or other cell-based therapies we may develop at commercial scale or in a cost-effective manner.

 

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The process of manufacturing cell therapies is inherently susceptible to contamination. If microbial, viral or other contaminations are discovered in any product candidate or in our manufacturing facility, our manufacturing facility may need to be closed for an extended period of time to allow us to investigate and remedy the contamination. Because our cell therapy product candidates are manufactured from the cells of third-party donors, the process of manufacturing is susceptible to the availability of the third-party donor material. The process of developing products that can be commercialized may be particularly challenging, even if they otherwise prove to be safe and effective. The manufacture of these product candidates involves complex processes. Some of these processes require specialized equipment and highly skilled and trained personnel. The process of manufacturing these product candidates will be susceptible to additional risks, given the need to maintain aseptic conditions throughout the manufacturing process. Contamination with viruses or other pathogens in either the donor material or materials utilized in the manufacturing process or ingress of microbiological material at any point in the process may result in contaminated or unusable product. These types of contaminations could result in manufacturing delays which could result in delays in the development of our product candidates. These contaminations could also increase the risk of adverse side effects.

If our manufacturing facility is damaged or destroyed or production at our manufacturing facility is otherwise interrupted, our business would be negatively affected.

Damage to our manufacturing facility or disruption to our operations for any reason, including due to natural disaster (such as earthquake, wildfires and other fires or extreme weather), power loss, communications failure, cyberattack, unauthorized entry or other events, such as a flu or other health epidemic (such as the COVID-19 pandemic), could affect our manufacturing processes.

In particular, our manufacturing facility, located on the Health Science Center campus of the University of Louisville, supplies all of our clinical needs, and any damage or disruption to that facility could cause a loss of products or materials or otherwise adversely affect our ability to manufacture our current and any future product candidates in support of our clinical trials. It may require substantial lead time to repair, and we may not have control over such repairs. The property damage and business interruption insurance coverage on our facility that we maintain might not cover all losses under such circumstances, and we may not be able to renew or obtain such insurance in the future on acceptable terms with adequate coverage or at reasonable costs.

Any damage or disruption to the University of Louisville’s operations, including the foregoing events, may also adversely affect our business. For example, disruption to any of the utilities provided to our facility by University of Louisville (HVAC, electrical, water, etc.) could inhibit or prevent us from being able to manufacture our product candidates. Moreover, if we are unable to obtain key inputs used in our manufacturing process, disinfectants or other materials required to maintain “clean room” sterility in our manufacturing facility, we may be unable to manufacture products entirely. Any failure of our building systems could also adversely affect our operations, including but not limited to equipment malfunctions, failure to follow specific protocols and procedures, and issues relating to air handling and other utilities. Any significant disruption to our manufacturing facility or processes would likely have an adverse impact on our business.

Any adverse developments affecting manufacturing operations for our current and any future product candidates may result in lot failures, inventory shortages, shipment delays, product losses or other interruptions in the supply of our product candidates for an undetermined period of time. We may also have to write off raw material and drug product inventory, incur other charges and expenses for key manufacturing inputs that fail to meet specifications, undertake costly remediation efforts, or seek more costly manufacturing alternatives. Inability to meet the clinical demand for our product candidates could damage our reputation and the reputation of our products among physicians, healthcare payors, patients or the medical community that supports our product development efforts, including hospitals and outpatient clinics.

 

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Our manufacturing process needs to comply with regulations relating to the quality and reliability of such processes. Any failure to comply with relevant regulations could result in delays in or termination of our clinical programs and suspension or withdrawal of any regulatory approvals. Further, as our preclinical and clinical programs and the manufacture of our product candidates are dependent on human donor material, we are or could be subject to additional regulations and requirements.

The FDA, EMA and comparable foreign regulatory authorities require that our product candidates and any products that we may eventually commercialize be manufactured according to cGMP, cGTP and similar jurisdictional standards. These requirements include, among other things, quality control, quality assurance and the maintenance of records and documentation. The FDA and comparable foreign regulatory agencies may also implement new standards at any time, or change their interpretations and enforcement of existing standards, including for the manufacture, packaging or testing of biological products.

We may encounter difficulties in achieving quality control and quality assurance or meeting regulatory expectations. Our facilities are subject to inspections by the FDA and comparable foreign regulatory authorities to confirm compliance with applicable regulatory requirements. Any failure to follow cGMP, cGTP or other regulatory requirements or delay, interruption or other issues that arise in the manufacture, packaging, or storage of our product candidates as a result of our failure to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop and commercialize our product candidates, including leading to significant delays in the availability of our product candidates for our clinical trials or the termination of or suspension of a clinical trial, or the delay or prevention of a filing or approval of marketing applications for our product candidates. Significant non-compliance could also result in the imposition of sanctions, including warning or untitled letters, fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could damage our reputation and our business.

In addition, our clinical programs and the manufacture of our product candidates are dependent on human donor material. Procurement of certain human organs for transplantation is subject to the National Organ Transplant Act of 1984 (NOTA), which prohibits the acquisition, receipt, or transfer of any human organ for valuable consideration for use in human transplantation. We depend on third parties who arrange for living donor kidney transplants to comply with applicable NOTA requirements and we do not know whether any failure by such third parties to comply with NOTA requirements could impact the integrity or usability of data in our clinical trials.

If we fail to comply with environmental, health and safety laws and regulations, we could become subject to fines or penalties or incur costs that could have a material adverse effect on the success of our business.

We are subject to numerous environmental, health and safety laws and regulations, including those governing laboratory procedures and the handling, use, storage, treatment and disposal of hazardous materials and wastes. Our operations involve the use of hazardous and flammable materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We generally contract with third parties for the disposal of these materials and wastes. We cannot eliminate the risk of contamination or injury from these materials. In the event of contamination or injury resulting from our use of hazardous materials, we could be held liable for any resulting damages, and any liability could exceed our resources. We also could incur significant costs associated with civil or criminal fines and penalties.

Although we maintain workers’ compensation insurance to cover us for costs and expenses we may incur due to injuries to our employees resulting from the use of hazardous materials with a policy limit that we believe is customary for similarly situated companies and adequate to provide us with insurance coverage for foreseeable risks, this insurance may not provide adequate coverage against potential liabilities. We do not maintain

 

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insurance for environmental liability or toxic tort claims that may be asserted against us in connection with our storage or disposal of biological or hazardous materials.

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

The process for treatment using cell therapies is subject to human and systemic risks.

The “ vein-to-vein” cycle for treating patients using our Facilitated Allo-HSCT Therapeutic Approach and other cell-based targeted therapies typically takes approximately four to twelve weeks and involves a large number of steps, as well as human participants. In the United States, samples of the final product are subjected to several release tests which must fulfill specified criteria for the drug product to be released for infusion. These include sterility, identity, purity, potency and other tests. We are subject to stringent regulatory and quality standards in the course of our cell therapy treatment process. We cannot assure you that our quality control and assurance efforts will be successful or that the risk of human or systemic errors in these processes can be eliminated. Our cell therapies are uniquely manufactured for each recipient, so they must be administered only to the recipient matched to the donor from which the cellular source material was collected. While we implement specific identifiers, lot numbers and labels with cross checks for our products and operations from collection of cellular source material, through manufacture of drug product, transport of product to the clinical site up to thawing and administration of the product, it is possible that a product may be administered into the wrong patient. If our cell therapies were to be administered into the wrong recipient, the recipient could suffer harm, including experiencing a severe adverse immune reaction and this event, should it happen, could adversely affect our business, financial condition, results of operations and prospects.

Risks Related to Our Dependence on Third Parties

We are dependent on a limited number of suppliers and, in some cases sole suppliers, for some of our components and materials used in our product candidates.

Our manufacturing process, like that of a number of other cell therapy companies, is characterized by limited numbers of suppliers, and in some cases sole source suppliers, with the manufacturing capabilities and know-how to create or source the reagents, materials and equipment necessary for the production of our product candidates. We cannot be sure that our suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that decides not to continue producing these materials for us. Additionally, two vaccines for COVID-19 were granted Emergency Use Authorization by the FDA in late 2020, and more are likely to be authorized in the coming months. The resultant demand for vaccines and potential for manufacturing facilities and materials to be commandeered under the Defense Production Act of 1950, or equivalent foreign legislation, may make it more difficult to obtain materials or reagents for our current and any future product candidates for our clinical trials or for commercial production, if approved, which could lead to delays in these trials or issues with our commercial supply. Our use of a sole or a limited number of suppliers of raw materials, components and finished goods exposes us to several risks, including disruptions in supply, price increases, late deliveries and an inability to meet customer demand. While we try to mitigate these risks by purchasing excess supplies, some of these components, such as reagents, typically expire after approximately four to six months. This short expiration period means that stocking the reagents in large quantities for future needs would not be an effective strategy to mitigate against the risk of shortage due to disruption of the supply chain or termination of our business relationship. We also pursue multiple sources for the critical components of our manufacturing process, but there are, in general, relatively few alternative sources of supply for these components and we may not be successful in securing these additional sources at all or on a timely basis. These vendors may be unable or unwilling to meet our future demands for our clinical trials or

 

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commercial sale. If we are able to find a replacement supplier, the replacement supplier would need to be qualified and may require additional regulatory authority approval, which could result in further delay. For example, the FDA or EMA could require additional supplemental data, manufacturing data and comparability data up to and including clinical trial data if we rely upon a new supplier. Any disruption in supply from any supplier or manufacturing location, including on account of the COVID-19 pandemic, could lead to supply delays or interruptions which would damage our business, financial condition, results of operations and prospects. If we are required to switch to a replacement supplier, the manufacture and delivery of our product candidates could be interrupted for an extended period, adversely affecting our business. Establishing additional or replacement suppliers may not be accomplished quickly. While we seek to maintain adequate inventory of the components and materials used in our product candidates, any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to conduct our clinical trials and, if our product candidates are approved, to meet the demand of our customers and cause them to cancel orders.

In addition, as part of the FDA’s approval of our product candidates, the FDA must review and approve the individual components of our production process, which includes raw materials, the manufacturing processes and facilities of our suppliers and CMOs. Some of our current suppliers may not have undergone this process, and may not have had any components included in any product approved by the FDA.

Our reliance on external suppliers subjects us to a number of risks that could harm our reputation, business, and financial condition, including, among other things:

 

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the interruption of supply resulting from modifications to or discontinuation of a supplier’s operations;

 

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delays in product shipments resulting from uncorrected defects, reliability issues, or a supplier’s variation in a component;

 

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a lack of long-term commercial supply arrangements for key components with our suppliers;

 

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the inability to obtain adequate supply in a timely manner, or to obtain adequate supply on commercially reasonable terms;

 

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difficulty and cost associated with locating and qualifying alternative suppliers for our components in a timely manner;

 

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production delays related to the evaluation and testing of products from alternative suppliers, and corresponding regulatory qualifications;

 

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a delay in delivery due to our suppliers prioritizing other customer orders over ours; and

 

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fluctuation in delivery by our suppliers due to changes in demand from us or their other customers.

If any of these risks materialize, costs could significantly increase and our ability to conduct our clinical trials and, if our product candidates are approved, to meet demand for our products could be impacted. Some of these events could be the basis for FDA or other regulatory authority action, including injunction, recall, seizure, or total or partial suspension of production of our product candidates.

We rely on third parties to conduct our clinical trials and perform some of our research and preclinical studies. If these third parties do not satisfactorily carry out their contractual duties or fail to meet expected deadlines, our development programs may be delayed or subject to increased costs, each of which may have an adverse effect on our business and prospects.

We do not have the ability to conduct all aspects of our clinical trials ourselves. As a result, we are, and expect to remain, dependent on third parties to conduct our ongoing clinical trials and any future clinical trials of our product candidates, including but not limited to governmental agencies and university laboratories, CMOs, CROs, distribution and supply (logistics) services organizations, contract testing organizations (CTOs),

 

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consultants or consultant organization with specialized knowledge based expertise. The timing of the initiation and completion of these trials will therefore be partially controlled by such third parties and may result in delays to our development programs. Specifically, we expect CROs, clinical investigators, and consultants to play a significant role in the conduct of these trials and the subsequent collection and analysis of data. However, we will not be able to control all aspects of their activities. Nevertheless, we are responsible for ensuring that each of our trials is conducted in accordance with the applicable protocol and legal, regulatory and scientific standards, and our reliance on the CROs, CTOs, and other third parties does not relieve us of our regulatory responsibilities. For example, we rely on a single third-party investigator to provide ongoing data from our Phase 2 clinical trial. We, our CROs and clinical sites are required to comply with GCP requirements, which are regulations and guidelines enforced by the FDA, the Competent Authorities of the Member States of the European Economic Area and comparable foreign regulatory authorities for all of our current product candidates and any future product candidates in clinical development. Regulatory authorities enforce these GCP requirements through periodic inspections of trial sponsors, clinical trial investigators and clinical trial sites. If we or any of our CROs, and in particular, our single third-party investigator for our Phase 2 company-sponsored trial, or clinical trial sites fail to adhere to our clinical trial protocols or to comply with applicable GCP requirements, the data generated in our clinical trials may be deemed unreliable, and the FDA or comparable foreign regulatory authorities may require us to perform additional clinical trials before approving our marketing applications. In addition, our clinical trials must be conducted with product produced under cGMP regulations. Our failure to comply with these regulations may require us to stop and/or repeat clinical trials, which would delay the marketing approval process.

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

There is no guarantee that any such CROs, clinical trial investigators or other third parties on which we rely will devote adequate time and resources to our development activities or perform as contractually required. Further, the performance of our CROs has been, and may again in the future be interrupted by the ongoing COVID-19 pandemic, including due to travel or quarantine policies, heightened exposure of CRO staff who are healthcare providers to COVID-19 or prioritization of resources toward the pandemic. If any of these third parties fail to meet expected deadlines, adhere to our clinical protocols or meet regulatory requirements, otherwise performs in a substandard manner, or terminates its engagement with us, the timelines for our development programs may be extended or delayed or our development activities may be suspended or terminated. If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in such clinical trials unless we are able to transfer those subjects to another qualified clinical trial site, which may be difficult or impossible. If these relationships and any related compensation result in perceived or actual conflicts of interest, or the FDA or comparable foreign regulatory authorities concludes that the financial relationship may have affected the interpretation of the trial, the integrity of the data generated at the applicable clinical trial site may be questioned and the utility of the clinical trial itself may be jeopardized, which could result in the delay or rejection of any marketing application we submit by the FDA or any comparable foreign regulatory authority. Any such delay or rejection could prevent us from commercializing our current product candidates and any future product candidates.

 

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We may not realize the benefits of strategic alliances that we may form in the future or of potential future product acquisitions or licenses.

We may desire to form strategic alliances, create joint ventures or collaborations, enter into licensing arrangements with third parties or acquire products or businesses, in each case that we believe will complement or augment our existing business. These relationships or transactions, or those like them, may require us to incur nonrecurring and other charges, increase our near- and long-term expenditures, issue securities that dilute our existing stockholders, reduce the potential profitability of the products that are the subject of the relationship or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic alliances and transactions and the negotiation process is time-consuming and complex and there can be no assurance that we can enter into any of these transactions even if we desire to do so. Moreover, we may not be successful in our efforts to establish a strategic alliance or other alternative arrangements for any future product candidates and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and third parties may not view our product candidates and programs as having the requisite potential to demonstrate a positive risk profile. Any delays in entering into new strategic alliances agreements related to our product candidates could also delay the development and commercialization of our product candidates and reduce their competitiveness even if they reach the market.

If we license products or acquire businesses, we may not be able to realize the benefit of these transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following an acquisition or license, we will achieve the financial or strategic results that would justify the transaction.

Risks Related to Our Intellectual Property

We depend substantially on intellectual property licensed from the ULRF, and termination of this license could result in the loss of significant rights, which would materially harm our business.

We depend substantially on the ULRF license for our intellectual property, data and know-how. The ULRF License, imposes, and we expect that future license agreements will impose, various development, diligence, commercialization and other obligations on us. This license may be terminated upon certain conditions. Any termination of this license could result in the loss of significant rights and could harm our ability to commercialize our product candidate. In the future, we may also enter into additional license agreements that are material to the development of our product candidates.

Disputes may also arise between us and our licensors regarding intellectual property subject to a license agreement, including those related to:

 

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

 

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whether and the extent to which our technology and processes infringe on intellectual property of the licensor that is not subject to the licensing agreement;

 

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

 

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

 

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

If disputes over intellectual property that we have licensed, or license in the future, prevent or impair our ability to maintain our current licensing arrangements on acceptable terms, we may be unable to successfully

 

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develop and commercialize the affected product candidates. In addition, the resolution of any such disputes could narrow what we believe to be the scope of our rights to the relevant intellectual property or technology, or increase what we believe to be our financial or other obligations under the relevant agreement, either of which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

We may rely on third parties from whom we license proprietary technology to file and prosecute patent applications and maintain patents and otherwise protect the intellectual property we license from them. We may have limited control over these activities or any other intellectual property that may be related to our in-licensed intellectual property. For example, we cannot be certain that such activities by these licensors will be conducted in compliance with applicable laws and regulations or will result in valid and enforceable patents and other intellectual property rights. We may have limited control over the manner in which our licensors initiate an infringement proceeding against a third-party infringer of the intellectual property rights, or defend certain of the intellectual property that may be licensed to us. It is possible that the licensors’ infringement proceeding or defense activities may be less vigorous than if we conduct them ourselves.

We are generally also subject to all of the same risks with respect to protection of intellectual property that we license, as we are for intellectual property that we own, which are described below. If we or our licensors fail to adequately protect such licensed intellectual property, our ability to commercialize products could suffer.

If we are unable to obtain and maintain sufficient intellectual property protection for our product candidates and manufacturing process, or if the scope of the intellectual property protection is not sufficiently broad, our ability to commercialize our product candidates successfully and to compete effectively may be adversely affected.

We rely upon a combination of patents, trademarks, trade secrets and confidentiality agreements—both that we own or possess or that are owned or possessed by our collaborators that are in-licensed to us under licenses, including the ULRF License—to protect the intellectual property related to our technology and product candidates. When we refer to “our” technologies, inventions, patents, patent applications or other intellectual property rights, we are referring to both the rights that we own or possess as well as those that we in-license, many of which are critical to our intellectual property protection and our business. For example, our product candidates and Facilitating Allo-HSCT Therapy are protected by patents or patent applications of ULRF that we have licensed and as confidential know-how and trade secrets. Additionally, our earlier stage product candidates are not yet protected by any patents or patent applications. If the intellectual property that we rely on is not adequately protected, competitors may be able to use our technologies and erode or negate any competitive advantage we may have.

The patentability of inventions and the validity, enforceability and scope of patents in the biotechnology field is highly uncertain because it involves complex legal, scientific and factual considerations, and it has in recent years been the subject of significant litigation. Moreover, the standards applied by the U.S. Patent and Trademark Office (USPTO) and non-U.S. patent offices in granting patents are not always applied uniformly or predictably. For example, there is no uniform worldwide policy regarding patentable subject matter or the scope of claims allowable in biotechnology patents.

There is no assurance that all potentially relevant prior art relating to our patents and patent applications is known to us or has been found in the instances where searching was done. Further, publications of discoveries in the scientific literature often lag behind the actual discoveries, and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing or, in some cases, not at all. Thus, we may be unaware of prior art that could be used to invalidate an issued patent or prevent a pending patent application from issuing as a patent. There also may be prior art of which we are aware, but which we do not believe affects the validity or enforceability of a claim of one of our patents or patent applications, which may, nonetheless, ultimately be found to affect the validity or enforceability of such claim. As a consequence of these and other factors, our patent applications may fail to result in issued patents with claims that cover our product candidates in the United States or in other countries.

 

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Even if patents have issued or do successfully issue from patent applications, and even if these patents cover our product candidates, third parties may challenge the validity, ownership, enforceability or scope thereof, which may result in these patents being narrowed, invalidated, circumvented, or held to be unenforceable. No assurance can be given that if challenged, our patents would be declared by a court to be valid or enforceable.

Even if unchallenged, our patents and patent applications or other intellectual property rights may not adequately protect our intellectual property, provide exclusivity for our product candidates or prevent others from designing around our claims. The possibility exists that others will develop products on an independent basis which have the same or similar effect as our product candidates and which do not infringe our patents or other intellectual property rights, or that others will design around the claims of patents that we have had issued that cover our product candidates. If the breadth or strength of protection provided by our patents and patent applications with respect to our product candidates is threatened, it could jeopardize our ability to commercialize our product candidates and dissuade companies from collaborating with us.

We may also desire to seek a license from a third party who owns intellectual property that may be necessary or useful for providing exclusivity for our product candidates, or for providing the ability to develop and commercialize a product candidate in an unrestricted manner. There is no guarantee that we will be able to obtain a license from such a third party on commercially reasonable terms, or at all.

Obtaining and enforcing biopharmaceutical patents is costly, time consuming and complex, and we may not be able to file and prosecute all necessary or desirable patent applications, or maintain, enforce and license any patents that may issue from such patent applications, at a reasonable cost or in a timely manner. It is also possible that we will fail to identify patentable aspects of our research and development output before it is too late to obtain patent protection. We may not have the right to control the preparation, filing and prosecution of patent applications, or to maintain patents licensed from third parties. We may have limited control over the manner in which our licensors initiate an infringement proceeding against a third-party infringer of the intellectual property rights, or defend certain of the intellectual property that may be licensed to us. It is possible that the licensors’ infringement proceeding or defense activities may be less vigorous than if we conduct them ourselves. Therefore, these patents and applications may not be prosecuted and enforced in a manner consistent with the best interests of our business.

We and our collaborators have filed a number of patent applications covering our product candidates or methods of using or making those product candidates. We cannot offer any assurances about which, if any, patents will be issued with respect to these pending patent applications, the breadth of any such patents that are ultimately issued or whether any issued patents will be found invalid and unenforceable or will be threatened by third parties. Because patent applications in the United States and most other countries are confidential for a period of time after filing, and some remain so until issued, we cannot be certain that we or our collaborators were the first to file any patent application related to a product candidate. We or our collaborators may also become involved in proceedings regarding our patents, including patent infringement lawsuits, interference or derivation proceedings, oppositions, reexaminations, and inter partes and post-grant review proceedings before the USPTO, the European Patent Office and other non-U.S. patent offices.

Even if granted, patents have a limited lifespan. In the United States, if all maintenance fees are timely paid, the natural expiration of a patent generally occurs 20 years after the earliest U.S. non-provisional application is filed. Although various extensions may be available if certain conditions are met, the life of a patent and the protection it affords is limited. If we encounter delays in our clinical trials or in obtaining regulatory approvals, the period of time during which we could exclusively market any of our product candidates under patent protection, if approved, could be reduced. Given the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such candidates might expire before or shortly after such candidates are commercialized. Even if patents covering our product candidates are obtained, once the patent life has expired for a product, we may be vulnerable to competition from biosimilar products, as we may be unable to prevent competitors from entering the market with a product that is similar or identical to our product candidates.

 

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In the United States, a patent that covers an FDA-approved drug or biologic may be eligible for a term extension designed to restore the period of the patent term that is lost during the premarket regulatory review process conducted by the FDA. Depending upon the timing, duration and conditions of FDA marketing approval of our product candidates, one or more of our U.S. patents may be eligible for limited patent term extension under the Drug Price Competition and Patent Term Restoration Act of 1984 (Hatch-Waxman Act), which permits a patent term extension of up to five years for a patent covering an approved product as compensation for effective patent term lost during product development and the FDA regulatory review process. A patent term extension cannot extend the remaining term of a patent beyond a total of 14 years from the date of product approval, and only claims covering such approved drug product, a method for using it or a method for manufacturing it may be extended. In the European Union, our product candidates may be eligible for term extensions based on similar legislation. In either jurisdiction, however, we may not receive an extension if we fail to apply within applicable deadlines, fail to apply prior to expiration of relevant patents or otherwise fail to satisfy applicable requirements. Even if we are granted such extension, the duration of such extension may be less than our request. If we are unable to obtain a patent term extension, or if the term of any such extension is less than our request, the period during which we can enforce our patent rights for that product will be in effect shortened and our competitors may obtain approval to market competing products sooner. The resulting reduction of years of revenue from applicable products could be substantial.

In addition, the United States federal government retains certain rights in inventions produced with its financial assistance under the Bayh-Dole Act. The federal government retains a “nonexclusive, nontransferable, irrevocable, paid-up license” for its own benefit. The Bayh-Dole Act also provides federal agencies with “march-in rights”. March-in rights allow the government, in specified circumstances, to require the contractor or successors in title to the patent to grant a “nonexclusive, partially exclusive, or exclusive license” to a “responsible applicant or applicants.” If the patent owner refuses to do so, the government may grant the license itself. Some of our licensed patents are subject to the provisions of the Bayh-Dole Act.

If we are sued for infringing the intellectual property rights of third parties, the resulting litigation could be costly and time-consuming and could prevent or delay our development and commercialization efforts.

Our commercial success depends, in part, on us and our future collaborators not infringing the patents and proprietary rights of third parties. However, our research, development and commercialization activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. There is a substantial amount of litigation and other adversarial proceedings, both within and outside the United States, involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, including patent infringement lawsuits, interference or derivation proceedings, oppositions, reexaminations, and inter partes and post-grant review proceedings before the USPTO and non-U.S. patent offices. Numerous U.S. and non-U.S. issued patents and pending patent applications owned by third parties exist in the fields in which we are developing and may develop our product candidates. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates may be subject to claims of infringement of third parties’ patent rights, as it may not always be clear to industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents is subject to interpretation by the courts, and the interpretation is not always uniform or predictable. For example, we are aware of certain issued patents that may cover some of our product candidates, and while we believe these patent claims are not valid and would not establish a basis for our operations to be enjoined, we may be subject to litigation and be obligated to pay reasonable royalties to the patent owners. In addition, many companies in intellectual property-dependent industries, including the biotechnology and pharmaceutical industries, have employed intellectual property litigation as a means to gain an advantage over their competitors. Some claimants may have substantially greater resources than we do and may be able to sustain the costs of complex intellectual property litigation to a greater degree and for longer periods of time than we could. In addition, patent holding companies that focus solely on extracting royalties and settlements by enforcing patent rights may target us.

 

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Third parties may assert infringement claims against us based on existing or future intellectual property rights, alleging that we are employing their proprietary technology without authorization. There may be third-party patents or patent applications with claims to materials, formulations, methods of manufacture or methods for treatment related to the use or manufacturing of our product candidates that we failed to identify. For example, patent applications covering our product candidates could have been filed by others without our knowledge, since these applications generally remain confidential for some period of time after their filing date. Even pending patent applications that have been published, including some of which we are aware, could be later amended in a manner that could cover our product candidates or their use or manufacture. After issuance, the scope of patent claims remains subject to construction as determined by an interpretation of the law, the written disclosure in a patent and the patent’s prosecution history. In addition, we may have analyzed patents or patent applications of third parties that we believe are relevant to our activities and believe that we are free to operate in relation to any of our product candidates, but our competitors may obtain issued claims, including in patents we consider to be unrelated, which may block our efforts or potentially result in any of our product candidates or our activities infringing their claims.

If we or our future collaborators are sued for patent infringement, we would need to demonstrate that our product candidates, products and methods either do not infringe the patent claims of the relevant patent or that the patent claims are invalid or unenforceable, and we may not be able to do this. Proving that a patent is invalid or unenforceable is difficult and even if we are successful in the relevant proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted from other activities. If any issued third-party patents were held by a court of competent jurisdiction to be valid and enforceable and cover aspects of our materials, formulations, methods of manufacture or methods for treatment, we could be forced, including by court order, to cease developing, manufacturing or commercializing the relevant product candidate until the relevant patent expires. Alternatively, we may desire or be required to obtain a license from such third party in order to use the infringing technology and to continue developing, manufacturing or marketing the infringing product candidate. However, we may not be able to obtain any required license on commercially reasonably terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property licensed to us. Additionally, in the event of a successful intellectual property claim against us, we may have to pay substantial damages, including treble damages and attorneys’ fees if we are found to have willfully infringed a patent, or to redesign our infringing product candidates, which may be impossible or technically infeasible, or require substantial time and monetary expenditure. In addition to paying monetary damages, we may lose valuable intellectual property rights or personnel and the parties making claims against us may obtain injunctive or other equitable relief, which could impose limitations on the conduct of our business.

We may face claims that we misappropriated, or otherwise acted unjustly or in bad faith with respect to, the confidential information or trade secrets of third parties, including collaborators or former collaborators. If we are found to have misappropriated a third party’s trade secrets, or otherwise to have acted unjustly or in bad faith with respect to such trade secrets, we may be prevented from further using these trade secrets, which could limit our ability to develop our product candidates, or may be otherwise subject to monetary damages.

We may face claims that we misappropriated, or otherwise acted unjustly or in bad faith with respect to, the confidential information or trade secrets of third parties, including collaborators or former collaborators. Defending against intellectual property claims could be costly and time consuming, regardless of the outcome. Thus, even if we were to ultimately prevail, or to settle before a final judgment, any litigation could burden us with substantial unanticipated costs. Parties making claims against us may be able to sustain the costs of litigation more effectively than we can because they have substantially greater resources. In addition, litigation or threatened litigation could result in significant demands on the time and attention of our management team, distracting them from the pursuit of other company business. During the course of any intellectual property litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation and these announcements may have negative impact on the perceived value of our

 

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product candidates, programs or intellectual property. Any uncertainties resulting from the initiation and continuation of any litigation could have material adverse effect on our ability to raise additional funds or otherwise have a material adverse effect on our business, results of operations, financial condition and prospects. As a result of all of the foregoing, any actual or threatened intellectual property claim, including claims that we acted unjustly or in bad faith with respect to the intellectual property of others, could prevent us from developing or commercializing a product candidate, subject us to monetary damages, or force us to cease some aspect of our business operations.

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

Filing, prosecuting, enforcing and defending patents on all of our product candidates in all countries throughout the world would be prohibitively expensive. Our intellectual property rights in certain countries outside the United States may be less extensive than those in the United States. In addition, the laws of certain foreign countries do not protect intellectual property rights to the same extent as laws in the United States. Consequently, we and our future collaborators may not be able to prevent third parties from practicing our inventions in countries outside the United States, or from selling or importing infringing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection or where we do not have exclusive rights under the relevant patents to develop their own products and, further, may export otherwise-infringing products to territories where we and our collaborators have patent protection but where enforcement is not as strong as that in the United States. These infringing products may compete with our product candidates in jurisdictions where we or our future collaborators have no issued patents or where we do not have exclusive rights under the relevant patents, or our patent claims and other intellectual property rights may not be effective or sufficient to prevent them from so competing.

Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly those relating to biopharmaceuticals, which could make it difficult for us and our collaborators to stop the infringement of our patents or marketing of competing products in violation of our intellectual property rights generally. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our patent applications at risk of not issuing, and could provoke third parties to assert claims against us or our future collaborators. We or our future collaborators may not prevail in any lawsuits that we or our collaborators initiate, and even if we or our collaborators are successful, the damages or other remedies awarded, if any, may not be commercially meaningful.

In some jurisdictions, including European Union countries, compulsory licensing laws compel patent owners to grant licenses to third parties. In addition, some countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of such patent. If we or any of our future collaborators are forced to grant a license to third parties under patents relevant to our business, or if we or our future collaborators are prevented from enforcing patent rights against third parties, our competitive position may be substantially impaired in such jurisdictions.

We cannot ensure that additional patent rights relating to inventions described and claimed in our pending patent applications will issue or that patents based on our patent applications will not be challenged and rendered invalid and/or unenforceable.

We have issued and pending U.S. and foreign patent applications in our portfolio, however, we cannot predict:

 

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if and when additional patents may issue based on our patent applications;

 

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the scope of protection of any patent issuing based on our patent applications;

 

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whether the claims of any patent issuing based on our patent applications will provide protection against competitors;

 

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whether or not third parties will find ways to invalidate or circumvent our patent rights;

 

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whether or not others will obtain patents claiming aspects similar to those covered by our patents and patent applications;

 

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whether we will need to initiate litigation or administrative proceedings to enforce and/or defend our patent rights which will be costly whether we win or lose; and

 

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whether the patent applications that we own or in-license will result in issued patents with claims that cover our product candidates or uses thereof in the United States or in other foreign countries.

We cannot be certain that the claims in our pending patent applications directed to our product candidates and/or technologies will be considered patentable by the USPTO or by patent offices in foreign countries. One aspect of the determination of patentability of our inventions depends on the scope and content of the “prior art,” information that was or is deemed available to a person of skill in the relevant art prior to the priority date of the claimed invention. There may be prior art of which we are not aware that may affect the patentability of our patent claims or, if issued, affect the validity or enforceability of a patent claim. The examination process may require us to narrow our claims, which may limit the scope of patent protection that we may obtain. Even if the patents are issued based on our patent applications, third parties may challenge the validity, enforceability or scope thereof, which may result in such patents being narrowed, invalidated or held unenforceable. Furthermore, even if they are unchallenged, patents in our portfolio may not adequately exclude third parties from practicing relevant technology or prevent others from designing around our claims. If the breadth or strength of our intellectual property position with respect to our product candidates is threatened, it could dissuade companies from collaborating with us to develop and threaten our ability to commercialize our product candidates. In the event of litigation or administrative proceedings, we cannot be certain that the claims in any of our issued patents will be considered valid by courts in the United States or foreign countries.

Some intellectual property has been discovered through government-funded programs and thus may be subject to federal regulations such as certain reporting requirements, a preference for U.S.-based companies, and the possibility of “march-in” rights. Compliance with such regulations or the inability to obtain a waiver for meeting such requirements may limit our ability to contract with non-U.S. manufacturers, or, in the unlikely event of the government exercising their “march-in” rights, may limit our exclusive rights.

Some of our intellectual property rights were generated through the use of U.S. government funding and are therefore subject to certain federal regulations. As a result, the U.S. government may have certain rights to intellectual property embodied in certain of our current or future product candidates pursuant to the Bayh-Dole Act of 1980 (Bayh-Dole Act). These U.S. government rights in certain inventions developed under a government-funded program include a non-exclusive, non-transferable, irrevocable worldwide license to use inventions for any governmental purpose. In addition, the U.S. government has the right, under certain limited circumstances, to require us to grant exclusive, partially exclusive, or non-exclusive licenses to any of these inventions to a third party if it determines that: (i) adequate steps have not been taken to commercialize the invention; (ii) government action is necessary to meet public health or safety needs; or (iii) government action is necessary to meet requirements for public use under federal regulations (also referred to as “march-in rights”). To our knowledge, however, the U.S. government has, to date, not exercised any march-in rights on any patented technology that was generated using U.S. government funds. The U.S. government also has the right to take title to these inventions if we or the applicable grantee fail to disclose the invention to the government and fail to file an application to register the intellectual property within specified time limits. Intellectual property generated under a government funded program is also subject to certain reporting requirements, compliance with which may require us to expend substantial resources. In addition, the U.S. government requires that any products embodying the subject invention or produced through the use of the subject invention be manufactured

 

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substantially in the United States. The manufacturing preference requirement can be waived if the owner of the intellectual property can show that reasonable but unsuccessful efforts have been made to grant licenses on similar terms to potential licensees that would be likely to manufacture substantially in the United States or that under the circumstances domestic manufacture is not commercially feasible. This preference for U.S. manufacturers may limit our ability to contract with non-U.S. product manufacturers for products covered by such intellectual property. To the extent any of our current or future intellectual property is generated through the use of U.S. government funding, the provisions of the Bayh-Dole Act may similarly apply.

We may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time-consuming and unsuccessful and have a material adverse effect on the success of our business.

Third parties may infringe our patents or misappropriate or otherwise violate our intellectual property rights. Our patent applications cannot be enforced against third parties practicing the technology claimed in these applications unless and until a patent issues from the applications, and then only to the extent the issued claims cover the technology. In the future, we or our collaborators may elect to initiate legal proceedings to enforce or defend our or our collaborators’ intellectual property rights, to protect our or our collaborators’ trade secrets or to determine the validity, ownership, enforceability or scope of our intellectual property rights. Any claims that we or our collaborators assert against perceived infringers could also provoke these parties to assert counterclaims against us or our collaborators alleging that we or our collaborators infringe their intellectual property rights or that our intellectual property rights are invalid or unenforceable.

Interference or derivation proceedings provoked by third parties, brought by us or our collaborators, or declared by the USPTO may be necessary to determine the priority of inventions or matters of inventorship with respect to our patents or patent applications. We or our collaborators may also become involved in other proceedings, such as reexamination or opposition proceedings, inter partes review, post-grant review or other pre-issuance or post-grant proceedings before the USPTO or in non-U.S. jurisdictions relating to our intellectual property or the intellectual property of others. An unfavorable outcome in any of these proceedings could result in us losing our valuable intellectual property rights, require us or our collaborators to cease using the related technology and commercializing our product candidates, or require us to license rights to it from the prevailing party. Our business could be harmed if the prevailing party does not offer us or our collaborators a license on commercially reasonable terms if any license is offered at all. Even if we or our licensors obtain a license, it may be non-exclusive, thereby giving our competitors access to the same technologies licensed to us or our collaborators. In addition, if the breadth or strength of protection provided by our patents and patent applications is threatened, it could dissuade companies from collaborating with us to license, develop or commercialize current or future product candidates.

Any intellectual property proceedings can be expensive and time-consuming. Our or our collaborators’ adversaries in these proceedings may have the ability to dedicate substantially greater resources to prosecuting these legal actions than we or our collaborators can. Accordingly, despite our or our collaborators’ efforts, we or our collaborators may not be able to prevent third parties from infringing upon or misappropriating our intellectual property rights, particularly in countries where the laws may not protect our rights as fully as in the United States. Even if we are successful in the relevant proceedings, we may incur substantial costs and the time and attention of our management and scientific personnel could be diverted from other activities. In addition, in an infringement proceeding, a court may decide that one or more of our patents is invalid or unenforceable, in whole or in part, or may refuse to stop the other party from using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly.

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, there could be public announcements of the results of hearings, motions

 

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or other interim proceedings or developments, and if securities analysts or investors view these announcements in a negative light, the price of our common stock could be adversely affected.

If we are unable to protect the confidentiality of our trade secrets and other proprietary information, the value of our technology could be materially adversely affected and our business could be harmed.

In addition to seeking the protection afforded by patents, we rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce, and other elements of our technology, discovery and development processes that involve proprietary know-how, information or technology that is not covered by patents. Any disclosure to or misappropriation by third parties of our confidential proprietary information could enable competitors to quickly duplicate or surpass our technological achievements, including by enabling them to develop and commercialize products substantially similar to or competitive with our product candidates, thus eroding our competitive position in the market.

Trade secrets can be difficult to protect. We seek to protect our proprietary technology and processes, in part, by entering into confidentiality agreements and invention assignment agreements with our employees, consultants, and outside scientific advisors, contractors and collaborators. These agreements are designed to protect our proprietary information. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, collaborators, or outside scientific advisors might intentionally or inadvertently disclose our trade secrets or confidential, proprietary information to our competitors. In addition, our competitors may otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. If any of our confidential proprietary information were to be lawfully obtained or independently developed by a competitor, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position.

Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, the laws of certain foreign countries do not protect proprietary rights such as trade secrets to the same extent or in the same manner as the laws of the United States. Misappropriation or unauthorized disclosure of our trade secrets to third parties could impair our competitive advantage in the market and could materially adversely affect our business, results of operations and financial condition.

We may be subject to claims that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third parties or that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industry, we employ individuals who are or were previously employed at universities or other biotechnology or pharmaceutical companies, including our competitors or potential competitors. In particular, our founder and Chief Scientific Officer, Suzanne T. Ildstad, MD, is the Jewish Hospital Distinguished Professor of Transplantation Research, Director of the Institute for Cellular Therapeutics, and a Professor in the Department of Surgery with associate appointments in the Departments of Physiology & Biophysics and Microbiology & Immunology at the University of Louisville School of Medicine. Our Chief Technology Officer, Michael Zdanowski, and certain other employees or consultants were previously employed at Medeor Therapeutics, Inc. (Medeor Therapeutics), which is developing a cell therapy similar to ours. Although we try to ensure that our employees, consultants and independent contractors do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of any of our employee’s former employer or other third parties. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

 

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

Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and/or applications will be due to be paid to the USPTO and various governmental patent agencies outside of the United States in several stages over the lifetime of the patents and/or applications. We have systems in place to remind us to pay these fees, and we employ an outside firm and rely on our outside counsel to pay these fees due to non-U.S. patent agencies. The USPTO and various non-U.S. governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can be cured by payment of a late fee or by other means in accordance with the applicable rules. However, there are situations in which non-compliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

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

Changes in either the patent laws or interpretation of the patent laws in the United States or non-U.S. jurisdictions could increase the uncertainties and costs surrounding the prosecution of patent applications and the enforcement or defense of issued patents. Assuming that other requirements for patentability are met, prior to March 2013, in the United States, the first to invent the claimed invention was entitled to the patent, while outside the United States, the first to file a patent application was entitled to the patent. After March 2013, under the Leahy-Smith America Invents Act (America Invents Act), enacted in September 2011, the United States transitioned to a first inventor to file system in which, assuming that other requirements for patentability are met, the first inventor to file a patent application will be entitled to the patent on an invention regardless of whether a third party was the first to invent the claimed invention. A third party that files a patent application in the USPTO after March 2013, but before us could therefore be awarded a patent covering an invention of ours even if we had made the invention before it was made by such third party. This will require us to be cognizant of the time from invention to filing of a patent application and be diligent in filing patent applications, but circumstances could prevent us from promptly filing patent applications on our inventions. Since patent applications in the United States and most other countries are confidential for a period of time after filing or until issuance, we cannot be certain that we or our licensors were the first to either (i) file any patent application related to our product candidates or (ii) invent any of the inventions claimed in our or our licensor’s patents or patent applications.

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

 

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In addition, the patent positions of companies in the development and commercialization of biologics and pharmaceuticals are particularly uncertain. U.S. Supreme Court rulings have narrowed the scope of patent protection available in certain circumstances and weakened the rights of patent owners in certain situations. This combination of events has created uncertainty with respect to the validity and enforceability of patents, once obtained. Depending on future actions by the U.S. Congress, the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that could have a material adverse effect on our existing patent portfolio and our ability to protect and enforce our intellectual property in the future.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected.

If our trademarks and trade names are not adequately protected, then we may not be able to build name recognition in our markets of interest and our business may be adversely affected. We may not be able to protect our rights to these trademarks and trade names, which we need to build name recognition among potential collaborators or customers in our markets of interest. At times, competitors may adopt trade names or trademarks similar to ours, thereby impeding our ability to build brand identity and possibly leading to market confusion. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our unregistered trademarks or trade names. Over the long term, if we are unable to successfully register our trademarks and trade names and establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business may be adversely affected. Our efforts to enforce or protect our proprietary rights related to trademarks, trade secrets, domain names, copyrights or other intellectual property may be ineffective and could result in substantial costs and diversion of resources and could adversely impact our financial condition or results of operations.

Risks Related to Our Business, Growth and Industry

Our business has been adversely affected by the ongoing COVID-19 pandemic, and could be further adversely affected by the effects this and other of public health epidemics in regions where we, or third parties on which we rely have significant research, development or production facilities, concentrations of clinical trial sites or other business operations.

Our business has been adversely affected by the COVID-19 pandemic, and could be further adversely affected by this and other public health epidemics in regions where we, and third parties on which we rely, such as CROs or suppliers, have concentrations of clinical trial sites or other business operations, and could cause significant disruption in the operations of those third-parties, and adversely affect our business. For example, the performance of our CROs may also be delayed or disrupted by the ongoing COVID-19 pandemic, including due to travel or quarantine policies, availabilities of staff, exposure of CRO staff to COVID-19 or re-prioritization of CRO resources as a result of the pandemic.

Quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could impact personnel at our manufacturing facilities, including our ability to manufacture FCR001, or the availability or cost of materials, which would disrupt our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and manufacturing activities.

In addition, our clinical trials have been and may be further affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment has been and may be further delayed due to prioritization of healthcare system resources toward the COVID-19 pandemic. For example, some of our patients may not be able to comply with clinical trial protocols and follow-ups if quarantines impede patient movement, interrupt healthcare services, reduce patient access to trial investigators, hospitals and trial sites, and limit on-site personnel support at various trial sites. Similarly, COVID-19 may adversely impact our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, thereby adversely impacting our clinical trial operations and enrollment timelines.

 

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The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity. 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 global COVID-19 pandemic continues to rapidly evolve. The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, our clinical trials, healthcare systems or the global economy as a whole. However, these potential effects could have a material impact on our operations, and we will continue to monitor the COVID-19 situation closely.

We are highly dependent on our key personnel and anticipate hiring new key personnel. If we are not successful in attracting and retaining highly qualified personnel, we may not be able to successfully implement our business strategy.

Our ability to compete in the highly competitive biotechnology and pharmaceutical industries depends upon our ability to attract and retain highly qualified managerial, scientific and medical personnel. We are highly dependent on our management, scientific and medical personnel, including Scott Requadt, our Chief Executive Officer; Suzanne T. Ildstad, MD, our founder and Chief Scientific Officer; Nancy Krieger, MD, our Chief Medical Officer; Michael Zdanowski, our Chief Technology Officer; and Mary Kay Fenton, our Chief Financial Officer. While we expect to engage in an orderly transition process as we integrate newly appointed officers and managers, we face a variety of risks and uncertainties relating to management transition, including diversion of management attention from business concerns, failure to retain other key personnel or loss of institutional knowledge. In addition, the loss of the services of any of our executive officers, other key employees and other scientific and medical advisors, and an inability to find suitable replacements could result in delays in product development and harm our business.

We conduct our main operations at our cell processing facility in Louisville, Kentucky, and we also maintain a corporate office in Wellesley, Massachusetts. Competition for skilled personnel in our market is intense, particularly in Massachusetts, which serves as headquarters to many other biopharmaceutical companies and many academic and research institutions, and may limit our ability to hire and retain highly qualified personnel on acceptable terms or at all. Changes to U.S. immigration and work authorization laws and regulations, including those that restrain the flow of scientific and professional talent, can be significantly affected by political forces and levels of economic activity. Our business may be materially adversely affected if legislative or administrative changes to immigration or visa laws and regulations impair our hiring processes and goals or projects involving personnel who are not U.S. citizens.

To encourage valuable employees to remain at our company, in addition to salary and cash incentives, we have provided stock options that vest over time. The value to employees of stock options that vest over time may be significantly affected by movements in our stock price that are beyond our control, and may at any time be insufficient to counteract more lucrative offers from other companies. Despite our efforts to retain valuable employees, members of our management, scientific and development teams may terminate their employment with us on short notice. Although we have employment agreements with our key employees, these employment agreements provide for at-will employment, which means that any of our employees could leave our employment at any time, with or without notice. Our success also depends on our ability to continue to attract, retain and motivate highly skilled junior, mid-level and senior managers as well as junior, mid-level and senior scientific and medical personnel. It may be difficult or time-consuming to recruit all of the qualified personnel that we need in order to scale-up our manufacturing operations in Louisville.

 

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We may need to grow the size of our organization, and we may experience difficulties in managing this growth.

As of January 31, 2021, we had 72 full-time employees and 18 consultants. As our development and commercialization plans and strategies develop, and as we transition into operating as a public company, or as a result of any future acquisitions, we expect to need additional managerial, operational, manufacturing, sales, marketing, financial and other personnel, as well as additional facilities to expand our operations to support this future growth. Our management, personnel and systems currently in place may not be adequate to support this future growth. Future growth would impose significant added responsibilities on members of management, including:

 

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managing our preclinical studies and clinical trials effectively;

 

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identifying, recruiting, maintaining, motivating and integrating additional employees;

 

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managing our internal development efforts effectively while complying with our contractual obligations to licensors, licensees, contractors and other third parties;

 

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improving our managerial, development, operational, information technology, and finance systems; and

 

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expanding our facilities.

As our operations expand, we will also need to manage additional relationships with various strategic collaborators, suppliers and other third parties. Our future financial performance and our ability to commercialize our product candidates and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and preclinical and clinical studies effectively and hire, train and integrate additional management, research and development, manufacturing, administrative and sales and marketing personnel. Our failure to accomplish any of these tasks could prevent us from successfully growing our company.

If our security measures are compromised now, or in the future, or the security, confidentiality or integrity or availability of our information technology, software, services, communications or data is compromised, limited, or fails, this could result in a materially adverse impact, including without limitation, damage to our reputation, significant financial and legal exposure, breach or triggering of data protection laws, privacy policies and data protection obligations, disruption to our clinical trial or administrative activities, or loss of customers or collaborators.

We rely on information technology systems that we or our third-party providers operate to process, transmit and store electronic information in our day-to-day operations. In connection with our business, we may collect and use a variety of personal data, such as name, mailing address, email addresses, phone number and clinical trial information, as well as intellectual property, trade secrets, and proprietary business information owned or controlled by ourselves or other parties.

Despite the implementation of security measures, our internal computer systems and those of our current and future CROs and other contractors, consultants and relevant third parties are vulnerable to several threats, including without limitation damage from computer viruses, unauthorized access, terrorism, war, natural disasters, and telecommunication and electrical failures. We exercise little or no control over these third parties, which increases our vulnerability to problems with their systems. A successful cyberattack could result in the theft or destruction of intellectual property, data, or other misappropriation of assets, or otherwise compromise our confidential or proprietary information and disrupt our operations. Cyberattacks are increasing in their frequency, sophistication and intensity, and have become increasingly difficult to detect. Cyberattacks could include wrongful conduct by hostile foreign governments, industrial espionage, wire fraud and other forms of cyber fraud, the deployment of harmful malware, phishing attacks, denial-of-service, social engineering fraud or other means to threaten data security, confidentiality, integrity and availability. Although we have not, to our

 

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knowledge, experienced a material security incident, we realize that cyberattacks are a threat, and there can be no assurance that our efforts will prevent information security breaches.

We may be required to expend significant resources, fundamentally change our business activities and practices, or modify our services, software, operations or information technology in an effort to protect against security breaches and to mitigate, detect, and remediate actual and potential vulnerabilities. Applicable data protection laws, privacy policies and other data protection obligations may require us to implement specific security measures or use industry-standard or reasonable measures to protect against security breaches.

If we, our service providers, collaborators, or other relevant third parties have experienced or in the future experience, any security incident(s) that result in any data loss, deletion or destruction, unauthorized access to, loss of, unauthorized acquisition or disclosure of, or inadvertent disclosure of sensitive information or compromise related to the security, confidentiality, integrity or availability of our (or their) information technology, software, services, communications or data, it may result in a material adverse impact, including without limitation, legal liability, government investigations an inability to conduct our clinical trials, regulatory investigations, enforcement actions, indemnity obligations, the disruption of our operations, delays to the development and commercialization of our product candidates, negative publicity and financial loss. A failure by us or relevant third parties to detect, anticipate, measure or detect such security incidents could result in similar material adverse impacts.

Additionally, applicable data protection laws, privacy policies and data protection obligations may require us to notify relevant stakeholders of security breaches, including affected individuals, customer and regulators. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to material adverse impacts, including without limitation, negative publicity, a loss of customer confidence in our products or security measures or a breach of contract claim. There can be no assurances that the limitations of liability in our contract would be enforceable or adequate or would otherwise protect us from liabilities or damages.

Failures or significant downtime of our information technology or telecommunication systems or those used by our third-party service providers could cause significant interruptions in our operations and adversely impact the confidentiality, integrity and availability of sensitive or confidential information. While we have not experienced any such material system failure or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our development programs and our business operations. For example, the loss of data from completed or future preclinical studies and clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data.

While we maintain general liability insurance coverage and coverage for errors or omissions, we cannot assure that such coverage will be adequate or otherwise protect us from or adequately mitigate liabilities or damages with respect to claims, costs, expenses, litigation, fines, penalties, business loss, data loss, regulatory actions or other material adverse impacts arising out of our privacy and security actions we may experience, or that such coverage will continue to be available on acceptable terms or at all. The successful assertion of one or more large claims against us that exceeds our available insurance coverage, or that results in changes to our insurance policies (including premium increases or the imposition of large deductible or co-insurance requirements), could have an adverse effect on our business. In addition, we cannot be sure that our existing insurance coverage and coverage for errors and omissions will continue to be available on acceptable terms or that our insurers will not deny coverage as to any future claim.

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

Our manufacturing operations, and those of our CROs, suppliers and other contractors and consultants, could be subject to earthquakes, power shortages, telecommunications failures, water shortages, floods,

 

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hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our operations and financial condition and increase our costs and expenses.

Legislation or other changes in U.S. tax law could adversely affect our business and financial condition.

The rules dealing with U.S. federal, state, and local income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department. Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. In recent years, many changes have been made to applicable tax laws and changes are likely to continue to occur in the future.

It cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be enacted, or regulations and rulings may be enacted, promulgated or issued under existing or new tax laws, which could result in an increase in our or our shareholders’ tax liability or require changes in the manner in which we operate in order to minimize or mitigate any adverse effects of changes in tax law or in the interpretation thereof.

Our ability to use our U.S. net operating loss carryforwards and certain other U.S. tax attributes may be limited.

Our ability to use our U.S. federal and state net operating losses to offset potential future taxable income and related income taxes that would otherwise be due is dependent upon our generation of future taxable income, and we cannot predict with certainty when, or whether, we will generate sufficient taxable income to use all of our net operating losses.

Under current law, unused U.S. federal net operating losses generated for tax years beginning after December 31, 2017 are not subject to expiration and may be carried forward indefinitely. Such U.S. federal net operating losses generally may not be carried back to prior taxable years, except that, net operating losses generated in 2018, 2019 and 2020 may be carried back to each of the five tax years preceding the tax years of such losses. Additionally, for taxable years beginning after December 31, 2020, the deductibility of such U.S. federal net operating losses is limited to 80% of our taxable income in any future taxable year. In addition, both our current and our future unused U.S. federal net operating losses and tax credits may be subject to limitation under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (Code), if we undergo an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders over a rolling three-year period. We may have experienced such ownership changes in the past, and we may experience ownership changes in the future as a result of this offering or subsequent shifts in our stock ownership, some of which are outside our control. Our net operating losses and tax credits may also be impaired or restricted under state law. As of December 31, 2020, we had U.S. federal net operating loss carryforwards of approximately $8.4 million, and our ability to utilize those net operating loss carryforwards could be limited by an “ownership change” as described above, which could result in increased tax liability to us.

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

Global credit and financial markets have experienced extreme volatility and disruptions in the past several years, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and confidence in economic conditions will not occur. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit

 

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markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive.

Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other collaborators may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget.

Furthermore, our stock price may decline due in part to the volatility of the stock market and the general economic downturn.

We are subject to U.S. anti-corruption laws and regulations and can face serious consequences for violations.

We are subject to anti-corruption laws, including the U.S. domestic bribery statute contained in 18 U.S.C. 201, the U.S. Travel Act, and the U.S. Foreign Corrupt Practices Act of 1977, as amended. These anti-corruption laws generally prohibit companies and their employees, agents, and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, corrupt or improper payments or anything else of value to recipients in the public or private sector. We can be held liable for the corrupt or illegal activities of our agents and intermediaries, even if we do not explicitly authorize or have actual knowledge of such activities. Violations of anti-corruption laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. Likewise, any investigation of potential violations of anti-corruption laws could also have an adverse impact on our reputation, our business, results of operations and financial condition.

Risks Related to This Offering and Ownership of Our Common Stock

There has been no prior public market for our common stock and we do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of our common stock will be and, as a result, it may be difficult for you to sell your shares of our common stock.

Prior to this offering, there was no public trading market for shares of our common stock. Although we have applied to list our common stock on The Nasdaq Stock Market, an active trading market for our shares may never develop or be sustained following this offering. You may not be able to sell your shares quickly or at the market price if trading in shares of our common stock is not active. The initial public offering price for our common stock will be determined through negotiations with the underwriters, and the negotiated price may not be indicative of the market price of the common stock after the offering. As a result of these and other factors, you may be unable to resell your shares of our common stock at or above the initial public offering price. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may impair our ability to enter into strategic collaborations or acquire companies or products by using our shares of common stock as consideration.

The price of our stock may be volatile, and you could lose all or part of your investment.

The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control, including limited trading volume. In addition to the factors discussed in this “Risk Factors” section and elsewhere in this prospectus, these factors include:

 

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actual or anticipated variations in quarterly operating results;

 

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our cash position;

 

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our failure to meet the estimates and projections of the investment community or that we may otherwise provide to the public;

 

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publication of research reports about us or our industry, or cell therapy in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts;

 

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changes in the market valuations of similar companies;

 

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overall performance of the equity markets;

 

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sales of our common stock by us or our stockholders in the future;

 

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trading volume of our common stock;

 

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changes in accounting practices;

 

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ineffectiveness of our internal controls;

 

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disputes or other developments relating to intellectual property or proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;

 

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significant lawsuits, including intellectual property or stockholder litigation;

 

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changes in the structure of health care payment systems;

 

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general political and economic conditions, including impacts from the COVID-19 pandemic; and

 

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other events or factors, many of which are beyond our control.

In addition, the stock market in general, and the market for biopharmaceutical companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of a company’s securities. This type of litigation, if instituted, could result in substantial costs and a diversion of management’s attention and resources, which would harm our business, financial condition, results of operation and future prospects.

Our principal stockholders and management own a significant percentage of our stock and will be able to exert significant influence over matters subject to stockholder approval.

Prior to this offering, our executive officers, directors, and 5% stockholders beneficially owned approximately 80.8% of our fully diluted voting stock as of December 31, 2020, and, assuming the sale by us of                  shares of common stock in this offering, based on the initial public offering price of $         per share, and not accounting for any shares purchased in this offering by certain of our existing stockholders (or their affiliates), we anticipate that same group will hold approximately     % of our outstanding voting stock following this offering (assuming no exercise of the underwriters’ option to purchase additional shares). Therefore, even after this offering, these stockholders will have the ability to influence us through this ownership position. These stockholders may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

 

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If you purchase our common stock in this offering, you will incur immediate and substantial dilution in the book value of your shares.

The initial public offering price will be substantially higher than the net tangible book value per share of our common stock. Investors purchasing common stock in this offering will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. As a result, investors purchasing common stock in this offering will incur immediate dilution of $         per share, based on the initial public offering price of $         per share. Further, investors purchasing common stock in this offering will contribute approximately     % of the total amount invested by stockholders since our inception, but will own only approximately     % of the total number of shares of our common stock outstanding after this offering.

This dilution is due to our investors who purchased shares prior to this offering having paid substantially less when they purchased their shares than the price offered to the public in this offering, and the exercise of stock options granted to our employees. To the extent that outstanding stock options or warrants are exercised, there will be further dilution to new investors. As a result of the dilution to investors purchasing common stock in this offering, investors may receive significantly less than the purchase price paid in this offering, if anything, in the event of our liquidation. For a further description of the dilution that you will experience immediately after this offering, see the section of this prospectus entitled “Dilution.”

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering, including for any of the purposes described in the section 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 variability of factors that will determine our use of the net proceeds from this offering, their ultimate use may vary substantially from their currently intended use. Our management might not apply our net proceeds in ways that ultimately increase or maintain the value of your investment.

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.

We currently anticipate that we will retain future earnings for the development, operation, and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. In addition, we may enter into agreements that prohibit us from paying cash dividends without prior written consent from our contracting parties, or which other terms prohibiting or limiting the amount of dividends that may be declared or paid on our common stock. Any return to stockholders will therefore be limited to the appreciation of their stock, which may never occur.

We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies will make our common stock less attractive to investors.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act, or JOBS Act, enacted in April 2012. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley Act), reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, and exemptions from the requirements of holding nonbinding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We could be an emerging growth company for up to five years following the year in which we complete this offering, although circumstances could cause us to lose that status earlier. We will remain an emerging growth

 

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company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the closing of this offering, (b) in which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer, which requires the market value of our common stock that is held by non-affiliates to exceed $700 million as of the prior June 30th, and (2) the date on which we have issued more than $1 billion in non-convertible debt during the prior three-year period.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to not “opt out” of this exemption from complying with new or revised accounting standards and, therefore, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which would allow us to continue to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements.

We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions applicable to emerging growth companies and smaller reporting companies. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Participation in this offering by our existing stockholders and/or their affiliated entities may reduce the public float for our common stock.

To the extent our existing stockholders who are our affiliates or their affiliated entities participate in this offering, such purchases would reduce the non-affiliate public float of our common stock after this offering, which is the number of shares of common stock hat are not held by our officers, directors and affiliated stockholders. A reduction in the public float could reduce the number of shares of common stock that can be traded at any given time, which could adversely impact the liquidity of our common stock and depress the price at which you may be able to sell shares of common stock purchased in this offering.

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

As a public company, we will incur significant legal, accounting, and other expenses that we did not incur as a private company. We will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (Exchange Act), which will require, among other things, that we file with the Securities and Exchange Commission (SEC), annual, quarterly, and current reports with respect to our business and financial condition. In addition, the Sarbanes-Oxley Act, as well as rules subsequently adopted by the SEC and The Nasdaq Global Market to implement provisions of the Sarbanes-Oxley Act, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, in July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted. There are significant corporate governance and executive compensation related provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas, such as “say on pay” and proxy access. Recent legislation permits emerging growth companies to implement many of these requirements over a longer period and up to five years from the pricing of this offering. We intend to take advantage of this new legislation but cannot guarantee that we will not be required to implement these requirements sooner than budgeted or planned and thereby incur unexpected expenses. Stockholder activism, the current political environment, and the current high level of government

 

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intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate.

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

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

If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the lockup and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline. Upon the closing of this offering, we will have outstanding a total of                  shares of common stock. Of these shares, only the shares of common stock sold in this offering by us, plus any shares sold upon exercise of the underwriters’ option to purchase additional shares, will be freely tradable without restriction in the public market immediately following this offering. In connection with this offering, our officers, directors and substantially all of our stockholders have agreed to be subject to a contractual lock-up with the underwriters, which will expire 180 days after the date of this prospectus.

The lock-up agreements contain important exceptions that govern their applicability. Morgan Stanley & Co. LLC, SVB Leerink LLC and Evercore Group, L.L.C., however, may, in their sole discretion, permit our officers, directors and other stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In addition, shares of common stock that are either subject to outstanding options or reserved for future issuance under our 2021 Stock Plan and our 2021 ESPP, each to be effective upon the effectiveness of the registration statement of which this prospectus forms a part, will become eligible for sale in the public market to the extent permitted by the provisions of various vesting schedules, the lock-up agreements and Rule 144 and Rule 701 under the Securities Act of 1933, as amended (Securities Act). If these additional shares of common stock are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

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

Anti-takeover provisions under our certificate of incorporation and bylaws and Delaware law could delay or prevent a change of control, which could limit the market price of our common stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and restated certificate of incorporation and amended and restated bylaws, which are to become effective upon the closing of this offering, will contain provisions that could delay or prevent a change of

 

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control of our company or changes in our board of directors that our stockholders might consider favorable. Some of these provisions include:

 

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a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;

 

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a prohibition on stockholder action through written consent, which requires that all stockholder actions be taken at a meeting of our stockholders;

 

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a requirement that special meetings of stockholders be called only by the board of directors acting pursuant to a resolution approved by the affirmative vote of a majority of the directors then in office;

 

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advance notice requirements for stockholder proposals and nominations for election to our board of directors;

 

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a requirement that no member of our board of directors may be removed from office by our stockholders except for cause and, in addition to any other vote required by law, upon the approval of not less than two-thirds of all outstanding shares of our voting stock then entitled to vote in the election of directors;

 

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a requirement of approval of not less than two-thirds of all outstanding shares of our voting stock to amend any bylaws by stockholder action or to amend specific provisions of our certificate of incorporation; and

 

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the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval and which preferred stock may include rights superior to the rights of the holders of common stock.

In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These antitakeover provisions and other provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors and could also delay or impede a merger, tender offer, or proxy contest involving our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing or cause us to take other corporate actions you desire. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

Our bylaws that will become effective upon the consummation of this offering designate certain courts as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.

Our bylaws that will become effective upon the completion of this offering provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any state law claims for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, and employees to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim that is governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein (Delaware Forum Provision). The Delaware Forum Provision will not apply to any causes of action arising under the Securities Act or the Exchange Act. Our amended and restated bylaws further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the sole

 

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and exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act (Federal Forum Provision). In addition, our amended and restated bylaws provide that any person or entity purchasing or otherwise acquiring any interest in shares of our common stock is deemed to have notice of and consented to the foregoing provisions; provided, however, that stockholders cannot and will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder.

The Delaware Forum Provision and the Federal Forum Provision in our amended and restated bylaws may impose additional litigation costs on stockholders in pursuing any such claims. Additionally, the forum selection clauses in our amended and restated bylaws may limit our stockholders’ ability to bring a claim in a forum that they find favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees even though an action, if successful, might benefit our stockholders. In addition, while the Delaware Supreme Court ruled in March 2020 that federal forum selection provisions purporting to require claims under the Securities Act be brought in federal court were “facially valid” under Delaware law, there is uncertainty as to whether other courts will enforce our Federal Forum Provision. If the Federal Forum Provision is found to be unenforceable, we may incur additional costs associated with resolving such matters. The Federal Forum Provision may also impose additional litigation costs on stockholders who assert that the provision is not enforceable or invalid. The Court of Chancery of the State of Delaware and the federal district courts of the United States may also reach different judgments or results than would other courts, including courts where a stockholder considering an action may be located or would otherwise choose to bring the action, and such judgments may be more or less favorable to us than our stockholders.

If we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. In connection with this offering, we intend to begin the process of documenting, reviewing, and improving our internal controls and procedures for compliance with Section 404 of the Sarbanes-Oxley Act, which will require annual management assessment of the effectiveness of our internal control over financial reporting. We have begun recruiting additional finance and accounting personnel with certain skill sets that we will need as a public company.

Implementing any appropriate changes to our internal controls may distract our officers and employees, entail substantial costs to modify our existing processes, and take significant time to complete. These changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price and make it more difficult for us to effectively market and sell our service to new and existing customers.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price may decline. If one or more of these

 

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analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

After the completion of this offering, we may be at an increased risk of securities class action litigation.

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business,” contains express or implied forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future operational or financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

•

the initiation timing, progress, results and cost of manufacturing and conducting clinical trials of FCR001, as well as our research and development programs and our current and future preclinical and clinical studies, including statements regarding the timing of initiation and completion of studies or trials and related preparatory work, the period during which the results of the trials will become available and our current and future programs;

 

•

our ability to identify research priorities and apply a risk-mitigated strategy to efficiently discover and develop additional product candidates, if any, including by applying learnings from one program to other programs and from one indication to our other indications;

 

•

our ability to initiate, recruit and enroll patients in and conduct our clinical trials at the pace that we project;

 

•

our ability to scale-up our manufacturing and processing approaches to appropriately address our anticipated commercial needs, if FCR001 is approved, which will require significant resources;

 

•

our ability to maintain and further develop the specific shipping, storage, handling and administration of FCR001 at the clinical sites, including cold-chain logistics,

 

•

the ability and willingness of our third-party vendors to continue to supply raw materials, supplies and other components that we use for processing and analyzing FCR001, and to supply the future research and development components of any future product candidates;

 

•

our ability to obtain funding for our operations necessary to complete further development and commercialization of our product candidates;

 

•

our ability to obtain and maintain regulatory approval of our product candidates;

 

•

our ability to commercialize our products, if approved;

 

•

the pricing and reimbursement of our product candidates, if approved;

 

•

the implementation of our business model, and strategic plans for our business, product candidates, and technology;

 

•

the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and our Facilitated Allo-HSCT Therapy;

 

•

estimates of our future expenses, revenues and capital requirements and our needs for additional financing;

 

•

future agreements with third parties in connection with the development and commercialization of product candidates and any other approved product;

 

•

the size and growth potential of the markets for our product candidates and our ability to serve those markets;

 

•

our financial performance;

 

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the rate and degree of market acceptance of our product candidates;

 

•

regulatory developments in the United States and foreign countries;

 

•

our ability to produce our products or product candidates with advantages in turnaround times or manufacturing cost;

 

•

the success of competing therapies that are or may become available;

 

•

our ability to attract and retain key scientific, cell manufacturing, quality or management personnel, particularly in the necessary geographic areas;

 

•

the impact of laws and regulations;

 

•

our use of the proceeds from this offering;

 

•

developments relating to our competitors and our industry;

 

•

the effect of the COVID-19 pandemic, including variants of the virus, mitigation efforts and economic effects, on any of the foregoing or other aspects of our business operations, including but not limited to a negative impact on enrollment in our ongoing clinical trial as well as any other impacts on our existing and future clinical trials or our preclinical studies; and

 

•

other risks and uncertainties, including those listed under the caption “Risk Factors.”

In some cases, forward-looking statements can be identified by terminology such as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the section entitled “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should therefore not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

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

 

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USE OF PROCEEDS

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

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $         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 estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each 1.0 million share increase (decrease) in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $         million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to create a public market for our common stock and thereby facilitate future access to the public equity markets, increase our visibility in the marketplace and obtain additional capital. We currently intend to use the net proceeds from this offering, together with our existing cash, cash equivalents and marketable securities, for the following:

 

•

Approximately $         million for the further development of FCR001 in our ongoing Phase 3 registrational trial, FREEDOM-1, through evaluation of its primary endpoint, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each;

 

•

Approximately $         million for the continued research and development of FCR001 in additional pipeline programs such as living donor kidney transplant delayed tolerance induction and scleroderma in our FREEDOM-2 and FREEDOM-3 trials, respectively, through evaluation of their primary endpoints, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each;

 

•

Approximately $         million for the development of expanded CMC operations to facilitate scale-up and commercialization of FCR001;

 

•

Approximately $         million to fund the development of our preclinical programs towards IND filings and/or into clinical trials; and

 

•

the remainder for working capital and other general corporate purposes.

Based on our current plans, we believe that our existing cash, cash equivalents and marketable securities, together with the net proceeds from this offering, will be sufficient to enable us to fund our operating expenses and capital expenditure requirements at least through                . We have based this estimate on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We do not have any committed external source of funds.

Our expected use of the net proceeds from this offering represents our intentions based upon our current plans and business conditions. As of the date of this prospectus, we cannot predict with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering or the amounts that we will actually spend on the uses set forth above and we expect that we will require additional funds in order to fully accomplish the specified uses of the proceeds of this offering. We may also use a portion of the net proceeds to in-license, acquire, or invest in complementary businesses or technologies to continue to build our pipeline, research and development capabilities and our intellectual property position, although we currently have no agreements, commitments, or understandings with respect to any such transaction.

 

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Due to the many inherent uncertainties in the development of our product candidates, the amounts and timing of our actual expenditures may vary significantly depending on numerous factors, including the progress of our research and development, the timing of patient enrollment and evolving regulatory requirements, the timing and success of preclinical studies, our ongoing clinical studies or clinical studies we may commence in the future, the timing of regulatory submissions, any strategic alliances that we may enter into with third parties for our product candidates or strategic opportunities that become available to us, and any unforeseen cash needs.

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation instruments, including short-term and long-term interest-bearing instruments, investment-grade securities, and direct or guaranteed obligations of the U.S. government. We cannot predict whether the proceeds invested will yield a favorable return. Our management will retain broad discretion in the application of the net proceeds we receive from our initial public offering, and investors will be relying on the judgment of our management regarding the application of the net proceeds.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and any future earnings to fund the growth and development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

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CAPITALIZATION

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

 

•

on an actual basis;

 

•

on a pro forma basis to give effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 130,499,993 shares of common stock prior to the completion of this offering and the filing and effectiveness of our amended and restated certificate of incorporation prior to the completion of this offering, in each case as if such events had occurred on December 31, 2020; and

 

•

on a pro forma as adjusted basis to give further effect to the issuance and sale of                shares of common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma as adjusted information below is illustrative only, and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read the information in this table together with our financial statements and the related notes appearing at the end of this prospectus and the “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this prospectus.

 

		As of December 31, 2020
		Actual				Pro forma				Pro forma as adjusted(1)
		(in thousands, except share and per share amounts)
Cash, cash equivalents and marketable securities		$	149,488			$	149,488
Convertible preferred stock (Series A, A-1 and B), $0.0001 par value; 130,499,993 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted			186,151				—
Stockholders’ equity (deficit):
Common stock, $0.0001 par value; 194,558,815 shares authorized, 42,903,914 shares issued and outstanding, actual; shares authorized, 173,403,907 shares issued and outstanding, pro forma;                 shares authorized, shares issued and outstanding, pro forma as adjusted			4				17
Additional paid-in capital			4,876				191,015
Accumulated deficit			(43,014	)			(43,014	)
Accumulated other comprehensive loss			(13	)			(13	)
Total stockholders’ equity (deficit)			(38,147	)			148,005
Total capitalization		$	297,493			$	297,493

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and marketable securities, total stockholders’ equity and total capitalization by $         million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted amount of each of cash, cash equivalents and

 

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marketable securities, total stockholders’ equity and total capitalization by $         million, assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our common stock in the table above is based on 173,403,907 shares of our common stock outstanding as of December 31, 2020, including 4,987,685 shares of unvested restricted common stock (which are not considered outstanding for accounting purposes), and after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 130,499,993 shares of our common stock immediately prior to the completion of this offering, and excludes:

 

•

14,687,278 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020 under our Second Amended and Restated 2018 Equity Incentive Plan (2018 Plan) at a weighted-average exercise price of $0.79 per share;

 

•

6,118,880 shares of common stock reserved for future issuance as of December 31, 2020 under the 2018 Plan, which will cease to be available for issuance at the time that our 2021 Stock Option and Incentive Plan (2021 Stock Plan) becomes effective;

 

•

348,750 shares of common stock contingently issuable to a licensor in connection with this offering;

 

•

shares of our common stock that will become available for future issuance under the 2021 Stock Plan, which will become effective in connection with this offering; and

 

•

shares of our common stock reserved for future issuance under our 2021 Employee Stock Purchase Plan (2021 ESPP), which will become effective in connection with this offering.

 

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DILUTION

If you invest in our common stock in this offering, 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.

Our historical net tangible book deficit as of December 31, 2020 was $(38.1) million, or $(0.89) per share of our common stock. Our historical net tangible book deficit is the amount of our total tangible assets less our total liabilities and the carrying values of our convertible preferred stock, which is not included within stockholders’ deficit. Our historical net tangible book deficit per share represents historical net tangible book deficit divided by the 42,903,914 shares of our common stock outstanding as December 31, 2020, including 4,987,685 shares of unvested restricted common stock (which are not considered outstanding for accounting purposes).

Our pro forma net tangible book value as of December 31, 2020 would have been $148.0 million, or $0.85 per share of our common stock. Pro forma net tangible book value represents the amount of our total tangible assets less our total liabilities, after giving effect to (i) the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 130,499,993 shares of common stock prior to the completion of this offering and (ii) the filing and effectiveness of our amended and restated certificate of incorporation and amended and restated bylaws prior to the completion of this offering, in each case as if such events had occurred on December 31, 2020. Pro forma net tangible book value per share represents pro forma net tangible book value divided by the total number of shares outstanding as of December 31, 2020, after giving effect to the pro forma adjustments described above.

After giving further effect to our issuance and sale of                  shares of our common stock in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2020 would have been $         million, or $         per share. This amount represents an immediate increase in pro forma as adjusted net tangible book value per share of $         to our existing stockholders and immediate dilution of $         in pro forma as adjusted net tangible book value per share to new investors purchasing common stock in this offering.

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

 

Assumed initial public offering price per share
Historical net tangible book value (deficit) per share as of December 31, 2020		$	(0.89	)
Increase per share attributable to the pro forma adjustments described above
Pro forma net tangible book value per share as of December 31, 2020 attributable to the conversion of convertible preferred stock			0.85
Increase in pro forma net tangible book value per share attributable to new investors participating in this offering
Pro forma as adjusted net tangible book value per share after this offering
Dilution per share to new investors purchasing common stock in this offering

The dilution information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value per

 

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share after this offering by $         and dilution per share to new investors purchasing common stock in this offering by $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would increase our pro forma as adjusted net tangible book value per share after this offering by $         and decrease dilution per share to new investors purchasing common stock in this offering by $         , assuming no change in the assumed initial public offering price per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each decrease of 1,000,000 shares in the number of shares offered by us, as set forth on the cover page of this prospectus, would decrease our pro forma as adjusted net tangible book value per share after this offering by $         and increase dilution per share to new investors purchasing common stock in this offering by $         , assuming no change in the assumed initial public offering price and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares in full, our pro forma as adjusted net tangible book value per share after this offering would be $        , representing an immediate increase in pro forma as adjusted net tangible book value per share of $         to existing stockholders and immediate dilution in pro forma as adjusted net tangible book value per share of $         to new investors purchasing common stock in this offering, based on the assumed initial public offering price of $         per share and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The following table summarizes on the pro forma as adjusted basis described above, the total number of shares of common stock purchased from us on an as converted to common stock basis, the total consideration paid or to be paid, and the average price per share paid or to be paid by existing stockholders and by new investors in this offering at an assumed initial public offering price of $         per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. As the table shows, new investors purchasing common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

Shares Purchased

Total Consideration

Average Price Per Share

Number

Percentage

Amount

Percentage

Existing stockholders

%

%

New investors

Total

100

%

100

%

The table above assumes no exercise of the underwriters’ option to purchase additional shares in this offering. If the underwriters’ option to purchase additional shares is exercised in full, the number of shares of our common stock held by existing stockholders would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares of common stock held by new investors purchasing common stock in this offering would be increased to     % of the total number of shares of our common stock outstanding after this offering.

The discussion and tables above are based on 173,403,907 shares of our common stock outstanding as of December 31, 2020, including 4,987,685 shares of unvested restricted common stock (which are not considered outstanding for accounting purposes), and after giving effect to the automatic conversion of all outstanding shares of our convertible preferred stock into an aggregate of 130,499,993 shares of our common stock immediately prior to the completion of this offering, and excludes:

 

•

14,687,278 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2020 under our 2018 Plan at a weighted-average exercise price of $0.79 per share;

 

•

6,118,880 shares of common stock reserved for future issuance as of December 31, 2020 under the 2018 Plan, which will cease to be available for issuance at the time that the 2021 Stock Plan becomes effective;

 

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•

348,750 shares of common stock contingently issuable to a licensor in connection with this offering;

 

•

shares of our common stock that will become available for future issuance under the 2021 Stock Plan, which will become effective in connection with this offering; and

 

•

shares of our common stock reserved for future issuance under our 2021 ESPP, which will become effective in connection with this offering.

To the extent that new stock options are issued or any outstanding options are exercised, or we issue additional shares of common stock in the future, there will be further dilution to new investors. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED FINANCIAL DATA

You should read the following selected financial data together with our financial statements and the related notes appearing at the end of this prospectus and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus. We have derived the statements of operations data for the years ended December 31, 2020 and December 31, 2019 and the balance sheet data as of December 31, 2020 and 2019 from our audited financial statements appearing at the end of this prospectus. Our historical results are not necessarily indicative of the results that should be expected in any future periods.

 

		Year ended December 31, 2020				Year ended December 31, 2019
		(in thousands, except share and per share amounts)
Statements of Operations Data:
Operating expenses:
Research and development		$	15,278			$	13,369
General and administrative			7,406				5,009
Total operating expenses			22,684				18,378
Loss from operations			(22,684	)			(18,378	)
Interest and other income (expense), net			(23	)			223
Net loss		$	(22,707	)		$	(18,155	)
Unrealized loss on marketable securities			(13	)			—
Total other comprehensive loss			(13	)			—
Total comprehensive loss		$	(22,720	)		$	(18,155	)
Net loss attributable to common stockholders		$	(22,707	)		$	(18,155	)
Net loss per common share, basic and diluted		$	(0.63	)		$	(0.53	)
Weighted average number of common shares outstanding used in computation of net loss per common share, basic and diluted			35,765,166				34,150,458
Pro forma net loss per common share, basic and diluted		$	(0.20	)
Pro forma weighted average number of common shares outstanding used in computation of net loss per common share, basic and diluted			113,380,353

 

(1)	See Note 14 to our financial statements appearing at the end of this prospectus for details on the calculation of basic and diluted net loss per share attributable to common stockholders and the calculation of basic and diluted pro forma net loss per share attributable to common stockholders.

 

		As of December 31,
		2020				2019
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities		$	149,488			$	38,978
Working capital(1)			147,347				38,503
Total assets			152,778				41,942
Convertible preferred stock			186,151				56,690
Total stockholders’ deficit			(38,147	)			(17,102	)

 

(1)	We define working capital as current assets less current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Financial Data” section of this prospectus and our financial statements and the related notes appearing elsewhere in this prospectus. This discussion and other parts of this prospectus contain forward-looking statements that involve risks and uncertainties, such as statements regarding our plans, objectives, expectations, intentions and projections. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the “Risk Factors” section of this prospectus.

Overview

We are a late-clinical stage, cell therapy company developing an innovative method of allogeneic hematopoietic stem cell transplantation (allo-HSCT) that we believe has the potential to transform the standard of care in solid organ transplantation, certain severe autoimmune diseases and certain severe non-malignant blood, immune and metabolic disorders. In the organ transplant setting, which is our initial focus, we believe our proprietary therapeutic approach, which we call Facilitated Allo-HSCT Therapy, could prevent organ rejection without the morbidity and mortality that has been associated with the use of lifelong immunosuppression. Beyond the organ transplant setting, our Facilitated Allo-HSCT Therapy also has the potential to treat a range of severe non-malignant blood, immune and metabolic disorders, in each case with potential for similar outcomes to what has previously been observed with HSCT, while mitigating the toxicities, morbidities and extended hospital stay associated with the fully myeloablative conditioning typically required by HSCT. We believe that these indications, individually and collectively, represent a significant unmet need and commercial opportunity.

We were incorporated as Regenerex, Inc. in 2018 under the laws of the State of Delaware, having converted from a limited liability company under the name Regenerex LLC. In 2019, we changed our corporate name from Regenerex, Inc. to Talaris Therapeutics, Inc.

Since our inception, we have devoted substantially all of our resources to developing our lead product candidate, FCR001, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have principally financed our operations through private placements of convertible preferred stock, together with payments under a former research collaboration with Novartis, Inc. and research grants. Through December 31, 2020, we had received net proceeds of $186.2 million from sales of our convertible preferred stock.

We have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of our product and any future product candidates. Our net losses were $22.7 million and $18.2 million for the years ended December 31, 2020 and December 31, 2019. As of December 31, 2020, we had an accumulated deficit of $43.0 million. We expect to continue to incur net losses for the foreseeable future, and we expect our research and development expenses, general and administrative expenses and capital expenditures to continue to increase. In particular, we expect our expenses to increase as we continue our development of, and seek regulatory approvals for, our product candidates, as well as hire additional personnel, pay fees to outside consultants, lawyers and accountants, and incur other increased costs associated with being a public company. In addition, if we obtain marketing approval for any product candidates, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. We may also incur expenses in connection with the in-licensing or acquisition of additional product candidates. Furthermore, upon the completion of this offering, we expect to incur additional costs associated with operating as a public company, including significant legal, accounting, investor relations, compliance and other expenses that we did not incur as a private company.

 

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As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through the sale of equity, debt financings, or other capital sources, which may include collaborations with other companies or other strategic transactions. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable 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, reduce or eliminate the development and commercialization of one or more of our product candidates or delay our pursuit of potential in-licenses or acquisitions.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations.

As of December 31, 2020, we had cash and cash equivalents and marketable securities of $149.5 million. We believe that the anticipated net proceeds from this offering, together with our existing cash and cash equivalents and marketable securities as of December 31, 2020, will enable us to fund our operating expenses and capital expenditure requirements through at least                . We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. See “Liquidity and Capital Resources.”

Impact of COVID-19 on Our Business

The worldwide COVID-19 pandemic and recent emergence of variants of the virus have affected and may affect in the future our ability to initiate and complete preclinical studies, delay the initiation and completion of our current and planned clinical trials, disrupt regulatory activities or have other adverse effects on our business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect our business, operations and ability to raise funds to support our operations.

We are following, and plan to continue to follow, recommendations from federal, state and local governments regarding workplace policies, practices and procedures. In response to the direction from state and local governmental authorities, we have limited the access to our facility to those individuals who are not performing critical research and laboratory support activities that must be completed on site, limited the total number of such people that can be present at our facility at any one time and required any employees working in our facility to receive negative COVID-19 tests before entering site. Timely enrollment in planned clinical trials is dependent upon clinical trial sites which have been adversely affected by global health matters, such as COVID-19. For example, screening and enrollment in our ongoing FREEDOM-1 Phase 3 clinical trial in the United States have been adversely impacted by the COVID-19 pandemic. In addition, we and the third-party manufacturers, CROs, and academic collaborators that we engage may face future disruptions that could affect our ability to initiate and complete preclinical studies or clinical trials, including disruptions in procuring items that are essential for our research and development activities, such as, for example, raw materials used in the manufacture of our product candidates and laboratory supplies for our preclinical studies and clinical trials, in each case, for which there may be shortages because of ongoing efforts to address the COVID-19 pandemic.    

We cannot be certain what the overall impact of the COVID-19 pandemic will be on our business, and it has the potential to adversely affect our business, financial condition, results of operations and prospects.

License Agreement

In October 2018, the Company entered an amended and restated exclusive license agreement (ULRF License Agreement) with University of Louisville Research Foundation (ULRF) related to certain licensed patent

 

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rights and know-how related to human facilitating cells for our Facilitated Allo-HSCT Therapy approach. Pursuant to the ULRF License Agreement, ULRF granted us an exclusive, worldwide license under such patents and a nonexclusive royalty-bearing, worldwide license for such know-how to research, develop, commercialize and manufacture FCR001 and products containing FCR001 in all fields, without limitation. ULRF also granted us the right to grant sublicenses in accordance with the ULRF License Agreement. Under the terms of the agreement, the Company is obligated to compensate ULRF three percent of net sales of all licensed products sold, one third of any non-royalty sublicensing income, and up to $1.625 million in regulatory and sales milestones on each licensed product upon the occurrence of specific events as outlined in the license agreement; and annual license maintenance fees.

In addition, upon execution of the ULRF License Agreement, the Company granted contingent equity consideration equal to 348,750 shares of common stock to ULRF. On or prior to the Company’s first underwritten public offering or any transaction that is treated as a deemed liquidation event, the Company may either issue to ULRF the 348,750 shares in common stock or make a cash payment equal to the 348,750 shares of common stock multiplied by either the price per share of common stock in the underwritten public offering or by the price per share of common stock received in connection with such deemed liquidation event. At December 31, 2020 and December 31, 2019, the Company measured the fair value of the contingent equity consideration and recorded a contingent stock liability of $0.4 million and $0.1 million, respectively, in other liabilities (see Note 3 in accompanying audited financial statements).

Components of Our Results of Operations

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the future, if at all. If our product candidates we are currently developing and that we may develop in the future are successful and result in marketing approval or if we enter into collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from such collaboration or license agreements.

Operating Expenses

Research and Development Expenses

Research and development expenses consist primarily of costs incurred in connection with the development and research of our novel cell therapy, as well as unrelated discovery program expenses. We expense research and development costs as incurred. These expenses include:

 

•

employee-related expenses, including salaries, related benefits and stock-based compensation expense, for employees engaged in research and development functions;

 

•

external research and development expenses incurred under arrangements with third parties, such as CROs, investigational sites, and consultants;

 

•

the cost of acquiring, developing, and manufacturing clinical study materials;

 

•

costs associated with preclinical and clinical activities and regulatory operations;

 

•

costs incurred in development of intellectual property; and

 

•

an allocated portion of facilities and other infrastructure costs associated with our research and development activities.

The Company enters into consulting, research, and other agreements with commercial entities, researchers, universities, and others for the provision of goods and services. Such arrangements are generally cancelable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the

 

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progress to completion of specific tasks under each contract using information and data provided by the respective vendors, including the Company’s clinical sites. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved, and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

The successful clinical development and subsequent commercialization of product candidates is highly uncertain. This is due to the numerous risks and uncertainties with product development and commercialization, including significant variations in our clinical development costs as well as the following factors:

 

•

per patient trial costs;

 

•

the number of trials required for approval;

 

•

the number of sites included in the trials;

 

•

the countries in which the trials are conducted;

 

•

the length of time required to enroll eligible patients;

 

•

the number of patients that participate in the trials;

 

•

the length of hospitalization of patients in our clinical trials

 

•

the drop-out or discontinuation rates of patients;

 

•

potential additional safety monitoring requested by regulatory agencies;

 

•

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

 

•

the cost and timing of manufacturing our product candidates;

 

•

the phase of development of our product candidates;

 

•

the efficacy and safety profile of our product candidates. the timing and progress of nonclinical and clinical development activities;

 

•

the number and scope of preclinical and clinical programs we decide to pursue;

 

•

raising necessary additional funds;

 

•

the progress of the development efforts of parties with whom we may enter into collaboration arrangements;

 

•

our ability to maintain our current development program and to establish new ones;

 

•

our ability to establish new licensing or collaboration arrangements;

 

•

the successful initiation and completion of clinical trials with safety, tolerability and efficacy profiles that are satisfactory to the FDA or any comparable foreign regulatory authority;

 

•

the receipt and related terms of regulatory approvals from applicable regulatory authorities;

 

•

the availability of drug substance and drug product for use in production of our product candidate;

 

•

the development of commercial scale manufacturing and distribution processes for our product candidates;

 

•

establishing and maintaining agreements with third-party manufacturers for commercial manufacturing, if we pursue a third party manufacturing strategy outside of the United States, and if our product candidate is approved;

 

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•

our ability to obtain and maintain patents, trade secret protection and regulatory exclusivity, both in the United States and internationally;

 

•

our ability to protect our rights in our intellectual property portfolio;

 

•

the commercialization of our product candidate, if and when approved;

 

•

obtaining and maintaining third-party insurance coverage and adequate reimbursement;

 

•

the acceptance of our product candidate, if approved, by patients, the medical community and third-party payors;

 

•

competition with other products; and

 

•

a continued acceptable safety profile of our therapies following approval.

We may never succeed in obtaining regulatory approval for any of our current and future product candidates, including FCR001. We may obtain unexpected results from our preclinical studies and clinical trials including FREEDOM-1, FREEDOM-2, and FREEDOM-3. We may elect to discontinue, delay or modify clinical trials of some product candidates or focus on others. A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future preclinical and clinical product candidates. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials for FCR001 beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of any of our preclinical studies or execution or enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of preclinical and clinical development. A change in the outcome of any of these variables with respect to the development of our product candidates could significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any of our product candidates.

Research and development activities account for a significant portion of our operating expenses. We expect our research and development expenses to increase for the foreseeable future as we continue to implement our business strategy, which includes advancing FCR001 through clinical development of FREEDOM-1, FREEDOM-2 and FREEDOM-3 as well as other product candidates into clinical development, expanding our research and development efforts, including hiring additional personnel to support our research efforts, our clinical and product development efforts, and seeking regulatory approvals for our product candidates that successfully complete clinical trials.

We use our personnel and infrastructure resources across multiple research and development programs directed toward identifying and developing product candidates. Our direct research and development expenses are tracked on a program-by-program basis and consist primarily of external costs, including fees paid to consultants, contractors and CROs in connection with our development activities and the cost of acquiring, developing, and manufacturing clinical study materials. At this time, we do not fully allocate personnel costs to individual programs as many of our personnel are deployed across multiple programs.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, corporate and business development, and administrative functions. General and administrative expenses also include legal fees relating to patent and corporate matters, professional fees for accounting, auditing, tax and administrative consulting services, insurance costs and other operating costs, including an allocated portion of facilities and other infrastructure costs associated with our general and administrative activities.

We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support development of our product candidates and our continued research activities. We also

 

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anticipate that we will incur increased accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with being a public company.

Other Income (Expense), Net

Other income (expense), net is comprised of interest income earned on cash reserves in our operating account and on our marketable securities, amortization expense and accretion income on our marketable securities and expense incurred in relation to the change in fair value of our contingent stock liability with ULRF.

Results of Operations

Comparison of Years Ended December 31, 2020 and 2019

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

 

		Years ended December 31,								Change
		2020				2019
		(in thousands)
Operating expenses
Research and development		$	15,278			$	13,369			$	1,909
General and administrative			7,406				5,009				2,397
Total operating expenses			22,684				18,378				4,305
Loss from operations			(22,684	)			(18,378	)			(4,305	)
Interest and other income (expense), net			(23	)			223				(246	)
Net loss		$	(22,707	)		$	(18,155	)		$	(4,552	)

Research and development expenses

 

		Years ended December 31,								Change
		2020				2019
		(in thousands)
Direct research and development expenses by program:
FREEDOM-1 program		$	3,886			$	6,049			$	(2,163	)
Other pre-clinical and clinical programs			454				—				454
Indirect research and development expenses:
Personnel related (including stock-based compensation)			8,572				5,074				3,498
Facilities and other operating costs			2,366				2,246				120
Total research and development expenses		$	15,278			$	13,369			$	1,909

Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase substantially for the foreseeable future as we advance FCR001 through clinical trials, including our FREEDOM- 1 Phase 3 clinical trial, and we continue to develop additional product candidates.

Research and development expenses were $15.3 million for the year ended December 31, 2020, compared to $13.4 million for the year ended December 31, 2019. The increase of $1.9 million was primarily due to:

 

•

An increase of $3.5 million in personnel costs related to the need for additional staff to conduct our FREEDOM-1 Phase 3 clinical trial, progress start-up activities in our FREEDOM-3 Phase 2 clinical trial and to advance other pre-clinical activities.

 

•

An increase of $0.4 million in other pre-clinical and clinical program expense related to start-up activities for our FREEDOM-3 Phase 2 clinical trial; and

 

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•

An increase of $0.1 million in other unallocated costs related to consulting and other services in support of ongoing and planned clinical trials.

The increase in research and development expenses was offset by a decrease of $2.1 million in the direct program costs of FREEDOM-1 as the majority of start-up costs for this Phase 3 clinical trial were incurred in 2019.

General and Administrative Expenses

The following table summarizes our general and administrative expenses to support our business activities for the years ended December 31, 2020 and 2019:

 

		Years ended December 31,								Change
		2020				2019
		(in thousands)
Personnel related (including stock-based compensation)		$	3,031			$	2,208			$	823
Professional and consulting fees			1,981				1,101				880
Facility-related and other			2,394				1,700				694
Total general and administrative expenses		$	7,406			$	5,009			$	2,397

General and administrative expenses were $7.4 million for the year ended December 31, 2020 compared to $5.0 million for the year ended December 31, 2019. The increase in general and administrative costs of $2.4 million was primarily due to:

 

•

An increase of $0.8 million in personnel costs primarily due to the hiring of additional personnel in our general and administrative functions as we continued to expand our operations to support the organization.

 

•

An increase of $0.9 million fees primarily due to increased legal and accounting fees in association with our Series A-1 financing and Series B financing during 2020, as well as increased accounting and consulting fees in association with our IPO preparation; and

 

•

An increase of $0.7 million in facility-related and other costs primarily due to an expanded lease agreement for additional space in our Louisville facility in 2020 and other expenditures to support our expanded operations.

Other Income (Expense), Net

Other income, net in the year ended December 31, 2020 was comprised of $0.4 million in interest income from our marketable securities and operating cash balance, $(0.1) million of net amortization expense on our marketable securities and $(0.3) million in expense related to a fair value adjustment of our contingent stock liability. Other income, net in the year ended December 31, 2019 was comprised of $0.2 million of interest income.

Liquidity and Capital Resources

Since our inception, we have incurred significant operating losses. We have not yet commercialized any products and we do not expect to generate revenue from sales of products for several years, if at all. Since 2018, we have funded our operations primarily with proceeds from the sale of our convertible preferred stock. Through December 31, 2020, we had received net proceeds of $186.2 million from sales of our convertible preferred stock.

Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Our primary use of cash is to fund operating expenses, which

 

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consist primarily of research and development expenditures, and to a lesser extent, general and administrative expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. As of December 31, 2020, we had cash and cash equivalents of $17.6 million and marketable securities of $131.9 million.

Cash Flows

The following table summarizes our sources and uses of cash for each of the periods presented:

 

		Years ended December 31,								Change
		2020				2019
		(in thousands)
Net cash used in operating activities		$	(19,212	)		$	(17,660	)		$	(1,552	)
Net cash used in investing activities			(133,300	)			(562	)			(132,738	)
Net cash provided by financing activities			131,123				36,204				94,919
Net increase (decrease) in cash and cash equivalents and restricted cash		$	(21,389	)		$	17,982			$	(39,371	)

Cash Flow from Operating Activities

During the year ended December 31, 2020, operating activities used $19.2 million of cash, due to our net loss of $22.7 million, partially offset by non-cash charges of $1.9 million and net cash provided by changes in our operating assets and liabilities of $1.6 million. Non-cash charges primarily consisted of $1.0 million of stock-based compensation expense, $0.6 million of depreciation on fixed assets and amortization of marketable securities and $0.3 million of expense related to the fair value adjustment of our contingent stock liability. Net cash provided by changes in our operating assets and liabilities primarily consisted of a $1.0 million increase in accounts payable and accrued expenses related to timing and a decrease in current assets of $0.6 million driven by a decrease in our prepaid balances with contract research organizations.

During the year ended December 31, 2019, operating activities used $17.7 million of cash, due to our net loss of $18.2 million and $0.1 million of net cash used from changes in our operating assets and liabilities, partially offset by non-cash charges of $0.6 million. Non-cash charges primarily consisted of $0.4 million of depreciation expense and $0.2 million of stock-based compensation expense.

Cash Flow from Investing Activities

During the year ended December 31, 2020, investing activities used $133.3 million of cash, due to purchases of marketable securities of $158.2 million and purchases of property and equipment of $1.3 million, partially offset by maturities of marketable securities of $26.2 million.

During the year ended December 31, 2019, investing activities used $0.6 million of cash, consisting solely of purchases of property and equipment.

Cash Flow from Financing Activities

During the year ended December 31, 2020, net cash provided by financing activities was $131.1 million, primarily consisting of proceeds from our issuances of Series B preferred stock in September 2020 of $114.5 million, net of issuance costs, issuances of Series A-1 preferred stock in August 2020 of $15.0 million, net of issuance costs, early exercise of stock options of $1.0 million and issuances of common stock from exercise of stock options of $0.6 million.

During the year ended December 31, 2019, net cash provided by financing activities was $36.2 million, primarily consisting of proceeds from our issuances of Series A-1 preferred stock in December 2019 of

 

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$19.3 million, net of issuance costs, and issuances of Series A preferred stock in December 2019 of $16.9 million, net of issuance costs.

Future Funding Requirements

We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the late-stage clinical development of our product candidates. In addition, upon the completion of this offering, we expect to incur additional costs associated with operating as a public company. The timing and amount of our operating expenditures will depend largely on:

 

•

the initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates or any future product candidates we may develop;

 

•

the outcome, timing and cost of seeking and obtaining regulatory approvals from the FDA and comparable foreign regulatory authorities, including the potential for such authorities to require that we perform more preclinical studies or clinical trials than those that we currently expect or change their requirements on studies that had previously been agreed to;

 

•

the cost to establish, maintain, expand, enforce and defend the scope of our intellectual property portfolio, including the amount and timing of any payments we may be required to make, or that we may receive, in connection with licensing, preparing, filing, prosecuting, defending and enforcing any patents or other intellectual property rights;

 

•

the effect of competing technological and market developments;

 

•

the costs of continuing to grow our business, including hiring key personnel and maintaining or acquiring operating space;

 

•

market acceptance of any approved product candidates, including product pricing, as well as product coverage and the adequacy of reimbursement by third-party payors;

 

•

the cost of acquiring, licensing or investing in additional businesses, products, product candidates and technologies;

 

•

the cost and timing of selecting, auditing and potentially validating or expanding a manufacturing site for commercial-scale manufacturing;

 

•

the cost of establishing sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval and that we determine to commercialize; and

 

•

our need to implement additional internal systems and infrastructure, including financial and reporting systems.

We believe that the anticipated net proceeds from this offering, together with our existing cash and cash equivalents and marketable securities as of December 31, 2020, will enable us to fund our operating expenses and capital expenditure requirements into                 . We have based this estimate on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect. We expect that we will require additional funding to (i) further develop FCR001 in our ongoing Phase 3 registrational trial, FREEDOM-1, through evaluation of its primary endpoint, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each; (ii) continue research and development of FCR001 in additional pipeline programs such as living donor kidney transplant delayed tolerance induction and scleroderma in our FREEDOM-2 and FREEDOM-3 trials, respectively, through evaluation of their primary endpoints, including in-house manufacturing and quality assurance of clinical trial material, third-party clinical trials costs, clinical development and trial management, and personnel associated with each; (iii) develop expanded CMC operations to facilitate scale-up and commercialization of FCR001, or to engage a third-party manufacturer to undertake such commercialization; and (iv) develop our preclinical programs towards IND filings and/or into clinical trials.

 

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If we receive regulatory approval for any of product candidates, we expect to incur significant commercialization expenses related to product manufacturing, sales, marketing and distribution, depending on where we choose to commercialize those product candidates ourselves.

Developing pharmaceutical products, including conducting preclinical studies and clinical trials, is a time-consuming, expensive and uncertain process that takes years to complete, and we may never generate the necessary data or results required to obtain marketing approval for any product candidates or generate revenue from the sale of any product candidate for which we may obtain marketing approval. In addition, our product candidates, if approved, may not achieve commercial success. Our commercial revenues, if any, will be derived from sales of drugs that we do not expect to be commercially available for many years, if ever. Accordingly, we will need to obtain substantial additional funds to achieve our business objectives.

Adequate additional funds may not be available to us on acceptable terms, or at all. We do not currently have any committed external source of funds. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, royalty-based financings, debt financings, collaborations, strategic alliances, and marketing, distribution or licensing arrangements with third parties. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interest may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing, royalty-based financing and preferred equity financing, if available, may involve agreements that include restrictive covenants that limit our ability to take specified actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise funds through royalty-based financings, collaborations, strategic 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 unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, reduce or eliminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2020 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:

 

		Payments due by period
		Total				Less than 1 year				1 to 3 years				3 to 5 years				More than 5 years
		(in thousands)
Operating lease commitments(1)			1,425				515				910				—				—
Total		$	1,425			$	515			$	910			$	—			$	—

 

(1)	Represents our future minimum lease obligation under our non-cancelable operating leases for our manufacturing facility in Louisville, KY, our corporate offices in Wellesley, MA and additional corporate space in Louisville, KY.

Apart from the contracts with payment commitments that we have reflected in the table, we have entered into other contracts in the normal course of business with certain CROs and other third parties for nonclinical research studies and testing, as well as clinical trials. These contracts do not contain any minimum purchase commitments and are cancelable by us upon prior notice and, as a result, are not included in the table of contractual obligations and commitments above. Payments due upon cancellation consist only of payments for services provided and expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation.

 

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Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles (GAAP) in the United States. The preparation of our financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses, and the disclosure of contingent assets and liabilities in our financial statements. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in Note 2 to our financial statements appearing at the end of this prospectus, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.

Research and Development Contract Costs and Accruals

As part of the process of preparing our financial statements, we are required to estimate our accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our applicable personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. The majority of our service providers invoice us in arrears for services performed, on a pre-determined schedule or when contractual milestones are met; however, some require advance payments. We make estimates of our accrued expenses as of each balance sheet date in the financial statements based on facts and circumstances known to us at that time. We periodically confirm the accuracy of these estimates with the service providers and make adjustments, if necessary. Examples of estimated accrued research and development expenses include fees paid to:

 

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vendors in connection with clinical development activities; and

 

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CROs and investigative sites in connection with pre-clinical, non-clinical, and human clinical trials

We base the expense recorded related to external research and development on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple CROs that supply, conduct and manage clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or the amount of prepaid expenses accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.

Stock-Based Compensation Expense

We measure stock-based awards granted to employees, directors, and nonemployees based on their fair value on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is generally the vesting period of the respective award. For stock-based awards with service-based vesting conditions, we recognize compensation expense using the straight-line method. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of

 

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the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. The fair value of each option to purchase common stock award is estimated on the date of grant based on the fair value of our common stock on that same date.

Determination of the Fair Value of Common Stock

As there has been no public market for our common stock to date, the estimated fair value of our common stock has been determined by our board of directors as of the date of each option grant with input from management, considering our most recently available third-party valuations of common stock, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant. These independent third-party valuations of our equity instruments were performed contemporaneously with identified value inflection points.

These third-party valuations were performed in accordance with the guidance outlined in the American Institute of Certified Public Accountants’ Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. We account for equity-based compensation in accordance with ASC 718, Compensation-Stock Compensation (ASC 718). In accordance with ASC 718, compensation cost is measured at estimated fair value and is included as compensation expense over the vesting period during which service is provided in exchange for the award. Our common stock valuation was prepared using the option-pricing method (OPM), which used a market approach to estimate our enterprise value.

The OPM treats common stock and preferred stock as call options on the total equity value of a company, with exercise prices based on the value thresholds at which the allocation among the various holders of a company’s securities changes. Under this method, the common stock has value if the funds available for distribution to stockholders exceed the value of the liquidation preferences at the time of a liquidity event, such as a strategic sale or merger. The common stock is modeled as a call option on the underlying equity value at a predetermined exercise price. In the model, the exercise price is based on a comparison with the total equity value rather than, as in the case of a regular option, a comparison with a per share stock price. Thus, common stock is considered to be a call option with a claim on the enterprise at an exercise price equal to the remaining value immediately after the preferred stock liquidation preference is paid. The OPM uses the Black-Scholes option pricing model to price the call options. This model defines the fair value of securities as functions of the current fair value of a company and uses assumptions such as the anticipated timing of a potential liquidity event and the estimated volatility of the equity securities. The OPM method was used for our November 2018, October 2019, August 2020 and October 2020 valuations.

The assumptions used to determine the fair values of stock options granted to employees and directors during the years ended December 31, 2020 and December 31, 2019, are presented as follows:

 

		December 31,
		2020				2019
Fair value of common stock			$0.27-1.07				$0.21
Dividend yield			—%				—%
Volatility			72.8%-80.6%				72.4%-72.8%
Risk-free interest rate			0.31%-1.46%				1.43%-2.69%
Expected term (years)			6.25				6.25

The assumptions underlying these valuations were highly complex and subjective and represented management’s best estimates, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used significantly different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could be materially different.

 

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Once a public trading market for our common stock has been established in connection with the completion of this offering, it will no longer be necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for granted stock options and other such awards we may grant, as the fair value of our common stock will be determined based on the quoted market price of our common stock.

Grant of Stock-Based Awards

The following table sets forth by grant date the number of shares subject to options granted between January 1, 2019 and December 31, 2020, the per share exercise price of the options, the fair value of common stock per share on each grant date, and the per share estimated fair value of the options:

 

Grant date		Number of shares subject options granted				Per share exercise price of options				Fair value per common share on grant date				Black- Scholes value per share on grant date
November 2018			400,000			$	1.00			$	0.21			$	0.04
December 2018—October 2019			8,479,250			$	0.17			$	0.21			$	0.15
February 2020—July 2020			5,377,000			$	0.18			$	0.27			$	0.20
August 2020			1,462,072			$	0.73			$	0.73			$	0.47
October 2020—December 2020			8,889,382			$	1.07			$	1.07			$	0.74

The Company utilizes a third-party valuation firm to assist in determining the grant date fair market value of its common stock. In connection with the initial audit of the Company’s 2019 financial statements, the fair market value of our common stock was re-valued as of November 1, 2018 and February 7, 2020, solely for financial reporting purposes. This revaluation resulted in recognition of additional stock compensation expense. The fair value of common stock as of November 1, 2018 was determined to be $0.21 as compared to the initial $0.17 third-party fair valuation determination. The exercise price for stock options granted from November 1, 2018 through October 10, 2019 was derived from the initial valuation in November 2018. The fair value of common stock as of February 7, 2020 was determined to be $0.27 as compared to the initial $0.18 third-party fair valuation determination. The exercise price for stock options granted from February 7, 2020 through August 19, 2020 was derived from the initial valuation in February 2020.

Emerging Growth Company and Smaller Reporting Status

In April 2012, the Jumpstart Our Business Startups Act of 2012 (JOBS Act) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” (EGC) can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (Securities Act), for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to use the extended transition period for new or revised accounting standards during the period in which we remain an emerging growth company; however, we may adopt certain new or revised accounting standards early to the extent allowed by the standard.

We will remain an emerging growth company until the earliest to occur of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

We are also a “smaller reporting company” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700 million and our annual revenue was less than $100 million during the most recently completed

 

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fiscal year. We may continue to be a smaller reporting company after this offering if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission.

Recently Issued and Adopted Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our financial statements appearing at the end of this prospectus.

Quantitative and Qualitative Disclosures About Market Risks

Our primary exposure to market risk relates to changes in interest rates. As of December 31, 2020 and 2019, we had cash and cash equivalents of $17.6 million and $39.0 million, respectively. As of December 31, 2020, we had marketable securities of $131.9 million. We had no marketable securities as of December 31, 2019. Our exposure to interest rate sensitivity is affected by changes in the general level of U.S. interest rates. If market interest rates were to increase immediately and uniformly by 100 basis points, or one percentage point, the net fair value of our interest sensitive marketable securities would not experience a material change in fair market value.

All of our employees and our operations are currently located in the United States. We have, from time to time, engaged in contracts with contractors or other vendors in a currency other than the U.S. dollar. To date, we have had minimal exposure to fluctuations in foreign currency exchange rates as the time period between the date that transactions are initiated, and the date of payment or receipt of payment is generally of short duration. Accordingly, we believe we do not have a material exposure to foreign currency risk.

Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the years ended December 31, 2020 or 2019.

 

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BUSINESS

Overview

We are a late-clinical stage, cell therapy company developing an innovative method of allogeneic hematopoietic stem cell transplantation (allo-HSCT) that we believe has the potential to transform the standard of care in solid organ transplantation, certain severe autoimmune diseases and certain severe non-malignant blood, immune and metabolic disorders. In the organ transplant setting, which is our initial focus, we believe our proprietary therapeutic approach, which we call Facilitated Allo-HSCT Therapy, could prevent organ rejection without the morbidity and mortality that has been associated with the use of lifelong immunosuppression. Beyond the organ transplant setting, our Facilitated Allo-HSCT Therapy also has the potential to treat a range of severe autoimmune diseases and severe non-malignant blood, immune and metabolic disorders, in each case with potential for similar outcomes to what has previously been observed with HSCT, while mitigating the toxicities, morbidities and extended hospital stay associated with the fully myeloablative conditioning typically required by HSCT. We believe that these indications, individually and collectively, represent a significant unmet need and commercial opportunity.

Our lead product candidate, FCR001, which is central to our Facilitated Allo-HSCT Therapy, is a novel allogeneic cell therapy comprised of stem and immune cells that are procured from a healthy donor, who is also the organ donor in the case of organ transplantation. FCR001 is rapidly processed in our GMP facility using our proprietary manufacturing methods. Then, at the time of transplant, FCR001 is administered to the recipient following nonmyeloablative conditioning. We do not outsource any key aspect of our cell processing. We are developing FCR001 as a pipeline-in-a-product with the potential to address the therapeutic areas described above.

We are currently enrolling patients in FREEDOM-1, a randomized, controlled, open-label Phase 3 registration trial in the United States of FCR001 in 120 adult living donor kidney transplant (LDKT) recipients. The goal of this trial is to evaluate the potential of FCR001, when administered the day after the kidney transplant, to induce durable, drug-free immune tolerance in the recipient of the transplanted kidney. Inducing durable immune tolerance to a transplanted organ without the morbidities associated with lifelong immunosuppression is a goal that has been broadly referred to in the transplant field as the “Holy Grail” of solid organ transplant.

We have robust, long-term Phase 2 data supporting our lead indication in LDKT. In our Phase 2 trial of 37 adult LDKT patients treated with FCR001, 26 of 37 patients (70%) were able to completely discontinue their chronic immunosuppression approximately one year after receiving their transplant. After mid-course optimizations to the Phase 2 protocol, 14 of the last 17 patients (82%) in the trial were able to discontinue their chronic immunosuppression by approximately one year post-transplant. Every transplant recipient who was weaned off immunosuppression has remained off chronic immunosuppression, without any organ rejection, for the duration of their follow-up. As of January 31, 2021, we have followed these patients for a median of over six years post-transplant, and the longest for over 11 years post-transplant. These results were achieved despite significant degrees of immune system human leukocyte antigen (HLA) mismatch between the donors and recipients, and the degree of immune mismatch between the donor and recipient did not appear to impact the safety or efficacy of our therapy candidate.

We have identified a near-term surrogate marker, chimerism, that we believe to be highly predictive of the ability of an organ transplant recipient to durably discontinue chronic immunosuppression at one year post-transplant without rejecting the transplanted organ. Chimerism refers to a state whereby the recipient’s and donor’s blood and immune cells co-exist in the recipient, creating a reciprocal state of immune tolerance called allogeneic tolerance. We use a simple blood test to measure and regularly monitor the degree of donor chimerism in the recipient, which has to date shown a close association in our research with long-term immune tolerance in patients who have received FCR001. In our Phase 2 trial of FCR001, we observed that 26 of 27 recipients (96%)

 

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who achieved donor chimerism at six months post-transplant were successfully weaned off chronic immunosuppression over approximately the next six months, including recipients who were highly HLA-unmatched and/or unrelated to their donors. In addition, donor chimerism at three months post-transplant, which we observed in 26 of 29 recipients (90%), was also highly predictive of successful weaning off chronic immunosuppression at approximately one year post-transplant.

We continue to monitor the patients in our Phase 2 trial for long term safety and durability of effect. Through January 31, 2021, we have accumulated approximately 235 patient-years of exposure to FCR001 in LDKT, and the safety profile in our patients is generally consistent with that expected if a patient were to separately receive both a standard kidney transplant and an allo-HSCT with nonmyeloablative conditioning. Moreover, preliminary data indicates that patients who were able to be weaned off immunosuppression with FCR001 had preserved kidney function and third-party data suggests a markedly lower reliance on cardiovascular medications at four years post-transplant compared to traditional transplants with chronic immunosuppression over a similar time frame. Based on the data generated from our Phase 2 trial, FDA has granted Regenerative Medicine Advanced Therapy (RMAT) and Orphan Drug Designation for FCR001 for LDKT.

We plan to initiate two additional Phase 2 trials of FCR001, FREEDOM-2 and FREEDOM-3 in      . In FREEDOM-2, we will evaluate the potential of FCR001 to induce durable immune tolerance in LDKT recipients who received a donated kidney between three months to one year prior to FCR001 administration. Positive results in this trial would be the first step to potentially extending the use of FCR001 to a portion of the prevalent LDKT population and could also support extending our Facilitated Allo-HSCT Therapy to deceased donor transplant procedures. Every year in the United States, there are approximately four times as many deceased donor solid organ transplants as living donor transplants. We are conducting preclinical research to evaluate whether we can procure the same types of stem and immune cells from a recently deceased donor as from a living donor. If our preclinical studies are successful, we intend to assess the ability of FCR001, or a product candidate similar to FCR001 (FCR002), to induce durable allogeneic tolerance in a recipient of an organ from a deceased donor.

In FREEDOM-3, we will evaluate the safety and efficacy of FCR001 in adults with a severe form of scleroderma, a debilitating autoimmune disease. In our Phase 2 LDKT trial, all seven LDKT patients who required a kidney transplant as a result of a kidney-related autoimmune disease, and who achieved durable chimerism and could be withdrawn from chronic immunosuppression at one year, have not experienced recurrence of their prior kidney-related autoimmune disease. We believe that this observation, as well as the current use of HSCT for severe scleroderma, supports the potential of our therapy in autoimmune diseases. We believe that positive data in the FREEDOM-3 trial in severe scleroderma patients could support the potential applicability of FCR001 to other severe, systemic autoimmune diseases.

There are also a number of severe non-malignant blood, immune and metabolic disorders for which allo-HSCT has already been observed to be potentially curative, but its use to date for these indications has been limited by two important considerations: (i) it necessitates matching the patient with a highly HLA-matched stem cell donor and (ii) it subjects the patient to the toxicities, morbidities and an extended hospital stay associated with fully myeloablative conditioning. Since our Phase 2 data suggest that our Facilitated Allo-HSCT Therapy can promote durable engraftment of donor stem cells and diverse immune reconstitution regardless of degree of HLA match and with a less toxic nonmyeloablative (as opposed to myeloablative) conditioning regimen, with a low incidence of GvHD, we intend to explore the potential of our Facilitated Allo-HSCT Therapy in one or more such disorders. We expect to announce the first of these initiatives in                  .

 

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The pipeline-in-a-product potential of FCR001, and our Facilitated Allo-HSCT Therapy more broadly, is summarized in the graphic below:

 

 

We own unencumbered, worldwide rights to all of our product candidates and technologies.

Our manufacturing strategy is designed to meet the high quality and demand needs of clinical supply and commercial launch of any approved product. We manufacture FCR001 in less than a day at our GMP cell processing facility, employing robust, reproducible, proprietary methods which remain substantially unchanged as we have progressed FCR001 from Phase 2 to Phase 3. We do not outsource any key aspect of our cell processing. Unlike gene therapies or chimeric antigen receptor T-cell (CAR-T) therapies, our manufacturing process does not employ viral vectors, nor do we perform any transductions or ex vivo cell expansions.

Our executive management team has over 100 years of experience developing and investing in innovative cell therapies and biopharmaceutical products. Our founder and Chief Scientific Officer, Dr. Suzanne T. Ildstad, has published over 230 peer-reviewed papers, is a named inventor or co-inventor on over 35 patents, and has dedicated herself to inducing durable immune tolerance for nearly 30 years.

We have raised $190.0 million in aggregate gross proceeds since November 2018 through two private financings. Our investors include Blackstone Life Sciences, Surveyor Capital, Viking Global Investors, Longitude Capital, Qiming Venture Partners USA, Cormorant Asset Management, Invus, BlackRock, Eventide, Logos Capital, Aisling Capital, and Pamoja Capital, as well as one other large-but-unnamed investment fund. Between 2002 and 2018, we received substantial non-dilutive funding from grants, as well as from a prior strategic collaboration with Novartis AG.

 

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Our Strengths

We aim to remove solid organ transplantation recipients’ need for chronic immunosuppression and treat patients who suffer from severe autoimmune diseases and certain severe non-malignant blood, immune and metabolic disorders. Our competitive strengths include the following:

 

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Registration-stage lead program with long-term, compelling Phase 2 data indicating the potential to induce durable immune tolerance to a transplanted organ. In our Phase 2 trial of 37 adult living donor kidney transplant patients treated with our investigational therapy, FCR001, 26 of 37 (70%) of patients were able to discontinue their use of chronic immunosuppression approximately one year after receiving their transplant. After mid-course optimizations to the Phase 2 protocol, 14 of the last 17 patients (82%) in the trial were able to discontinue their chronic immunosuppression by approximately one year post-transplant. Every patient in our trial who was weaned off their transplant immunosuppression has remained off immunosuppression for the duration of their follow-up. As of January 31, 2021, we have followed these patients for a median of over six years, and the longest for more than 11 years. We believe these data indicate the potential of FCR001 to enable the majority of transplant patients to durably remain off chronic immunosuppression without rejecting the transplanted organ.

 

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Near-term surrogate marker, which was highly predictive of long-term tolerance in our Phase 2 trial. We have identified a near-term surrogate marker, chimerism, which, through a simple blood test, allows us to routinely monitor and, thus far, predict long-term immune tolerance in patients who received FCR001. In our Phase 2 trial of FCR001, we observed that 26 of 27 recipients (96%) who achieved chimerism at six months post-transplant were able to be weaned off their chronic immunosuppression over approximately the next six months, including recipients who were highly HLA-unmatched or unrelated to their donors. Donor chimerism at three months post-transplant, which we observed in 26 of 29 recipients (90%), was also highly predictive of this outcome. We intend to continue to assess donor chimerism as a potential surrogate marker for long term immune tolerance in our ongoing Phase 3 trial of FCR001.

 

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Significant pipeline-in-a-product opportunity for FCR001, with potential across multiple therapeutic areas. Beyond the organ transplant setting, we believe that FCR001 also has the potential to define a new standard of care for the treatment of patients with severe autoimmune diseases and severe non-malignant blood, immune or metabolic disorders where standard hematopoietic stem cell transplant (HSCT) has already been observed to be potentially curative. We believe that our Facilitated Allo-HSCT Therapy has the potential to achieve similar outcomes in such patients as have been observed with standard HSCT, but with considerably greater degrees of HLA mismatch than was previously thought to be possible or safe for allogeneic HSCT (allo-HSCT), and with lesser toxicities, co-morbidities, and costs compared to the myeloablative conditioning that is generally needed for HSCT in such settings. In our Phase 2 LDKT trial, all seven patients who required kidney transplant as a result of kidney-related autoimmune disease and who were successfully tolerized with FCR001, have not experienced recurrence of their prior kidney-related autoimmune diseases. We have followed these patients from four to ten years post-transplant. Moreover, we observed a very low rate of graft versus host disease (GvHD) in our Phase 2 patients despite significant degrees of HLA-mismatch between the donors and recipients, and we have optimized our Phase 3 protocol in ways that we believe further reduce the risk of GvHD. We believe that our Facilitated Allo-HSCT Therapy has the potential to enable the broader use of allo-HSCT in indications where it could be curative, but, at present, is not widely used due risks associated with fully myeloablative conditioning, as well as concerns over GvHD.

 

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Fully in-house, robust and efficiently scalable manufacturing and testing. We have developed a robust and reliable one-day manufacturing process for FCR001 that does not involve complex and time-consuming cell expansion or gene modification using viral vectors. Unlike many organizations that outsource their cell processing activities, our in-house manufacturing capabilities have allowed us to better control our manufacturing processes and to develop significant know-how regarding all aspects of our processes and analytics. Our process for making FCR001 has remained substantially unchanged as we have progressed from Phase 2 to Phase 3, and we have developed and qualified our

 

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own in-house potency assays. We believe our current manufacturing processes to be scalable to address our future commercial needs in North America without substantial modifications, potentially with a single, centrally-located facility. Moreover, we expect to use substantially the same manufacturing process, testing and starting material for all of our currently planned programs and indications, with the exception of our deceased donor transplant program.

 

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Significant first mover advantage in solid organ transplants with long-term durability data, a proprietary process and broad IP protection. Chronic immunosuppression is a very significant concern and burden for transplant and autoimmune disease patients. The ability to durably wean such patients off their chronic immunosuppression would confer a significant benefit to their health and quality of life (QoL). As of January 31, 2021, we have followed our Phase 2 patients for a median of over six years, and the longest for more than 11 years, demonstrating 100% durability in all patients who were successfully weaned off their chronic immunosuppression for the duration of their follow-up. We will continue to follow these patients for up to 15 years from the time of their transplant, to monitor the long-term safety and durability of our therapy. Through January 31, 2021, we have accumulated approximately 235 patient-years of exposure to FCR001 in LDKT. We believe these long-term data represent a significant first mover advantage compared to any third party seeking to demonstrate comparable results to ours. We have also established an extensive intellectual property portfolio, including issued claims directed at FCR001 composition of matter and pending claims directed at our potency assays. We believe that our intellectual property portfolio, as well as our substantial know-how and trade secrets associated with our proprietary manufacturing process, create significant additional barriers to entry.

 

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Unencumbered worldwide rights to FCR001 and all of our other programs. We own all rights to develop and commercialize FCR001 and all of our other programs in all indications and territories worldwide. We hold exclusive rights to all of our intellectual property for all indications.

 

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Talented and experienced team with deep and relevant experience. Our executive management team has over 100 years of experience developing and investing in innovative cell therapies and biopharmaceutical products. Our founder, Dr. Suzanne T. Ildstad, has over 230 peer reviewed manuscripts, is a named inventor or co-inventor on over 35 patents, and has dedicated herself to inducing durable immune tolerance in the organ transplant setting for nearly 30 years.

Our Strategy

Our goal is to transform the standard of care in solid organ transplantation, severe autoimmune disease, and certain severe non-malignant blood, immune and metabolic disorders, all with a single therapeutic approach. We plan to do this through our proprietary investigational therapy, FCR001, the cornerstone of our novel Facilitated Allo-HSCT Therapy. Our strategy is comprised of the following key elements:

 

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Establish Talaris as a leader in developing, manufacturing, and ultimately commercializing cell therapies to address multiple areas of high unmet need. Our Facilitated Allo-HSCT Therapy combines nonmyeloablative conditioning and optimized stem cell transplant protocols with our investigational therapy, FCR001. FCR001 consists of a unique and proprietary composition of donor stem and immune cells, which are processed via our proprietary manufacturing methods. We believe that FCR001 and our proprietary therapeutic approach have the potential to transform the standard of care for a range of severe non-malignant blood, immune and metabolic disorders.

 

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Advance FCR001 through clinical development, registration, and commercialization in LDKT. Our lead product candidate, FCR001, is a single-dose, investigational cell therapy that is currently in an ongoing Phase 3 registration trial known as FREEDOM-1, for LDKT. The goal of this trial, in which FCR001 is administered the day after the kidney transplant, is to assess the potential of our therapy to induce durable, drug-free immune tolerance in the transplant recipient to their donated kidney. In                 , we also expect to initiate FREEDOM-2, a Phase 2 trial to evaluate the potential for FCR001 to induce durable immune tolerance to a donated kidney in patients who have previously received a kidney from a living donor, which we refer to as “delayed tolerance.”

 

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Extend FCR001 clinical development to severe autoimmune diseases. We intend to investigate the potential of FCR001 to treat certain severe, systemic autoimmune diseases in which HSCT has already been observed to be potentially curative, albeit with significant risks. In                 , we expect to initiate FREEDOM-3, a Phase 2 trial that will evaluate the safety and efficacy of FCR001 in patients with a severe form of scleroderma. Scleroderma is a complex and heterogeneous systemic autoimmune disease affecting multiple tissues and organs. We believe that positive proof of concept data from FREEDOM-3 could support the potential of our Facilitated Allo-HSCT Therapy to be disease-modifying or even curative in scleroderma as well as certain other severe, systemic autoimmune diseases.

 

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Further extend FCR001 clinical development to certain severe non-malignant blood, immune or metabolic disorders. We believe that our Facilitated Allo-HSCT Therapy has the potential to benefit patients in other severe non-malignant settings where allo-HSCT has previously been associated with clinical benefit and/or curative potential, but where the use of allo-HSCT has been limited due to the challenge of identifying highly HLA-matched donors and the significant toxicities, co-morbidities, and lengthy hospitalization associated with myeloablative conditioning. We expect to announce our first initiative in this therapeutic area in                 .

 

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Explore the potential to extend our therapeutic approach to deceased donor organ transplantation. Annually in the United States, there are more than four times as many deceased donor transplants as living donor transplants. We are conducting preclinical research to explore whether we can successfully procure and process cells from deceased donors to produce FCR001 or a product candidate similar to FCR001, which we would refer to as FCR002. If successful, this could extend the potential of our Facilitated Allo-HSCT Therapy to benefit recipients of organs from deceased donors, significantly expanding our commercial opportunity in kidney transplant and other solid organ transplant patients.

 

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Further scale our in-house manufacturing and analytical capabilities and supply chain logistics. We have developed a robust and reproducible proprietary manufacturing process and streamlined logistics to produce FCR001 in-house at our centrally located and dedicated cell processing facility. Our current facility is sufficient for all of our currently contemplated clinical supply needs and we believe that, if FCR001 is approved, we are well positioned to serve our initial commercial markets with our existing and planned infrastructure. We intend to further scale our manufacturing and processing approaches to appropriately address our anticipated commercial needs, which will require significant resources.

 

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Commercialize FCR001 independently in North America, if approved, and explore other markets through strategic collaborations. We have global development and commercialization rights to FCR001 in all indications and geographies. Given the high concentration of Clinical Centers of Excellence performing allo-HSCT and solid organ transplant in North America, we plan to advance our Facilitated Allo-HSCT Therapy independently through clinical development and commercialization in these geographies in our three main areas of therapeutic interest. We intend to explore expanding into other high-value markets, notably EU and Asia, either alone or in collaboration with global or regional partners. We may also explore collaborations with partners in areas outside of our core areas of therapeutic interest.

Overview of Immune Intolerant Indications and Current Treatment Approaches

Immune Tolerance and HLA Inheritance

The human immune system is composed of cells that mature from hematopoietic stem cells (HSCs). HSCs are immature cells found primarily in the bone marrow that can develop into all types of blood and immune cells that protect individuals against infection, tumors, and other pathogens. In healthy individuals, the immune system distinguishes “self” antigens from “non-self” foreign antigens (e.g., transplanted organs, infectious agents or cancerous cells) and selectively mounts a protective attack against “non-self” foreign antigens while avoiding an attack on “self” antigens. The immune system’s natural process for not mounting an immune response to

 

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antigens it deems as “self” is referred to as immune tolerance. An autoimmune disease occurs when the immune system mistakenly recognizes some aspect of “self” as “non-self” and attacks those cells or tissues.

The immune system distinguishes “self” versus “non-self” predominantly via the major histocompatibility complex (MHC). The MHC is a group of proteins expressed on the surface of most cells that function to present “self” or “non-self” antigens to lymphocytes, which mediate the immune response against antigens that are recognized as “non-self.” In humans, the MHC is composed of highly genetically diverse MHC proteins called human leukocyte antigens (HLAs). As depicted in the figure below, human cells express combinations of multiple HLA proteins that collectively define an individual’s unique “tissue type” or a distinct molecular “self” signature.

The genes that encode HLAs are inherited in sets called haplotypes. An individual inherits one haplotype from each parent; as a result, their tissue type is 50% matched, or haploidentical to each parent’s tissue type. As shown in the figure below, if two children inherit the same HLA haplotypes from their parents, they are fully HLA matched. Siblings have a one in four chance of having a complete HLA match in their tissue types. Even if 100% HLA-matched, siblings are not genetically identical unless they are identical twins.

Illustration of HLA Matching

 

 

Although the immune system plays a vital role in eliminating pathogens and damaged cells, it poses significant challenges in two distinct areas where immune-mediated attack of antigens deemed non-self is detrimental: (1) allogeneic transplantation of solid organs, such as kidneys, or of HSCs; and (2) autoimmune diseases.

Allogeneic Transplantation of Solid Organs

In solid organ transplantation, practitioners generally seek a tissue-typing match of six HLA proteins between donors and recipients to lower the risk of the immune system recognizing the donated organ as

 

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“non-self”, which can trigger immune-mediated rejection of the donated organ by the recipient’s immune system, a process called allograft rejection. The greater the HLA match, the lower the risk of rejection because the recipient’s immune system is more likely to recognize the foreign cells as similar to “self.” However, with the exception of identical twin donor/recipient pairs, even recipients with a 6 out of 6 HLA match must take lifelong immunosuppression drugs to prevent life-threatening organ rejection. Organ rejection can occur immediately (hyperacute), within months (acute) or gradually over years (chronic) following transplant.

To prevent organ rejection, a lifelong, daily regimen of chronic immunosuppression is used to suppress the transplant recipient’s immune system. A standard immunosuppression regimen typically includes one or more high dose immunosuppressant drugs administered in the hospital at the time of transplant, called induction therapy, followed by lifelong, daily maintenance treatment, typically with tacrolimus (Prograf ^®, Envarsus XR ^®, generics), mycophenolate mofetil (MMF: CellCept ^®, Myfortic ^®, generics), and frequently also includes a corticosteroid (usually prednisone). Other maintenance therapies used in lieu of tacrolimus include everolimus, sirolimus, and belatacept. Although immunosuppressants can be effective at preventing organ rejection, they have many drawbacks, including but not limited to the following:

 

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Immunosuppressant medications do not induce tolerance to transplanted organs and require chronic dosing. These medicines broadly impair the recipient’s immune system to reduce the risk of rejecting the organ, but do not train the recipient’s immune system to recognize the “non-self” antigens on the organ as “self.” Thus, recipients must take immunosuppressants for as long as their donated organ is functioning.

 

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Chronic immunosuppressant treatment can damage kidneys, ultimately leading to loss of the transplanted organ. Ironically, long-term treatment with immunosuppressant medications such as tacrolimus can be toxic to, and can cause premature loss of, kidneys. Kidneys are the most commonly transplanted organs for which transplant recipients take immunosuppressants to prevent rejection. The average life of a transplanted kidney is between 15.5 and 20.9 years, with one-third of LDKTs and approximately half of deceased donor kidney transplants failing within 10 years. Individuals whose transplants fail typically require hemodialysis, at an average Medicare fee-for-service cost in the United States of approximately $90,000 per year. Hemodialysis imposes a substantial negative impact on the patient’s QoL and is associated with significant morbidity and mortality. If a patient whose transplant has failed is fortunate enough to locate another organ donor, they must undergo a repeat transplant. All of these factors lead to significant burdens individually on patients and systemically to our healthcare system. Total hospital charges for a solid organ transplant in the United States average $442,500. This figure does not include any costs outside of the 30-day window following the transplant.

 

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Chronic immunosuppressant treatment is associated with an increased risk of cancer. Several studies have demonstrated that the degree and duration of immunosuppression influence the risk for post-transplant malignancies. Most notably, in a study of over 175,000 solid organ transplant recipients from 1987 to 2008, more than 30 types of cancer were identified in over 10,650 cases, which correlated with a twofold increased incidence relative to the general population. Cancers with a fivefold or greater increase compared with the general population included Kaposi’s sarcoma, skin cancers, non-Hodgkin’s lymphoma, and cancers of the liver, anus, vulva and lip. Cancer accounts for nearly 25% of overall mortality in kidney transplant patients.

 

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Chronic immunosuppressant treatment is associated with significant co-morbidities that prompt need for many other medications. Patients on chronic immunosuppression medication typically need to take numerous medicines—often 20 or more pills per day—to manage the numerous negative side effects and significant co-morbidities that chronic immunosuppressant medicines cause, notably:

 

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Cardiovascular complications. Cardiovascular death is the leading cause of mortality in kidney transplant recipients. Chronic use of immunosuppressant medications can lead to hypertension, hyperlipidemia, and hypertriglyceridemia, all of which are risk factors for cardiovascular morbidity and mortality and accordingly prompt the need for medical management along with lifestyle modifications.

 

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Infection. Viral, bacterial, and fungal infections collectively are among the leading causes of post-transplant mortality after cardiovascular death. Transplants recipients on chronic immunosuppression

 

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must often take numerous prophylactic anti-infectives and adapt their lifestyles to avoid exposure to infection.

 

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Metabolic abnormalities. Approximately 12% of kidney transplant recipients develop post-transplant diabetes mellitus (PTDM) within the first five years post-transplant. Both corticosteroids and tacrolimus contribute to this complication, which requires medication to manage glycemic control. PTDM is associated with an increased risk of cardiovascular events, failure of the transplanted organ, and death.

 

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Neurologic disorders. Patients treated with tacrolimus over extended periods can experience a range of troubling neurologic adverse events including impaired cognition, tremors, neuropathies, depression, and sleep disorders.

 

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The burden and cost of immunosuppressants can lead to non-compliance, which can adversely affect outcomes. Reimbursement of immunosuppressant drugs, labs and associated medications for comorbidities varies greatly from patient to patient. The high cost (averaging nearly $25,000 in the first year and ranging from approximately $5,000 to $10,000 annually lifelong for tacrolimus and MMF alone) and decreased QoL associated with chronic immunosuppression and other medications to manage its complications often leads transplant recipients to stop taking them, or to take them inconsistently, thus increasing their risk of organ rejection.

In light of the above, we believe that reprogramming a transplant recipient’s immune system, with a one-time therapy, to durably tolerate the donated organ regardless of HLA match could potentially have significant benefits for patients and substantial cost savings for the healthcare system more broadly.

Allo-HSCT

Allo-HSCT has been used to replace diseased immune, blood or stem cells in patients with severe immune, blood or metabolic disorders. In allo-HSCT, an HLA-matched, healthy donor’s HSCs are first procured, then the patient’s own HSCs (and their associated immune and blood systems) are eliminated by high dose chemotherapy and radiation in a process known as myeloablative conditioning. The donor’s HSCs are then transplanted to the patient. If the donor’s HSCs engraft in the recipient’s bone marrow, and are not rejected in the months following, then they will differentiate into donor-derived immune and blood cells.

In allo-HSCT, less-than-perfect HLA matching can increase the potential for GvHD. GvHD occurs when immune cells that are produced by donor-derived stem cells that have engrafted in the recipient attack the recipient’s body as “non-self.” GvHD, which can be acute (within the first 100 days following transplant) or chronic (beyond 100 days), can cause potentially life-threatening damage to the liver, skin, mucosal tissues, and gastrointestinal tract. Current medical practice for HLA matching in allo-HSCT is more stringent than for solid organ transplantation. Specifically, in solid organ transplant, HLA matching is based on a panel of six HLA proteins, whereas in HSC transplant, HLA matching is based on a more stringent panel of ten HLA proteins. Thus, in allo-HSCT, a ten out of ten match of HLA proteins is strongly preferred, with a minimum requirement for at least a haploidentical match of five out of ten. If individuals in need of allo-HSCT cannot find a suitable donor match, they cannot benefit from the curative potential of this procedure because the risk of GvHD is unacceptably high. As a result, although allo-HSCT also has the potential to restore self-tolerance in patients with autoimmune disease, it is seldom used for autoimmune disease because of the challenge of finding a highly HLA-matched donor and associated concerns over the risk of GvHD.

Although there is no currently approved, standard regimen to prevent GvHD, patients may receive peri-procedural treatment with cyclophosphamide, corticosteroids and other therapies. GvHD can develop in up to 50% of individuals receiving allo-HSCT, depending on the conditioning regimen, underlying disease, and degree of HLA mismatch between donor and recipient. Treatment of acute or chronic GvHD depends on the extent of

 

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tissue and organ involvement, which is rated from Grade 1 (mild) to Grade 4 (severe), with corticosteroids generally serving as the typical first-line treatment. Nearly half of patients with acute GvHD are refractory to first-line steroid treatment and may receive treatment with second line therapies such as ruxolitinib. However, ruxolitinib can have limited efficacy, and its side effects include anemia, thrombocytopenia, neutropenia, infections, and edema. Thus, there is a significant need for an approach to allo-HSCT that could enable reciprocal tolerance between the donor’s and recipient’s tissues and immune cells, irrespective of the degree of HLA match, thereby lowering the risk of GvHD in the allo-HSCT recipient.

Autoimmune Diseases

In healthy individuals, the immune system produces cells that are potentially capable of attacking “self”, but such cells are either eliminated or silenced by regulatory mechanisms within the body. However, if these mechanisms fail, or if an infection introduces a foreign antigen that mimics a self-antigen, the immune system can mount an attack on an individual’s own cells, tissues, or organs, either locally or systemically. This phenomenon is termed autoimmune disease, and reflects the absence of immune tolerance to some aspect of self. There are more than 80 recognized types of autoimmune diseases.

The discovery and understanding of several key molecular pathways and mediators of pathological inflammation have led to the approval of several immunomodulatory therapies (e.g., anti-cytokines, co-stimulatory blockers and interferons) that improve symptoms and delay progression of debilitating autoimmune diseases such as rheumatoid arthritis and multiple sclerosis. However, these therapies require chronic, repeated administration to maintain significant benefit, and can be associated with side effects and toxicities similar to other immunosuppressive therapies. No therapies approved to date have been shown to be curative of autoimmune disease or to effectively restore durable immune tolerance to self-antigens.

HSCT is not an approved treatment for autoimmune disorders, but it has been observed to have curative potential for certain severe autoimmune diseases—notably scleroderma, multiple sclerosis and Crohn’s disease—in clinical trials conducted by third parties, albeit with the significant limitations described above. To date, autologous HSCT has been preferred to allo-HSCT in these trials because the latter carries a significant risk of GvHD, as well as a greater risk that the donated stem cells will fail to engraft in the recipient.

In autologous HSCT, a patient’s HSCs are first procured and then the patient’s entire immune system, including the autoreactive cells, is eliminated by myeloablative conditioning. The previously procured stem cells are then transplanted back into the patient, where they engraft and then differentiate into mature immune cells. The underlying principle is that these newly created immune cells have the potential to reset the patient’s immune system, and enable disease remission.

Autologous HSCT has two major limitations. First, the acute toxicity of myeloablative conditioning, notably to the heart, lungs, and kidneys, necessitates a long and costly hospitalization—on average 20 days with billed charges of over $250,000—and restricts its use solely to the patients who can tolerate its intensity. Moreover, there are important long-term complications of myeloablative conditioning, including significantly increased risk of infections and hematological malignancies. Second, since these patients likely have a genetic predisposition towards autoimmune diseases, there is a higher risk of recurrence, which should be lower if stem cells were transplanted from a healthy allogeneic donor. Our Facilitated Allo-HSCT Therapy has the potential to mitigate both of these key limitations. As a result, we believe there is an opportunity with our Facilitated Allo-HSCT Therapy to improve and safely expand the practice of HSCT to a greater number of patients and induce durable remissions in severe autoimmune diseases.

Chimerism and Inducible Allogeneic Tolerance

As depicted in the figure below, chimerism refers to a state in which both the donor’s HSCs and the recipient’s HSCs co-exist in the recipient’s bone marrow. These co-existing HSCs in turn produce blood and immune cells of both donor and recipient origin. We believe chimerism is the most robust means of inducing durable allogeneic tolerance.

 

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The Concept of Chimerism

 

 

Allogeneic tolerance refers to a chimeric state in which the recipient’s preexisting immune system and the donor’s transplanted immune system (which co-exist in the recipient following our Facilitated Allo-HSCT Therapy) mutually recognize the other’s cells and tissues as “self”, thereby evading immune-mediated rejection and GvHD. We believe allogeneic tolerance can be achieved by transplanting a healthy donor’s HSCs so that they coexist with the recipient’s HSCs in the recipient’s bone marrow, thereby creating a “dual hematopoietic system” (part-donor and part-recipient) in the recipient. The dual hematopoietic system in turn produces cells that constitute coexisting immune- and blood systems. If the donor’s T-cells constitute more than 50% of the detectable T-cells in the recipient’s blood for six months or longer after the transplant, our Phase 2 data have shown that this is highly predictive of the recipient having achieved durable chimerism, and thus durable allogeneic tolerance.

We believe inducible allogeneic tolerance has therapeutic potential in three broad categories of clinical applications: (1) solid organ transplantation; (2) severe autoimmune disease; and (3) severe non-malignant blood, immune and metabolic disorders that have been shown to be potentially curable via allo-HSCT.

Our Therapeutic Approach: Facilitated Allo-HSCT to Induce Allogeneic Tolerance

The goal of our proprietary, investigational Facilitated Allo-HSCT Therapy is to induce allogeneic tolerance for the treatment of multiple therapeutic conditions with significant unmet need. While the principle of inducing allogeneic tolerance has been understood for decades, its clinical application in humans via allo-HSCT has proven elusive due to two key challenges: (1) minimizing the risks of graft rejection and/or GvHD, irrespective of the degree of matching of the donor’s and recipient’s HLA antigens and (2) identifying a better-tolerated, nonmyeloablative conditioning regimen (as opposed to a fully myeloablative conditioning regimen) that nonetheless enables durable engraftment of donor cells into the recipient. We believe that our Facilitated Allo-HSCT Therapy has the potential to address these two challenges and could represent a major advance in unlocking potential clinical applications for induced tolerance in the following ways:

 

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Reprogram—Solid Organ Transplantation—By reprogramming the immune system to tolerate the donated organ without the need for chronic immunosuppression, we believe that our Facilitated Allo-HSCT Therapy has the potential to prevent immune-mediated organ rejection and thereby reduce or eliminate the co-morbidities, toxicities, costs and suboptimal patient survival rates and QoL associated with lifelong immunosuppression.

 

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Restore—Severe Autoimmune Disease—By restoring tolerance to self-antigens in patients with severe autoimmune diseases, we believe that our Facilitated Allo-HSCT Therapy has the potential to induce durable remission without the need for chronic immunosuppression.

 

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Replace—Severe Non-Malignant Blood, Immune and Metabolic Disorders—By replacing defective or deficient HSCs, we believe that our Facilitated Allo-HSCT Therapy has the potential to correct a range of severe non-malignant blood, immune and metabolic disorders that have been shown to be potentially curable with allo-HSCT, but with a less toxic conditioning regimen, reduced or no need for HLA-matching, and reduced risk of GvHD compared to standard allo-HSCT.

Our lead product candidate, FCR001, which is central to our Facilitated Allo-HSCT Therapy, is a proprietary, one-time, investigational cell therapy derived from donor-mobilized peripheral blood cells, which are processed to contain an optimized number of the donor’s HSCs, FCs, and aßTCR+ T-cells. As depicted in the figure below, these three distinct cell types and the combination of these cell populations are critical for the safety and efficacy of FCR001. Specifically:

 

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HSCs are progenitor cells that are used to rebuild the hematopoietic and immune system of the recipient. As a result of their engraftment, the recipient’s new immune system will reflect the donor’s genotype and, thus, can potentially recognize the donor cells and tissues as “self” without the need for chronic immunosuppression.

 

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Facilitating Cells (FCs) are defined by the cell surface expression of the CD8 protein and by the lack of a functional T-cell receptor (TCR) (CD8+/TCR-). FCs are a mixed cell population that we believe to be responsible for fast and efficient engraftment of donor HSCs to promote chimerism. In addition, in preclinical studies, FCs have been observed to be associated with a reduced risk of GvHD relative to standard allo-HSCT. Consistent with these data, we have observed a very low incidence of GvHD in our Phase 2 trial of FCR001, despite a high degree of HLA mismatch between most donors and recipients.

 

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aßTCR+ T-cells are known to support donor HSC engraftment in recipients who receive allo-HSCT from an HLA-mismatched donor with nonmyeloablative conditioning, but they are also known to increase the risk of acute GvHD in the recipient. FCR001 incorporates an optimized number of aßTCR+ T-cells that are intended to promote engraftment of the donor’s HSCs in the recipient while minimizing the risk of acute GvHD.

Active Cell Type Composition of FCR001

 

 

 

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The FCR001 manufacturing process is designed to limit the number of aßTCR+ T-cells to a desired number in the cell therapy product candidate while optimizing the yield of HSCs and FCs obtained after apheresis of the donor. See “Preclinical Studies: Facilitating Cell Mechanism of Action,” below, for a summary of some of the key preclinical data supporting the mechanism of action of FCR001.

Our Pipeline

Based on the clinical evidence we have observed in our Phase 2 trial, we believe FCR001, and our Facilitated Allo-HSCT Therapy more broadly, can potentially be applied to numerous therapeutic areas. We are advancing a pipeline of three clinical and two preclinical programs across three therapeutic categories: (1) solid organ transplantation, (2) severe autoimmune disease, and (3) severe non-malignant blood, immune and metabolic disorders that have been observed to be potentially curable via allo-HSCT. We retain global development and commercial rights for FCR001 in all indications.

FCR001: Pipeline-in-a-Product Opportunity

 

 

Our lead indication for FCR001 is living donor kidney transplant (LDKT). We are currently evaluating FCR001 in FREEDOM-1, a randomized, controlled, open-label, multi-center Phase 3 trial in the United States. This registration trial is designed to assess the safety and efficacy of FCR001 in first-time LDKT recipients, where FCR001 is administered the day after the kidney transplant. The goal of the FREEDOM-1 trial is to assess the potential of FCR001 to induce durable immune tolerance to the transplanted kidney without the need for chronic immunosuppression to prevent graft rejection. Based on the data generated from our Phase 2 trial, FCR001 has been granted Regenerative Medicine Advanced Therapy (RMAT) and Orphan Drug designations by the U.S. Food and Drug Administration (FDA) in this indication. We anticipate providing an initial clinical update on FREEDOM-1 in                  .

In                 , we plan to initiate FREEDOM-2, a Phase 2 trial to evaluate the potential for FCR001 to induce durable immune tolerance in patients who have previously received a kidney from a living donor, a process called delayed tolerance. In this trial, FCR001 will be administered between three to twelve months after

 

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the initial kidney transplant. Demonstrating that FCR001 can induce durable tolerance to a transplanted kidney, even if FCR001 is administered up to one year after the original LDKT, could enable broader clinical application of our Facilitated Allo-HSCT Therapy both to a portion of the prevalent LDKT population as well as potentially to the deceased donor solid organ transplant setting. We are also currently conducting preclinical research to explore whether we can manufacture FCR001 (or FCR002, if deemed a separate product candidate) from bone marrow procured from deceased organ donors. If these preclinical studies are successful, we plan to initiate IND-enabling studies of FCR001 or FCR002 in deceased donor kidney transplants in                .

Also in                 , we plan to initiate our first clinical trial in autoimmune diseases, FREEDOM-3, a Phase 2 trial exploring the safety and clinical activity of FCR001 in patients with a severe form of scleroderma. We believe that positive proof of concept data in this trial could support the potential applicability of FCR001 to other severe, systemic autoimmune diseases.

We also plan to prioritize FCR001 for one or more severe non-malignant blood, immune or metabolic disorders for advancement into IND-enabling studies in     ..                

Our Programs

Reprogram: Solid Organ Transplantation

We believe that our Facilitated Allo-HSCT Therapy has the potential to reprogram the immune system of recipients of solid organ transplants to recognize the donated organ as “self,” thereby avoiding organ rejection without the degree of toxicities, risks, co-morbidities, and burden of compliance associated with chronic immunosuppression. In the United States, there were 39,719 transplants of solid organs performed in 2019, up from 36,350 in 2018. These life-saving procedures entail procuring organs from either living donors (in the case of kidney and partial liver) or deceased donors (in the case of kidney, liver, heart, lung, pancreas and intestine) and surgically implanting them into appropriately matched recipients with end-stage organ failure. In 2019 (the most recent year before the COVID-19 pandemic temporarily reduced the number of transplants, such as LDKT, which are considered elective procedures), there were 7,397 transplants performed from living donors, of which 6,687 were kidney and 524 were partial liver. In addition, there were 32,322 transplants from deceased donors in 2019, as follows: 16,534 kidney, 8,372 liver, 3,552 heart, 2,714 lung, and 1,150 other organs, including heart/lung, kidney/pancreas, pancreas, and intestine.

Demand for solid organ transplants significantly exceeds the supply. As of January 2021, there were more than 108,100 people in the United States on the waiting list for a transplant, of whom more than 91,400 were awaiting a kidney—with a median wait of 4.1 years. We believe that inducing durable tolerance to a transplanted organ without the need for chronic immunosuppression has the potential to prolong the viability of kidney transplants and ultimately other solid organ transplants, thereby reducing the need for the approximately 10% of organ transplants annually that are repeat transplants. Reducing the number of repeat transplants following failure of their initial transplant should, in turn, enable more patients on the waiting list to receive an initial transplant, and save significant associated healthcare costs.

Our Initial Focus: First-Time Living Donor Kidney Transplant

Long-term outcomes in LDKT are suboptimal due to the complications associated with taking lifelong chronic immunosuppression medications. We believe FCR001 has the potential to induce durable allogeneic tolerance in LDKT recipients to their transplanted organ, thereby permitting the LDKT recipient to discontinue all chronic immunosuppression within approximately twelve months of their transplant, without rejecting the transplanted organ. FCR001 is a single-dose, personalized investigational therapy that is made from stem and immune cells procured from the kidney donor, that are processed at our GMP facility to specifications that are optimized for the transplant recipient. FCR001 is infused into the transplant recipient within a day of the LDKT. The patient journey and our therapeutic approach in our Phase 2 and Phase 3 LDKT trials, including our vein-to-vein process from donor to recipient, is illustrated in the figure below.

 

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The Patient Journey and Our Therapeutic Approach in Our Current LDKT Clinical Trials

 

Our approach begins with the procurement of a donor’s stem and immune cells through a standard mobilization and apheresis procedure. At least three weeks prior to the scheduled LDKT, the kidney donor receives medication over a five-day period to mobilize their stem cells and immune cells and allow these cells to circulate out of the bone marrow and into the bloodstream. The mobilized cells that comprise FCR001 are then collected from the donor using our specified apheresis protocol.

The donated cells are shipped to our GMP cell processing facility in Louisville, Kentucky (which is also the location of UPS’ WorldPort hub), where our proprietary process removes a calculated amount of the donor’s aßTCR+ T-cells and relatively enriches the product for the donor’s HSCs and FCs. The minimum doses of donor-derived HSCs and FCs in our FCR001 investigational therapy are customized for each patient, as is the target dose range of aßTCR+ T-cells. The final product is cryopreserved, and after clearing quality control specifications and processing, shipped to the transplant center, where it is stored until the transplant date.

Separately, commencing four days prior to the transplant, the recipient will receive nonmyeloablative conditioning to facilitate engraftment of the HSCs contained in FCR001. Our nonmyeloablative conditioning regimen consists of low total doses of fludarabine and cyclophosphamide and a one-time, low dose of total body irradiation (TBI), resulting in a less toxic regimen than fully myeloablative conditioning. Our nonmyeloablative conditioning regimen enables the patient to be managed primarily in an outpatient setting, with a relatively short hospital stay, whereas fully myeloablative conditioning typically requires inpatient management for 20 to 30 days. As the nonmyeloablative conditioning regimen employed as part of our Facilitated Allo-HSCT Therapy is mainly immunosuppressive and much less toxic to the recipient’s stem cells than myeloablative conditioning, the patient’s immune system is generally expected to recover on its own even if the donated HSCs do not engraft.

 

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Three days prior to the LDKT, the recipient will begin a standard chronic immunosuppressive therapy of tacrolimus and MMF, to help prevent both graft rejection and GvHD after transplantation. On Day 1 post-LDKT, the recipient will receive a single intravenous infusion of FCR001 at their bedside. On Day 3 post-transplant, the recipient will receive a single dose of cyclophosphamide and Mesna to suppress the immune system and reduce undesired side effects of certain chemotherapy drugs.

Over the course of the next six months, the transplant recipient will remain on standard immunosuppressive therapy (i.e. tacrolimus and MMF) and will return to the clinic for routine monitoring. At approximately month six post-transplant, if the recipient demonstrates durable donor chimerism (defined as at least 50% donor T-cell chimerism) there is no evidence of rejection or GvHD, and kidney function remains stable, then MMF can be discontinued. Thereafter, tacrolimus can be tapered starting at month nine, and if the recepient continues to fulfill the preceding conditions, tacrolimus can be discontinued at approximately month 12 post-transplant.

Overview of Our Phase 2 Trial

We conducted an our open-label, single-arm Phase 2 trial to investigate whether administration of FCR001 along with nonmyeloablative conditioning can induce durable immune tolerance to a donated kidney in adult LDKT recipients. Although this trial is no longer actively enrolling patients, this trial will continue to monitor the FCR001-dosed patients for up to 15 years from the time of their transplant and thereby provide long-term follow-up safety and durability data.

Thirty-seven patients were dosed between 2009 and 2016 at Northwestern Medical Center (n=36) and Duke University Hospital (n=1). The first four patients dosed at Northwestern Medical Center were treated under a compassionate use exemption, but we consider these patients to be part of our Phase 2 trial because they were treated with the same FCR001 product and under substantially the same protocol as the subsequent 33 patients. Eligible donor and recipient pairs were adults between the ages of 18 to 65 who met trial eligibility criteria. All levels of immune HLA mismatching between donor and recipients were allowed.    

The primary endpoint of the trial was to determine whether the administration of FCR001 can induce durable tolerance to the donated kidney and substantially reduce or eliminate the requirement for immunosuppression within 12 months following transplant.

Phase 2 LDKT study design

 

 

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As of January 31, 2021, the median follow-up of the 37 patients who received LDKT and FCR001 was over six years, with the longest follow-up being over 11 years. Moreover, as of such time, 33 recipients have at least 36 months of follow-up, and 21 patients have had at least 60 months of follow-up. As of January 31, 2021, we have accumulated a total of approximately 235 patient-years of exposure to FCR001 in LDKT.

Our Phase 2 Results—Clinical Activity

As depicted in the flowchart below, 37 patients received LDKT as well as our investigational therapy, FCR001, plus nonmyeloablative conditioning. As of January 31, 2021, the results were as follows:

Phase 2 Clinical Trial Results as of January 31, 2021

 

 

 

*	Chimerism lost between months 2 and 5 post-transplant.

In our Phase 2 trial, nearly every patient (26 of 27) who demonstrated chimerism at six months post-transplant was able to be completely weaned off all chronic immunosuppression by approximately twelve months post-transplant, and every patient (n = 26) who was weaned off all chronic immunosuppression at twelve months post-transplant has subsequently been able to stay off chronic immunosuppression, without organ rejection during their follow-up. As detailed below, two patients that remained off chronic immunosuppression died at years 3.5 and 4 post-transplant due to pneumococcal sepsis and lung cancer, respectively. We have followed these 26 patients for a median of six years, and the longest for up to 11 years since their transplant.

Induction of Durable Chimerism and Withdrawal of Immunosuppression

Of the 37 patients who received FCR001, 26 (70%) achieved durable donor chimerism (defined for purposes of the Phase 2 trial as whole blood or T-cell donor chimerism greater than 40% at six months post-transplant) and were successfully weaned from their chronic immunosuppression without developing acute rejection or donor specific antibodies. After mid-course optimizations to the Phase 2 protocol were implemented in late 2013, 14 of the last 17 patients (82%) in the trial achieved durable chimerism and could be withdrawn from chronic immunosuppression at approximately one year post-transplant. The chart below shows the duration

 

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and disposition of each patient who participated in our Phase 2 trial, as well as the three main timepoints at which our trial protocol was optimized. Each row in the chart below is indicative of a patient enrolled in our trial. While a total of 43 patients were originally enrolled in our Phase 2 trial, only 37 patients were ultimately dosed with FCR001.

Phase 2 LDKT Trial: Summary of Patient Dispositions and Duration of Follow-Up

 

As depicted in the chart above, during approximately the first half of the Phase 2 trial, we identified certain factors that may have contributed to the failure of the donor’s HSCs to durably engraft in some of our FCR001 recipients. These factors include suboptimal HSC/FC cell counts, failure to administer a post-transplant dose of cyclophosphamide per protocol, the presence of infection at the time of the transplant, a lack of adherence to best clinical practices for management of allo-HSCT patients, and a Panel Reactive Antibody (PRA) greater than 20%. A high PRA indicates that a patient has a disproportionate response to HLA antigens, and a PRA of greater than 20% (which is observed in approximately 10% of LDKT recipients) is a known risk factor for organ rejection in solid organ transplant. Based on these observations, we incorporated certain dosing and protocol refinements into our Phase 2 trial through late 2013. From that timepoint onward (denoted by the (2) in the figure above), 14 of the last 17 patients (82%) dosed in our trial achieved durable donor chimerism and were able to be weaned off their chronic immunosuppression without rejecting the transplanted organ. Based on two observed cases of GvHD in 2014 and 2015, each of which involved a female donor to unrelated male recipient (a known risk factor for GvHD in allo-HSCT), in October 2015 we further refined our Phase 2 protocol to exclude female donors to unrelated male recipients (denoted by the (3) in the figure above). Once this protocol change was implemented in our Phase 2 trial, we did not observe any further cases of GvHD in the last seven patients who received FCR001.

The chart below shows the distribution of the duration of the 26 patients in our Phase 2 trial who are off all chronic immunosuppression without having rejected their transplanted kidney, including two patients whose follow-up stopped at years 3.5 and 4 post-transplant due to their death.

 

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Distribution of 26 Patients Durably Free of Chronic Immunosuppression

 

 

Withdrawal of Chronic Immunosuppression Irrespective of HLA Mismatch

In our Phase 2 trial, the ability to discontinue chronic immunosuppression was observed across all levels of donor and recipient HLA matching, with 19 out of 26 recipients (73%) who were able to durably discontinue their chronic immunosuppression having an HLA match of three or less to their donor. We did not observe any correlation between the degree of HLA mismatch and any of durable chimerism, safety, or GvHD. We believe that the induction of durable allogeneic tolerance (as demonstrated by successful discontinuation of chronic immunosuppression) in a number of patients with poor HLA matching demonstrates FCR001’s potential to overcome a major obstacle in solid organ transplantation and allo-HSCT. The figure below summarizes the distribution of all 37 FCR001-dosed patients in terms of the degree of HLA matching in each of living related donors and living unrelated donors. Results were comparable across all degrees of HLA matching, and whether the donor was related or unrelated. Of patients who received very low-matched (zero to two HLA match) kidneys from unrelated donors, 12 of 17 were durably weaned off their chronic immunosuppression.

 

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HLA Matching and Relatedness—Patient Status

 

 

Chimerism as Predictor of Ability to Withdraw Chronic Immunosuppression at One Year Post-Transplant

Hematopoietic chimerism has recently emerged as a promising, near-term, surrogate marker for predicting allogeneic tolerance induction. In our Phase 2 trial, we observed that high levels (>50%) of donor chimerism at three and six months post-transplant correlated strongly with the ability to discontinue chronic immunosuppression approximately one year after transplant, without subsequent graft rejection. Durable whole-blood and T-cell donor chimerism was observed in 27 patients, of whom 26 were successfully weaned from chronic immunosuppression at approximately one year, with one durably chimeric subject dying due to complications from GvHD shortly before the one-year time point.

All 26 patients in our Phase 2 trial who could be withdrawn from chronic immunosuppression at approximately one year post-transplant attained high and durable levels of whole blood chimerism and/or T-cell chimerism. Of these 26 patients, 22 developed very high level (>90%) donor whole blood chimerism beginning the first month post-transplant, and 24 out of 26 patients had >90% chimerism at one year post transplant. As of January 31, 2021, all 26 patients had retained durable chimerism for the duration of their follow-up.

As depicted in the graph below, the mean percentage whole blood and T-cell donor chimerism levels for FCR001-treated patients weaned off their chronic immunosuppression at approximately one year post-transplant reached approximately 95% as early as one month post-transplant and remained at this level for as long as ten years.

 

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Percentage of Donor Chimerism in FCR001-Treated Patients Who Are Off Chronic Immunosuppression

 

 

Values are mean +/- standard error.

N indicates the number of FCR001 treated patients weaned off IS at approximately one year post-transplant for whom % whole blood and T-cell donor chimerism were measured at that time point

We believe that these collective observations support our belief that the establishment of high levels of donor chimerism is an early and consistent predictor of the ability to durably withdraw an LDKT recipient from chronic immunosuppression without rejecting the transplanted organ.

Of the ten FCR001-dosed transplant recipients in our Phase 2 trial who did not achieve durable chimerism, eight were transiently chimeric and two never engrafted. Transiently chimeric patients typically lost donor chimerism within the first two to five months post-transplant.

While none of the 26 patients in our Phase 2 trial who developed durable chimerism experienced biopsy-proven acute rejection (BPAR), seven of the ten patients who did not achieve durable chimerism did develop BPAR. BPAR was successfully treated in five of these seven patients, but severe infections in two patients required them to be removed from all immunosuppression, which resulted in graft loss. This is consistent with how severe infections would be treated in a standard of care solid organ transplant setting. At the time of their BPAR episodes, all but one patient was being maintained on lower-than-normal levels of immunosuppression, which would have significantly increased the risk of BPAR. In four of these seven patients, immunosuppression therapy was lowered to monotherapy (tacrolimus in three cases and sirolimus in one case), at the investigator’s discretion, and/or lowered to a dose level below what would be permitted in our Phase 3 trial. Our Phase 3 protocol requires that standard of care immunosuppression therapy be maintained for all patients who do not maintain durable donor chimerism at and beyond month six post-transplant unless lowering of immunosuppression is otherwise determined to be medically necessary (e.g. due to a serious infection).

Overall Five-Year Kidney Graft Survival

As of January 31, 2021, five-year survival of the donated kidney was 34 out of 37 patients (92%) in our Phase 2 trial, compared to five-year kidney graft survival of 86% in patients tracked by the United Network for Organ Sharing (UNOS). The three cases of kidney graft loss in our Phase 2 trial occurred in patients who did not establish durable chimerism and were unable to discontinue chronic immunosuppression. As noted earlier, we revised our Phase 2 protocol (and maintained these revisions in our Phase 3 protocol) to address certain factors that we believe may have played a role in these three graft losses, including incorporating into our Phase 2 protocol best clinical practices for management of allo-HSCT patients to minimize infections and excluding patients with a history of infection.

 

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Observation of Renal Function

As shown in the graph below, average renal function in our Phase 2 patients, as measured by estimated glomerular filtration rate (eGFR) by Modification of Diet in Renal Disease, was observed to be preserved over time, both for the durably chimeric patients off chronic immunosuppression after approximately one year as well as for all FCR001 patients on an intent-to-treat basis (ITT). No abnormal histologic findings or instances of BPAR were observed on any protocol biopsies in durably chimeric patients off chronic immunosuppression.

Mean Estimated eGFR* Over Time Post-Transplant

 

 

Average renal function calculation excludes graft losses occurring prior to any given time point. Over time, sample size decreased due to 3 deaths, 3 graft losses, patients not yet out to the time point, or eGFR values missing. Note that ITT analysis excludes the five patients who were enrolled in the Phase 2 trial but did not actually receive FCR001.

Cardiovascular Medication Usage

Separately and apart from our Phase 2 trial protocol, the lead investigator at Northwestern Medical Center for our Phase 2 trial evaluated cardiovascular medication usage at four years post-transplant in FCR001-treated patients compared to 132 standard of care LDKT patients who would have met all of our Phase 2 trial enrollment criteria and were transplanted at Northwestern between 2009 and 2012 (the first three years of our Phase 2 trial). As shown in the table below, at four years post-transplant, cardiovascular medication usage of FCR001 patients who were durably chimeric and off chronic immunosuppression compared favorably with that of the retrospectively gathered standard of care cohort of 132 transplant recipients who received their LDKT at the same site and during the same timeframe as the first half of our Phase 2 trial.

 

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Comparison of Cardiovascular Medication Usage in Durably Chimeric FCR001 Patients vs. Historical Standard of Care Cohort, at Four Years Post-Transplant

 

		Durably chimeric FCR001 patients off immunosuppression (n=26)				Standard of care patients (n=132)
Anti-hypertension medications			18	%			83	%
Anti-hyperlipidemia medications			9	%			43	%

Baseline data not available

Evidence of Immunocompetence in FCR001-Treated Patients

One measure of successful immune system reconstitution is having a highly diverse repertoire of T cell receptor (TCR) clones, meaning a wide range of TCR clones, each capable of recognizing and targeting different foreign antigens. To examine TCR clone diversity in our LDKT patients, we randomly selected nine patients from our Phase 2 trial, of which five had achieved full chimerism and four did not, and analyzed blood samples 24 months after LDKT. We observed that, even though the clone diversity in TCR repertoire was somewhat reduced in all nine post-transplant recipients, the repertoire in these patients was diverse enough to suggest recovery of immune competence. As shown in the figure below, at least 97% and 95% of the total and top 1000 TCR clones, respectively, observed in a representative sample of these post-transplant recipients were not present in either donor or recipient pre-transplant. This suggests that a significant number of unique TCR clones (that were not previously present in either the donor or the recipient) were generated post-transplant, which is evidence of a competent immune system. Within the pool of shared sequences observed in the remaining 3% of clones, full chimerism correlated with a shift towards homology with the donor, meaning that the TCR clones were primarily derived from the donor HSCs, rather than from residual recipient HSCs, while loss of chimerism correlated more closely with the TCR clonal diversity in the recipient following autologous recovery of T-cells.

Unique TCR Clones in Post-Transplant Recipients

 

 

 

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In another study, reported in Science Translational Medicine (2012), Dr. Ildstad and certain collaborators analyzed lineage reconstitution in the first eight recipients of FCR001 in our Phase 2 trial. In that study, Dr. Ildstad and certain collaborators observed evidence of reconstitution of immune and blood cell components (e.g. T-cells, B-cells, natural killer (NK) cells, monocytes, granulocytes) in those FCR001 recipients. In addition, in a separate analysis reported in Transplantation (2015), Dr. Ildstad and certain collaborators analyzed blood reconstitution in the first 20 recipients of FCR001 in our Phase 2 trial (with follow up on the durably chimeric patients between eight and 48 months post-discontinuation of chronic immunosuppression). In many of the patients who achieved durable chimerism, donor-derived red blood cell production was observed. We believe that these observations support the potential of our Facilitated Allo-HSCT Therapy to address certain severe non-malignant blood, immune or metabolic disorders that have previously been successfully treated with standard allo-HSCT.

Our Phase 2 Results—Safety

Through January 31, 2021, we have accumulated a total of approximately 235 patient-years of exposure to FCR001 in LDKT, and the safety profile observed in our patients was generally consistent with that expected if a patient were to separately receive both a standard kidney transplant and an allo-HSCT with nonmyeloablative conditioning. Moreover, as noted above, preliminary data indicates that patients who were able to be weaned off immunosuppression with FCR001 had preserved kidney function and third-party data suggests a markedly lower reliance on cardiovascular medications at four years post-transplant compared to traditional transplants with chronic immunosuppression over a similar time frame. Most adverse events occurred during the first 12 months post-transplant when the patients were on conventional immunosuppression, and no events of infusion toxicity following FCR001 administration were observed. We summarize the safety findings in greater detail below.

The most commonly reported adverse events were diarrhea, BK viruria/viremia, fever, cough, and nausea. The most commonly reported serious adverse events were fever, deep vein thrombosis, including among several patients who had predisposing factors such as central venous catheter placements or Factor V deficiency, diarrhea, pneumonia and febrile neutropenia. The most commonly reported infections were BK viruria/viremia, nasopharyngitis, cellulitis, upper respiratory tract infection, and urinary tract infection. BK urine/blood were monitored frequently per protocol and no cases of BK nephropathy were observed. Cytomegalovirus (CMV) viremia was also observed at a rate consistent with what would be expected in a kidney transplant and allogeneic stem cell transplant population. There was not an increase in CMV incidence in donor/recipient pairs at higher risk of CMV incidence or activation. There were two cases of tissue invasive CMV disease (colitis), both of which occurred in the two FCR001 patients that experienced GvHD.

Five-year patient survival in our Phase 2 trial is comparable to that of LDKT patients as reported in the UNOS database, being approximately 92% in each case. Out of the 37 patients in our Phase 2 trial who received FCR001, there were three patient deaths. The first death, of a patient who had durable chimerism through month 11 post-transplant, occurred eleven months post-transplant and was attributed to complications arising from progressive, treatment-resistant, Grade III GvHD with recurrent CMV colitis. There was a meaningful delay between onset of symptoms and when this patient presented to the transplant center for evaluation and treatment. The second death, of a durably chimeric patient approximately four years after transplant and approximately three years after the patient had discontinued chronic immunosuppression, was attributed to non-small cell carcinoma of the lung. This patient had a more than 40-year history of heavy smoking and refused treatment for his cancer. The third death, of a durably chimeric patient approximately 3.5 years post-transplant and approximately 2.5 years after the patient had discontinued chronic immunosuppression, was attributed to pneumococcus sepsis and human metapneumovirus infection. This patient was non-compliant with the trial’s revaccination protocol (which is standard of care following allo-HSCT) and fell ill while traveling abroad.

There were two cases of GvHD, both in the setting of a female donor to an unrelated male recipient. This donor/recipient combination is known to have a higher risk of GvHD in allo-HSCT. The first case of GvHD occurred at month 11 and was fatal, as described above. The HLA match between this recipient and his donor was two out of six. The second case (Grade II acute GvHD) occurred at approximately two months post-

 

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transplant, almost immediately after the patient’s immunosuppression medication was changed from tacrolimus to sirolimus due to tacrolimus-induced toxicity. The patient’s acute GvHD resolved following treatment with corticosteroids. This patient was weaned off chronic immunosuppression and subsequently developed Grade I-II ocular/musculoskeletal chronic GvHD, which is currently well-managed. The HLA match between this recipient and his donor was one out of six. There were no other reports of acute or chronic GvHD. While other female-donor-to-unrelated-male-recipient pairs in our Phase 2 trial did not experience GvHD, we nonetheless excluded female donor to unrelated male recipients from the last seven patients in our Phase 2 trial, and no further instances of GvHD were observed. We are continuing to exclude these donor-recipient pairs from our FREEDOM-1 Phase 3 protocol.

Six patients in our Phase 2 trial were diagnosed with skin cancers (squamous cell and basal cell), all of which were successfully treated. Skin cancers account for 40% to 50% of malignancies in solid organ transplant, and solid organ transplant recipients are 65- to 250-fold more likely to develop squamous cell cancers and ten- to 16-fold more likely to develop basal cell skin cancers compared to the general population. One patient who was not durably chimeric and remained on chronic immunosuppression developed acute lymphocytic leukemia approximately seven years post-transplant and is in remission following chemotherapy. Approximately six years after transplant, this patient had received rituximab to treat an episode of acute, antibody-mediated rejection approximately nine months before this diagnosis. One patient was diagnosed approximately seventeen months post-transplant with papillary thyroid carcinoma, which was successfully surgically removed, and, as described above, one patient, a lifelong smoker, was diagnosed 4.5 years post-transplant with non-small cell carcinoma of the lung, which was ultimately fatal.

Adverse events reported by stem cell donors consisted of headache, fatigue, skeletal muscular pain, and nausea, and occurred around the timing of their granulocyte colony-stimulating factor administration for stem cell mobilization and apheresis. These adverse events were generally mild, fairly transient, and responded to nonsteroidal anti-inflammatory drugs or similar pain medications. There were no serious adverse events reported by any stem cell donors.

Our Phase 2 Results—Quality of Life (QoL)

Several clinical and real-world studies highlight that treatment with chronic immunosuppression significantly impairs patient-reported QoL in solid organ transplant recipients. To study the potential influence of withdrawal from chronic immunosuppression on transplant recipients’ patient-reported QoL, 13 FCR001-treated patients from our Phase 2 LDKT trial who were successfully withdrawn from chronic immunosuppression at approximately one year post-transplant were compared with 12 patients who would have met inclusion criteria for the FCR001 tolerance protocol but were transplanted under standard of care therapy. Patients were administered three validated QoL self-administered questionnaires: the End Stage Renal Disease Symptom Checklist—Transplantation Module (ESRD-TM); the Short Form 36 (SF-36) questionnaire, the most frequently used patient reported outcomes instrument in clinical trials today; and the EuroQol 5 Dimension (EQ-5D-5L) questionnaire. Investigators and statisticians were blinded to the treatment group. The patient demographics were similar between the two groups. FCR001-treated patients and the standard of care patients were surveyed an average of 50 and 75 months after their organ transplant, respectively.

In general, FCR001 treated patients reported better QoL than standard of care treated patients in all dimensions. In the ESRD-TM, standard of care patients reported statistically significantly greater cardiac and renal dysfunction and significantly greater levels of side effects from corticosteroids than FCR001 patients. The General Health Component of the SF-36 showed a statistically significant decrease in self-reported health among the standard of care patients compared to the FCR001 patients. In the EQ-5D-5L, standard of care patients reported a statistically significantly higher rate of pain and discomfort problems than FCR001 patients. A number of other categories in each of the three questionnaires showed positive trends in favor of FCR001 patients, but the findings were not statistically significant due to the small sample size. In addition to the dimensions of the SF-36 and ESRD-TM where FCR001 treated patients had a statistically significant benefit versus standard of care,

 

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patients treated with FCR001 had numerically favorable ratings on all other dimensions that did not reach statistical significance. Moreover, on the EQ-5D5L, in addition to the statistically significant benefit on pain/discomfort ratings, FCR001 treated patients had numerically favorable ratings versus standard of care on the dimensions of usual activity, anxiety/depression, and mobility. Both FCR001 and standard of care treated patients rated no problems on the dimension of self-care.

In summary, the three quality of life instruments used in this trial were in agreement that standard of care patients reported diminished mental health in the form of greater psychological stress, decreased overall mental health, and greater anxiety/depression scores compared to the FCR001-treated patients who had been able to discontinue their chronic immunosuppression. The three instruments also provided similar results in the areas of reported pain and discomfort as well as cognitive impairment, which again were notably higher in the standard of care patients compared to the FCR001-treated patients. Collectively, these preliminary results suggest that when our investigational FCR001 therapy enabled the discontinuation of all chronic immunosuppression medications, this outcome may be associated with significantly improved QoL in those FCR001-treated patients as compared to the QoL of standard of care patients who remained on chronic immunosuppression. Our FREEDOM-1 trial will further evaluate the potential QoL impact of FCR001 versus standard of care using the ESRD-TM and SF-36 questionnaires.

Our Phase 3 FREEDOM-1 Trial

Based on promising data from our Phase 2 LDKT trial, we have initiated FREEDOM-1, a 5-year multicenter, open-label, randomized, controlled, Phase 3 trial assessing the safety and efficacy of FCR001 in first-time, adult LDKT. A total of 120 LDKT recipients will be randomized 2-to-1 into the following two arms: (1) the interventional arm, where 80 patients will receive LDKT and FCR001 accompanied by nonmyeloablative conditioning, and will receive standard of care chronic immunosuppression that can potentially be eliminated by 12 months post-transplant, and (2) the control arm, where 40 patients will receive a LDKT plus standard of care chronic immunosuppression. The primary objective is to evaluate the proportion of FCR001 recipients who are free from chronic immunosuppression, without BPAR, at 24 months post-transplant. The key secondary objective is to evaluate the change in mean renal function (eGFR by Modification of Diet in Renal Disease) from month one post-transplant to month 24 in FCR001 recipients. Because LDKT recipients on standard of care treatments do not discontinue immunosuppression without rejecting the transplanted organ, neither the primary endpoint nor the key secondary endpoint of FREEDOM-1 involves a statistical comparison between the interventional arm and the control arm. Instead, the primary endpoint of FREEDOM-1 is the demonstration that the lower end of our confidence interval of FCR001 patients free from chronic immunosuppression and without BPAR at two years post-transplant is above 30%. The secondary endpoint of FREEDOM-1 is the demonstration that the lower end of our confidence interval for the mean renal function (as measured by eGFR) of the FCR001 patients is above a five-point decline in eGFR.

Our Phase 3 protocol incorporates several learnings from our Phase 2 trial in order to optimize the likelihood of achieving donor stem cell engraftment and durable chimerism and minimize the risks of graft rejection or GvHD. As depicted in the figure above entitled “Phase 2 LDKT Trial: Summary of Patient Dispositions and Duration of Follow-Up,” and the accompanying discussion, during our Phase 2 trial, we identified a number of factors that we believe negatively affected outcomes, and we adjusted our minimum cell doses and trial protocols accordingly. For example, we observed that highly sensitized patients were more likely to reject their stem cell graft. As a result, we are excluding certain types of highly sensitized patients from our Phase 3 protocol. Characteristics of highly sensitized patients include, but are not limited to, patients with a PRA greater than 20% and patients who have had recent blood product transfusions. We are also excluding female-donor-to-unrelated-male-recipient pairings, as this pairing is known to increase the risk of GvHD in allo-HSCT, as well as transplant recipients who have had significant recent infections.

Further, we require adherence to our full nonmyeloablative conditioning regimen (including administration of the post-transplant dose of cyclophosphamide), and we require that our centers adhere to best clinical practices

 

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for allo-HSCT, including enhanced surveillance for, and proactive management of, GvHD; infectious disease prophylaxis and treatment with drugs that are not myelosuppressive; standard revaccination protocols; and avoiding medications that may induce cytopenia. We will also require all FCR001-dosed patients who are not durably chimeric and weaned off their chronic immunosuppression to be maintained at all times on standard of care maintenance immunosuppression unless it is medically necessary to reduce immunosuppression, such as in cases of severe infection.

Delayed Tolerance in LDKT: FREEDOM-2

In our FREEDOM-2 trial, we intend to assess whether FCR001 can induce durable immune tolerance to the transplanted organ when it is administered, together with nonmyeloablative conditioning to LDKT recipients up to one year following their kidney transplant. The design of the FREEDOM-2 trial is virtually identical to the FREEDOM-1 trial, except that FCR001 will be administered three- to twelve months post-LDKT in FREEDOM-2, whereas it will be administered the day after the LDKT in FREEDOM-1. In both cases, nonmyeloablative conditioning will be administered commencing five days prior to the administration of FCR001. Positive results in FREEDOM-2 could potentially enable us to also address some portion of the prevalent LDKT population, rather than the incident LDKT population that is addressed by FREEDOM-1.

FREEDOM-2 is a five-year, multi-center, single-arm, open-label trial to assess the safety, preliminary efficacy, and overall benefit of FCR001 cell therapy in previously transplanted recipients of a kidney from a living donor. We filed an original IND and protocol for this trial in 2011, in which two patients were dosed on an exploratory basis. We have recently revitalized and amended this protocol to incorporate numerous learnings from our Phase 2 LDKT trial, including increasing our minimal cell doses, exclusion of highly sensitized patients, and adherence to best allo-HSCT practices and use of appropriate prophylactic medications for HSCT. Similar to FREEDOM-1, the primary objective of FREEDOM-2 is to evaluate the proportion of FCR001 recipients who are free from chronic immunosuppression, without BPAR, at 24 months post-FCR001 infusion. The key secondary objective is to evaluate the change in renal function from baseline (day one, prior to FCR001 infusion) to month 24 in FCR001 recipients. The amended protocol has not yet been reactivated to enroll patients. We expect to reinitiate the FREEDOM-2 trial in      .

As noted above, in 2012, we enrolled two patients in an earlier version of our delayed tolerance protocol. Both patients continue to have stable renal function and are being managed as standard of care kidney transplant patients, even though neither achieved durable chimerism. As noted above, we have revitalized and amended this protocol to incorporate numerous learnings from our Phase 2 LDKT trial. Because neither of these patients was treated in accordance with the current protocol, nor received our optimized cell doses, these patients will not count towards the formal analysis of our FREEDOM-2 trial.

Although FREEDOM-2 initially contemplates administering FCR001 no more than one year after LDKT, we have the flexibility to amend the trial protocol to extend the period of time between LDKT and FCR001 administration if we see positive initial results from our FREEDOM-2 trial.

We believe that positive proof of concept in FREEDOM-2 could open to the door to broader clinical application of our Facilitated Allo-HSCT Therapy to deceased donor kidney and other solid organ transplantation settings. In the deceased donor setting, there is an inherent delay between the time that a deceased donor’s solid organ is transplanted to a recipient, and when a product made from cells procured from the deceased donor could be processed and then subsequently administered to the transplant recipient. Demonstration in FREEDOM-2 of the feasibility of delayed tolerance induction would lend support to the potential of our Facilitated Allo-HSCT Therapy to induce durable immune tolerance in a recipient of a deceased donor’s organ up to twelve months after their original organ transplant.

 

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Deceased Donor Program

We believe that it may be possible to induce allogeneic tolerance in a recipient using HSCs procured and processed from a deceased donor. We are conducting preclinical research to explore whether we can successfully procure and process cells from deceased donors to produce either FCR001 or a similar product to FCR001, which we would designate FCR002.

Deceased donor kidney transplants represent a substantial portion of the kidney transplant recipient population, accounting for more than 70% of annual kidney transplants in the United States. If our Facilitated Allo-HSCT Therapy is shown to be capable of inducing durable immune tolerance in the deceased donor kidney transplant setting, then we also believe our therapeutic approach could be applied to the transplant of other solid organs from deceased donors. Collectively, the incident deceased solid organ transplant population is more than four times greater than the living donor transplant population.

Restore: Severe Autoimmune Disease

We believe that our Facilitated Allo-HSCT Therapy has the potential to restore self-tolerance in patients suffering from severe autoimmune diseases by eradicating diseased autoreactive cells and regenerating a new and healthy repertoire of immune cells, thereby halting the autoreactive cells’ attack on one’s own body.

We believe that our Phase 2 LDKT trial has already provided some proof of concept that our Facilitated Allo-HSCT Therapy could be used to treat severe autoimmune disease. Typically, 20% to 60% of kidney transplant patients whose end-stage renal disease is caused by a kidney-related autoimmune disease experience post-transplant recurrence of their kidney-related autoimmune disorder. Ten patients in our Phase 2 trial of FCR001 had an underlying, kidney-related autoimmune disease that led to their need for a LDKT. As shown in the table below, seven of these ten patients achieved durable donor chimerism and were able to be weaned off all chronic immunosuppression approximately one year post-transplant. As of January 31, 2021, none of these seven successfully tolerized patients has experienced recurrence of their prior kidney-related autoimmune disorder, with follow-up from four to ten years post-transplant. By contrast, recurrence of the prior kidney-related autoimmune disease was reported in two of the three other patients who experienced either transient or no chimerism.

Durable Chimerism vis-à-vis Disease Recurrence in our Phase 2 Trial

 

		Durable Chimerism								Disease Recurrence
Condition		Durable Chimerism				Disease Recurrence				Transient or no Chimerism				Disease Recurrence
IGA Nephropathy			4				0				2				1
Focal Segmental Glomerulosclerosis			2				0				0				0
Membranous Glomerulonephritis			1				0				1				1
Total			7				0				3				2

We believe that this preliminary finding highlights the importance of achieving durable chimerism in order to induce durable allogeneic tolerance, as well as the potential of FCR001 to induce durable allogeneic tolerance in patients with an autoimmune disease.

Over the past 25 years, data from randomized trials and real-world experience gathered from more than 3,300 patients by the European Society for Blood and Marrow Transplantation Autoimmune Disease Working Party has shown that individuals suffering from a range of severe, refractory forms of rheumatologic, neurologic, and hematological autoimmune diseases appear to have benefitted from HSCT, primarily autologous HSCT. We believe that those data, together with our preliminary findings showing the potential of FCR001 to induce

 

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allogeneic tolerance in patients with a prior kidney-related autoimmune disease, support development of FCR001 for severe autoimmune disease. We initially have prioritized development of FCR001 in a severe form of scleroderma, also known as systemic sclerosis (SSc), given the high unmet need in this indication and third party data supporting the potential benefit of HSCT for SSc.

Background of Scleroderma or SSc

SSc is a rare, clinically heterogenous, progressive, multisystem, chronic autoimmune disorder that primarily affects the connective tissues. It has a prevalence of approximately 70,000 to 80,000 individuals in the United States, about 80% of whom are women aged 30 to 50. SSc is characterized by progressive fibrosis of the skin and visceral organs, vasculopathy, and the presence of autoantibodies against various cellular antigens. The etiology of this disorder is largely unknown, but research suggests it is due to both genetic and environmental factors that lead to dysregulation of the innate and adaptive immune systems, dysfunctional inflammatory responses, and connective tissue repair injury in susceptible individuals.

We estimate that approximately 40% of systemic sclerosis patients are diagnosed with the most severe form of SSc, diffuse cutaneous SSc (dcSSc). dcSSc has a poor prognosis, with a disease-related mortality of 5% to 10% per year. dcSSc may progress rapidly, affecting areas throughout the body. Progression from Raynaud’s phenomenon—a condition that causes decreased blood flow to the fingers and toes—to skin thickening typically occurs within one year and can cause profound impairments to quality of life and morbidities, including disfigurement, difficulty opening the mouth, loss of facial expression, and joint contractures. Internal organ vasculopathy and fibrosis typically begin within five years of diagnosis. Commonly affected organs can include the gastrointestinal tract, heart, lungs and kidneys. Interstitial lung disease and pulmonary hypertension together account for nearly 50% of SSc deaths, followed by renal and cardiac complications.

The mortality rate in dcSSc is highest during the first five years of disease onset, when disease progression is most rapid. Patients with rapidly progressing dcSSc have an especially poor prognosis, with survival rates at five and ten years as low as 60% and 30%, respectively. There are no disease modifying therapies for dcSSc. Nintedanib is the only FDA-approved therapy indicated for SSc but is only labeled to address interstitial lung disease in these patients. Other treatment options are only focused on symptom management and their costs can be substantial, especially in patients with advanced disease. A study published prior to the introduction of nintedanib—which costs nearly $140,000 annually—estimated that five-year direct healthcare costs in the United States for SSc patients with interstitial lung disease or pulmonary hypertension exceed $190,000 and $250,000, respectively.

Recently, however, HSCT has emerged as a promising and potentially disease-modifying treatment for patients with dcSSc at risk for organ failure.

HSCT as Potential Treatment for dcSSc

SSc is thought to be mediated by autoreactive T-cells and B-cells targeting self-antigens, eventually leading to organ damage. HSCT aims to reconstitute the hematopoietic system using either the patient’s own (autologous) or healthy donor (allogeneic) stem cells to re-establish a naïve, self-tolerant immune system to both allo-antigens and auto-antigens. The combination of lymphotoxic chemotherapy (e.g., cyclophosphamide and anti-thymocyte globulin) with or without TBI leads to a profound and long-lasting lymphopenia with persistently reduced levels of pathogenic autoantibodies. Aside from this nonspecific immunosuppression, there is growing evidence that HSCT can restore tolerance by establishing a diversified T-cell receptor repertoire and by increasing numbers of regulatory T-cells.

Autologous HSCT is increasingly being explored as a treatment option for patients with dcSSc and internal organ involvement. Cumulative data from three randomized, controlled trials conducted by third parties have observed the benefit of autologous HSCT therapy in dcSSc as assessed by multiple important outcome measures

 

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including clinical improvement, overall and event-free survival, and disease relapse. Further, based on these findings, the European League Against Rheumatism and the American Society for Blood and Marrow Transplantation both now recommend HSCT for patients with rapidly progressive dcSSc at risk for organ failure. Data to date indicate that autologous HSCT may require a myeloablative regimen to be most effective. Higher rates of relapse have been observed when less intensive conditioning regimens have been used. Nevertheless, disease recurrence still was observed in autologous HSCT patients, presumably in part because the patient’s own diseased stem cells are being reinfused in the patient.

Allogeneic HSCT offers a promising alternative therapy to autologous HSCT for patients diagnosed with dcSSc. The advantage of allo-HSCT is its ability to replace the immune system with cells from healthy donors that lack the genetic predisposition for a return to autoimmunity, and with the potential of inducing tolerance to both auto-antigens and allo-antigens. Despite these benefits, allo-HSCT is not commonly used to treat dcSSc patients due to concerns over a potentially higher risk of transplant-related mortality (TRM) and GvHD, which affects between 20% to 70% of recipients. The risk of TRM and GvHD depends on the type of transplant, the degree of donor-recipient HLA compatibility, and the prophylaxis regimen.

Compared to autologous HSCT, standard allo-HSCT has the potential to offer patients with dcSSc additional benefit of lower rates of disease recurrence or potentially a cure. However, with current approaches, this procedure is accompanied by the significant risk of acute and chronic GvHD and a higher TRM. We believe that our Facilitated Allo-HSCT Therapy, which combines administration of FCR001 with a nonmyeloablative conditioning regimen, could offer a less toxic alternative to autologous HSCT (which generally requires a fully myeloablative conditioning regimen), and has the potential to enable broader use of allo-HSCT with a lower GvHD risk for patients with dcSSc and potentially other severe autoimmune diseases.

Our Phase 2 Trial in dcSSc: FREEDOM-3

FREEDOM-3 is a two-year treatment and three-year follow-up, multi-center, single-arm, open-label proof-of-concept Phase 2 trial assessing the safety and efficacy of FCR001 in adults with dcSSc at risk for organ failure. The design of the FREEDOM-3 trial is substantially similar to that of the FREEDOM-2 trial, except without the kidney transplant. We plan to enroll up to 18 adults diagnosed with dcSSc within five years of first non-Raynaud’s symptom, who have not adequately responded to at least one immunosuppressive agent and have significant cutaneous and pulmonary and/or renal involvement. The primary endpoint in this trial will be safety assessed by AE/SAEs, GvHD, AEs of special interest, neutrophil and platelet recovery time, safety lab assessments, autologous rescue infusion use and donor-specific antibodies. Secondary and exploratory endpoints will include T-cell chimerism over time, overall event-free survival and various efficacy markers (e.g., CRISS, a relatively new composite response index for dcSSc which has recently been validated in later stage clinical studies; DMARD use; and skin manifestation changes by Modified Rodnan skin score). We expect to initiate this trial in      .

Replace: Potential of FCR001 to Treat Certain Other Severe Non-Malignant Disorders

Use of Allo-HSCT to Treat Certain Severe Non-Malignant Blood, Immune and Metabolic Disorders

In 2017, more than 1,100 allo-HSCT procedures were performed to treat a wide range of severe non-malignant blood, immune and metabolic disorders, all of which involve functional defects or deficiencies of cells derived from HSCs that mature into our functioning blood and immune systems. Standard allo-HSCT entails transplanting HSCs collected from a healthy donor into these patients, to potentially cure the patient’s defective cells by replacing them with healthy, donor-derived cells. As depicted in the figures below, HSCs differentiate broadly into common blood (myeloid) and immune (lymphoid) progenitor cells. These cells in turn further differentiate into cells that, if defective, can correspond to various categories of hematological or immune disorders.

 

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Severe Non-malignant Blood Disorders for which Facilitated Allo-HSCT has Therapeutic Potential

 

 

 

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Immune Indications for which Facilitated Allo-HSCT has Therapeutic Potential

 

The therapeutic principle of allo-HSCT for the range of severe non-malignant disorders noted above is to replace the defective or deficient HSCs in a patient’s bone marrow with normal-functioning HSCs from a healthy donor. Thereafter, the donor HSCs would produce functional blood and immune cells that could potentially ameliorate or even functionally cure these disorders.

Many patients who might benefit from allo-HSCT do not receive it because they are unable to find a suitable HLA-matched donor. Approximately 30% of allo-HSCT candidates overall have suitable related donor matches. The risk of GvHD is positively correlated with the degree of HLA mismatch, and this risk is even greater if the donor is unrelated to the recipient. In 2017, less than half of allo-HSCTs for non-malignant indications were from HLA-matched sibling donors. According to the National Marrow Donor Program, which has over 25 million donors registered worldwide, there is a wide racial and ethnic disparity in the likelihood of finding a suitable match. As such, there is a significant unmet need for an approach to allo-HSCT that could enable better clinical outcomes regardless of the degree of HLA mismatch between donor and recipient, as mitigating the HLA-mismatch barrier could dramatically expand the pool of potential donors for allo-HSCT.

 

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A second major limitation of allo-HSCT for non-malignant indications is that it usually entails fully myeloablative conditioning due to concerns that nonmyeloablative conditioning will not promote robust levels and durability of donor chimerism to effectively replace most of the defective HSCs in the recipient’s bone marrow. The intensity and toxicity of myeloablative conditioning regimens is greater than for nonmyeloablative regimens and necessitates a long and costly hospitalization while the recipient’s immune and blood systems reconstitute. According to the AHRQ HCUPNet, the average length of hospital stay for patients undergoing allo-HSCT in 2017 was 32 days, with an average charge per hospitalization of $572,945. Moreover, the risk of serious long-term sequelae, such as blood cancers, is significantly elevated by fully myeloablative conditioning. An analysis of more than 28,000 patients showed that one factor affecting the incidence of secondary cancers was the dose of TBI. Patients who received a single dose of greater than 1000 cGy (which is a dose consistent with fully myeloablative conditioning) were more likely to develop secondary cancers compared to those given a single dose of less than 1000 cGy, and this risk increased over time after transplant, reaching up to 7% at 15 years. Assuming a dose-response relationship, the risk of developing secondary cancers would be significantly reduced for patients that receive a significantly lower dose of TBI (e.g., 200 cGy), which is the dose that is currently used in our nonmyeloablative conditioning regimen.

Thus, we believe there is a significant unmet need for a nonmyeloablative approach to allo-HSCT for severe non-malignant blood, immune and metabolic disorders that could enable high levels of durable donor chimerism with less short- and long-term toxicity and correspondingly shorter hospital stays and lower costs.

FCR001 for Certain Severe Non-Malignant Disorders

We believe that FCR001, or our Facilitated Allo-HSCT Therapy more broadly, has the potential to address key limitations to current allo-HSCT, which has limited the use of allo-HSCT in severe non-malignant blood, immune and metabolic disorders despite its potentially curative impact on such disorders.

In our Phase 2 trial of LDKT recipients, FCR001 treatment induced, in a significant portion of our patients, high levels (>95%) of durable (median of six years, longest up to 11 years) donor whole blood chimerism and T-cell donor chimerism despite a nonmyeloablative conditioning regimen. Notably, we have observed evidence of reconstitution of immune and blood cell components (e.g. T-cells, B-cells, natural killer cells, monocytes, granulocytes, and red blood cells) in FCR001 recipients. We have also observed a low incidence of acute GvHD (grade II-IV of 5%; grade III-IV of 3%) and of chronic GvHD (3%) in our Phase 2 trial, despite the fact that many of our donor-recipient pairs were significantly HLA-mismatched and unrelated. By contrast, in a trial conducted by a third party at Johns Hopkins, HLA-related patients with hematologic malignancies who were transplanted with unmodified HSCs and with a nonmyeloablative conditioning regimen that was similar to ours, but somewhat more intensive, had a relatively high incidence of acute GvHD (grade II-IV of 34%; grade III-IV of 6%) and of chronic GvHD (25%). Patients on the Johns Hopkins protocol were treated with two post-transplant cyclophosphamide doses, while those treated in our Phase 2 trial with our nonmyeloablative regimen for FCR001 received only one post-transplant cyclophosphamide dose. These data are derived from two different clinical trials with differences in trial design and patient populations. No head-to-head clinical trials have been conducted.

We plan to prioritize FCR001 for one or more severe non-malignant blood, immune or metabolic disorders for advancement into IND-enabling studies in                 .

Preclinical Studies: Facilitating Cell Mechanism of Action

Preclinical research conducted by third parties has observed that high doses of purified HSCs can reconstitute lethally conditioned, allogeneic recipients, but that significantly lower numbers of HSCs are needed when whole marrow is transplanted. A university team led by our founder and Chief Scientific Officer, Dr. Suzanne T. Ildstad, originally discovered that FCs may serve to facilitate engraftment of HSCs in allogeneic settings. Subsequently, FCs have been observed by other investigators to be associated with enhanced allogeneic

 

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HSC engraftments in both mouse and humanized mouse models. In addition, FCs have been observed to be associated with reduced rates of GvHD. Consistent with preclinical data generated in mouse models, enhanced engraftment of donor HSCs was observed in our Phase 2 trial of FCR001.

Our preclinical studies of FCR001 have observed the potential of FCs to augment engraftment of HSCs. Together with our former collaborator, Novartis, we evaluated the impact of FCs on HSC engraftment in lethally irradiated mice. We observed that, in lethally irradiated mice, transfer of 5,000 HSCs alone resulted in death due to engraftment failure; however, the transfer of 5,000 HSCs together with 30,000 FCs resulted in HSC engraftment and survival of all mice, as shown in the figure below. We believe that these data support the hypothesis that enriching the FC subpopulation in human HSC transplants may improve the outcome of allo-HSCT in the clinic.

Mouse FCs and Engraftment in allo-HSCT

 

 

Although a limited number of donor T-cells are known to improve HSC engraftment, these same donor T-cells can also elicit GvHD. As shown in the figure below, we have observed that co-transfer of FCs with HSCs and T-cells in an in vivo allogeneic mouse model was associated with delays and reductions in the development of GvHD. Recipient mice were conditioned with lethal doses of TBI. Both experimental groups were transplanted with HSCs and T-cells, and one of the groups also received FCs. We observed that all mice in the group that only received HSCs and T-cells died due to GvHD within 42 days, as shown in the orange line of the graphic. When FCs were also transferred, we observed delayed development of GvHD and survival of 40% of these animals, as represented by the blue line of the graphic. We believe that these data support the hypothesis that FCs provide a protective effect against the development of allogeneic GvHD.

 

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Evidence that Mouse FCs Protect Against Death from GvHD

 

We, together with Novartis and a university team, conducted a study in immunodeficient NSG mice to evaluate the role of human FC subpopulations in engraftment of HSCs and the establishment of chimerism in vivo. The human FC population makes up approximately 1.4% to 3.0% of the total mobilized peripheral blood progenitor cells which proliferate in the bone marrow and migrate into circulation. FCs are a heterogeneous population and comprise at least two distinct subsets distinguished by CD56 expression or lack thereof. HSCs and CD56- or CD56+ FCs were sorted from the same donor and transplanted into NSG mice given sublethal conditioning. The Figure A below shows the percentage of animals in which human HSCs engrafted, while Figure B shows the percentage of human HSCs cells in the peripheral blood (PB) of engrafted animals. As illustrated below, 90 days after transplantation, both FC subpopulations exhibited augmented engraftment of HSCs in this setting as compared to the HSC alone population.

Human FCs and Long-term HSC Engraftment in NSG Mice

 

 

 

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Based on these preclinical studies, we believe that both subpopulations of CD56 FCs are relevant for facilitating engraftment of HSCs. Both subpopulations of CD56 FCs are components of FCR001.

Competition

The biotechnology and pharmaceutical industries are characterized by the rapid evolution of technologies and understanding of disease etiology, intense competition and a strong emphasis on intellectual property. We believe that our approach, strategy, scientific capabilities, know-how and experience provide us with competitive advantages. However, we expect substantial competition from multiple sources, including major pharmaceutical, specialty pharmaceutical, and existing or emerging biotechnology companies, academic research institutions and governmental agencies and public and private research institutions worldwide. Many of our competitors, either alone or through collaborations, have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical trial sites and patient enrollment in clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs. As a result, our competitors may discover, develop, license or commercialize products before or more successfully than we do.

Living Donor Kidney Transplant (LDKT) and Solid Organ Transplant

There are currently no FDA- or EMA-approved cell therapies for inducing durable immune tolerance to a transplanted solid organ. Medeor Therapeutics, Inc. is conducting a Phase 3 clinical trial for MDR-101, an allogeneic cell therapy, to induce immune tolerance to a donated kidney only in 6 out of 6 HLA-matched LDKT donor-recipient pairs. In 2018, Medeor announced its intent to initiate additional clinical trials to explore tolerance induction in LDKT, for which enrollment has not yet commenced. ITB-MED AB is conducting an early-stage safety study of siplizumab, a humanized anti-CD2 monoclonal antibody in LDKT recipients. In addition, there are other T-cell-based approaches in early development stages that seek to induce immune tolerance in the transplantation of solid organs.

 

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Furthermore, we also face competition more broadly across the solid organ transplantation market from cost-effective and reimbursable anti-rejection and immunosuppressive treatments. The most common medications used to prevent organ rejection are tacrolimus, mycophenolate mofetil and corticosteroids. In many cases, these drugs are administered in combination to enhance efficacy. FCR001 or other allo-HSCT candidates, if any are approved, may not be cost competitive with these existing drugs and other therapies. Some anti-rejection and immunosuppressive medicines are branded and subject to patent protection, while others are available on a generic basis. Insurers and other third-party payors may also encourage the use of generic products or specific branded anti-rejection and immunosuppressive products. As a result, obtaining market acceptance of, and gaining significant share of the market for, any of our therapies that we successfully introduce to the market may pose challenges. In addition, many companies, such as Novartis AG, are developing new therapeutics, and we cannot predict how the standard of care will evolve as our product candidates progress through clinical development.

Scleroderma and Severe Autoimmune Diseases

There are currently no FDA- or EMA-approved cell therapies for treating scleroderma. Current treatment options are focused on addressing organ or tissue-specific manifestations. Methotrexate is often prescribed for skin or musculoskeletal complications, proton pump inhibitors or H2 blockers for gastrointestinal reflux, and endothelin receptor antagonists, epoprostenol analogues or PDE-5 inhibitors for pulmonary artery hypertension. Boehringer Ingelheim’s nindetanib is the only FDA-approved therapy indicated for the treatment of SSc-associated interstitial lung disease. In addition, other companies, such as Acceleron Pharma, Inc., are exploring therapeutics for SSc, and others, such as Corbus Pharmaceuticals, Inc., Horizon Therapeutics, Plc., and Kadmon Holdings, Inc., are exploring therapeutics for dcSSc; however, these agents are not intended to be curative. Although not formally approved by FDA for this indication, autologous HSCT is occasionally used as a therapy for severe scleroderma and is reimbursed by some payors in the United States and Europe. In the future, we may pursue the development of FCR001 or another cell therapy as a treatment for other severe autoimmune diseases, and as a result, we may also face competition more broadly from other companies with approved products or product candidates in development.

License Agreement with University of Louisville Research Foundation, Inc.

In October 2018, we entered into an amended and restated exclusive license agreement (ULRF License Agreement) with University of Louisville Research Foundation, Inc. (ULRF) as an agent of the University of Louisville, relating to certain licensed patent rights and know-how related to human facilitating cells for our Facilitated Allo-HSCT Therapy. Pursuant to the ULRF License Agreement, ULRF granted us an exclusive, worldwide license under such patents and a nonexclusive royalty-bearing, worldwide license for such know-how to research, develop, commercialize and manufacture FCR001 and products containing FCR001 in all fields, without limitation. ULRF also granted us the right to grant sublicenses in accordance with the ULRF License Agreement.

ULRF retained (i) the rights to publish the licensed technology, subject to our prior written approval and in accordance with the reciprocal nondisclosure agreement governing confidential information relating to the ULRF License Agreement, and (ii) the rights to practice the licensed patents and use the licensed technology, in each case solely for not-for-profit educational and non-commercial research purposes. The ULRF License Agreement is also subject to pre-existing rights of the U.S. government.

Pursuant to the terms of the ULRF License Agreement, we shall use commercially reasonable efforts to develop the products with the goal of achieving regulatory approval thereof and, following such approval, to commercialize such product in any country or countries for which such regulatory approval has been obtained.

As partial consideration for the license and rights, we have paid and will continue to pay ULRF a non-refundable, non-creditable annual license maintenance fee starting on the third anniversary date of the

 

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agreement through the seventeenth anniversary date. In addition, we are obligated to pay ULRF non-refundable, non-creditable research and development, regulatory and sales milestone payments upon the occurrence of certain milestone events in an aggregate amount of approximately $1.625 million for development, regulatory and sales milestones. Each milestone is payable only once. One milestone has been achieved to date under the ULRF License Agreement.

As partial consideration for the license and rights, we also granted to ULRF 348,750 shares of contingent equity consideration. On or prior to an initial public offering or deemed liquidation event, we will either issue shares of common stock equal to such consideration or make an equivalent cash payment of such share amount multiplied by the price per share of common stock at the time of the initial public offering or deemed liquidation event, in full satisfaction of the contingent equity consideration owed to ULRF pursuant to the ULRF License Agreement. If we grant stock to ULRF pursuant to the ULRF License Agreement, then ULRF has agreed to enter into a lockup agreement for such duration and in the form requested by the underwriters of the initial public offering in the same manner as our directors, executive officers and certain stockholders. Dr. Ildstad is entitled to a portion of this compensation pursuant to investor rights under the University of Louisville’s Intellectual Property Policy.

Furthermore, on a licensed product-by-licensed product, indication-by-indication and country-by-country basis, we are required to pay future tiered royalties ranging from 1.5% to 4% on annual aggregate net sales of all products during the term of the ULRF License Agreement, subject to certain reductions in connection with obtaining a license for any patents owned or controlled by a third party in order to commercialize the licensed product; provided, however, that the royalties due to ULRF shall not be reduced by more than fifty percent (50%). In the event that we sublicense the licensed patent rights, ULRF is also entitled to receive a tiered percentage of the non-royalty sublicensing revenue we receive. The Company’s obligation to pay royalties continues until the expiration or abandonment of the last valid claim of any of the licensed patents under the ULRF License Agreement.

ULRF may terminate the ULRF License Agreement upon our material breach or bankruptcy. We may also terminate ULRF License Agreement upon prior written notice. Unless earlier terminated, the ULRF License Agreement will continue until the expiration or abandonment of the last valid claim of any of the licensed patents under the ULRF License Agreement.

Intellectual Property

The intellectual property that is available to is critical to our business and we strive to protect it, including by obtaining, maintaining, defending, and enforcing patent protection in the United States and internationally for our proprietary technology, improvements, platforms, products and components thereof, novel biological discoveries, new therapeutic approaches and potential indications, and other inventions that are important to our business. For our product candidates, generally we initially pursue patent protection covering compositions of matter, methods of production, and methods of use. Throughout the development of our product, we will seek to identify additional means of obtaining patent protection that would potentially enhance commercial success, including through methods of clinical production and quality control.

As of February 1, 2021, the Talaris patent portfolio includes four patent families, which are exclusively in-licensed from ULRF in our field. These families include issued patents and pending applications related generally to the Talaris facilitating cell product, methods of making the facilitating cell product, methods of using the facilitating cell product therapeutically, and methods of evaluating the viability or potency of the facilitating cell product. Specifically, we have exclusively in-licensed a patent portfolio that currently includes at least three issued U.S. patents, 31 issued patents issued in foreign jurisdictions, and 12 patent applications pending worldwide. The issued patents from three of the four families in the Talaris portfolio are expected to expire around 2029, and any patents that issue from the fourth family in the Talaris portfolio are expected to expire around 2038, absent any applicable patent term adjustments or extensions.

 

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The first family includes issued patents in Australia, Canada, and Europe; there are no pending applications in this family. All of the issued claims in this family are directed to compositions that include at least 30% facilitating cells, methods of making such compositions, and/or methods of using such compositions. The European patent is validated in five European countries including France, Germany, Italy, Spain, and United Kingdom. This family of patents is in-licensed under an exclusive license agreement with ULRF, and is expected to expire in 2029, absent any applicable patent term adjustments or extensions.

The second family includes one issued US patent, with claims directed to methods of increasing the number of facilitating cells by exposing them to the DOCK-2 protein. This patent is in-licensed under the same exclusive license agreement with ULRF, and is expected to expire in 2032, absent any applicable patent term adjustments or extensions.

The third family includes two issued U.S. patents and two pending U.S. applications, at least one issued patent in each of Australia, China, Europe, India, and Japan, and pending applications in both Canada and China. The claims in this family are directed to compositions that include at facilitating cells, methods of making such compositions, and/or methods of using such compositions absent a requirement for any particular amount of facilitating cells. The European patent is validated in 17 European countries including Austria, Belgium, Denmark, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Norway, Poland, Spain, Sweden, Switzerland, Turkey, and United Kingdom, and also is validated in Hong Kong. This family of patents is in-licensed under the same exclusive license agreement with ULRF. The US members of this family claim the benefit of priority to members of the first family (i.e., as a Continuation-in-Part), and are expected to expire in 2029, while the non-US members of this family are expected to expire in 2031, absent any applicable patent term adjustments or extensions.

The fourth family includes pending applications in the U.S., Australia, Canada, China, Europe, India, Japan and Russia. These pending applications generally have claims directed to determining the potency of a composition that includes facilitating cells. This family of patents is co-owned by us and ULRF; this family of patents also falls within the same exclusive license agreement with ULRF. Patents that issue in this family are expected to expire in 2038, absent any applicable patent term adjustments or extensions.

The term of individual patents depends upon the legal term for patents in the countries in which they are obtained. In most countries, including the U.S., the patent term is 20 years from the earliest filing date of a non-provisional patent application. In the U.S., the term of a patent may be lengthened by patent term adjustment (PTA), which compensates a patentee for administrative delays by the U.S. Patent and Trademark Office (USPTO) in examining and granting a patent or the term of a patent may be shortened if a patent is terminally disclaimed over an earlier filed patent. The term of a patent that covers a drug or biological product may also be eligible for patent term extension (PTE) after FDA approval for a portion of the term effectively lost as a result of the FDA regulatory review period, subject to certain limitations and provided statutory and regulatory requirements are met. PTE can be for no more than five years, typically only one patent per approved product can be extended, the extension cannot extend the total patent term beyond 14 years from approval, and only those claims covering the approved drug, a method for using it or a method for manufacturing it may be extended. In addition, the length of the adjustment or extension granted could be less than that requested, and we may not receive the full PTA or PTE available if we fail to exercise due diligence during the testing phase or regulatory review process, fails to apply within applicable deadlines, fails to apply prior to expiration of relevant patents, or otherwise fails to satisfy applicable requirements.

As with many biotechnology and pharmaceutical companies, Talaris’ ability to maintain and solidify our proprietary and intellectual property position for our products will depend on our success in obtaining effective patent claims and enforcing those patent claims. However, our owned and in-licensed pending patent applications, and any patent applications that may be filed in the future or licensed from third parties, may not result in issuance. The breadth of claims that may be allowed or enforced in Talaris patents also cannot be predicted. Any of the Talaris issued patents or patents obtained in the future may be challenged, invalidated, infringed or circumvented. In addition, because of the extensive time required for clinical development and

 

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regulatory review of a therapeutic product that may be developed, it is possible that, before any Talaris products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby limiting the protection such patent would afford the respective product and any competitive advantage such patent may provide. For more information, see the section entitled “Risk Factors—Risks Related to Intellectual Property.”

In addition to patents, we rely upon trade secrets and know-how and continuing technological innovation to develop and maintain our competitive position. However, trade secrets and know-how can be difficult to protect. We take measures to protect and maintain the confidentiality of proprietary information in order to protect aspects of the business that are not amenable to, or that we do not consider appropriate for, patent protection. It is our policy to require employees, consultants, outside scientific partners, sponsored researchers and other advisors (non-Talaris individuals) to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements provide that all confidential information concerning our business or financial affairs developed or made known to non-Talaris individuals during the course of the relationship between us and non-Talaris individuals is to be kept confidential and not disclosed to third parties except in specific circumstances. The agreements we maintain with employees and consultants also provide that all inventions conceived by the employee or consultant in the course of employment or consulting relationships with Talaris, or from the employee’s or consultant’s use of our confidential information, are our exclusive property and require such employees and consultants to assign their right, title and interest in such inventions to us. Although we take steps to protect our proprietary information and trade secrets, including through such contractual means with employees and consultants, we cannot guarantee that we have executed such agreements with all applicable counterparties, such agreements will not be breached, or that these agreements will afford us adequate protection of our intellectual property and proprietary rights. For more information, see the section entitled “Risk Factors—Risks Related to Intellectual Property.”

We have filed and obtained U.S. Registration No. 6180755 for the TALARIS THERAPEUTICS character mark for “biological preparations in the nature of allogeneic cell therapies for use in treating organ transplant patients” in International Class 5 and “providing laboratory services to hospitals and transplant centers involving manipulation of allogeneic cells used for cell therapy treatment of organ transplant patients” in International Class 42. We plan to register trademarks in connection with future products.

Commercialization

Subject to receiving marketing approvals, we expect to commence commercialization activities by building a focused sales and marketing organization in the United States to sell our products. Outside the United States, we expect to enter into distribution and other marketing arrangements with third parties for any of our product candidates that obtain marketing approval.

We also plan to build a marketing and sales management organization to create and implement marketing strategies for any products that we market through our own sales organization and to oversee and support our sales force. The responsibilities of the marketing organization would include developing educational initiatives with respect to approved products and establishing relationships with researchers and practitioners in relevant fields of medicine.

Manufacturing

Our manufacturing strategy is designed to meet the high quality and demand needs of clinical supply and commercial launch of any approved product, while also pursuing the goal of carefully managing our cost structure, maximizing optionality, and optimizing long-term cost of goods. Execution of our strategy includes the following three major features:

 

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In-House Manufacturing Facility: All finished product development and manufacturing is performed in-house in our GMP Cell Processing Facility, which we believe has sufficient capacity for all contemplated clinical trials.

 

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Reliable Processing: Our one-day manufacturing process is robust, reliable and has remained substantially unchanged from Phase 2 to Phase 3, and we believe it is sufficiently scalable to meet future commercial needs without substantial modification.

 

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Robust Analytical Testing: We have developed and qualified in-process assays to support our process, and potency assays required to for the timely release of our product.

Manufacturing Facility

We believe that operating our own manufacturing facility provides us with enhanced control of material supply and enables the more rapid implementation of process enhancements. We believe this approach positions us to support our multicenter clinical trials and potential future commercialization. Our GMP Cell Processing Facility is located in Louisville, Kentucky. The overall facility is approximately 20,000 square feet and includes two identical cleanroom GMP manufacturing suites, two identical quality control testing labs, gowning, changing and supply rooms, clean corridor, material warehouse, accessioning/ shipping rooms, freezer room and other support spaces.

Manufacturing Process and Analytical Testing

The manufacture of FCR001 involves complex processes, including detailed in-process analysis of cell types required for custom patient dosing, separation of the appropriate cells from the starting material with fast and efficient processing to maintain viability, and controlled cryopreservation designed to allow stable product storage until use. Our FCR001 process is substantially unchanged from Phase 2 to Phase 3, and we have manufactured and released multiple lots of clinical trial material for our Phase 2 and Phase 3 clinical trials.

The manufacturing process takes one day and does not require the costly and difficult cell expansion or genetic manipulation necessary for gene therapy and CAR-T manufacturing. The starting material, donated mobilized apheresed peripheral blood, is shipped to our GMP Cell Processing Facility and brought to the accessioning room, where it is inspected and received into the system, and then transported to one of the two dedicated manufacturing suites. Detailed analysis of the incoming apheresis product is performed during initial processing to precisely determine the HSC, FC, and aßTCR+ T-cell content, in order to set the requirements for downstream processing. The manufacturing process is carried out on semi-automated systems which use pre-sterilized, single-use, disposable kits. In order to meet the prescribed dose, our process removes a calculated amount of aßTCR+ T-cells and relatively enriches the product for HSCs and FCs. Samples of the product are then transported to the adjacent dedicated quality control lab for release testing. The final product is cryopreserved in a controlled rate freezer and stored in liquid nitrogen freezers. After testing for all finished product specifications and review of GMP requirements, the product is released by our in-house quality unit, and is later shipped in liquid nitrogen dry shippers to the transplant center, where it is stored until the transplant date.

Government Regulation

In the United States, biological products are subject to regulation under the Federal Food, Drug, and Cosmetic Act, (FD&C Act), the Public Health Service Act (PHS Act) and other federal, state, local and foreign statutes and regulations. Both the FD&C Act and the PHS Act and their corresponding regulations govern, among other things, the research, development, clinical trial, testing, manufacturing, quality control, safety, efficacy, labeling, packaging, storage, record keeping, distribution, reporting, marketing, promotion, advertising, post-approval monitoring, and post-approval reporting involving biological products. The process of obtaining regulatory approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals.

 

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U.S. Biological Products Development Process

The process required by the FDA before a biological product may be marketed in the United States generally involves the following:

 

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completion of nonclinical laboratory tests and animal studies according to good laboratory practices (GLPs) and applicable requirements for the humane use of laboratory animals or other applicable regulations;

 

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submission to the FDA of an application for an investigational new drug application (IND) which must become effective before human clinical trials may begin;

 

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approval of the protocol and related documentation by an independent institutional review board (IRB) or ethics committee at each clinical trial site before each study may be initiated;

 

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performance of adequate and well-controlled human clinical trials according to the FDA’s regulations commonly referred to as good clinical practices (GCPs) and any additional requirements for the protection of human research subjects and their health information, to establish the safety and efficacy of the proposed biological product for its intended use;

 

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preparation of and submission to the FDA of a biologics license application (BLA) for marketing approval that includes sufficient evidence of establishing the safety, purity, and potency of the proposed biological product for its intended indication, including from results of nonclinical testing and clinical trials;

 

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payment of user fees for FDA review of the BLA (unless a fee waiver applies);

 

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satisfactory completion of an FDA inspection of the manufacturing facility or facilities where the biological product is produced to assess compliance with current good manufacturing practices (cGMPs) to assure that the facilities, methods and controls are adequate to preserve the biological product’s identity, strength, quality and purity and, if applicable, the FDA’s current good tissue practices (CGTPs) for human cellular and tissue products;

 

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potential FDA audit of the nonclinical study and clinical trial sites that generated the data in support of the BLA;

 

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review of the product candidate by an FDA advisory committee, where appropriate and if applicable; and

 

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FDA review and approval of the BLA, resulting in the licensure of the biological product for commercial marketing.

Before testing any biological product candidate, in humans, the product candidate enters the preclinical testing stage. Preclinical tests, also referred to as nonclinical studies, include laboratory evaluations of product biological characteristics, chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and activity of the product candidate. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs.

Prior to beginning the first clinical trial with a product candidate in the United States, an IND must be submitted to the FDA and the FDA must allow the IND to proceed. An IND is an exemption from the FD&C Act that allows an unapproved product candidate to be shipped in interstate commerce for use in an investigational clinical trial and a request for FDA allowance that such investigational product may be administered to humans in connection with such trial. Such authorization must be secured prior to interstate shipment and administration. In support of a request for an IND, applicants must submit a protocol for each clinical trial and any subsequent protocol amendments must be submitted to the FDA as part of the IND. In addition, the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or literature and plans for clinical trials, among other things, must be submitted to the FDA as part of an IND. An IND must become

 

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effective before human clinical trials may begin. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA, within the 30-day time period, raises safety concerns or questions about the proposed clinical trial. In such a case, the IND may be placed on clinical hold or partial clinical hold. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can begin. Submission of an IND therefore may or may not result in FDA allowance to begin a clinical trial.

Clinical trials involve the administration of the biological product candidate to healthy volunteers or patients under the supervision of qualified investigators which generally are physicians not employed by, or under, the control of the trial sponsor. Clinical trials are conducted under written study protocols detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped if certain adverse events should occur.

An IRB representing each institution participating in the clinical trial must review and approve the plan for any clinical trial before it commences at that institution, and the IRB must conduct continuing review and reapprove the study at least annually. The IRB must review and approve, among other things, the study protocol and informed consent information to be provided to study subjects. An IRB must operate in compliance with FDA regulations. An IRB can suspend or terminate approval of a clinical trial at its institution, or an institution it represents, if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the product candidate has been associated with unexpected serious harm to patients.

Some trials are overseen by an independent group of qualified experts organized by the trial sponsor, known as a data safety monitoring board or committee (DSMB). This group provides authorization as to whether or not a trial may move forward at designated check points based on access that only the group maintains to available data from the study.

Certain information about certain clinical trials must also be submitted within specific timeframes to the NIH for public dissemination on its clinicaltrials.gov website.

Clinical trials typically are conducted in three sequential phases that may overlap or be combined:

 

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Phase 1. The investigational product is initially introduced into healthy human subjects and tested for safety. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to ethically administer to healthy volunteers, the initial human testing is often conducted in patients.

 

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Phase 2. The investigational product is evaluated in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of the product for specific targeted diseases and to determine dosage tolerance, optimal dosage and dosing schedule.

 

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Phase 3. The investigational product is administered to an expanded patient population to further evaluate dosage, clinical efficacy, potency, and safety in an expanded patient population at geographically dispersed clinical trial sites. These clinical trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for approval and product labeling.

In some cases, FDA may require, or firms may voluntary pursue, post-approval clinical trials, sometimes referred to as Phase 4 clinical trials, after initial marketing approval. These clinical trials are used to gain additional experience from the treatment of patients in the intended therapeutic indication, particularly for long-term safety follow-up. During all phases of clinical development, regulatory agencies require extensive monitoring and auditing of all clinical activities, clinical data, and clinical trial investigators. Annual progress reports detailing the results of the clinical trials must be submitted to the FDA. Written IND safety reports must be promptly submitted to the FDA and the investigators for serious and unexpected adverse events, any findings from other studies, tests in laboratory animals or in vitro testing that suggest a significant risk for human subjects, or any clinically important increase in the rate of a serious suspected adverse reaction over that listed in

 

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the protocol or investigator brochure. The sponsor must submit an IND safety report within 15 calendar days after the sponsor determines that the information qualifies for reporting. The sponsor also must notify the FDA of any unexpected fatal or life-threatening suspected adverse reaction within seven calendar days after the sponsor’s initial receipt of the information. Phase 1, Phase 2 and Phase 3 clinical trials may not be completed successfully within any specified period, if at all. The FDA or the sponsor, acting on its own or based on a recommendation from the sponsor’s data safety monitoring board may suspend a clinical trial at any time on various grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s requirements or if the biological product has been associated with unexpected serious harm to patients.

Concurrent with clinical trials, companies usually complete additional animal studies and also must develop additional information about the physical characteristics of the biological product as well as finalize a process for manufacturing the product in commercial quantities in accordance with cGMP and as applicable CGTP requirements. To help reduce the risk of the introduction of adventitious agents with use of biological products, the PHS Act emphasizes the importance of manufacturing control for products whose attributes cannot be precisely defined. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among other things, the sponsor must develop methods for testing the identity, strength, quality, potency and purity of the final biological product. Additionally, appropriate packaging must be selected and tested and stability studies must be conducted to demonstrate that the biological product candidate does not undergo unacceptable deterioration over its shelf life.

U.S. Review and Approval Processes

Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. The BLA must include results of product development, laboratory and animal studies, human studies, information on the manufacture and composition of the product, proposed labeling and other relevant information.

Within 60 days following submission of the application, the FDA reviews a BLA submitted to determine if it is substantially complete before the FDA accepts it for filing. The FDA may refuse to file any BLA that it deems incomplete or not properly reviewable at the time of submission and may request additional information. In this event, the BLA must be resubmitted with the additional information. The resubmitted application also is subject to review to determine if it is substantially complete before the FDA accepts it for filing. In most cases, the submission of a BLA is subject to a substantial application user fee, although the fee may be waived under certain circumstances. Under the performance goals and policies implemented by the FDA under the Prescription Drug User Fee Act (PDUFA) for original BLAs, the FDA targets ten months from the filing date in which to complete its initial review of a standard application and respond to the applicant, and six months from the filing date for an application with priority review. The FDA does not always meet its PDUFA goal dates, and the review process is often significantly extended by FDA requests for additional information or clarification.

Once the submission is accepted for filing, the FDA begins an in-depth substantive review of the BLA. The FDA reviews the BLA to determine, among other things, whether the proposed product is safe, pure and potent, for its intended use, and whether the product is being manufactured in accordance with cGMP to ensure its continued safety, purity and potency. The FDA may refer applications for novel biological products or biological products that present difficult or novel questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation and a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions. During the biological product approval process, the FDA also will determine whether a Risk Evaluation and Mitigation

 

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Strategy (REMS) is necessary to assure the safe use of the biological product. If the FDA concludes a REMS is needed, the sponsor of the BLA must submit a proposed REMS; the FDA will not approve the BLA without a REMS, if required.

Before approving a BLA, the FDA typically will inspect the facilities at which the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent production of the product within required specifications. Where applicable, the FDA also will not approve the product if the manufacturer is not in compliance with the CGTPs. These are FDA regulations that govern the methods used in, and the facilities and controls used for, the manufacture of human cells, tissues, and cellular and tissue-based products (HCT/Ps), which are human cells or tissue intended for implantation, transplant, infusion, or transfer into a human patient. The primary intent of the CGTP requirements is to ensure that cell and tissue-based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease. FDA regulations also require tissue establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through appropriate screening and testing. Additionally, before approving a BLA, the FDA will typically inspect one or more clinical sites to assure that the clinical trials were conducted in compliance with IND study requirements and GCP requirements. To assure cGMP, CGTP and GCP compliance, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production and quality control.

Under the Pediatric Research Equity Act (PREA), a BLA or supplement to a BLA for a novel product (e.g., new active ingredient, new indication, etc.) must contain data to assess the safety and effectiveness of the biological product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers. Unless otherwise required by regulation, PREA does not apply to any biological product for an indication for which orphan designation has been granted.

After the FDA evaluates a BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced, the FDA may issue an approval letter or a Complete Response Letter. An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. A Complete Response Letter will describe all of the deficiencies that the FDA has identified in the BLA, except that where the FDA determines that the data supporting the application are inadequate to support approval, the FDA may issue the Complete Response Letter without first conducting required inspections, testing submitted product lots, and/or reviewing proposed labeling. In issuing the Complete Response Letter, the FDA may recommend actions that the applicant might take to place the BLA in condition for approval, including requests for additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.

If a product receives regulatory approval, the approval may be significantly limited to specific diseases and dosages or the indications for use may otherwise be limited, including to subpopulations of patients, which could restrict the commercial value of the product. Further, the FDA may require that certain contraindications, warnings precautions or interactions be included in the product labeling. The FDA may impose restrictions and conditions on product distribution, prescribing, or dispensing in the form of a REMS, or otherwise limit the scope of any approval. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more Phase IV post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization, and may limit further marketing of the product based on the results of these post-marketing studies.

 

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Orphan Drug Designation

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biological product intended to treat a rare disease or condition, which is generally a disease or condition that affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making a drug or biological product available in the United States for this type of disease or condition will be recovered from sales of the product. Orphan product designation must be requested before submitting a BLA. After the FDA grants orphan product designation, the identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. Orphan product designation does not convey any advantage in or shorten the duration of the regulatory review and approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for a particular active ingredient for the disease for which it has such designation, the product is entitled to orphan product exclusivity, which means that the FDA may not approve any other applications, including a full BLA, to market the same biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity or if the FDA finds that the holder of the orphan drug exclusivity has not shown that it can assure the availability of sufficient quantities of the orphan drug to meet the needs of patients with the disease or condition for which the drug was designated. Orphan drug exclusivity does not prevent the FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the BLA application user fee.

A designated orphan drug many not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or, as noted above, if the second applicant demonstrates that its product is clinically superior to the approved product with orphan exclusivity or the manufacturer of the approved product is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

Orphan drug designation may also entitle a party to financial incentives such as opportunities for grant funding towards clinical trial costs, tax advantages and user-fee waivers.

Expedited Development and Review Programs

The FDA has various programs, including Fast Track designation, breakthrough therapy designation, accelerated approval and priority review, that are intended to expedite or simplify the process for the development and FDA review of drugs and biologics that are intended for the treatment of serious or life-threatening diseases or conditions. To be eligible for fast track designation, new drugs and biological product candidates must be intended to treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. Fast Track designation applies to the combination of the product and the specific indication for which it is being studied. The sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast track product at any time during the clinical development of the product. One benefit of fast track designation, for example, is that the FDA may consider for review sections of the marketing application on a rolling basis before the complete application is submitted if certain conditions are satisfied, including an agreement with the FDA on the proposed schedule for submission of portions of the application and the payment of applicable user fees before the FDA may initiate a review.

Under the FDA’s breakthrough therapy program, a sponsor may seek FDA designation of its product candidate as a breakthrough therapy if the product candidate is intended, alone or in combination with one or more other drugs or biologics, to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that it may demonstrate substantial improvement over existing therapies on one or more

 

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clinically significant endpoints, such as substantial treatment effects observed early in clinical development. Breakthrough therapy designation comes with all of the benefits of fast track designation, which means that the sponsor may file sections of the BLA for review on a rolling basis if certain conditions are satisfied, including an agreement with the FDA on the proposed schedule for submission of portions of the application and the payment of applicable user fees before the FDA may initiate a review. The FDA may take other actions appropriate to expedite the development and review of the product candidate, including holding meetings with the sponsor and providing timely advice to, and interactive communication with, the sponsor regarding the development program.

A product candidate is eligible for priority review if it treats a serious or life-threatening disease or condition and, if approved, would provide a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious disease or condition. The FDA will attempt to direct additional resources to the evaluation of an application for a new drug or biological product designated for priority review in an effort to facilitate the review. Under priority review, the FDA’s goal is to review an application in six months once it is filed, compared to ten months for a standard review. Priority review designation does not change the scientific/medical standard for approval or the quality of evidence necessary to support approval.

Additionally, a product candidate may be eligible for accelerated approval. Drug or biological products studied for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval, which means that they may be approved on the basis of adequate and well-controlled clinical trials establishing that the product has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on an intermediate clinical endpoint other than survival or irreversible morbidity, taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. As a condition of approval, the FDA generally requires that a sponsor of a drug or biological product receiving accelerated approval perform adequate and well-controlled post-marketing clinical trials to verify the clinical benefit in relationship to the surrogate endpoint or ultimate outcome in relationship to the clinical benefit. In addition, the FDA currently requires as a condition for accelerated approval pre-approval of promotional materials, which could adversely impact the timing of the commercial launch of the product. The FDA may withdraw approval of a drug or indication approved under accelerated approval if, for example, the confirmatory trial fails to verify the predicted clinical benefit of the product.

RMAT Designation

As part of the 21st Century Cures Act, enacted in December 2016, Congress created the Regenerative Medicine Advanced Therapy (RMAT) designation to facilitate an efficient development program for, and expedite review of, a product candidate that meets the following criteria: (1) it qualifies as a RMAT, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies or products, with limited exceptions; (2) it is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition; and (3) preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such a disease or condition. A sponsor may request that the FDA designate a drug as a RMAT concurrently with or at any time after submission of an IND. The FDA has 60 calendar days to determine whether the drug meets the criteria. A BLA for a regenerative medicine therapy that has received RMAT designation may be eligible for priority review or accelerated approval through use of surrogate or intermediate endpoints reasonably likely to predict long-term clinical benefit, or reliance upon data obtained from a meaningful number of sites. Benefits of RMAT designation also include early interactions with FDA to discuss any potential surrogate or intermediate endpoint to be used to support accelerated approval. A regenerative medicine therapy with RMAT designation that is granted accelerated approval and is subject to post-approval requirements may, as appropriate, fulfill such requirements through the submission of clinical evidence from clinical trials, patient registries, or other sources of real world evidence, such as electronic health records; the collection of larger confirmatory data sets; or post-approval monitoring of all patients treated with such therapy prior to its approval. Like some of FDA’s other expedited development programs, RMAT designation does not change the standards for approval but may help expedite the development or approval process.

 

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Post-Approval Requirements

Rigorous and extensive FDA regulation of biological products continues after approval, particularly with respect to cGMP requirements, as well as requirements relating to record-keeping, reporting of adverse experiences, periodic reporting, product sampling and distribution, and advertising and promotion of the product. We currently rely, and may continue to rely, on third parties for the production of clinical and commercial quantities of any products that we may commercialize. Manufacturers of our products are required to comply with applicable requirements in the cGMP regulations, including quality control and quality assurance and maintenance of records and documentation. Other post-approval requirements applicable to biological products, include reporting of cGMP deviations that may affect the identity, potency, purity and overall safety of a distributed product, record-keeping requirements, reporting of adverse effects, reporting updated safety and efficacy information, and complying with electronic record and signature requirements. As part of the manufacturing process, the manufacturer is required to perform certain tests on each lot of the product before it is released for distribution. After a BLA is approved for a biological product, the product also may be subject to official lot release. If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA together with a release protocol showing a summary of the history of manufacture of the lot and the results of all of the manufacturer’s tests performed on the lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots for distribution by the manufacturer. In addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency, and effectiveness of biological products.

Manufacturers also must comply with the FDA’s advertising and promotion requirements, such as those related to direct-to-consumer advertising, the prohibition on promoting products for uses or in patient populations that are not described in the product’s approved labeling (known as “off-label use”), industry-sponsored scientific and educational activities, and promotional activities involving the internet. Discovery of previously unknown problems or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or withdrawal of the product from the market as well as possible civil or criminal sanctions.

Failure to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, may subject an applicant or manufacturer to administrative or judicial civil or criminal sanctions and adverse publicity. FDA sanctions could include refusal to approve pending applications, withdrawal of an approval, clinical holds, warning or untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, product detentions or refusal to permit the import or export of the product, restrictions on the marketing or manufacturing of the product, injunctions, fines, refusals of government contracts, mandated corrective advertising or communications with doctors or other stakeholders, debarment, restitution, disgorgement of profits, or civil or criminal penalties. Any agency or judicial enforcement action could have a material adverse effect on us.

Biological product manufacturers and other entities involved in the manufacture and distribution of approved biological products are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP and other laws. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including withdrawal of the product from the market. In addition, changes to the manufacturing process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

 

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Marketing Exclusivity

Depending upon the timing, duration and specifics of the FDA approval of the use of our product candidates, some of our United States patents may be eligible for limited patent term extension under the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, patent term restoration cannot extend the remaining term of a patent beyond a total of 14 years from the product’s approval date. The patent term restoration period is generally one-half the time between the effective date of an IND and the submission date of a BLA plus the time between the submission date of a BLA and the approval of that application. Only one patent applicable to an approved biological product is eligible for the extension and the application for the extension must be submitted prior to the expiration of the patent. In addition, a patent can only be extended once and only for a single product. The U.S. PTO, in consultation with the FDA, reviews and approves the application for any patent term extension or restoration.

The Patient Protection and Affordable Care Act (ACA), as amended by the Health Care and Education Reconciliation Act, signed into law on March 23, 2010, includes a subtitle called the Biologics Price Competition and Innovation Act of 2009 (BPCIA), which created an abbreviated approval pathway for biological products shown to be biosimilar to, or interchangeable with, an FDA-licensed reference biological product. Biosimilarity, which requires that there be no clinically meaningful differences between the biological product and the reference product in terms of safety, purity, and potency, can be shown through analytical studies, animal studies, and a clinical trial or trials. Interchangeability requires that a product is biosimilar to the reference product and the product must demonstrate that it can be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic.

FDA will not accept an application for a biosimilar or interchangeable product based on the reference biological product until four years after the date of first licensure of the reference product, and FDA will not approve an application for a biosimilar or interchangeable product based on the reference biological product until twelve years after the date of first licensure of the reference product. “First licensure” typically means the initial date the particular product at issue was licensed in the United States. Date of first licensure does not include the date of licensure of (and a new period of exclusivity is not available for) a biological product if the licensure is for a supplement for the biological product or for a subsequent application by the same sponsor or manufacturer of the biological product (or licensor, predecessor in interest, or other related entity) for a change (not including a modification to the structure of the biological product) that results in a new indication, route of administration, dosing schedule, dosage form, delivery system, delivery device or strength, or for a modification to the structure of the biological product that does not result in a change in safety, purity, or potency.

The BPCIA is complex and continues to be interpreted and implemented by the FDA. In addition, government proposals have sought to reduce the 12-year reference product exclusivity period. Other aspects of the BPCIA, some of which may impact the BPCIA exclusivity provisions, have also been the subject of recent litigation. As a result, the ultimate impact, implementation, and impact of the BPCIA is subject to significant uncertainty.

In addition to exclusivity under the BPCIA, a biological product can obtain pediatric market exclusivity in the United States. Pediatric exclusivity, if granted, adds six months to existing exclusivity periods, including some regulatory exclusivity periods tied to patent terms. This six-month exclusivity, which runs from the end of other exclusivity protection or patent term, may be granted based on the voluntary completion of a pediatric study in accordance with an FDA-issued “Written Request” for such a study.

Additional Regulation

In addition to the foregoing, state and federal laws regarding environmental protection and hazardous substances, including the Occupational Safety and Health Act, the Resource Conservancy and Recovery Act and

 

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the Toxic Substances Control Act, affect our business. These and other laws govern our use, handling and disposal of various biological, chemical and radioactive substances used in, and wastes generated by, our operations. If our operations result in contamination of the environment or expose individuals to hazardous substances, we could be liable for damages and governmental fines. We believe that we are in material compliance with applicable environmental laws and that continued compliance therewith will not have a material adverse effect on our business. We cannot predict, however, how changes in these laws may affect our future operations.

U.S. Foreign Corrupt Practices Act, U.K. Bribery Act and Other Laws

The U.S. Foreign Corrupt Practices Act of 1977 (FCPA) prohibits companies and their employees, agents, and intermediaries from engaging in certain activities to obtain or retain business or secure any improper advantage, or to influence a person working in an official capacity. It is illegal to pay, offer to pay or authorize, directly or indirectly, the payment of anything of value to any employee or official of a foreign government or public international organization, or political party, political party official, or political candidate in an attempt to obtain or retain business or to otherwise influence the recipient working in an official capacity. The scope of the FCPA also includes employees and officials of state- owned or controlled enterprises, which may include healthcare professionals in many countries.

Equivalent laws have been adopted in other non-U.S. countries that impose similar obligations, including the U.K. Bribery Act 2010 (Bribery Act). As with the FCPA, these laws generally prohibit us and our employees and intermediaries from authorizing, promising, offering, or providing, directly or indirectly, improper or prohibited payments, or anything else of value, to government officials or other persons to obtain or retain business or gain some other business advantage. The Bribery Act also imposes liability for failing to prevent a person associated with us from committing a bribery offense.

There also are other laws and regulations governing international operations, including regulations administered by the governments of the United Kingdom and the United States and authorities in the European Union, including applicable export control regulations, economic sanctions and embargoes on certain countries and persons, anti-money laundering laws, import and customs requirements and currency exchange regulations, collectively referred to as trade control laws.

Failure to comply with the Bribery Act, the FCPA and other anti-corruption laws and trade control laws could subject us to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, where applicable.

Other Healthcare Laws and Compliance Requirements

In the United States, our current and future operations are subject to regulation by various federal, state and local authorities in addition to the FDA, including but not limited to, the Centers for Medicare & Medicaid Services (CMS), other divisions of the U.S. Department of Health and Human Services (HHS) (such as the Office of Inspector General, Office for Civil Rights and the Health Resources and Service Administration), the U.S. Department of Justice (DOJ), and individual U.S. attorney offices within the DOJ, and state and local governments. For example, our clinical research, sales, marketing and scientific/educational grant programs may have to comply with the anti-fraud and abuse provisions of the Social Security Act, the false claims laws, the privacy and security provisions of the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), and similar state laws, each as amended, as applicable:

 

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the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in kind, to induce, or in return for, either the referral of an individual, or the purchase, lease, order, arrangement or recommendation of any good,

 

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facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program, such as the Medicare and Medicaid programs; a person or entity does not need to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it to have committed a violation. In addition, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act or federal civil money penalties statute;

 

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the federal civil and criminal false claims laws, including the False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment to, or approval by Medicare, Medicaid, or other federal healthcare programs, knowingly making, using or causing to be made or used a false record or statement material to a false or fraudulent claim or an obligation to pay or transmit money to the federal government, or knowingly concealing or knowingly and improperly avoiding or decreasing or concealing an obligation to pay money to the federal government. Manufacturers can be held liable under the False Claims Act even when they do not submit claims directly to government payers if they are deemed to “cause” the submission of false or fraudulent claims. The False Claims Act also permits a private individual acting as a “whistleblower” to bring actions on behalf of the federal government alleging violations of the False Claims Act and to share in any monetary recovery;

 

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the anti-inducement law, which prohibits, among other things, the offering or giving of remuneration, which includes, without limitation, any transfer of items or services for free or for less than fair market value (with limited exceptions), to a Medicare or Medicaid beneficiary that the person knows or should know is likely to influence the beneficiary’s selection of a particular supplier of items or services reimbursable by a federal or state governmental program;

 

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HIPAA, which created new federal criminal statutes that prohibit, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or obtain, by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare benefit program, regardless of the payor (e.g., public or private) and knowingly and willfully falsifying, concealing or covering up by any trick or device a material fact or making any materially false, fictitious, or fraudulent statements or representations in connection with the delivery of, or payment for, healthcare benefits, items or services relating to healthcare matters; similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation;

 

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HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act of 2009, HITECH, and their respective implementing regulations, which impose requirements on certain covered healthcare providers, health plans, and healthcare clearinghouses and their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information as well as their covered subcontractors, relating to the privacy, security and transmission of individually identifiable health information;

 

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the federal transparency requirements under the ACA, including the provision commonly referred to as the Physician Payments Sunshine Act, and its implementing regulations, which requires applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program to report annually to the U.S. Department of Health and Human Services, CMS, information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as ownership and investment interests held by the physicians described above and their immediate family members. Effective January 1, 2022, these reporting obligations will extend to include transfers of value made during the previous year to certain non-physician providers, including physician assistants, nurse practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives;

 

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federal government price reporting laws, which require us to calculate and report complex pricing metrics in an accurate and timely manner to government programs; and

 

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federal consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers.

In addition to the above, on November 20, 2020, the Office of Inspector General (OIG) finalized further modifications to the federal Anti-Kickback Statute. Under the final rules, OIG added safe harbor protections under the Anti-Kickback Statute for certain coordinated care and value-based arrangements among clinicians, providers, and others. The effective date of the new safe harbors has been delayed until March 22, 2021 pending further review by the Biden administration. We continue to evaluate what effect, if any, these rules will have on our business.

Additionally, we are subject to state and foreign equivalents of each of the healthcare laws and regulations described above, among others, some of which may be broader in scope and may apply regardless of the payor. Many U.S. states have adopted laws similar to the federal Anti-Kickback Statute and False Claims Act, and may apply to our business practices, including, but not limited to, research, distribution, sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental payors, including private insurers. In addition, some states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement, we could be subject to penalties. Finally, there are state and foreign laws governing the privacy and security of health information (e.g., the California Consumer Privacy Act), many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws.

Violations of fraud and abuse laws may be punishable by criminal and/or civil sanctions, including penalties, fines, imprisonment and/or exclusion or suspension from federal and state healthcare programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the U.S. government under the federal False Claims Act as well as under the false claims laws of several states.

Law enforcement authorities are increasingly focused on enforcing fraud and abuse laws, and it is possible that some of our practices may be challenged under these laws. Efforts to ensure that our current and future business arrangements with third parties, and our business generally, will comply with applicable healthcare laws and regulations will involve substantial costs. If our operations, including our arrangements with physicians and other healthcare providers, are found to be in violation of any of such laws or any other governmental regulations that apply to us, we may be subject to penalties, including, without limitation, administrative, civil and criminal penalties, damages, fines, disgorgement, contractual damages, reputational harm, diminished profits and future earnings, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs (such as Medicare and Medicaid), and imprisonment, any of which could adversely affect our ability to operate our business and our financial results. The approval and commercialization of any of our other cell therapies outside the United States will also likely subject us to foreign equivalents of the healthcare laws mentioned above, among other foreign laws.

 

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If any of the physicians or other healthcare providers or entities with whom we expect to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs, which may also adversely affect our business.

The risk of our being found in violation of these laws is increased by the fact that many of these laws have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. The shifting compliance environment and the need to build and maintain a robust system to comply with multiple jurisdictions with different compliance and reporting requirements increases the possibility that a healthcare company may violate one or more of the requirements. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial cost.

Healthcare Reform

A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medical products. For example, in March 2010, the ACA was enacted, which, among other things, increased the minimum Medicaid rebates owed by most manufacturers under the Medicaid Drug Rebate Program; introduced a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected; extended the Medicaid Drug Rebate Program to utilization of prescriptions of individuals enrolled in Medicaid managed care plans; imposed mandatory discounts for certain Medicare Part D beneficiaries as a condition for manufacturers’ outpatient drugs coverage under Medicare Part D; subjected drug manufacturers to new annual, nondeductible fees based on pharmaceutical companies’ share of sales to federal healthcare programs; imposed a new federal excise tax on the sale of certain medical devices; expanded healthcare fraud and abuse laws, including the False Claims Act and the Anti-Kickback Statute, new government investigative powers and enhanced penalties for non-compliance; expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; expanded the entities eligible for discounts under the PHS Act’s pharmaceutical pricing program, also known as the 340B Drug Pricing Program; created new requirements to report financial arrangements with physicians and teaching hospitals, commonly referred to as the Physician Payments Sunshine Act; created a new requirement to annually report the identity and quantity of drug samples that manufacturers and authorized distributors of record provide to physicians; created a new Patient Centered Outcomes Research Institute to oversee, identify priorities in and conduct comparative clinical effectiveness research, along with funding for such research; and established the Center for Medicare Innovation at the CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending.

There have been executive, legal and political challenges to certain aspects of the ACA. During his presidency, former President Trump signed several executive orders and numerous other directives designed to delay, circumvent, or loosen certain requirements mandated by the ACA.

Concurrently, Congress considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, several bills affecting the implementation of certain taxes under the ACA have been signed into law. For example, on January 22, 2018, former President Trump signed a continuing resolution on appropriations for fiscal year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers based on

 

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market share, and the medical device excise tax on non-exempt medical devices; however, on December 20, 2019, former President Trump signed into law the Further Consolidated Appropriations Act (H.R. 1865), which repealed the Cadillac tax, the health insurance provider tax, and the medical device excise tax. Other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. The Bipartisan Budget Act of 2018 (BBA), among other things, amends the ACA, effective January 1, 2019, to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole.” In addition, the Tax Cuts and Jobs Act of 2017 (Tax Act), included a provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate.” On December 14, 2018, a federal district court in Texas ruled the individual mandate is a critical and inseverable feature of the ACA, and therefore, because it was repealed as part of the Tax Act, the remaining provisions of the ACA are invalid as well. On December 18, 2019, the Fifth Circuit U.S. Court of Appeals held that the individual mandate is unconstitutional, and remanded the case to the lower court to reconsider its earlier invalidation of the full ACA. The United States Supreme Court is currently reviewing this case, but it is unknown when a decision will be reached. Although the U.S. Supreme Court has yet ruled on the constitutionality of the ACA, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the ACA marketplace. The executive order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will impact the ACA and our business.

Other legislative changes have been proposed and adopted since the ACA was enacted. For example, in August 2011, President Obama signed into law the Budget Control Act of 2011, which, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in spending reductions. The Joint Select Committee on Deficit Reduction did not achieve a targeted deficit reduction of at least $1.2 trillion for fiscal years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs. This includes aggregate reductions to Medicare payments to providers of up to 2% per fiscal year, which went into effect beginning on April 1, 2013 and, due to legislation amendments to the statute, including the BBA, will stay in effect through 2030 unless additional Congressional action is taken. However, pursuant to the Coronavirus Aid, Relief and Economic Security Act (CARES Act), and subsequent legislation, these Medicare sequester reductions are suspended from May 1, 2020 through March 31, 2021 due to the COVID-19 pandemic. In January 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types of providers, including hospitals, imaging centers and cancer treatment centers, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Additionally, there has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drugs. At the federal level, the former Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive orders and policy initiatives. While a number of these reforms and other proposed measures require additional authorization to become effective, it is expected that Congress will continue to seek new legislative measures to control drug costs.

For example, on July 24, 2020 and September 13, 2020, former President Trump signed several Executive Orders aimed at lowering drug pricing that seek to implement several of the administration’s proposals. In

 

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response, the FDA released a final rule on September 24, 2020, which went into effect on November 30, 2020, providing guidance for states to build and submit importation plans for drugs from Canada. Further, on November 20 2020 CMS issued an Interim Final Rule implementing the Most Favored Nation (MFN) Model under which Medicare Part B reimbursement rates will be calculated for certain drugs and biologicals based on the lowest price drug manufacturers receive in Organization for Economic Cooperation and Development countries with a similar gross domestic product per capita. The MFN Model regulations mandate participation by identified Part B providers and will apply in all U.S. states and territories for a seven-year period and was scheduled to begin on January 1, 2021 and end on December 31, 2027. On December 28, 2020, the United States District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final rule. Additionally, on November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response to ongoing litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers the implementation of which have also been delayed pending review by the Biden administration until March 22, 2021. However, it is unclear whether the Biden administration will work to reverse these measures or pursue similar policy initiatives.

Individual states in the United States have also increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Further, it is possible that additional governmental action is taken in response to the COVID-19 pandemic.

Coverage and Reimbursement

Significant uncertainty exists as to the coverage and reimbursement status of any cell therapies for which we obtain regulatory approval. In the United States and markets in other countries, sales of any cell therapies for which we receive regulatory approval for commercial sale will depend, in part, on the availability of coverage and reimbursement from payors. Payors include government authorities, managed care providers, private health insurers and other organizations. Patients who are prescribed treatments for their conditions and providers generally rely on these third-party payors to reimburse all or part of the associated healthcare. The process for determining whether a payor will provide coverage for a product may be separate from the process for setting the reimbursement rate that the payor will pay for the product. Payors may limit coverage to specific products on an approved list, or formulary, which might not include all of the FDA-approved products for a particular indication. A decision by a payor not to cover our cell therapies could reduce physician utilization of our products once approved and have a material adverse effect on our sales, results of operations and financial condition. Moreover, a payor’s decision to provide coverage for a product does not imply that an adequate reimbursement rate will be approved. Adequate third-party reimbursement may not be available to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development and manufacturing costs. Further, due to the COVID-19 pandemic, millions of individuals have lost or will be losing employer-based insurance coverage, which may adversely affect our ability to commercialize our products.

In addition, coverage and reimbursement for products can differ significantly from payor to payor. One payor’s decision to cover a particular medical product or service does not ensure that other payors will also provide coverage for the medical product or service, or will provide coverage at an adequate reimbursement rate. In the United States, the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services (CMS), an agency within the U.S. Department of Health and Human Services. CMS decides whether and to what extent a new medicine will be covered and reimbursed under Medicare and private payors tend to follow CMS to a substantial degree.

 

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Additionally, the coverage determination process will require us to provide scientific and clinical support for the use of our products to each payor separately and will be a time-consuming process. Payors are increasingly challenging the price and examining the medical necessity and cost-effectiveness of medical products and services, in addition to their safety and efficacy. In order to obtain and maintain coverage and reimbursement for any product, we may need to conduct expensive evidence generation studies in order to demonstrate the medical necessity and cost-effectiveness of such a product, in addition to the costs required to obtain regulatory approvals. If payors do not consider a product to be cost-effective compared to current standards of care, they may not cover the product as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow a company to cover its costs or make a profit.

Employees and Human Capital Resources

As of January 31, 2021, we had 72 full-time employees and 18 consultants. Ten of our employees have MD or PhD degrees. Within our workforce, 56 employees are engaged in research and development and 16 are engaged in business development, finance, legal, and general management and administration. Our human capital resources objectives include identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. None of our employees are represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

Facilities

Our corporate headquarters is located in Louisville, Kentucky, where we lease and occupy 19,585 square feet of office and laboratory space. The current term of our Louisville lease expires November 1, 2023 with an option to extend the term by successive one-year renewal periods in each case upon six months’ prior written notice. We also lease office space in Wellesley, Massachusetts, where we lease and occupy 1,040 square feet. The current term of our Wellesley lease expires March 31, 2021. We believe our existing facilities in Louisville and Wellesley are sufficient for our needs for the foreseeable future. To meet the future needs of our business, we may lease additional or alternate space, and we believe suitable additional or alternative space will be available in the future on commercially reasonable terms.

Legal Proceedings

From time to time, we may become involved in litigation or other legal proceedings. We are not currently a party to any litigation or legal proceedings that, in the opinion of our management, are probable to have a material adverse effect on our business. Regardless of outcome, litigation can have an adverse impact on our business, financial condition, results of operations and prospects because of defense and settlement costs, diversion of management resources and other factors.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth the name, age and position of each of our executive officers and directors as of January 31, 2021.

 

Name		Age				Position
Executive Officers:
Scott Requadt			52			President, Chief Executive Officer and Director
Mary Kay Fenton			56			Chief Financial Officer*
Suzanne T. Ildstad, MD			68			Chief Scientific Officer and Director
Nancy Krieger, MD			54			Chief Medical Officer
Michael Zdanowski			54			Chief Technology Officer
Non-Employee Directors:
Francois Nader, MD			64			Chairman of the Board
Sandip Agarwala			41			Director
Nicholas G. Galakatos, PhD			63			Director
Geoff MacKay			54			Director
Mark D. McDade			65			Director
Gaurav D. Shah, MD			46			Director
Sapna Srivastava, PhD			50			Director

 

*	Effective as of March 1, 2021.

Executive Officers

Scott Requadt has served as our President and Chief Executive Officer and as a member of our board of directors since November 2018. Mr. Requadt has over 19 years of operating and investment experience in the biopharmaceutical industry. Mr. Requadt was most recently a Managing Director of Clarus Ventures, LLC (Clarus) (acquired by The Blackstone Group Inc. (Blackstone) in 2018), where he was an investment professional from September 2005 to October 2018, and a venture partner of Blackstone from November 2018 to December 2020, where he sourced, led and managed multiple investments for Clarus spanning therapeutics, medtech and diagnostics. He currently serves on the board of directors of ESSA Pharmaceuticals, Inc. (Nasdaq: EPIX) and has previously served on the board of directors of Avrobio, Inc. (Nasdaq: AVRO), VBI Vaccines, Inc. (Nasdaq: VBIV) and TyRx, Inc. Prior to joining Clarus in September 2005, Mr. Requadt was Director, Business Development of TransForm Pharmaceuticals, Inc. (Transform) from 2001 until it was acquired by Johnson & Johnson (NYSE: JNJ) in 2005. Prior to TransForm, Mr. Requadt was an M&A attorney at the New York-based law firm of Davis Polk & Wardwell LLP from 1995 to 1999, where he represented numerous private equity, pharmaceutical and technology clients. Mr. Requadt holds a B.Com (Joint Honors in Economics & Finance) from McGill University, an LLB (JD) from University of Toronto and an MBA from Harvard Business School, where he was a Baker Scholar. We believe that Mr. Requadt is qualified to serve as a member of our board of directors due to his substantial investing and operating experience in the biopharmaceutical industry.

Mary Kay Fenton will assume the role of Chief Financial Officer in March 2021. Ms. Fenton previously served as the Vice President of Strategic Operations, Vertex Cell & Genetic Therapies of Vertex Pharmaceuticals, Inc. (Nasdaq: VRTX) from October 2019 through February 2021. Ms. Fenton joined Vertex upon completion of the acquisition of Semma Therapeutics, Inc. (Semma) by Vertex in October 2019. From

 

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May 2019 until October 2019, Ms. Fenton served as the Chief Financial Officer and Chief Operating Officer of Semma. From January 2006 until December 2018, Ms. Fenton served as Chief Financial Officer of Achillion Pharmaceuticals, Inc. (Achillion) (acquired by Alexion Pharmaceuticals, Inc. (Nasdaq: ALXN)), and from October 2000 until January 2006, Ms. Fenton held various financial positions of increasing responsibility at Achillion. Prior to joining Achillion, Ms. Fenton held various positions within the Technology Industry Group at PricewaterhouseCoopers LLP from August 1991 until October 2000, including as Senior Manager responsible for the life sciences practice in Connecticut. Ms. Fenton also serves on the board of directors of Oncorus, Inc. (Nasdaq: ONCR). Ms. Fenton holds an MBA in finance from the Graduate School of Business at the University of Connecticut and an AB in economics from the College of the Holy Cross.

Suzanne T. Ildstad, MD, is our founder and has served us in various roles since our inception, including as Chief Scientific Officer since November 2018 and a member of our board of directors since February 2002. Her seminal discovery of facilitating cells led to our founding in 2002 and Dr. Ildstad served as our founding Chief Executive Officer from 2002 until November 2018. Dr. Ildstad has spent her career developing allogeneic cellular therapies for transplantation immunology and transitioning novel discoveries from the bench to the clinic. Dr. Ildstad is also the founding director of the Institute for Cellular Therapeutics of the University of Louisville and is a Professor (with Tenure), Department of Surgery, a Distinguished University Scholar and Jewish Hospital Distinguished Professor of Transplantation. She has received numerous awards and honors, including election to the National Academy of Medicine and National Academy of Inventors as well as the Mayo Clinic Distinguished Alumnus Award. She has authored over 230 manuscripts and is a named inventor or co-inventor on over 35 patents. Dr. Ildstad holds a BSc from University of Minnesota and an MD from Mayo Clinic Medical School. Dr. Ildstad also completed her surgery residency at Massachusetts General Hospital, an immunology fellowship at National Institutes of Health, and a pediatric surgery/transplant fellowship at Cincinnati Children’s Hospital.

Nancy Krieger, MD, has served as our Chief Medical Officer since November 2018. Dr. Krieger has over 15 years of diverse global experience in the pharmaceutical industry, in cellular therapy, solid organ and stem cell transplantation, immunology/inflammation, bone metabolism, rare diseases, as well as liver and chronic kidney disease. Prior to joining Talaris, she advanced through roles of increasing responsibility at Novartis AG (NYSE: NVS) from February 2007 to November 2018, most recently as a senior global program clinical head in immunology and dermatology from July 2017 to November 2018 and previously as executive director, global program medical director, immunology and dermatology from October 2009 to July 2017. Dr. Krieger also served as a medical director at Bristol-Myers Squibb Company (NYSE: BMY) from June 2004 to February 2007, playing a significant role in the clinical development of the Belatacept Transplant Program. Dr. Krieger completed her transplant fellowship at the University of Wisconsin, and general surgical residency at Stanford University, including a 3-year postdoctoral fellowship in Stanford’s immunology department. Dr. Krieger holds an AB in Biology from Occidental College and an MD from Columbia University College of Physicians and Surgeons.

Michael Zdanowski has served as our Chief Technology Officer since October 2020. Mr. Zdanowski is an accomplished leader in cell therapy technical operations with over 25 years of relevant experience. He has led manufacturing, logistics, QA/QC and process and analytical development groups for stem cell organizations, and led design, construction and/or validation of equipment and facilities for commercial manufacturing for such firms as Pfizer Inc. (NYSE: PFE), Bayer AG (OTC: BAYZF) and Regeneron Pharmaceuticals Inc. (Nasdaq: REGN). He was most recently Senior Vice President of BioPharmaceutical Operations for Medeor Therapeutics from March 2018 to April 2020. Previously, Mr. Zdanowski was Vice President of GMP Operations for the New York Stem Cell Foundation from September 2016 to March 2018 and Vice President of Manufacturing for Mesoblast Limited (Nasdaq: MESO) from April 2013 to August 2016. Mr. Zdanowski has prepared FDA & EU CMC submissions for several late-stage stem cell products, including the BLA supporting the first FDA approval for an allogeneic stem cell therapy product HemaCord. He received his MBA from Columbia University and degrees in Mechanical Engineering and Philosophy from the University of Pennsylvania.

 

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Non-Employee Directors

Francois Nader, MD, has served as Chairman of our board of directors since November 2018. Dr. Nader also currently serves as chairman of Acceleron Pharma, Inc. (Nasdaq: XLRN), and as independent director of Alexion Pharmaceuticals, Inc. (Nasdaq: ALXN) and Moderna, Inc (Nasdaq: MRNA). Dr. Nader is a leading value builder in the biopharma industry. Dr. Nader was President, Chief Executive Officer and Executive Director of NPS Pharmaceuticals, Inc. from March 2008 to February 2015, when the company was sold to Shire plc (Nasdaq: SHPG). Dr. Nader was recognized as the EY National Life Science Entrepreneur of the Year^® in 2013 and was awarded the Ellis Island Medal of Honor in 2017. Dr. Nader is the past chairman of BioNJ and Prevail Therapeutics Inc. (acquired by Eli Lilly and Company (NYSE: LLY)) and has served on the board of Biotechnology Innovation Organization (BIO), NPS Pharmaceuticals, Inc., Baxalta, Inc. (acquired by Shire plc (Nasdaq: SHPG)), Clementia Pharmaceuticals, Inc. (acquired by Ipsen SA (OTC: IPSEY)), Advanced Accelerator Applications SA (acquired by Novartis AG (NYSE: NVS)), Trevena, Inc. (TRVN) and Noven, Inc. (acquired by Hisamitsu Pharmaceutical Co., Inc). Dr. Nader earned his French Doctorate in Medicine from St. Joseph University in Lebanon and his Physician Executive MBA from the University of Tennessee. We believe Dr. Nader is qualified to serve on our board of directors because of his experience as public company CEO, integrated healthcare markets and medical and regulatory affairs and his extensive experience as a director of numerous public and private biopharmaceutical companies.

Sandip Agarwala has served as a member of our board of directors since November 2018. Mr. Agarwala has been a Managing Director of Longitude Capital Management, a healthcare venture capital firm that invests in transformative healthcare companies, since January 2014. Mr. Agarwala currently serves on the board of directors of Cydan Development Inc., Endeavor Biomedicines Inc., LEXEO Therapeutics Inc., Opna Immuno-Oncology SA, and has been a board observer of Inozyme Pharma Inc (Nasdaq: INZY) and Aptinyx, Inc. (Nasdaq: APTX). He has also led Longitude Capital’s royalty and structured investment strategy since April 2013. Mr. Agarwala holds an MBA in Finance and Health Care Management from the Wharton School of the University of Pennsylvania and a BSE in Systems Engineering from the University of Pennsylvania. We believe Mr. Agarwala is qualified to serve on our board of directors because of his experience and leadership both in the healthcare and venture capital fields.

Nicholas G. Galakatos, PhD, has served as a member of our board of directors since November 2018. Dr. Galakatos is the Global Head of Life Sciences of Blackstone. Prior to joining Blackstone, Dr. Galakatos was a co-Founder and Managing Director of Clarus, since the firm’s inception in 2005. Dr. Galakatos is currently the chairman of the board of directors of Anthos Therapeutics, Inc. (Anthos), a private, clinical-stage cardiovascular biotechnology company founded in 2019, and a member of the board of directors of Praxis Precision Medicines, Inc. (Nasdaq: PRAX). Previously, Dr. Galakatos also served on the board of directors of publicly traded public companies Entasis Therapeutics Holdings Inc. (Nasdaq: ETTX), NanoString Technologies, Inc. (Nasdaq: NSTG) and Catabasis Pharmaceuticals, Inc. (Nasdaq: CATB). Dr. Galakatos is a member of the Director’s Council of the Koch Institute at the Massachusetts Institute of Technology (MIT), and a member of the Board of Trustees at Reed College. Dr. Galakatos received a B.A. in chemistry from Reed College and a Ph.D. in organic chemistry from MIT. We believe Dr. Galakatos is qualified to serve on our board of directors because of his business, investing and leadership experience in the life sciences industry and his scientific background.

Geoff MacKay has served as a member of our board of directors since November 2018. From April 2015 to June 2017, Mr. MacKay served as interim chief executive officer of eGenesis, Inc., a biotechnology company, and from December 2003 to December 2014, he served as chief executive officer of Organogenesis Inc. (Nasdaq: ORGO). Prior to that, from February 1993 to December 2003, Mr. MacKay served in various senior leadership positions within the global transplantation & immunology franchise at Novartis Canada, Global (Basel), USA (NYSE: NVS). Mr. MacKay previously served on the board of RepliCel Life Sciences Inc. (OTC: REPCF), Gemstone Biotherapeutics LLC and Centre for Commercialization of Regenerative Medicine, as chairperson of the board of MassBio, chairperson of the board of the Alliance of Regenerative Medicine, and on the advisory council to the Health Policy Commission for Massachusetts. Mr. MacKay holds a B.A. in psychology and a

 

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graduate certificate in marketing management from McGill University. We believe Mr. MacKay is qualified to serve on our board of directors because of his extensive executive experience in the life sciences industry.

Mark D. McDade has served as a member of our board of directors since November 2018. Since January 2017, Mr. McDade has been Managing Partner of the Qiming US Healthcare Fund, a venture capital firm based in Seattle and formed in January 2017. Prior to Qiming, from April 2008, Mr. McDade was Executive Vice President, Corporate Development, and from January 2009, EVP and Chief Operating Officer, at UCB S.A. (OTC: UCBJF), a Belgian biopharmaceutical company, until his retirement from UCB in October 2016. From November 2002 to September 2007, Mr. McDade served as Chief Executive Officer and a member of the board of directors of PDL BioPharma, Inc. (Nasdaq: PDLI), a biotechnology company. From 2000 to 2002, Mr. McDade was Chief Executive Officer of Signature BioScience, Inc., a drug discovery company. Mr. McDade currently serves on the board of directors of Lupin Limited, a global biopharmaceutical company based in Mumbai, India. Previously, Mr. McDade also served on the board of directors of Dermira, Inc. (Nasdaq: DERM), and as chairman of the board of Aimmune Therapeutics, Inc. (Nasdaq: AIMT), until both companies were acquired by Eli Lilly and Company (NYSE: LLY) and Nestle SA (OTC: NSRGY), respectively, in March and October 2020. Previously, Mr. McDade also served on the board of directors of publicly traded companies Phillips Edison Grocery Center REIT II, Inc. and Five Prime Therapeutics, Inc. (Nasdaq: FPRX). Mr. McDade received a BA in History from Dartmouth College and an MBA from the Harvard Business School. We believe that Mr. McDade is qualified to serve on our board of directors due to his executive management, leadership and investing experience in the life sciences industry, as well as his extensive experience as a director of public biopharmaceutical companies.

Gaurav D. Shah, MD, has served as a member of our board of directors since December 2020. Dr. Shah has served as the co-founder, President, and Chief Executive Officer since October 2015, and a member of the board of directors since June 2020, of Rocket Pharmaceuticals (Nasdaq: RCKT). Prior to this role, from January 2011 to September 2015, Dr. Shah held various leadership positions at Novartis AG (NYSE: NVS), including Global Program Head for CAR-T-19, Global Clinical Program Head for CTL-019 and Biosimilars, and Global Clinical Leader for Afinitor. Prior to Novartis, Dr. Shah was a Medical Director at Eli Lilly and Company (NYSE: LLY) from July 2008 to December 2010, where he oversaw clinical development of numerous programs, including olaratumab. During his industry tenure, he has participated in several drug development programs resulting in successful regulatory approvals, such as CTL-019 in pediatric ALL, the first cell and gene therapy approved in the U.S., as well as various successful commercial launches. Prior to that, Dr. Shah was an Assistant Professor of Medicine/Oncology at Columbia University. Dr. Shah holds his BSc in behavioral neuroscience from Harvard College (summa cum laude, Phi Beta Kappa) and a MD from Columbia University. Dr. Shah also completed his internal medicine residency at Brigham and Women’s Hospital, and hematology/oncology fellowship training at Memorial-Sloan Kettering. We believe Dr. Shah is qualified to serve on our board of directors due to his extensive experience in the biopharmaceutical industry, including his current role as chief executive officer and in other management positions.

Sapna Srivastava, PhD, has served as a member of our board of directors since January 2021. Dr. Srivastava has over 20 years of experience as a senior executive in the biopharmaceutical industry. From September 2017 to January 2019, Dr. Srivastava served as the Chief Financial and Strategy Officer at Abide Therapeutics, Inc., a biopharmaceutical company that was acquired by H. Lundbeck A/S in 2019. From April 2015 to December 2016, Dr. Srivastava served as the Chief Financial and Strategy Officer at Intellia Therapeutics, Inc. (Nasdaq: NTLA), a genome editing company. Previously, for nearly 15 years Dr. Srivastava was a senior biotechnology analyst at Goldman Sachs, Morgan Stanley, and ThinkEquity Partners, LLC. She began her career as a research associate at JP Morgan. Dr. Srivastava currently serves on the board of directors of SQZ Biotechnologies Company (Nasdaq: SQZ) and Asclepix Therapeutics, Inc. Dr. Srivastava holds a PhD from NYU University School of Medicine and a BS from St. Xavier’s College, University of Bombay. We believe Dr. Srivastava is qualified to serve as a member of our board of director due to her extensive experience in the biopharmaceutical industry, including her prior experience as a chief financial officer and in other management positions.

 

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Composition of Our Board of Directors

Our board consists of nine members, each of whom are members pursuant to the board composition provisions of our certificate of incorporation and agreements with our stockholders. These board composition provisions will terminate upon the completion of this offering. Upon the termination of these provisions, there will be no further contractual obligations regarding the election of our directors. Our nominating and corporate governance committee and our board of directors may therefore consider a broad range of factors relating to the qualifications and background of nominees. Our nominating and corporate governance committee’s and our board of directors’ priority in selecting board members is identification of persons who will further the interests of our stockholders through their established record of professional accomplishment, the ability to contribute positively to the collaborative culture among board members, knowledge of our business, understanding of the competitive landscape, professional and personal experiences, and expertise relevant to our growth strategy. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. Our amended and restated certificate of incorporation that will become effective upon the closing of this offering and amended and restated bylaws that will become effective upon the effectiveness of the registration statement of which this prospectus is a part, also provide that our directors may be removed only for cause by the affirmative vote of the holders of at least two-thirds of the votes that all our stockholders would be entitled to cast in an annual election of directors, and that any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.

Director Independence

Our board of directors has determined that all members of the board of directors, except Suzanne T. Ildstad and Scott Requadt, are independent directors, including for purposes of the rules of the Nasdaq Global Market and the SEC. In making such independence determination, our board of directors considered the relationships that each non-employee director has with us and all other facts and circumstances that our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In considering the independence of the directors listed above, our board of directors considered the association of our directors with the holders of more than 5% of our common stock. Upon the completion of this offering, we expect that the composition and functioning of our board of directors and each of our committees will comply with all applicable requirements of the Nasdaq Global Market and the rules and regulations of the SEC. There are no family relationships among any of our directors or executive officers. Dr. Ildstad is not an independent director under these rules because she is the Chief Scientific Officer of the Company. Similarly, Mr. Requadt is not an independent director under these rules because he is the President and Chief Executive Officer of the Company.

Staggered Board

In accordance with the terms of our amended and restated certificate of incorporation that will become effective upon the closing of this offering and our amended and restated bylaws that will become effective upon the effectiveness of the registration statement of which this prospectus is a part, our board of directors will be divided into three staggered classes of directors and each will be assigned to one of the three classes. At each annual meeting of the stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the directors will expire upon the election and qualification of successor directors at the annual meeting of stockholders to be held during the years                for Class I directors,                 for Class II directors and                for Class III directors.

 

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Our Class I directors will be                 ;

 

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Our Class II directors will be                 ; and

 

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Our Class III directors will be                 .

 

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Our amended and restated certificate of incorporation that will become effective upon the closing of this offering and amended and restated bylaws that will become effective upon the effectiveness of the registration statement of which this prospectus is a part provide that the number of our directors shall be fixed from time to time by a resolution of the majority of our board of directors.

The division of our board of directors into three classes with staggered three-year terms may delay or prevent stockholder efforts to effect a change of our management or a change in control.

Board Leadership Structure

Currently, the role of chairman of the board of directors is separated from the role of Chief Executive Officer. Our Chief Executive Officer is responsible for recommending strategic decisions and capital allocation to the board of directors and to ensure the execution of the recommended plans. The chairman of the board of directors is responsible for leading the board of directors in its fundamental role of providing advice to and independent oversight of management. Our board of directors recognizes the time, effort and energy that the Chief Executive Officer is required to devote to his position in the current business environment, as well as the commitment required to serve as our chairman, particularly as the board of directors’ oversight responsibilities continue to grow. While our amended and restated bylaws and corporate governance guidelines will not require that our chairman and Chief Executive Officer positions be separate, our board of directors believes that having separate positions is the appropriate leadership structure for us at this time and demonstrates our commitment to good corporate governance.

Role of the Board in Risk Oversight

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including the four risks more fully discussed in the section entitled “Business” appearing elsewhere in this prospectus. Management is responsible for the day-to-day management of risks we face, while our board of directors, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes designed and implemented by management are adequate and functioning as designed.

The role of the board of directors in overseeing the management of our risks is conducted primarily through committees of the board of directors, as disclosed in the descriptions of each of the committees below and in the charters of each of the committees. The full board of directors (or the appropriate board committee in the case of risks that are under the purview of a particular committee) discusses with management our major risk exposures, their potential impact on us, and the steps we take to manage them. When a board committee is responsible for evaluating and overseeing the management of a particular risk or risks, the chairman of the relevant committee reports on the discussion to the full board of directors during the committee reports portion of the next board meeting. This enables the board of directors and its committees to coordinate the risk oversight role, particularly with respect to risk interrelationships.

Committees of Our Board of Directors

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee, each of which will operate pursuant to a charter to be adopted by our board of directors that will be effective upon the effectiveness of the registration statement of which this prospectus is a part. The board of directors may also establish other committees from time to time to assist the Company and the board of directors. Upon the effectiveness of the registration statement of which this prospectus is a part, the composition and functioning of all of our committees will comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, Nasdaq and SEC rules and regulations, if applicable. Upon our listing on Nasdaq, each committee’s charter will be available on our website at www.talaristx.com. The reference to our website

 

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address does not constitute incorporation by reference of the information contained at or available through our website, and you should not consider it to be part of this prospectus.

Audit Committee

                 serve on the audit committee, which is chaired by    . Our board of directors has determined that each are “independent” for audit committee purposes as that term is defined by the rules of the SEC and Nasdaq, and that each has sufficient knowledge in financial and auditing matters to serve on the audit committee. Our board of directors has designated as                  an “audit committee financial expert,” as defined under the applicable rules of the SEC. The audit committee’s responsibilities include:

 

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appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;

 

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pre-approving auditing and permissible non-audit services, and the terms of such services, to be provided by our independent registered public accounting firm;

 

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reviewing the overall audit plan with our independent registered public accounting firm and members of management responsible for preparing our financial statements;

 

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reviewing and discussing with management and our independent registered public accounting firm our annual and quarterly financial statements and related disclosures as well as critical accounting policies and practices used by us;

 

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coordinating the oversight and reviewing the adequacy of our internal control over financial reporting;

 

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establishing policies and procedures for the receipt and retention of accounting-related complaints and concerns;

 

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recommending, based upon the audit committee’s review and discussions with management and our independent registered public accounting firm, whether our audited financial statements shall be included in our Annual Report on Form 10-K;

 

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monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to our financial statements and accounting matters;

 

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preparing the audit committee report required by SEC rules to be included in our annual proxy statement;

 

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reviewing all related person transactions for potential conflict of interest situations and approving all such transactions; and

 

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reviewing quarterly earnings releases.

Compensation Committee

                 serve on the compensation committee, which is chaired by     . Our board of directors has determined that each member of the compensation committee is “independent” as defined in the applicable Nasdaq rules. The compensation committee’s responsibilities include:

 

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annually reviewing and recommending to the board of directors the corporate goals and objectives relevant to the compensation of our Chief Executive Officer;

 

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evaluating the performance of our Chief Executive Officer in light of such corporate goals and objectives and based on such evaluation: (i) recommending to the board of directors the cash compensation of our Chief Executive Officer, and (ii) reviewing and approving grants and awards to our Chief Executive Officer under equity-based plans;

 

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reviewing and approving the cash compensation of our other executive officers;

 

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reviewing and establishing our overall management compensation, philosophy and policy;

 

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overseeing and administering our compensation and similar plans;

 

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reviewing and approving the retention or termination of any consulting firm or outside advisor to assist in the evaluation of compensation matters and evaluating and assessing potential and current compensation advisors in accordance with the independence standards identified in the applicable Nasdaq rules;

 

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retaining and approving the compensation of any compensation advisors;

 

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reviewing and approving our policies and procedures for the grant of equity-based awards;

 

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reviewing and recommending to the board of directors the compensation of our directors; and

 

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preparing the compensation committee report required by SEC rules, if and when required, to be included in our annual proxy statement.

Nominating and Corporate Governance Committee

                 serve on the nominating and corporate governance committee, which is chaired by     . Our board of directors has determined that each member of the nominating and corporate governance committee is “independent” as defined in the applicable Nasdaq rules. The nominating and corporate governance committee’s responsibilities include:

 

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developing and recommending to the board of directors criteria for board and committee membership;

 

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establishing procedures for identifying and evaluating board of director candidates, including nominees recommended by stockholders;

 

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reviewing the composition of the board of directors to ensure that it is composed of members containing the appropriate skills and expertise to advise us;

 

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identifying individuals qualified to become members of the board of directors;

 

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recommending to the board of directors the persons to be nominated for election as directors and to each of the board’s committees;

 

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reviewing and recommending to the board of directors appropriate corporate governance guidelines; and

 

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overseeing the evaluation of our board of directors.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee has at any time during the prior three years been one of our officers or employees. None of our executive officers currently serves, or in the past fiscal year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or compensation committee.

Corporate Governance

Prior to the effectiveness of the registration statement of which this prospectus is a part, we will adopt a written code of business conduct and ethics that applies to our directors, officers, and employees, including our principal executive officer, principal financial officer, principal accounting officer, or controller, or persons performing similar functions. Following the effectiveness of the registration statement of which this prospectus is a part, a current copy of this code will be posted on the Corporate Governance section of our website, which is located at www.talaristx.com. The information on our website is deemed not to be incorporated in this prospectus

 

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or to be a part of this prospectus. If we make any substantive amendments to, or grant any waivers from, the code of business conduct and ethics for any officer or director, we will disclose the nature of such amendment or waiver on our website or in a current report on Form 8-K.

Limitations on Liability and Indemnification Maters

As permitted by Delaware law, provisions in our amended and restated certificate of incorporation, which will become effective immediately prior to the closing of this offering, and amended and restated bylaws, which will become effective upon the effectiveness of this registration statement, limit or eliminate the personal liability of 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, a director exercise an informed business judgment based on all material information reasonably available to him or her. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for:

 

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any breach of the director’s duty of loyalty to us or our stockholders;

 

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any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

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any act related to unlawful stock repurchases, redemptions or other distributions or payments of dividends; or

 

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any transaction from which the director derived an improper personal benefit.

These limitations of liability do not limit or eliminate our rights or any stockholder’s rights to seek non-monetary relief, such as injunctive relief or rescission. These provisions will not alter a director’s liability under other laws, such as the federal securities laws or other state or federal laws. Our amended and restated certificate of incorporation, which will become effective immediately prior to the closing of this offering also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under Delaware law.

As permitted by Delaware law, our amended and restated bylaws, which will become effective upon the effectiveness of this registration statement will provide that:

 

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we will indemnify our directors, officers, employees and other agents to the fullest extent permitted by law;

 

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we must advance expenses to our directors and officers, and may advance expenses to our employees and other agents, in connection with a legal proceeding to the fullest extent permitted by law; and

 

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the rights provided in our amended and restated bylaws are not exclusive.

If Delaware law is amended to authorize corporate action further eliminating or limiting the personal liability of a director or officer, then the liability of our directors or officers will be so eliminated or limited to the fullest extent permitted by Delaware law, as so amended. Our amended and restated bylaws will also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit such indemnification. We have obtained such insurance.

In addition to the indemnification that will be provided for in our amended and restated certificate of incorporation and amended and restated bylaws, we plan to enter into separate indemnification agreements with each of our directors and executive officers, which may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements may require us, among other things, to indemnify our directors and executive officers for some expenses, including attorneys’ fees, expenses, judgments, fines and settlement amounts incurred by a director or executive officer in any action or

 

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proceeding arising out of his service as one of our directors or executive officers or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

This description of the indemnification provisions of our amended and restated certificate of incorporation, our amended and restated bylaws and our indemnification agreements is qualified in its entirety by reference to these documents, each of which is filed as an exhibit to the registration statement of which this prospectus forms a part.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable.

There is no pending litigation or proceeding naming any of our directors or officers as to which indemnification is being sought, nor are we aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer.

Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to compliance with the terms of our insider trading policy. Prior to 180 days after the date of this offering, subject to early termination, the sale of any shares under such plans would be prohibited by the lock-up agreement that the director or officer has entered into with the underwriters.

 

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EXECUTIVE COMPENSATION

Overview

The following discussion contains forward-looking statements that are based on our current plans and expectations regarding our future compensation programs. The actual amount and form of compensation that we pay and the compensation policies and practices that we adopt in the future may differ materially from the currently-planned programs that are summarized in this discussion.

The compensation provided to our named executive officers for the fiscal year ended December 31, 2020 is detailed in the 2020 Summary Compensation Table and accompanying footnotes and narrative that follow.

Our named executive officers for the fiscal year ended December 31, 2020, which consisted of our Chief Executive Officer and our two most highly compensated executive officers other than our Chief Executive Officer, were:

 

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Scott Requadt, our President, Chief Executive Officer and Director

 

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Dr. Suzanne T. Ildstad, our Chief Scientific Officer

 

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Dr. Nancy Krieger, our Chief Medical Officer

2020 Summary Compensation Table

The following table provides information regarding the total compensation awarded to, earned by, and paid to our named executive officers for services rendered to us in all capacities for the fiscal year ended December 31, 2020.

 

Name and Principal Position		Year				Salary ($)				Option Awards ($)(1)				Non-Equity Incentive Plan Compensation ($)(2)				All Other Compensation ($)(3)				Total($)
Scott Requadt(4)
President, Chief Executive Officer and Director			2020				400,000				2,934,475				128,000				16,763				3,479,238
Dr. Suzanne T. Ildstad
Chief Scientific Officer and Director(4)			2020				376,000				—				95,880				14,195				486,075
Nancy Krieger
Chief Medical Officer			2020				375,000				614,210				92,813				14,951				1,096,974

 

(1)

The amounts reported represent the aggregate grant date fair value of the stock options awarded to the named executive officers during fiscal year 2020, calculated in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718. Such grant date fair value does not take into account any estimated forfeitures. The assumptions used in calculating the grant date fair value of the awards reported in this column are set forth in the notes to our financial statements included elsewhere in this prospectus. The amounts reported in this column reflect the accounting cost for the stock options and does not correspond to the actual economic value that may be received upon exercise of the stock option or any sale of any of the underlying shares of common stock.

(2)	The amounts represent actual bonuses earned as of December 31, 2020, upon the attainment of one or more pre-established company and individual performance goals established by our board of directors on an annual basis by Mr. Requadt, Dr. Ildstad, and Dr. Krieger. The amounts were paid in 2021.

(3)	The amounts represent an annual matching contribution under our 401(k) Plan.

(4)	Mr. Requadt and Dr. Ildstad are also members of our board of directors but did not receive any additional compensation in their capacity as a director.

 

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Narrative to Summary Compensation Table

Base Salaries

Each named executive officer’s base salary is a fixed component of annual compensation for performing specific duties and functions, and has been established by our board of directors taking into account each individual’s role, responsibilities, skills and expertise. Base salaries are reviewed annually, typically in connection with our annual performance review process, approved by our board of directors and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience. For fiscal year 2020, the annual base salary for (i) Mr. Requadt was $400,000, (ii) Dr. Ildstad was $376,000 and (iii) Dr. Krieger was $375,000.

Annual Bonuses

For the fiscal year ended December 31, 2020, each named executive officer was eligible to earn an annual cash bonus based on the achievement of corporate performance metrics, in the case of Mr. Requadt, and corporate and individual performance metrics, in the case of Drs. Ildstad and Krieger. The target annual bonus for Mr. Requadt, Dr. Ildstad, and Dr. Krieger for 2020 was 40%, 30% and 30% of their respective annual base salary.

Equity Compensation

Although we do not yet have a formal policy with respect to the grant of equity incentive awards to our executive officers, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. In addition, we believe that equity grants promote executive retention because they incentivize our executive officers to remain in our employment during the vesting period. Accordingly, our board of directors periodically reviews the equity incentive compensation of our named executive officers and may grant equity incentive awards to them from time to time.

In February 2020, our board of directors approved equity awards to our employees, including the named executive officers. Mr. Requadt and Dr. Krieger were granted 1,775,000 stock options and 495,000 stock options, respectively, as described in more detail in the “Outstanding equity awards at fiscal 2020 year-end” table.

In August 2020, Mr. Requadt and Dr. Krieger were granted 635,488 stock options and 176,781 stock options, respectively, as described in more detail in the “Outstanding equity awards at fiscal 2020 year-end” table.

In October 2020, Mr. Requadt and Dr. Krieger were granted 3,090,889 stock options and 585,749 stock options, respectively, as described in more detail in the “Outstanding equity awards at fiscal 2020 year-end” table.

Employment Arrangements with our Named Executive Officers

We have entered into an offer letter with each of the named executive officers in connection with their employment with us, which set forth the terms and conditions of their respective employment. In connection with this offering, we intend to enter into amended and restated employment agreements with our named executive officers that will become effective upon the closing of this offering.

Scott Requadt

On November 1, 2018, we entered into an Offer Letter with Scott Requadt (Requadt Offer Letter), who currently serves as our Chief Executive Officer (CEO). The Requadt Offer Letter provides that Mr. Requadt will

 

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also serve as a member of our board of directors for so long as he serves as the CEO of the Company, or until his earlier resignation or removal. The Requadt Offer Letter explicitly provides that Mr. Requadt will be deemed to have voluntarily resigned from our board of directors, effective immediately, upon his cessation of service as the CEO.

The Requadt Offer Letter sets forth his initial annual base salary of $375,000, his initial target annual bonus opportunity of 40% of his then-current base salary, his initial equity grant, and his eligibility to participate in our employee benefit plan generally. Mr. Requadt’s current base salary is $450,000. The receipt of an annual bonus is based upon the attainment of performance goals established by the Board and is contingent upon Mr. Requadt’s continued employment on the date the bonus is paid.

The Requadt Offer Letter provides that Mr. Requadt’s employment is at-will and may be terminated at any time for any reason; provided, that in the event that Mr. Requadt terminates his employment for “Good Reason,” as defined in the Requadt Offer Letter, he must provide at least 60 days’ advance written notice.

In the event that Mr. Requadt’s employment is terminated by us without “Cause” as defined in the Requadt Offer Letter, or by him for Good Reason, Mr. Requadt will be entitled to continued payment of his base salary for a period equal to nine months, paid ratably in accordance with the Company’s regular payroll cycle and payment or reimbursement for up to 12 months of health benefit continuation under COBRA (the Severance Benefits). Mr. Requadt must remain available to provide consulting services as reasonably requested by the Company to be eligible to receive the Severance Benefits.

In addition, in the event that Mr. Requadt’s employment is terminated by us without Cause, or by him with Good Reason, in each case, within three months prior to or 12 months following a “Change in Control” as defined in the 2018 Plan , Mr. Requadt will be entitled to a lump sum payment equal to his annual bonus target for the year of termination and the unvested portion of all Company equity awards then held by him will immediately vest and become exercisable (such accelerated vesting of equity is included in the term “Severance Benefits”). Mr. Requadt’s entitlement to the Severance Benefits is subject to the execution of an effective release of claims in favor of us (a Release).

Additionally, in the event Mr. Requadt’s employment is terminated without Cause and he agrees to be bound by, and complies with, a non-competition provision contained in the Release, in addition to the Severance Benefits, he will receive a lump sum payment equal to three months’ of base salary. Mr. Requadt is not obligated to agree to this non-competition provision to otherwise receive the Severance Benefits.

Separately, Mr. Requadt is subject to a Confidential Information, Inventions Assignment, and Restrictive Covenant Agreement (the NDA), which he entered into at the commencement of employment with the Company. The NDA includes non-competition and non-solicitation protections covering the one-year period following Mr. Requadt’s termination of employment, as well as non-disclosure, intellectual property assignment and non-disparagement obligations. In consideration of Mr. Requadt’s agreement to be bound by, and compliance with, the terms, conditions, and restrictions set forth in the NDA, if Mr. Requadt is terminated for Cause, or if he resigns with or without Good Reason, he will be entitled to a lump sum payment in the amount equal to three months of base salary. This lump sum payment is not conditioned upon his execution of a Release.

Suzanne T. Ildstad, MD

On November 1, 2018, we entered into an Offer Letter with Suzanne T. Ildstad (Ildstad Offer Letter), who currently serves as our Chief Scientific Officer. The Ildstad Offer Letter sets forth her initial annual base salary of $365,000, her initial target annual bonus opportunity of 30% of her then-current base salary, and her eligibility to participate in our employee benefit plan generally. Dr. Ildstad’s current base salary is $390,000. The receipt of an annual bonus is based upon the attainment of performance goals established by our board of directors or CEO and is contingent upon continued employment on the date the bonus is paid.

 

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The Ildstad Offer Letter recognizes that Dr. Ildstad is employed by the University of Louisville and is currently on “entrepreneurial leave.” The Ildstad Offer Letter includes a carveout in her NDA for her work with the University of Louisville and permits her to spend up to 5% of her working time fulfilling her responsibilities to the University of Louisville. Dr. Ildstad must notify us in the event she receives compensation from the University of Louisville that exceeds 10% of her base salary from us.

The Ildstad Offer Letter provides that Dr. Ildstad’s employment is at-will and may be terminated at any time for any reason; provided, that in the event that Dr. Ildstad terminates her employment for “Good Reason” as defined in the Ildstad Offer Letter, she must provide at least 30 days’ advance written notice.

In the event that Dr. Ildstad’s employment is terminated by us without “Cause” as defined in the Ildstad Offer Letter, or by her for Good Reason, Dr. Ildstad will be entitled to the Severance Benefits. Dr. Ildstad must remain available to provide consulting services as reasonably requested by the Company to be eligible to receive the Severance Benefits.

In addition, in the event that Dr. Ildstad’s employment is terminated by us without Cause, or by her with Good Reason, in each case, within three months prior to or 12 months following a “Change in Control” as defined in the 2018 Plan, Dr. Ildstad will be entitled to a lump sum payment equal to her annual bonus target for the year of termination and the unvested portion of all Company equity awards then held by her will immediately vest and become exercisable (such accelerated vesting of equity is included in the term “Severance Benefits”). Dr. Ildstad’s entitlement to the Severance Benefits is subject to the execution of a Release.

Dr. Ildstad is subject to an NDA, which she entered into at the commencement of her employment with the Company. The NDA includes non-competition and non-solicitation protections covering the one-year period following Dr. Ildstad’s termination of employment, as well as non-disclosure, intellectual property assignment and non-disparagement obligations. The NDA’s intellectual property assignment provision contains a carveout for inventions developed in connection with Dr. Ildstad’s work for the University of Louisville.

Nancy Krieger, MD

On November 1, 2018, we entered into an Offer Letter with Nancy Krieger (Krieger Offer Letter), who currently serves as our Chief Medical Officer. The Krieger Offer Letter sets forth her initial annual base salary of $350,000, her initial target annual bonus opportunity of 30% of her then-current base salary, her initial equity grant and her eligibility to participate in our employee benefit plan generally. Dr. Krieger’s current base salary is $415,000. The receipt of an annual bonus is based upon the attainment of performance goals established by our board of directors or CEO and is contingent upon continued employment on the date the bonus is paid.

The Krieger Offer Letter provides that Dr. Krieger’s employment is at-will, and may be terminated at any time for any reason; provided, that in the event that Dr. Krieger terminates her employment for “Good Reason” as defined in the Krieger Offer Letter, she must provide at least 30 days’ advance written notice.

In the event that Dr. Krieger’s employment is terminated by us without “Cause” as defined in the Krieger Offer Letter, or by her for Good Reason, Dr. Krieger will be entitled to the Severance Benefits. Dr. Krieger must remain available to provide consulting services as reasonably requested by the Company to be eligible to receive the Severance Benefits.

In addition, in the event that Dr. Krieger’s employment is terminated by us without Cause, or by her with Good Reason, in each case, within three months prior to or 12 months following a “Change in Control” as defined in our Equity Incentive Plan, Dr. Krieger will be entitled to a lump sum payment equal to her annual bonus target for the year of termination and the unvested portion of all Company equity awards then held by her will immediately vest and become exercisable (such accelerated vesting of equity is included in the term “Severance Benefits”). Dr. Krieger’s entitlement to the Severance Benefits is subject to the execution of a Release.

 

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Dr. Krieger is subject to an NDA. The NDA includes non-competition and non-solicitation protections covering the one-year period following Dr. Krieger’s termination of employment, as well as non-disclosure, intellectual property assignment and non-disparagement obligations.

Outstanding Equity Awards at Fiscal 2020 Year-End

The following table sets forth information regarding outstanding equity awards held by our named executive officers as of December 31, 2020:

 

						Option Awards(1)																				Stock Awards(1)(2)
Name		Grant Date				Vesting Commencement Date				Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Option Exercise Price ($)				Option Expiration Date				Number of Shares or Units of Stock That Have Not Vested (#)				Market Value of Shares or Units of Stock That Have Not Vested ($)(2)
Scott Requadt			12/20/2018				12/20/2018				—				—												1,455,469	(3)			1,557,352
President, Chief Executive Officer and Director			02/07/2020				02/07/2020				—				—												1,331,250	(4)			1,424,438
			08/20/2020				08/20/2020				635,488	(6)			—				0.73				08/20/2030
			10/02/2020				10/02/2020				3,090,889	(7)			—				1.07				10/02/2030
Dr. Suzanne T. Ildstad			—				—				—				—				—				—				—				—
Chief Scientific Officer and Director
Dr. Nancy Krieger			12/20/2018				—				—				—												404,297	(5)			432,598
Chief Medical Officer			02/07/2020				02/07/2020				—				—												371,250	(4)			397,238
			08/20/2020				08/20/2020				176,781	(8)			—				0.73				08/20/2030								—
			10/02/2020				10/02/2020				585,749	(9)			—				1.07				10/02/2030

 

(1)

All stock options and stock awards have been granted pursuant to the terms of our 2018 Equity Incentive Plan, as amended. Except as otherwise may be noted below, all stock options to our named executive officers have been granted with an early exercise feature. In the event of an early exercise, all options exercised that are still subject to vesting conditions are treated as restricted stock until those vesting conditions are met. In the event of a termination of the holder’s employment prior to meeting the vesting conditions, we have the right to repurchase any unvested shares at the original purchase price. Upon certain terminations of employment in connection with a change in control, vesting of unvested options and stock awards is fully accelerated, as described above under “—Employment Agreements with our Named Executive Officers”.

(2)	There was no public market for our common stock as of December 31, 2020. The fair market value of our common stock as of December 31, 2020 used in these calculations was determined by our board in reliance on an independent valuation.

(3)	Represents shares acquired upon the exercise of a stock option with an early exercise feature. These shares vest in equal monthly installments until November 1, 2022.

(4)	Represents shares acquired upon the exercise of a stock option with an early exercise feature. These shares vest in equal monthly installments until December 5, 2023.

(5)	Represents shares acquired upon the exercise of a stock option with an early exercise feature. These shares vest in equal monthly installments until November 16, 2022.

(6)	This stock option vests in 48 equal monthly installments following the vesting commencement date, subject to the named executive officer’s continuous service, and is subject to an early exercise feature. Of the shares subject to this option, 52,957 shares were vested as of December 31, 2020.

(7)	This stock option vests in 48 equal monthly installments following the vesting commencement date, subject to the named executive officer’s continuous service, and is subject to an early exercise feature. Of the shares subject to this option, 128,787 shares were vested as of December 31, 2020.

 

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(8)	This stock option vests in 48 equal monthly installments following the vesting commencement date, subject to the named executive officer’s continuous service, and is subject to an early exercise feature. Of the shares subject to this option, 14,731 shares were vested as of December 31, 2020.

(9)	This stock option vests in 48 equal monthly installments following the vesting commencement date, subject to the named executive officer’s continuous service, and is subject to an early exercise feature. Of the shares subject to this option, 24,406 shares were vested as of December 31, 2020.

Employee Benefits and Equity Compensation Plans

Second Amended and Restated 2018 Equity Incentive Plan

Our board of directors adopted, and our stockholders approved our 2018 Plan in November 2018. Our 2018 Plan was most recently amended in February 2020. Our 2018 Plan allows for the grant of incentive stock options to our employees, and grants of non-qualified stock options, restricted stock awards to the officers, employees, directors, and consultants of the company and our subsidiary corporations, and other stock-based awards to the officers, employees, directors, and consultants of the company and our subsidiary corporations.

Authorized Shares. No shares will be available for future issuance under the 2018 Plan following the effectiveness of the registration statement of which this prospectus forms a part. However, our 2018 Plan will continue to govern outstanding awards granted thereunder. As of January 31, 2021, we reserved an aggregate of 29,183,822 shares of our common stock for the issuance of options and other equity awards under the 2018 Plan. This number is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization. As of January 31, 2021, stock options to purchase 14,879,240 shares of our common stock at a weighted average exercise price of $0.80 per share, and 4,849,729 shares of restricted stock were outstanding under the 2018 Plan and 5,814,116 shares remained available for future issuance under the 2018 Plan.

Only shares of common stock that have actually been issued under the 2018 Plan in connection with an award shall be counted against the maximum aggregate number of shares of common stock available under the 2018 Plan. Any shares of common stock that are forfeited or canceled, expire, are surrendered or otherwise become unexercisable before the shares of common stock have been issued under the 2018 Plan shall be deemed not to have been issued for purposes of determining the maximum aggregate number of shares of common stock that may be issued under the 2018 Plan, and such unissued shares of common stock shall become available for future grant under the 2021 Stock Plan. If any award granted under the 2018 Plan expires, terminates, is canceled or is forfeited for any reason (in the case of any stock option, without having been exercised in full), or is settled in cash, the number of shares of common stock underlying such award (in the case of any stock option, to the extent unexercised) shall again be available for issuance under the 2018 Plan.

Administration. Our board of directors or a committee or subcommittee designated by our board of directors administers our 2018 Plan. Subject to the provisions of our 2018 Plan, the committee has full authority and discretion to take any actions it deems necessary or advisable for the administration our 2018 Plan, including the recipients, the number of shares or the amount of other consideration subject to each award, to approve forms of award agreements for use under the 2018 Plan, the exercise price, if any, the vesting schedule applicable to the awards for use under our 2018 Plan, to determine whether, to what extent and under what circumstances to provide loans to participants in order to exercise awards or to purchase or pay for shares of common stock issuable pursuant to awards under the plan, and establish additional terms, conditions, rules or procedures to accommodate the terms of any corporate transaction, award exchange program, award deferral program, or other such program, provided, however, that no award shall be subject to any such additional terms, conditions, rules, or procedures that are inconsistent with the provisions of the 2018 Plan.

Options. Stock options may be granted under our 2018 Plan. The 2018 Plan permits the granting of (i) stock options to purchase shares of common stock intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code and (ii) stock options that do not so qualify. The stock option exercise price per share

 

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of our common stock underlying each stock option was determined by our board or directors or a committee appointed by the board of directors, and must have been at least equal to 100% of the fair market value of a share of our common stock on the date of grant. The term of each stock option may not have exceeded 10 years from the date of grant. In the case of an incentive stock option granted to a grantee who, at the time of grant of such stock option, owned stock representing more than 10% of the combined voting power of all classes of stock of the Company, its subsidiaries or its parent or a 10% owner, the exercise price per share of our common stock underlying each such stock option must have been at least equal to 110% of the fair market value of a share of our common stock on the date of grant. the term of each stock option may not have exceeded five years from the date of grant. Stock options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the committee at the time of grant. In the event that a written employment agreement between the Company and a participant provides for a vesting schedule that is more favorable than the vesting schedule provided in the form of award agreement, the vesting schedule in such employment agreement shall govern, provided that such agreement is in effect on the date of grant and applicable to the specific stock option. Any unvested shares of common stock received in accordance with an early exercise shall be subject to a repurchase right in favor of the Company. The administrator will determine the methods of payment of the exercise price of a stock option as specified in the applicable award agreement or later authorized by the administrator under the terms of the 2018 Plan.

Restricted Stock. The 2018 Plan allows for the grant of shares of restricted stock. Restricted stock awards are grants of shares of our common stock that are subject to various restrictions, including restrictions on transferability and forfeitures provisions. Shares of restricted stock will vest, and the restrictions on such shares will lapse, in accordance with terms and conditions established by the committee.

Other Stock-Based Awards. The 2018 Plan allows for the grant of other stock-based awards. The committee is authorized to grant other stock-based awards that are payable in, valued in whole or in part by reference to, or otherwise based on shares of common stock, including, shares of common stock awarded purely as a bonus and not subject to any restrictions or conditions, shares of common stock in payment of amounts due under an incentive or performance plan sponsored or maintained by the Company, stock appreciation rights, stock equivalent units, restricted stock units, deferred stock units, phantom stock, phantom stock units, cash awards, and awards valued by reference to book value of shares of common stock. The committee may condition the grant or vesting of other stock-based awards upon the attainment of performance goals or such other factors as the committee may determine. Other stock-based awards and any underlying common stock shall vest or be forfeited to the extend set forth in the award agreement or as otherwise determined by the committee.

Termination. After a participant’s termination of employment, consultancy or directorship (other than a termination for cause), and not in the event of a participant’s change of status from employee, director or consultant to any other status, if the participant is involuntarily terminated without cause, all his or her stock options that are vested and exercisable may be exercised within a period of 90 days following such termination. If the participant’s termination is voluntary, the participant generally may exercise his or her stock options, to the extent vested as of such date of termination, for 30 days following such termination; provided, that if the termination is due to death or disability, the stock option generally will remain exercisable, to the extent vested as of such date of termination, until the one-year anniversary of such termination. In the event the participant engages in “detrimental activity” (as defined in the 2018 Plan) prior to any exercise of his or her stock options, all stock options (whether vested or unvested) shall terminate and expire (and in the case of restricted stock and other stock-based awards, all unvested restricted stock and other stock-based awards shall be immediately forfeited). In the event of a termination for cause or the discovery that the participant engaged in “detrimental activity” (as defined in the 2018 Plan), the Company shall have the right for a period of 90 days from the anniversary thereof, to repurchase any shares of common stock previously acquired by the participant under the 2018 Plan.

Transferability or Assignability of Awards. Our awards are subject to transfer restrictions as the committee may determine. The 2018 Plan generally does not allow for the transfer or assignment of awards, other than, at

 

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the discretion of the plan administrator, by will or the laws of descent and distribution, by gift to an immediate family member, or by instrument to an inter vivos or testamentary trust in which the award is passed to beneficiaries upon the death of the participant. Prior to any proposed transfer of shares of common stock, the participant must provide a written transfer notice to the Company fully describing the proposed transfer. If the Company determines that the transfer notice is insufficient, the Company has the right to repurchase all or any part of the shares of common stock by delivering to the participant (or his or her estate or legal representative) written notice of such exercise within 20 days after the date the Company has determined the proposed transfer to be insufficient.

Change in Control. The 2018 Plan provides that upon the occurrence of a “change in control” (as defined in the 2018 Plan), the administrator may (a) accelerate the vesting of the award, (b) in the case of stock options, accelerate the expiration of the term of the stock option to the date of the change in control, (c) cancel unvested awards for no consideration, and cancel vested awards for fair value, and (d) provide for the issuance of substitute award that will substantially preserve the otherwise applicable terms of any affected award previously granted. For purposes of the 2018 Plan, the completion of this initial public officer by itself, is not considered a change in control.

Certain Adjustments. In the event of certain changes in our capitalization, the number of shares available for future grants, the number of shares covered by each outstanding equity grant and the exercise price under each outstanding option will be proportionately adjusted.

Our board of directors may amend, suspend, or terminate the 2018 Plan at any time, subject to stockholder approval where such approval is required by applicable law. The board of directors may also amend, modify, or terminate any outstanding award, including the exercise price of such award, provided that no amendment to an award may adversely affect any of the rights of a participant under any awards previously granted without his or her consent.

2021 Stock Option and Incentive Plan

In connection with this offering, our board of directors, upon the recommendation of the compensation committee, is expected to adopt the 2021 Stock Plan, which will be subsequently approved by our stockholders. The 2021 Stock Plan is expected to become effective on the date immediately prior to the date on which the registration statement of which this prospectus is part is declared effective by the SEC. The 2021 Stock Plan is expected to replace our 2018 Plan, as our board of directors has determined not to make additional awards under the 2018 Plan following the closing of this offering. The 2021 Stock Plan will provide flexibility to our compensation committee to use various equity-based incentive awards as compensation tools to motivate our workforce.

We will initially reserve      shares of our common stock (Initial Limit) for the issuance of awards under the 2021 Stock Plan. The 2021 Stock Plan will provide that the number of shares reserved and available for issuance under the plan will automatically increase each January 1, beginning on January 1, 2022, by     % of the outstanding number of shares of our common stock on the immediately preceding December 31, or such lesser number of shares as determined by our compensation committee (the Annual Increase). This number will be subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.

The shares we issue under the 2021 Stock Plan will be authorized but unissued shares or shares that we reacquire. The shares of common stock underlying any awards that are forfeited, cancelled, held back upon exercise or settlement of an award to satisfy the exercise price or tax withholding, reacquired by us prior to vesting, satisfied without any issuance of stock, expire or are otherwise terminated (other than by exercise) under the 2021 Stock Plan will be added back to the shares of common stock available for issuance under the 2021 Stock Plan.

 

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The maximum aggregate number of shares that may be issued in the form of incentive stock options may not exceed the Initial Limit cumulatively increased on January 1, 2022, and on each January 1 thereafter by the lesser of the Annual Increase for such year or      shares of common stock.

The grant date fair value of all awards made under our 2021 Stock Plan and all other cash compensation paid by us to any non-employee director in any calendar year may not exceed      for the first year of service and                 for each year of service thereafter.

The grant date fair value of all awards made under our 2021 Stock Plan and all other cash compensation paid by us to any non-employee director in any calendar year for services as a non-employee director shall not exceed $                ; provided, however, that such amount shall be $                 for the calendar year in which the applicable non-employee director is initially elected or appointed to the board of directors.

The 2021 Stock Plan will be administered by our compensation committee. Our compensation committee will have full power to select, from among the individuals eligible for awards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the specific terms and conditions of each award, subject to the provisions of the 2021 Stock Plan. Persons eligible to participate in the 2021 Stock Plan will be those full or part-time employees, non-employee directors and consultants of the Company and its affiliates, as selected from time to time by our compensation committee in its discretion.

The 2021 Stock Plan will permit the granting of both options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code and options that do not so qualify. The option exercise price of each option will be determined by our compensation committee but may not be less than 100% of the fair market value of our common stock on the date of grant. The term of each option will be fixed by our compensation committee and may not exceed ten years from the date of grant. Our compensation committee will determine at what time or times each option may be exercised.

Our compensation committee may award stock appreciation rights subject to such conditions and restrictions as it may determine. Stock appreciation rights entitle the recipient to shares of common stock or cash, equal to the value of the appreciation in our stock price over the exercise price. The exercise price of each stock appreciation right may not be less than 100% of the fair market value of the common stock on the date of grant. The term of each stock appreciation right will be fixed by our compensation committee and may not exceed ten years from the date of grant. Our compensation committee will determine at what time or times each stock appreciation right may be exercised.

Our compensation committee will be permitted to award restricted shares of common stock and restricted stock units to participants subject to such conditions and restrictions as it may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment or service relationship with us through a specified vesting period. Our compensation committee will also be permitted to grant shares of common stock that are free from any restrictions under the 2021 Stock Plan. Unrestricted stock may be granted to participants in recognition of past services or other valid consideration and may be issued in lieu of cash compensation due to such participant.

Our compensation committee will be permitted to grant cash bonuses under the 2021 Stock Plan to participants, subject to the achievement of certain performance goals.

The 2021 Stock Plan will provide that upon the effectiveness of a “sale event,” as defined in the 2021 Stock Plan, an acquirer or successor entity may assume, continue or substitute outstanding awards under the 2021 Stock Plan. To the extent that awards granted under our 2021 Stock Plan are not assumed or continued or substituted by the successor entity, except as may be otherwise provided in the relevant award certificate, all awards with time-based vesting, conditions or restrictions will become fully vested and nonforfeitable as of the effective time of the sale event, and all awards with conditions and restrictions relating to the attainment of performance goals

 

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may become vested and nonforfeitable in connection with a sale event in the compensation committee’s discretion or to the extent specified in the relevant award certificate. Upon the effective time of the sale event, all outstanding awards granted under the 2021 Stock Plan will terminate to the extent not assumed, continued or substituted. In the event of such termination, individuals holding options and stock appreciation rights will be permitted to exercise such options and stock appreciation rights (to the extent exercisable) within a specified period of time prior to the sale event. In addition, in connection with the termination of the 2021 Stock Plan upon a sale event, we may make or provide for a payment, in cash or in kind, to participants holding vested and exercisable options and stock appreciation rights equal to the difference between the per share cash consideration payable to stockholders in the sale event and the exercise price of the options or stock appreciation rights and we may make or provide for a payment, in cash or in kind, to participants holding other vested awards.

Our board of directors will be permitted to amend or discontinue the 2021 Stock Plan and our compensation committee will be permitted to amend the exercise price of options and amend or cancel outstanding awards for purposes of satisfying changes in law or any other lawful purpose but no such action may adversely affect rights under an award without the holder’s consent. Certain amendments to the 2021 Stock Plan will require the approval of our stockholders. The administrator of the 2021 Stock Plan is specifically authorized to exercise its discretion to reduce the exercise price of outstanding stock options and stock appreciation rights or effect the repricing of such awards through cancellation and re-grants without stockholder consent.

No awards will be granted under the 2021 Stock Plan after the date that is 10 years from the date of stockholder approval. No awards under the 2021 Stock Plan have been made prior to the date of this prospectus.

Employee Stock Purchase Plan

In connection with this offering, our board of directors, upon the recommendation of the compensation committee, is expected to adopt the 2021 Employee Stock Purchase Plan (2021 ESPP), which will be subsequently approved by our stockholders. The 2021 ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 423(b) of the Code. The 2021 ESPP initially reserves and authorizes the issuance of up to a total of     shares of common stock to participating employees. The 2021 ESPP provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2022 and each January 1 thereafter through January 1, 2031, by the least of (i) % of the outstanding number of shares of our common stock on the immediately preceding December 31, (ii) shares or (iii) such lesser number of shares of common stock as determined by the 2021 ESPP administrator. The number of shares reserved under the 2021 ESPP is subject to adjustment in the event of a stock split, stock dividend or other change in our capitalization.

All employees whose customary employment is for more than 20 hours per week and have completed at least    days/months                of employment are eligible to participate in the 2021 ESPP. However, any participating employee who would own 5% or more of the total combined voting power or value of all classes of stock after an option were granted under the 2021 ESPP would not be eligible to purchase shares under the 2021 ESPP.

We may make one or more offerings each year to our employees to purchase shares under the 2021 ESPP. Offerings will begin on such dates as determined by the compensation committee and, unless otherwise determined by the compensation committee, will continue for one year periods, referred to as offering periods. The compensation committee may provide for one or more purchase periods in each offering period. Each eligible employee may elect to participate in any offering by submitting an enrollment form at least 15 business days before the relevant offering date.

Each employee who is a participant in the 2021 ESPP may purchase shares of our common stock by authorizing payroll deductions of up to      % of his or her base compensation during an offering period. Unless the participating employee has previously withdrawn from the offering, his or her accumulated payroll

 

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deductions will be used to purchase shares of our common stock on the last business day of the purchase period at a price equal to 85% of the fair market value of the shares of our common stock on the first business day or the last business day of the purchase period, whichever is lower. Under applicable tax rules, an employee may purchase no more than $25,000 worth of shares of common stock, valued at the start of the offering period, under the 2021 ESPP in any calendar year.

The accumulated payroll deductions of any employee who is not a participant on the last day of an offering period will be refunded. An employee’s rights under the 2021 ESPP terminate upon voluntary withdrawal from the plan or when the employee ceases employment with us for any reason.

Senior Executive Cash Incentive Bonus Plan

In         2021, our board of directors adopted the Senior Executive Cash Incentive Bonus Plan (Bonus Plan). The Bonus Plan provides for cash bonus payments based upon the attainment of performance targets established by our compensation committee. The payment targets will be related to financial and operational measures or objectives with respect to our company, or corporate performance goals, as well as individual performance objectives.

Our compensation committee may select corporate performance goals from among the following: developmental, publication, clinical or regulatory milestones; cash flow (including, but not limited to, operating cash flow and free cash flow); revenue; corporate revenue; earnings before interest, taxes, depreciation and amortization; net income (loss) (either before or after interest, taxes, depreciation and/or amortization); changes in the market price of our common stock; economic value-added; acquisitions, licenses or strategic transactions; financing or other capital raising transactions; operating income (loss); return on capital, assets, equity or investment; stockholder returns; return on sales; total shareholder return; gross or net profit levels; productivity; expense efficiency; margins; operating efficiency; customer satisfaction; working capital; earnings (loss) per share of our common stock; bookings, new bookings or renewals; sales or market shares; number of prescriptions or prescribing physicians; coverage decisions; leadership development, employee retention, and recruiting and other human resources matters; operating income and/or net annual recurring revenue, any of which may be measured in absolute terms, as compared to any incremental increase, in terms of growth, or as compared to results of a peer group.

Each executive officer who is selected to participate in the Bonus Plan will have a target bonus opportunity set for each performance period. The bonus formulas will be adopted in each performance period by the compensation committee and communicated to each executive. The corporate performance goals will be measured at the end of each performance period after our financial reports have been published or such other appropriate time as the compensation committee determines. If the corporate performance goals and individual performance objectives are met, payments will be made as soon as practicable following the end of each performance period, but not later than 74 days after the end of the fiscal year in which such performance period ends. Subject to the rights contained in any agreement between the executive officer and us, an executive officer must be employed by us on the bonus payment date to be eligible to receive a bonus payment. The Bonus Plan also permits the compensation committee to approve additional bonuses to executive officers in its sole discretion.

401(k) Plan

We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax-advantaged basis. Plan participants are able to defer eligible compensation subject to applicable annual Internal Revenue Code limits. We provide a discretionary matching contribution of up to 3% of employer contributions to employees who satisfy the minimum service requirements. The 401(k) plan is intended to be qualified under Section 401(a) of the Internal Revenue Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Internal Revenue Code. As a tax-qualified retirement plan,

 

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contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan.

Nonqualified Deferred Compensation

Our named executive officers did not participate in, or earn any benefits under, a nonqualified deferred compensation plan sponsored by us during the fiscal year ended December 31, 2020.

Other Benefits

Our named executive officers are eligible to participate in our employee benefit plans on the same basis as our other employees, including our health and welfare plans.

 

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DIRECTOR COMPENSATION

Non-employee Director Compensation Table

The following table presents the total compensation for each person who served as a non-employee member of our board of directors during the fiscal year ended December 31, 2020. Other than as set forth in the table and described more fully below, we did not pay any compensation, make any equity awards or non-equity awards to, or pay any other compensation to any of the non-employee members of our board of directors in 2020 for their services as members of the board of directors. Scott Requadt, our Chief Executive Officer, and Suzanne T. Ildstad, our Chief Scientific Officer, received no additional compensation for their service as directors. See “Executive Compensation” for more information on the compensation paid to or earned by Mr. Requadt and Dr. Ildstad as employees for year ended December 31, 2020.

 

Name		Fees Earned or Paid in Cash ($)(1)				Option Awards ($)(2)(3)				Total($)
Sandip Agarwala			—				—				—
Nicholas G. Galakatos			—				—				—
Geoff MacKay			35,000				115,303				150,303
Mark D. McDade			—				—				—
Francois Nader			75,000	(4)			541,006				616,606
Gaurav Shah			2,536				303,482				306,018

 

(1)	Amounts represent annual cash retainers payable to each of Mr. MacKay and Dr. Shah. Dr. Shah became a member of our board of directors in December 2020 and the amount reported represents his pro-rated earnings for the fourth quarter of 2020.

(2)

The amounts reported represent the aggregate grant date fair value of the stock options awarded to the non-employee directors during fiscal year 2020, calculated in accordance with ASC Topic 718. Such grant date fair value does not take into account any estimated forfeitures. The assumptions used in calculating the grant date fair value of the awards reported in this column are set forth in the notes to our financial statements included elsewhere in this prospectus. The amounts reported in this column reflect the accounting cost for the stock options and does not correspond to the actual economic value that may be received upon exercise of the stock option or any sale of any of the underlying shares of common stock.

(3)	As of December 31, 2020, each of our non-employee members of our board of directors who held such position held the following aggregate number of unexercised options as of such date:

 

Name		Number of Securities Underlying Unexercised Options
Geoff MacKay		410,822
Francois Nader		435,347
Gaurav Shah		410,000

 

(4)	This amount reflects the annual retainer payable to Dr. Nader, which he has deferred pursuant to the Company’s Deferred Compensation Plan.

Director Letter Agreements

In connection with their service to the board of directors, we entered into letter agreements with each of Dr. Nader, Mr. MacKay, Dr. Shah and Dr. Sapna Srivastava, pursuant to which each is eligible to receive a $35,000 annual cash compensation retainer ($75,000, in the case of Dr. Nader) paid in arrears in equal quarterly installments. These letter agreements will terminate upon the closing of this offering.

 

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Deferred Compensation Plan

On December 21, 2018, our board of directors adopted the Company’s Deferred Compensation Plan (the DCP), for the purpose of providing a deferred compensation arrangement to any independent members of our board of directors in consideration of services rendered to us as an inducement for their continued services in the future.

Our board of directors (excluding any participants) administers our DCP. Subject to the provisions of our DCP, our board of directors has full authority and discretion to take any actions it deems necessary or advisable for the administration our DCP, including, to determine who is eligible to participate in the DCP, to determine the eligible for and the amount of benefits payable under the DCP, to establish rules for determining when and how elections can be made, to adopt any rules relating to administering the DCP and to take any other action it deems appropriate to administer the DCP.

Our board of directors may permit a participant to defer “eligible cash compensation” (as defined in the DCP) payable in cash by the Company for any calendar year or other specified period. An election to defer eligible cash compensation must be made before the year in which it is earned. However, the board of directors may permit a participant, in the first year of eligibility for the DCP, to make a deferral election within 30 days of first becoming eligible, provided that the deferral election may relate only to eligible cash compensation attributable to the period following the deferral election. Except as otherwise determine by the board of directors, participants are always 100% vested in their contributions to the DCP.

Non-Employee Director Compensation Policy

In connection with this offering, we intend to adopt a non-employee director compensation policy that will become effective upon the date immediately preceding the date on which the registration statement of which this prospectus is a part is declared effective. The policy will be designed to enable us to attract and retain, on a long-term basis, highly qualified non-employee directors. Under the policy, each director who is not an employee will be paid cash compensation from and after the completion of this offering as set forth below:

 

Position		Annual Retainer
Board of Directors:
Members (other than chair)		$
Retainer for chair		$
Audit Committee:
Members (other than chair)		$
Retainer for chair		$
Compensation Committee:
Members (other than chair)		$
Retainer for chair		$
Nominating and Corporate Governance Committee:
Members (other than chair)		$
Retainer for chair		$

In addition, the non-employee director compensation policy will provide that, upon initial election to our board of directors, each non-employee director will be granted an equity award with a value of $         (the Initial Grant). The Initial Grant will vest one-third on the earlier of (i) the first anniversary of the grant date or (ii) our next annual meeting of stockholders and the remaining two-thirds will vest in equal monthly installments over two years, subject to continued service through the applicable vesting date. Furthermore, on the date of each of our annual meeting of stockholders upon the completion of this offering, each non-employee director who continues as a non-employee director following such meeting will be granted an annual equity award with value of $                     (the Annual Grant). The Annual Grant will vest in full on the earlier of (i) the first anniversary

 

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of the grant date or (ii) our next annual meeting of stockholders, subject to continued service through the applicable vesting date. Such awards are subject to full accelerated vesting upon the sale of the company and upon the death or disability of the non-employee director.

We will reimburse all reasonable out-of-pocket expenses incurred by non-employee directors for their attendance at meetings of our board of directors or any committee thereof.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a description of transactions or series of transactions since January 1, 2018, to which we were or will be a party, in which:

 

•

the amount involved in the transaction exceeds, or will exceed, the lesser of $120,000 or one percent of the average of the Company’s total assets for the last two completed fiscal years; and

 

•

in which any of our executive officers, directors or holder of five percent or more of any class of our capital stock, including their immediate family members or affiliated entities, had or will have a direct or indirect material interest.

Compensation arrangements for our named executive officers and our directors are described elsewhere in this prospectus under “Executive Compensation” and “Management—Director Compensation.”

Private Placement of Securities

Common Stock

We were initially organized as a Delaware limited liability company on February 15, 2002, under the name Regenerex LLC, controlled by Suzanne T. Ildstad, our founder and Chief Scientific Officer. On October 30, 2018, we converted to a Delaware corporation under the name of “Regenerex, Inc.” and on March 6, 2019, we changed our name to “Talaris Therapeutics, Inc.” Upon such conversion, all of our outstanding membership interests were exchanged on a proportional basis for shares of common stock.

Series A Preferred Stock Financings

First Closing

In November 2018, in connection with the initial closing of our Series A preferred stock financing, we sold an aggregate of 22,500,000 shares of our Series A preferred stock at a purchase price of $1.00 per share for an aggregate purchase price of $22,500,000. Each share of our Series A preferred stock will automatically convert into one share of our common stock immediately prior to the completion of this offering. The following table summarizes purchases of our Series A preferred stock by related persons:

 

Participant		Affiliated Director(s) or Officer(s)				Shares of Series A Preferred Stock				Total Purchase Price
Clarus Lifesciences III, L.P.(1)			Nicholas G. Galakatos				14,625,000			$	14,625,000
Longitude Venture Partners III, L.P.(2)			Sandip Agarwala				3,937,500			$	3,937,500
Qiming U.S. Healthcare Fund, L.P.(3)			Mark D. McDade				3,937,500			$	3,937,500

 

(1)	Such entity is affiliated with Blackstone, which holds five percent or more of our capital stock. Nicholas G. Galakatos is a senior managing director of Blackstone and a member of our board of directors.

(2)	Longitude Venture Partners III, L.P. beneficially holds more than five percent of our capital stock. Mr. Agarwala, a member of our board of directors, is a Managing Director of Longitude Capital Management, which is an affiliate of Longitude Venture Partners III, L.P.

(3)	Such entity is an affiliate of Qiming Venture Partners, which holds five percent or more of our capital stock. Mark D. McDade is a managing partner of Qiming U.S. Healthcare Fund and a member of our board of directors.

Second Closing

In December 2019, in connection with the second closing of our Series A preferred stock financing, we sold an aggregate of 17,500,000 shares of Series A preferred stock at a purchase price of $1.00 per share and

 

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16,000,000 Units at a purchase price of $1.25 per Unit for an aggregate purchase price of $37,500,000. Each Unit is comprised of one share of Series A-1 preferred stock and one Product Interest Right. See “Agreements with our Stockholders—Product Interest Rights Agreement.” The following table summarizes purchases of our Series A preferred stock and Units by related persons:

 

Participant		Affiliated Director(s) or Officer(s)				Shares of Series A Preferred Stock				Units				Total Purchase Price
Entities affiliated with Blackstone(1)			Nicholas G. Galakatos				11,375,000				10,400,000			$	24,375,000
Longitude Venture Partners III, L.P.(2)			Sandip Agarwala				3,062,500				2,800,000			$	6,562,500
Qiming U.S. Healthcare Fund, L.P.(3)			Mark D. McDade				3,062,500				2,800,000			$	6,562,500

 

(1)

Consists of (i) 11,375,000 shares of Series A preferred stock held by Clarus Lifesciences, III, L.P., (ii) 2,666,666 Units held by Clarus Defined Exit I, L.P., (iii) 1,066,667 Units held by Clarus DE II, L.P., (iv) 2,154,298 Units held by Clarus IV-A, L.P., (v) 1,404,268 Units held by Clarus IV-B, L.P., (vi) 2,590,152 Units held by Clarus IV-C, L.P. and (vii) 517,949 Units held by Clarus IV-D, L.P. Such entities are affiliated with Blackstone, which holds five percent or more of our capital stock. Nicholas G. Galakatos is a senior managing director of Blackstone and a member of our board of directors.

(2)	Longitude Venture Partners III, L.P. beneficially holds more than five percent of our capital stock. Mr. Agarwala, a member of our board of directors, is a Managing Director of Longitude Capital Management, which is an affiliate of Longitude Venture Partners III, L.P.

(3)	Such entity is an affiliate of Qiming Venture Partners, which holds five percent or more of our capital stock. Mark D. McDade is a managing partner of Qiming U.S. Healthcare Fund and a member of our board of directors.

Third Closing

In August 2020, in connection with the third closing of our Series A preferred stock financing, we sold an aggregate of 12,000,000 of our Units at a purchase price of $1.25 per Unit for an aggregate purchase price of $15,000,000. The following table summarizes purchases of our Units by related persons:

 

Participant		Affiliated Director(s) or Officer(s)				Units				Total Purchase Price
Entities affiliated with Blackstone(1)			Nicholas G. Galakatos				4,000,000			$	5,000,000
Longitude Venture Partners III, L.P.(2)			Sandip Agarwala				4,000,000			$	5,000,000
Qiming U.S. Healthcare Fund, L.P.(3)			Mark D. McDade				4,000,000			$	5,000,000

 

(1)

Consists of (i) 1,025,641 Units held by Clarus Defined Exit I, L.P., (ii) 410,257 Units held by Clarus DE II L.P., (iii) 828,576 Units held by Clarus IV-A, L.P., (iv) 540,103 Units held by Clarus IV-B, L.P., (v) 996,212 Units held by Clarus IV-C, L.P. and (vi) 199,211 Units held by Clarus IV-D, L.P. Such entities are affiliated with Blackstone, which holds five percent or more of our capital stock. Nicholas G. Galakatos is a senior managing director of Blackstone and a member of our board of directors.

(2)	Longitude Venture Partners III, L.P. beneficially holds more than five percent of our capital stock. Mr. Agarwala, a member of our board of directors, is a Managing Director of Longitude Capital Management, which is an affiliate of Longitude Venture Partners III, L.P.

(3)	Such entity is an affiliate of Qiming Venture Partners, which holds five percent or more of our capital stock. Mark D. McDade is a managing partner of Qiming U.S. Healthcare Fund and a member of our board of directors.

Series B Preferred Stock Financing

In two closings held on September 2020, we sold an aggregate of 62,499,993 shares of our Series B preferred stock at a purchase price of $1.84 per share for an aggregate purchase price of approximately

 

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$115,000,000. Each share of our Series B preferred stock will automatically convert into one share of our common stock immediately prior to the completion of this offering. The following table summarizes purchases of our Series B preferred stock by related persons:

 

Participant		Affiliated Director(s) or Officer(s)				Shares of Series B Preferred Stock				Total Purchase Price
Entities affiliated with Blackstone(1)			Nicholas G. Galakatos				2,717,391			$	5,000,000
Longitude Venture Partners III, L.P.(2)			Sandip Agarwala				2,173,913			$	4,000,000
Entities affiliated with Qiming(3)			Mark D. McDade				1,358,695			$	2,499,999
Citadel Multi-Strategy Equities Master Fund Ltd.(4)			—				13,586,956			$	24,999,999
Viking Global Opportunities Illiquid Investments Sub-Master LP(5)			—				13,586,956			$	24,999,999

 

(1)

Consists of (i) 696,767 shares of Series B preferred stock held by Clarus Defined Exit I, L.P., (ii) 278,707 shares of Series B preferred stock held by Clarus DE II, L.P. shares of Series B preferred stock held by Clarus DE II, L.P., (iii) 562,891 shares of Series B preferred stock held by Clarus IV-A, L.P., (iv) 366,918 shares of Series B preferred stock held by Clarus IV-B, L.P., (v) 676,774 shares of Series B preferred stock held by Clarus IV-C, L.P. and (vi) 135,334 shares of Series B preferred stock held by Clarus IV-D, L.P. Such entities are affiliated with Blackstone, which holds five percent or more of our capital stock. Nicholas G. Galakatos is a senior managing director of Blackstone and a member of our board of directors.

(2)	Longitude Venture Partners III, L.P. beneficially holds more than five percent of our capital stock. Mr. Agarwala, a member of our board of directors, is a Managing Director of Longitude Capital Management, which is an affiliate of Longitude Venture Partners III, L.P.

(3)

Consists of (i) 1,086,956 shares of Series B preferred stock held by Qiming U.S. Healthcare Fund II, L.P. and (ii) 271,739 shares of Series B preferred stock held by Gary Rieschel. Such entity and individual are affiliates of Qiming Venture Partners, which holds five percent or more of our capital stock. Mark D. McDade is a managing partner of Qiming U.S. Healthcare Fund and a member of our board of directors.

(4)	Such entity holds five percent or more of our capital stock.

(5)	Such entity holds five percent or more of our capital stock.

Agreements with Our Stockholders

In connection with our preferred stock financings, we entered into an investors’ rights agreement, voting agreement and right of first refusal agreement, in each case, with the purchasers of our preferred stock and certain holders of our common stock.

Our amended and restated investors’ rights agreement (Investor Rights Agreement), provides certain holders of our preferred stock with a participation right to purchase their pro rata share of new securities that we may propose to sell and issue, subject to certain exceptions. Such participation right will terminate upon the closing of this offering. The Investor Rights Agreement further provides certain holders of our capital stock with the right to demand that we file a registration statement, subject to certain limitations, and to request that their shares be covered by a registration statement that we are otherwise filing. See “Description of Capital Stock—Registration rights” appearing elsewhere in this prospectus, for additional information regarding such registration rights.

Our voting agreement (Voting Agreement) provides for drag-along rights in respect of sales by certain holders of our capital stock. The Voting Agreement also contains provisions with respect to the elections of our board of directors and its composition. The rights under the Voting Agreement will terminate upon the closing of this offering.

Our right of first refusal and co-sale agreement (Right of First Refusal and Co-Sale Agreement) provides for rights of first refusal and co-sale rights in respect of sales by certain holders of our capital stock. The rights under the Right of First Refusal and Co-Sale Agreement will terminate upon the closing of this offering.

 

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Product Interest Rights Agreement

In connection with our Series A and Series A-1 preferred stock financing, in November 2018, we entered into a Product Interest Rights Agreement (Product Interest Agreement) with the purchasers of our Series A-1 preferred stock. Pursuant to the Product Interest Agreement, we issued 28,000,000 Units, each comprised of one share of Series A-1 preferred stock and one product interest right, for cash consideration of $35,000,000. Each product interest right entitles the holder thereof, upon its election, to receive specified payments in connection with the commercial sale of FCR001. Because we have not made any commercial sales of FCR001, we have not made any payments with respect to the product interest rights. Holders of Units may either transfer the shares of Series A-1 preferred stock (or the shares of common stock issuance upon the conversion therefor) or the product interest right underlying the unit, but not both. Upon transfer, the component of the Unit, including the shares of common stock issued upon the conversion of the shares Series A-1 preferred stock upon the consummation of this offering, that is not transferred shall be automatically canceled, forfeited, and extinguished for no consideration.

Related Party Transactions

David Tollerud, MD, Dr. Ildstad’s spouse, joined us as Chief Operating Officer in 2016 and in 2018 was appointed as our Vice President, Scientific Affairs. During the years ended December 31, 2018, 2019 and 2020, Dr. Tollerud received total cash compensation, including base salary, bonus and other compensation, of $77,250, $218,875, and $256,599, respectively. Such appointment was ratified by our board of directors in November 2018, and such compensation was approved by our board of directors.

Suzanne Tollerud, Dr. Ildstad’s daughter, joined us as Director of Business Operations in 2014 and in 2018 was appointed as our Vice President, Business Operations. In 2019, she was promoted to our Vice President, Operations. During the years ended December 31, 2018, 2019 and 2020, Ms. Tollerud received total cash compensation, including base salary, bonus and other compensation, of $174,992, $206,000, and $282,767, respectively.

In connection with the commencement of her employment, Ms. Tollerud was granted an option to purchase 337,500 shares of common stock, one-fourth of which vested on the first anniversary of the grant date and the remaining three-fourths of which will vest in equal monthly installments over three years, subject to continued service through the applicable vesting date. Ms. Tollerud was awarded three additional grants of options to purchase common stock in 2020, all of which vest in 48 equal monthly installments from the vesting commencement date. She received an award for 197,000 options on February 7, 2020, an award for 70,580 options on August 20, 2020 and an award for 124,435 options on October 2, 2020. Such appointment and compensation, including option awards, were approved by our board of directors.

Indemnification Agreements

In connection with this offering, we intend to enter into new agreements to indemnify our directors and executive officers. These agreements will, among other things, require us to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of our company or that person’s status as a member of our board of directors to the maximum extent allowed under Delaware law.

Policies for Approval of Related Party Transactions

Our board of directors reviews and approves transactions with directors, officers and holders of 5% or more of our voting securities and their affiliates, each a related party. Prior to this offering, the material facts as to the related party’s relationship or interest in the transaction are disclosed to our board of directors prior to their

 

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consideration of such transaction, and the transaction is not considered approved by our board of directors unless a majority of the directors who are not interested in the transaction approve the transaction. Further, when stockholders are entitled to vote on a transaction with a related party, the material facts of the related party’s relationship or interest in the transaction are disclosed to the stockholders, who must approve the transaction in good faith.

In connection with this offering, we will adopt a written related party transactions policy that such transactions must be approved by our audit committee. This policy will become effective on the date on which the registration statement of which this prospectus is part is declared effective by the SEC.

 

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PRINCIPAL STOCKHOLDERS

The following table sets forth certain information known to us regarding beneficial ownership of our capital stock as of January 31, 2021, as adjusted to reflect the sale of common stock offered by us in this offering, for:

 

•

each person or group of affiliated persons known by us to be the beneficial owner of more than 5% of our capital stock;

 

•

each of our named executive officers;

 

•

each of our directors; and

 

•

all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Under those rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. Except as noted by footnote, and subject to community property laws where applicable, we believe, based on the information provided to us, that the persons and entities named in the table below have sole voting and investment power with respect to all common stock shown as beneficially owned by them.

The percentage of beneficial ownership prior to this offering in the table below is based on 173,403,907 shares of common stock deemed to be outstanding as of December 31, 2020, assuming the conversion of all outstanding shares of our preferred stock immediately prior to the closing of this offering, and assuming an initial public offering price or $                 per share, which is the midpoint of the offering range set forth on the cover page of this prospectus, and the percentage of beneficial ownership at this offering in the table below is based on                 shares of common stock assumed to be outstanding after the closing of the offering. The information in the table below assumes no exercise of the underwriters’ option to purchase additional shares.

Unless otherwise noted below, the address for each beneficial owner listed in the table below is c/o Talaris Therapeutics, Inc., 570 S. Preston St, Louisville, KY 40202.

 

		Shares Beneficially Owned Prior to Offering								Shares Beneficially Owned After Offering
		Number				Percentage				Number				Percentage
Name of Beneficial Owner
Entities affiliated with Blackstone(1)			43,117,391				24.9	%
Longitude Venture Partners III, L.P.(2)			15,973,913				9.2	%
Entities affiliated with Qiming(3)			15,158,695				8.7	%
Citadel Multi-Strategy Equities Master Fund Ltd.(4)			13,586,956				7.8	%
Viking Global Opportunities Illiquid Investments Sub-Master LP(5)			13,586,956				7.8	%
Named Executive Officers and Directors:
Scott Requadt, President, Chief Executive Officer and Director(6)			8,538,877				4.82	%
Suzanne T. Ildstad, MD, Chief Scientific Officer and Director(7)			25,714,490				14.83	%
Nancy Krieger, MD, Chief Medical Officer(8)			2,101,280				1.21	%
Francois Nader, MD, Chairman(9)			2,552,280				1.47	%
Sandip Agarwala, Director			—				—
Nicholas G. Galakatos, PhD, Director			—				—
Geoff MacKay, Director(10)			410,822				*
Mark D. McDade, Director			—				—
Gaurav D. Shah, MD, Director(11)			410,000				*
Sapna Srivastava, PhD, Director(12)			—				—
All executive officers and directors as a group (12 persons)(12)			40,927,749				22.7	%

 

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*	Less than one percent.

(1)

Consists of (i) 26,000,000 shares of common stock issuable upon conversion of convertible Series A preferred stock held by Clarus Lifesciences III, L.P., (ii) 3,692,307 shares of common stock issuable upon conversion of Series A-1 preferred stock and 696,767 shares of common stock issuable upon conversion of Series B preferred stock held by Clarus Defined Exit I, L.P., (iii) 1,476,924 shares of common stock issuable upon conversion of Series A-1 preferred stock and 278,707 shares of common stock issuable upon conversion of Series B preferred stock held by Clarus DE II, L.P., (iii) 2,982,874 shares of common stock issuable upon conversion of Series A-1 preferred stock and 562,891 shares of common stock issuable upon conversion of Series B preferred stock held by Clarus IV-A, L.P., (iv) 1,944,371 shares of common stock issuable upon conversion of Series A-1 preferred stock held and 366,918 shares of common stock issuable upon conversion of Series B preferred stock by Clarus IV-B, L.P., (v) 3,586,364 shares of common stock issuable upon conversion of Series A-1 preferred stock and 676,774 shares of common stock issuable upon conversion of Series B convertible preferred stock held by Clarus IV-C, L.P. and (vi) 717,160 shares of common stock issuable upon conversion of Series A-1 preferred stock and 135,334 shares of common stock issuable upon conversion of Series B preferred stock held by Clarus IV-D, L.P. Clarus Lifesciences III, L.P., Clarus Defined Exit I, L.P., Clarus DE II, L.P., Clarus IV-A, L.P., Clarus IV-B, L.P., Clarus IV-C, L.P. and Clarus IV-D, L.P. are collectively referred to as the “Clarus Funds.” Clarus Ventures III GP, L.P. is the general partner of Clarus Lifesciences III, L.P. Blackstone Clarus III L.L.C. is the general partner of Clarus Ventures III GP, L.P. Clarus Ventures DE GP, L.P. is the general partner of each of Clarus Defined Exit I, L.P. and Clarus DE II, L.P. Blackstone Clarus DE L.L.C. is the general partner of Clarus Ventures DE GP, L.P. Clarus IV GP, L.P. is the general partner of each of Clarus IV-A, L.P., Clarus IV-B, L.P., Clarus IV-C, L.P. and Clarus IV-D, L.P. Blackstone Clarus GP L.P. is the general partner of Clarus IV GP, L.P. Blackstone Clarus GP L.L.C. is the general partner of Blackstone Clarus GP L.P. The sole member of Blackstone Clarus GP L.L.C. is Blackstone Holdings I L.P. The sole member of each of Blackstone Clarus III L.L.C. and Blackstone Clarus DE L.L.C. is Blackstone Holdings II L.P. The general partner of each of Blackstone Holdings I L.P. and Blackstone Holdings II L.P. is Blackstone Holdings I/II GP L.L.C. The sole member of Blackstone Holdings I/II GP L.L.C. is The Blackstone Group Inc. The sole holder of the Class C common stock of The Blackstone Group Inc. is Blackstone Group Management L.L.C. Blackstone Group Management L.L.C. is wholly-owned by Blackstone’s senior managing directors and controlled by its founder, Stephen A. Schwarzman. Each of such entities and Mr. Schwarzman may be deemed to beneficially own the shares beneficially owned by the Clarus Funds directly or indirectly controlled by it or him, but each (other than the Clarus Funds to the extent of their direct holdings) disclaims beneficial ownership of such shares. The address for each of the Clarus Funds, Clarus Ventures III GP, L.P., Clarus Ventures DE GP, L.P. and Clarus IV GP, L.P. is c/o Clarus Ventures LLC, 101 Main Street, Suite 1210, Cambridge, MA 02142. The address for each of the other Blackstone entities and Mr. Schwarzman is c/o The Blackstone Group Inc., 345 Park Avenue, New York, NY 10154.

(2)

Consists of (i) 7,000,000 shares of common stock issuable upon conversion of Series A preferred stock, (ii) 6,800,000 shares of common stock issuable upon conversion of Series A-1 preferred stock, and (iii) 2,173,913 shares of common stock issuable upon conversion of Series B preferred stock held by Longitude Venture Partners III, L.P. (LVP III). Longitude Capital Partners III, LLC (LCP III) is the general partner of LVP III and may be deemed to have voting and investment power over the shares of the Company held by LVP III. Patrick G. Enright and Juliet Tammenoms Bakker are managing members of LCP III and may be deemed to share voting and investment power over the shares held by LVP III. Sandip Agarwala is a member of LCP III and may be deemed to share voting and investment power over the shares of the Company held by LVP III. Each of these individuals disclaims beneficial ownership of such shares except to the extent of his or her pecuniary interest therein. The address for each of these entities and individuals is 2740 Sand Hill Rd., 2nd Floor, Menlo Park, CA 94025.

(3)

Consists of (i) 7,000,000 shares of common stock issuable upon conversion of Series A preferred stock held by Qiming U.S. Healthcare Fund, L.P., (ii) 2,800,000 shares of common stock issuable upon conversion of Series A-1 preferred stock held by Qiming U.S. Healthcare Fund II, L.P., (iii) 4,000,000 shares of common stock issuable upon conversion of Series A-1 preferred stock held by Qiming U.S. Healthcare Fund II, L.P.,

 

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(iv) 1,086,956 shares of common stock issuable upon conversion of Series B preferred stock held by Qiming U.S. Healthcare Fund II, L.P. and (v) 271,739 shares of common stock issuable upon conversion of Series B preferred stock held by Gary Rieschel. The general partner of Qiming U.S. Healthcare Fund, L.P. is Qiming U.S. Healthcare GP, LLC. The general partner of Qiming U.S. Healthcare Fund II, L.P. is Qiming U.S. Healthcare GP II, LLC. Gary Rieschel is the managing member of Qiming U.S. Healthcare GP, LLC. Gary Rieschel and Mark D. McDade are the managing members of Qiming U.S. Healthcare GP II, LLC. Each of Qiming U.S. Healthcare GP II, LLC, Mr. Rieschel and Mr. McDade may be deemed to beneficially own the shares beneficially owned by Qiming U.S. Healthcare Fund II, L.P., but each disclaims beneficial ownership of such shares. The address for each of these entities and individuals is 11100 NE 8th St., Suite 200, Bellevue, WA 98004.

(4)

Consists of 13,586,956 shares of common stock issuable upon conversion of Series B preferred stock held directly by Citadel Multi-Strategy Equities Master Fund Ltd. (Citadel). Citadel Advisors LLC (Citadel Advisors) acts as the portfolio manager of Citadel. Citadel Advisors Holdings LP (CAH) is the sole member of Citadel Advisors, and Citadel GP LLC (CGP) is the general partner of CAH. Kenneth Griffin owns a controlling interest in CGP and may be deemed to share voting and dispositive power over shares held by Citadel. The address for this entity is c/o Citadel Advisors, 601 Lexington Avenue, New York, NY 10022.

(5)

Consists of 13,586,956 shares of common stock issuable upon conversion of Series B preferred stock held by Viking Global Opportunities Illiquid Investments Sub-Master LP (Opportunities Fund). The Opportunities Fund has the authority to dispose of and vote the shares directly owned by it, which power may be exercised by its general partner, Viking Global Opportunities Portfolio GP LLC (Opportunities GP), and by Viking Global Investors LP (VGI), which provides managerial services to Opportunities Fund. O. Andreas Halvorsen, David C. Ott and Rose Shabet, as Executive Committee members of Viking Global Partners LLC (the general partner of VGI) and Opportunities GP, have shared authority to direct the voting and disposition of investments beneficially owned by VGI and Opportunities GP. The business address of the Opportunities Fund is c/o Viking Global Investors LP, 55 Railroad Avenue, Greenwich, CT 06830.

(6)

Consists of (i) 652,796 shares of common stock, (ii) 1,753,454 shares of restricted common stock issued upon early exercise of stock options, (iii) 1,473,245 shares of common stock held by Requadt Family Limited Partnership, (iv) 933,005 shares of restricted common stock issued upon early exercise of stock options, held by Requadt Family Limited Partnership, and (v) 3,726,377 shares of common stock subject to options with an early exercise feature. Scott Requadt exercises voting and dispositive power over the shares beneficially owned by Requadt Family Limited Partnership.

(7)	Consists of 25,714,490 shares of common stock.

(8)	Consists of (i) 591,093 shares of common stock, (ii) 747,657 shares of restricted common stock issued upon early exercise of stock options, and (iii) 762,530 shares of common stock subject to options with an early exercise feature.

(9)	Consists of (i) 897,805 shares of common stock, (ii) 1,219,128 shares of restricted common stock issued upon early exercise of stock options, and (iii) 435,347 shares of common stock subject to options with an early exercise feature.

(10)	Consists of 410,822 shares of common stock subject to options with an early exercise feature.

(11)	Consists of 410,000 shares of common stock subject to options, none of which are vested and exercisable within 60 days of January 31, 2021.

(12)	Includes options to purchase 6,945,076 shares of common stock with an early exercise feature held by executive officers and directors, as described in notes 6 through 11 above.

 

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DESCRIPTION OF CAPITAL STOCK

The following descriptions are summaries of the material terms of our amended and restated certificate of incorporation, which will be effective upon the closing of this offering and amended and restated bylaws, which will be effective upon the effectiveness of the registration statement of which this prospectus is a part. The descriptions of the common stock and preferred stock give effect to changes to our capital structure that will occur immediately prior to the completion of this offering. We refer in this section to our amended and restated certificate of incorporation as our certificate of incorporation, and we refer to our amended and restated bylaws as our bylaws.

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 shares of preferred stock will be undesignated.

As of December 31, 2020, 173,403,907 shares of our common stock were outstanding, including 4,987,685 shares of non-vested restricted common stock, and held by 46 stockholders of record. This amount assumes the conversion of all outstanding shares of our preferred stock into common stock, which will occur immediately prior to the closing of this offering.

Common Stock

The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our common stock do not have any cumulative voting rights. Holders of our common stock are entitled to receive ratably any dividends declared by our board of directors out of funds legally available for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion rights or other subscription rights or redemption or sinking fund provisions.

In the event of our liquidation, dissolution or winding up, holders of our common stock will be entitled to share ratably in all assets remaining after payment of all debts and other liabilities and any liquidation preference of any outstanding preferred stock. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and non-assessable.

Preferred Stock

Immediately prior to the completion of this offering, all outstanding shares of our preferred stock will be converted into shares of our common stock. Upon the consummation of this offering, our board of directors will have the authority, without further action by our stockholders, to issue up to                 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting, or the designation of, such series, any or all of which may be greater than the rights of common stock. The issuance of our preferred stock could adversely affect the voting power of holders of common stock and the likelihood that such holders will receive dividend payments and payments upon our liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change in control of our Company or other corporate action. Immediately after consummation of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

Options

As of December 31, 2020, we had outstanding options under our 2018 Plan to purchase an aggregate of 14,687,278 shares of our common stock, with a weighted-average exercise price of $0.79 per share.

 

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Registration Rights

Upon the completion of this offering, certain holders of our common stock, including those issuable upon the conversion of preferred stock, will be entitled to rights with respect to the registration of these securities under the Securities Act. These rights are provided under the terms of an investors’ rights agreement between us and the holders of our preferred stock. The investors’ rights agreement includes demand registration rights, short-form registration rights and piggyback registration rights. All fees, costs and expenses of underwritten registrations under this agreement will be borne by us and all selling expenses, including underwriting discounts and selling commissions, will be borne by the holders of the shares being registered.

Demand Registration Rights

Beginning six months after the completion of this offering, certain holders of our common stock, including those issuable upon the conversion of shares of our preferred stock upon closing of this offering, will be entitled to demand registration rights. Under the terms of the investors’ rights agreement, we will be required, upon the written request of a majority of holders of the registerable securities then outstanding that would result in an aggregate offering price of at least $10 million, to file a registration statement on Form S-1 with respect to at least 30% of the registrable securities then outstanding and to use commercially reasonable efforts to effect the registration of all or a portion of these shares for public resale.

Short-form Registration Rights

Upon the completion of this offering, certain holders of our common stock, including those issuable upon the conversion of shares of our preferred stock upon closing of this offering, are also entitled to short-form registration rights. Pursuant to the investors’ rights agreement, if we are eligible to file a registration statement on Form S-3, upon the written request of at least 20% in interest of these holders to sell registrable securities at an aggregate price of at least $5 million, we will be required to use commercially reasonable efforts to effect a registration of such shares. We are required to effect only two registrations in any twelve month period pursuant to this provision of the investor rights agreement.

Piggyback Registration Rights

Upon the completion of this offering, certain holders of our common stock, including those issuable upon the conversion of shares of our preferred stock upon closing of this offering, are entitled to piggyback registration rights. If we register any of our securities either for our own account or for the account of other security holders, the holders of these shares are entitled to include their shares in the registration. Subject to certain exceptions contained in the investors’ rights agreement, we and the underwriters may limit the number of shares included in the underwritten offering to the number of shares which we and the underwriters determine in our sole discretion will not jeopardize the success of the offering.

Indemnification

Our investors’ rights agreement contains customary cross-indemnification provisions, under which we are obligated to indemnify holders of registrable securities in the event of material misstatements or omissions in the registration statement attributable to us, and they are obligated to indemnify us for material misstatements or omissions attributable to them.

Expiration of Registration Rights

The demand registration rights and short-form registration rights granted under the investor rights agreement will terminate on the third anniversary of the completion of this offering.

 

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Anti-takeover Effects of Our Certificate of Incorporation and Bylaws and Delaware Law

Our certificate of incorporation and bylaws include a number of provisions that may have the effect of delaying, deferring or preventing another party from acquiring control of us and encouraging persons considering unsolicited tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the items described below.

Board Composition and Filling Vacancies

Our certificate of incorporation will provide for the division of our board of directors into three classes serving staggered three-year terms, with one class being elected each year. Our certificate of incorporation also will provide that directors may be removed only for cause and then only by the affirmative vote of the holders of two-thirds or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring, including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a quorum. The classification of directors, together with the limitations on removal of directors and treatment of vacancies, has the effect of making it more difficult for stockholders to change the composition of our board of directors.

No Written Consent of Stockholders

Our certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take stockholder actions and would prevent the amendment of our bylaws or removal of directors by our stockholders without holding a meeting of stockholders.

Meetings of Stockholders

Our certificate of incorporation and bylaws provide that only a majority of the members of our board of directors then in office may call special meetings of stockholders and only those matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our bylaws limit the business that may be conducted at an annual meeting of stockholders to those matters properly brought before the meeting.

Advance Notice Requirements

Our bylaws establish advance notice procedures with regard to stockholder proposals relating to the nomination of candidates for election as directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. Our bylaws specify the requirements as to form and content of all stockholders’ notices. These requirements may preclude stockholders from bringing matters before the stockholders at an annual or special meeting.

Amendment to Certificate of Incorporation and Bylaws

Any amendment of our certificate of incorporation must first be approved by a majority of our board of directors, and if required by law or our certificate of incorporation, must thereafter be approved by a majority of the outstanding shares entitled to vote on the amendment and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the provisions relating to stockholder action,

 

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board composition, and limitation of liability must be approved by not less than two-thirds of the outstanding shares entitled to vote on the amendment, and not less than two-thirds of the outstanding shares of each class entitled to vote thereon as a class. Our bylaws may be amended by the affirmative vote of a majority of the directors then in office, subject to any limitations set forth in the bylaws; and may also be amended by the affirmative vote of a majority of the outstanding shares entitled to vote on the amendment, voting together as a single class, except that the amendment of the provisions relating to notice of stockholder business and nominations and special meetings must be approved by not less than two-thirds of the outstanding shares entitled to vote on the amendment, and not less than two-thirds of the outstanding shares of each class entitled to vote thereon as a class, or, if our board of directors recommends that the stockholders approve the amendment, by the affirmative vote of the majority of the outstanding shares entitled to vote on the amendment, in each case voting together as a single class.

Undesignated Preferred Stock

Our certificate of incorporation provides for                 authorized shares of preferred stock. The existence of authorized but unissued shares of preferred stock may enable our board of directors to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to determine that a takeover proposal is not in the best interests of our stockholders, our board of directors could cause shares of preferred stock to be issued without stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer or insurgent stockholder or stockholder group. In this regard, our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring or preventing a change in control of us.

Choice of Forum

Our bylaws provide that, unless we consent 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 any state law claims for (1) any derivative action or proceeding brought on our behalf, (2) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, and employees to us or our stockholders, (3) any action asserting a claim arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, (4) any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or bylaws, or (5) any action asserting a claim that is governed by the internal affairs doctrine; provided, however, that the this provision shall not apply to any causes of action arising under the Securities Act or Exchange Act. In addition, our bylaws provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States shall be the sole and exclusive forum for resolving any complaint asserting a cause or causes of action arising under the Securities Act, including all causes of action asserted against any defendants to such complaint. For the avoidance of doubt, this provision is intended to benefit and may be enforced by us, our officers and directors, the underwriters to any offering giving rise to such complaint, and any other professional entity whose profession gives authority to a statement made by that person or entity and who has prepared or certified any part of the documents underlying the offering. 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. Any person or entity purchasing or otherwise acquiring any interest in our securities shall be deemed to have notice of and consented to these forum provisions. These forum provisions may impose additional costs on stockholders, may limit our stockholders’ ability to bring a claim in a forum they find favorable, and the designated courts may reach different judgments or results than other courts. Please also see “Risk Factors—Our bylaws that will become effective upon the consummation of this offering designate certain courts as the sole and exclusive forum for

 

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certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.”

Section 203 of the Delaware General Corporation Law

Upon completion of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested stockholder is prohibited unless it satisfies one of the following conditions:

 

•

before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;

 

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upon consummation of the transaction which 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, shares owned by persons who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or

 

•

at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.

 

•

Section 203 defines a business combination to include:

 

•

any merger or consolidation involving the corporation and the interested stockholder;

 

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any sale, transfer, lease, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;

 

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subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

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subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; and

 

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the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges, or other financial benefits provided by or through the corporation.

In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Nasdaq Global Market Listing

We have applied to list our common stock on the Nasdaq Global Market under the trading symbol “TALS.”

Transfer Agent and Registrar

The transfer agent and registrar for our common stock will be     .

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our shares. Future sales of our common stock in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nevertheless, sales of our common stock in the public market after such restrictions lapse, or the perception that those sales may occur, could adversely affect the prevailing market price at such time and our ability to raise equity capital in the future.

Based on the number of shares outstanding as of December 31, 2020, upon the completion of this offering,                 shares of our common stock will be outstanding, assuming no exercise of the underwriters’ option to purchase additional shares and no exercise of outstanding options. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our affiliates, as that term is defined in Rule 144 under the Securities Act, may only be sold in compliance with the limitations described below.

Rule 144

In general, a person who has beneficially owned restricted stock for at least six months would be entitled to sell their securities provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale and (ii) we are subject to the Securities Exchange Act of 1934, as amended, or the Exchange Act, periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:

 

•

1% of the number of shares then outstanding, which will equal                 shares immediately after this offering assuming no exercise of the underwriters’ option to purchase additional shares, based on the number of shares outstanding as of December 31, 2020; or

 

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the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale;

provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.

Rule 701

Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, or directors who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under “Underwriting” included elsewhere in this prospectus and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

Lock-Up Agreements

We, all of our directors and executive officers, and the holders of substantially all of our capital stock and securities convertible into or exchangeable for our capital stock have entered into lock-up agreements with the underwriters and/or are subject to market standoff agreements or other agreements with us, which prevents them

 

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from selling any of our common stock or any securities convertible into or exercisable or exchangeable for common stock for a period of not less than 180 days from the date of this prospectus without the prior written consent of the representatives, subject to certain exceptions. See “Underwriting” appearing elsewhere in this prospectus for more information.

Registration Rights

Upon completion of this offering, certain holders of our securities will be entitled to various rights with respect to registration of their shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See “Description of Capital Stock—Registration rights” appearing elsewhere in this prospectus for more information.

Equity Incentive Plans

We intend to file one or more registration statements on Form S-8 under the Securities Act to register our shares issued or reserved for issuance under our equity incentive plans. The first such registration statement is expected to be filed soon after the date of this prospectus and will automatically become effective upon filing with the SEC. Accordingly, shares registered under such registration statement will be available for sale in the open market, unless such shares are subject to vesting restrictions with us or the lock-up restrictions described above.    

 

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CERTAIN MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

The following discussion is a summary of the material 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;

 

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a corporation or other organization taxable as a corporation for U.S. federal income tax purposes that is created or organized in or under laws other than the laws of the United States, any state thereof, or the District of Columbia;

 

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an estate the income of which is not subject to U.S. federal income tax on a net income basis; or

 

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a trust the income of which is not subject to U.S. federal income tax on a net income basis and that (1) is not subject to the primary supervision of a court within the United States or over which no U.S. persons have authority to control all substantial decisions and (2) has not made an election to be treated as a U.S. person.

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 acquiring, holding and disposing of our common stock through a partnership or other pass-through entity, as applicable.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the 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, which we refer to as the 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, 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 nor does it address any aspects of U.S. state, local or non-U.S. taxes, the alternative minimum tax, the Medicare tax on net investment income, the rules regarding qualified small business stock within the meaning of Section 1202 of the Code or any U.S. federal tax other than the income tax (including, for example, the estate 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;

 

•

financial institutions;

 

•

brokers or dealers in securities;

 

•

regulated investment companies;

 

•

pension plans;

 

•

“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;

 

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“qualified foreign pension funds,” or 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 partners and investors therein);

 

•

persons deemed to sell our common stock under the constructive sale provisions of the Code;

 

•

persons that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment;

 

•

persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation;

 

•

investors in pass-through entities (or entities that are treated as disregarded entities for U.S. federal income tax purposes); and

 

•

certain U.S. expatriates.

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 own 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

Distributions, if any, on our common stock generally 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.

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 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 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 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 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 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 of 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, within the meaning of the applicable Treasury Regulations, 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. If we are determined to be a U.S. real property holding corporation and the foregoing exception does not apply, then the non-U.S. holder generally will be taxed on its net gain derived from the disposition at the U.S. federal income tax rates applicable to United States persons (as defined in the Code), except that the branch profits tax generally will not apply. If we are a U.S. real property holding corporation and our common stock is not regularly traded on an established securities market, a non-U.S. holder’s proceeds received on the disposition of shares will also generally be subject to withholding at a rate of 15%. 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 distributions 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.

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

 

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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 own 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

The Foreign Account Tax Compliance Act (FATCA), generally imposes a U.S. federal withholding tax at a rate of 30% on certain types of payments made 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. Such withholding may also apply to gross proceeds from the sale or disposition of our common stock, although under proposed U.S. Treasury Regulations, no withholding would apply to such gross proceeds. The preamble to the proposed regulations specifies that taxpayers (including withholding agents) are permitted to rely on the proposed regulations pending finalization. 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. It is not tax advice. Each prospective investor should consult its 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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UNDERWRITING

Under the terms and subject to the conditions in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. LLC, SVB Leerink LLC and Evercore Group L.L.C. are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:

 

Name		Number of Shares
Morgan Stanley & Co. LLC
SVB Leerink LLC
Evercore Group L.L.C.
Total:

The underwriters and the representatives are collectively referred to as the “underwriters” and the “representatives,” respectively. The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters’ over-allotment option described below.

The underwriters initially propose to offer part of the shares of common stock directly to the public at the offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $                per share under the public offering price. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives.

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to                 additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter’s name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table.

The following table shows the per share and total public offering price, underwriting discounts and commissions, and proceeds before expenses to us. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase up to an additional                 shares of common stock.

 

Per Share

Total

No Exercise

Full Exercise

Public offering price

$

$

$

Underwriting discounts and commissions to be paid by us:

$

$

$

Proceeds, before expenses, to us

$

$

$

The estimated offering expenses payable by us, exclusive of the underwriting discounts and commissions, are approximately $                . We have agreed to reimburse the underwriters for expenses relating to clearance of this offering with the Financial Industry Regulatory Authority of up to $                .

 

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The underwriters have informed us that they do not intend sales to discretionary accounts to exceed 5% of the total number of shares of common stock offered by them.

We intend to apply to list our common stock on The Nasdaq Global Market under the trading symbol “TALS.”

We and all directors and officers and the holders of substantially all of our outstanding stock and stock options have agreed that, without the prior written consent of Morgan Stanley & Co. LLC, SVB Leerink LLC and Evercore Group L.L.C. on behalf of the underwriters, we and they will not, and will not publicly disclose an intention to, during the period ending 180 days after the date of this prospectus (the restricted period), subject to certain exceptions:

 

•

offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock;

 

•

file any registration statement with the Securities and Exchange Commission relating to the offering of any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or

 

•

enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock.

whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. In addition, we and each such person agrees that, without the prior written consent of Morgan Stanley & Co. LLC, SVB Leerink LLC and Evercore Group L.L.C. on behalf of the underwriters, we or such other person will not, during the restricted period, make any demand for, or exercise any right with respect to, the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock.

The restrictions described in the immediately preceding paragraph to do not apply in certain circumstances, including:

 

•

transactions relating to shares of common stock or other securities acquired (i) from the underwriters in the offering (other than issuer-directed shares of common stock purchased in the offering by our officers or directors) or (ii) in open market transactions after the completion of the offering, provided that no filing under Section 16(a) of the Exchange Act shall be required or shall be voluntarily made in connection with subsequent sales of common stock or other securities acquired in the offering or such open market transactions, or

 

•

transfers of shares of common stock or any security convertible into common stock as a bona fide gift or to a charitable organization or educational institution in a transfer not involving a disposition for value; or

 

•

transfers or dispositions of common stock or any security convertible into common stock to any immediate family member of the holder or any trust for the direct or indirect benefit of the holder or an immediate family member of the holder, or if the holder is a trust, to a grantor, trustee or beneficiary of the trust (including such beneficiary’s estate) of the holder;

 

•

transfers or dispositions of common stock or any security convertible into or exercisable or exchangeable for common stock (i) by will, other testamentary document or intestate succession to the legal representative, heir, beneficiary or a member of the immediate family of the undersigned upon the death of the undersigned or (ii) by operation of law pursuant to orders of a court or regulatory agency, in connection with a negotiated divorce settlement or pursuant to a qualified domestic relations order;

 

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if the holder is an entity, transfers, dispositions or distributions of shares of common stock or any security convertible into common stock (i) to another corporation, partnership, limited liability company, trust or other business entity that is an affiliate (within the meaning set forth in Rule 405 under the Securities Act of 1933, as amended, and including the subsidiaries of the holder) of the holder, (ii) to any investment fund or other entity controlling, controlled by, managing or managed by or under common control with the holder or affiliates of the holder (including, for the avoidance of doubt, where the holder is a partnership, to its general partner or a successor partnership or fund, or any other funds managed by such partnership) or (iii) to its stockholders, limited partners, general partners, limited liability company members or other equityholders or to the estate of any such stockholders, limited partners, general partners, limited liability company members or equityholders;

 

•

transfers or dispositions of common stock or any security convertible into or exercisable or exchangeable for common stock to the company (i) pursuant to any contractual arrangement in effect on the date of this agreement and described in this preliminary prospectus contained in the registration statement relating to this offering at the time the registration statement became effective as well as in the final prospectus relating to this offering that provides for the repurchase of the holder’s common stock or other securities by the company or (ii) in connection with the termination of the holder’s employment with or service to the company; provided that any filing under Section 16(a) of the Exchange Act reporting a reduction in beneficial ownership of common stock shall indicate by footnote disclosure or otherwise the nature of the transfer or disposition;

 

•

(i) transfers of common stock (or any securities convertible into or exercisable or exchangeable for common stock) pursuant to a bona fide third-party tender offer for shares of our capital stock made to all holders of our securities, merger, consolidation or other similar transaction approved by our board of directors the result of which is that any person (as defined in Section 13(d)(3) of the Exchange Act), or group of persons, other than us, becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 of the Exchange Act) of more than 50% of the total voting power of our voting stock and (ii) entry into any lock-up, voting or similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of common stock or such other securities in connection with a transaction described in (i) above; provided that in the event that such change of control transaction is not completed, the common stock (or any security convertible into or exercisable or exchangeable for common stock) owned by the holder shall remain subject to the restrictions contained in the lock-up agreement;

 

•

facilitating the establishment of a trading plan on behalf of a shareholder, officer or director pursuant to Rule 10b5-1 under the Exchange Act for the transfer of shares of common stock, provided that (i) such plan does not provide for the transfer of common stock during the restricted period and (ii) to the extent a public announcement or filing under the Exchange Act, if any, is required of or voluntarily made by the company regarding the establishment of such plan, such announcement or filing shall include a statement to the effect that no transfer of common stock may be made under such plan during the restricted period.

Morgan Stanley & Co. LLC, SVB Leerink LLC and Evercore Group L.L.C., in their joint 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.

In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may sell more shares than they are obligated to purchase under the underwriting agreement, creating a short position. A short sale is covered if the short position is no greater than the number of shares available for purchase by the underwriters under the over-allotment option. The underwriters can close out a covered short sale by exercising the over-allotment option or purchasing shares in the open market. In determining the source of shares to close out a covered short sale, the underwriters will consider, among other things, the open market price of shares

 

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compared to the price available under the over-allotment option. The underwriters may also sell shares in excess of the over-allotment option, creating a naked short position. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering. As an additional means of facilitating this offering, the underwriters may bid for, and purchase, shares of common stock in the open market to stabilize the price of the common stock. These activities may raise or maintain the market price of the common stock above independent market levels or prevent or retard a decline in the market price of the common stock. The underwriters are not required to engage in these activities and may end any of these activities at any time.

We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.

A prospectus in electronic format may be made available on websites maintained by one or more underwriters (the selling group members), if any, participating in this offering. The representatives may agree to allocate a number of shares of common stock to underwriters for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters that may make Internet distributions on the same basis as other allocations.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.

In addition, in the ordinary course of their various business activities, the underwriters and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers and may at any time hold long and short positions in such securities and instruments. Such investment and securities activities may involve our securities and instruments. The underwriters and their respective affiliates may also make investment recommendations or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long or short positions in such securities and instruments.

Pricing of the Offering

Prior to this offering, there has been no public market for our common stock. The initial public offering price was determined by negotiations between us and the representatives. Among the factors considered in determining the initial public offering price were our future prospects and those of our industry in general, our sales, earnings and certain other financial and operating information in recent periods, and the price-earnings ratios, price-sales ratios, market prices of securities, and certain financial and operating information of companies engaged in activities similar to ours.

Selling Restrictions

Australia

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (Corporations Act) and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

 

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Any offer in Australia of the shares may only be made to persons (Exempt Investors), who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.

The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

Canada

The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.

Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.

Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

Dubai International Financial Centre

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

 

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European Economic Area

In relation to each Member State of the European Economic Area (each a Relevant State), no shares have 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 shares 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 the shares may be offered to the public in that Relevant State at any time:

(a) to any legal entity which is a qualified investor as defined under Article 2 of the Prospectus Regulation;

(b) to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the Prospectus Regulation), subject to obtaining the prior consent of representatives for any such offer; or

(c) in any other circumstances falling within Article 1(4) of the Prospectus Regulation,

provided that no such offer of the shares shall require us or any of the representatives 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 to the public” in relation to the shares 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 shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares, and the expression “Prospectus Regulation” means Regulation (EU) 2017/1129.

Hong Kong

Shares of our common stock may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to shares of our common stock may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares of our common stock which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder.

Israel

In the State of Israel this prospectus shall not be regarded as an offer to the public to purchase shares of common stock under the Israeli Securities Law, 5728—1968, which requires a prospectus to be published and authorized by the Israel Securities Authority, if it complies with certain provisions of Section 15 of the Israeli Securities Law, 5728—1968, including, inter alia, if: (i) the offer is made, distributed or directed to not more than 35 investors, subject to certain conditions (the Addressed Investors); or (ii) the offer is made, distributed or directed to certain qualified investors defined in the First Addendum of the Israeli Securities Law, 5728—1968, subject to certain conditions (the Qualified Investors). The Qualified Investors shall not be taken into account in the count of the Addressed Investors and may be offered to purchase securities in addition to the 35 Addressed Investors. The company has not and will not take any action that would require it to publish a prospectus in accordance with and subject to the Israeli Securities Law, 5728—1968. We have not and will not distribute this prospectus or make, distribute or direct an offer to subscribe for our common stock to any person within the State of Israel, other than to Qualified Investors and up to 35 Addressed Investors.

 

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Qualified Investors may have to submit written evidence that they meet the definitions set out in of the First Addendum to the Israeli Securities Law, 5728—1968. In particular, we may request, as a condition to be offered common stock, that Qualified Investors will each represent, warrant and certify to us and/or to anyone acting on our behalf: (i) that it is an investor falling within one of the categories listed in the First Addendum to the Israeli Securities Law, 5728—1968; (ii) which of the categories listed in the First Addendum to the Israeli Securities Law, 5728—1968 regarding Qualified Investors is applicable to it; (iii) that it will abide by all provisions set forth in the Israeli Securities Law, 5728—1968 and the regulations promulgated thereunder in connection with the offer to be issued common stock; (iv) that the shares of common stock that it will be issued are, subject to exemptions available under the Israeli Securities Law, 5728—1968: (a) for its own account; (b) for investment purposes only; and (c) not issued with a view to resale within the State of Israel, other than in accordance with the provisions of the Israeli Securities Law, 5728—1968; and (v) that it is willing to provide further evidence of its Qualified Investor status. Addressed Investors may have to submit written evidence in respect of their identity and may have to sign and submit a declaration containing, inter alia, the Addressed Investor’s name, address and passport number or Israeli identification number.

Japan

No registration pursuant to Article 4, paragraph 1 of the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended, the FIEL) has been made or will be made with respect to the solicitation of the application for the acquisition of the shares of common stock.

Accordingly, the shares of common stock have not been, directly or indirectly, offered or sold and will not be, directly or indirectly, offered or sold in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or to others for re-offering or re-sale, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan except pursuant to an exemption from the registration requirements, and otherwise in compliance with, the FIEL and the other applicable laws and regulations of Japan.

For Qualified Institutional Investors (QII)

Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of common stock constitutes either a “QII only private placement” or a “QII only secondary distribution” (each as described in Paragraph 1, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of common stock. The shares of common stock may only be transferred to QIIs.

For Non-QII Investors

Please note that the solicitation for newly-issued or secondary securities (each as described in Paragraph 2, Article 4 of the FIEL) in relation to the shares of common stock constitutes either a “small number private placement” or a “small number private secondary distribution” (each as is described in Paragraph 4, Article 23-13 of the FIEL). Disclosure regarding any such solicitation, as is otherwise prescribed in Paragraph 1, Article 4 of the FIEL, has not been made in relation to the shares of common stock. The shares of common stock may only be transferred en bloc without subdivision to a single investor.

People’s Republic of China

This prospectus will not be circulated or distributed in the People’s Republic of China (the PRC), and the securities will not be offered or sold, and will not be offered or sold to any person for re-offering or resale directly or indirectly to any residents of the PRC except pursuant to any applicable laws and regulations of the PRC. Neither this prospectus nor any advertisement or other offering material may be distributed or published in the PRC, except under circumstances that will result in compliance with applicable laws and regulations.

 

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Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares of our common stock may not be circulated or distributed, nor may the shares of our common stock be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where shares of our common stock are subscribed or purchased under Section 275 by a relevant person which is: (i) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (ii) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired shares of our common stock under Section 275 except: (a) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (b) where no consideration is given for the transfer; or (c) by operation of law.

Switzerland

The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document does not constitute a prospectus within the meaning of, and has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.

Neither this document nor any other offering or marketing material relating to the offering, the Company, the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA (FINMA), and the offer of securities has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.

United Arab Emirates

The securities have not been, and are not being, publicly offered, sold, promoted or advertised in the United Arab Emirates (including the Dubai International Financial Centre) other than in compliance with the laws of the United Arab Emirates (and the Dubai International Financial Centre) governing the issue, offering and sale of securities. Further, this prospectus does not constitute a public offer of securities in the United Arab Emirates (including the Dubai International Financial Centre) and is not intended to be a public offer. This prospectus has not been approved by or filed with the Central Bank of the United Arab Emirates, the Securities and Commodities Authority or the Dubai Financial Services Authority.

 

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United Kingdom

No shares have been offered or will be offered pursuant to the offering to the public in the United Kingdom prior to the publication of a prospectus in relation to the shares which has been approved by the Financial Conduct Authority, except that the shares may be offered to the public in the United Kingdom at any time:

(a) to any legal entity which is a qualified investor as defined under Article 2 of the U.K. Prospectus Regulation;

(b) to fewer than 150 natural or legal persons (other than qualified investors as defined under Article 2 of the U.K. Prospectus Regulation), subject to obtaining the prior consent of the representatives for any such offer; or

(c) in any other circumstances falling within Section 86 of the FSMA.

provided that no such offer of the shares shall require the Issuer or any Manager to publish a prospectus pursuant to Section 85 of the FSMA or supplement a prospectus pursuant to Article 23 of the U.K. Prospectus Regulation. For the purposes of this provision, the expression an “offer to the public” in relation to the shares in the United Kingdom means the communication in any form and by any means of sufficient information on the terms of the offer and any shares to be offered so as to enable an investor to decide to purchase or subscribe for any shares and the expression “U.K. Prospectus Regulation” means Regulation (EU) 2017/1129 as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018.

 

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LEGAL MATTERS

The validity of the shares of common stock offered by this prospectus will be passed upon for us by Goodwin Procter LLP, Boston, Massachusetts. Certain legal matters related to this offering will be passed upon for the underwriters by Cooley LLP, Boston, Massachusetts.

EXPERTS

The financial statements included in this Prospectus, have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements are included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 (File Number 333-                ) under the Securities Act with respect to the common stock we are offering by this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information pertaining to us and our common stock, you should refer to the registration statement and to its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document.

Upon the completion of the offering, we will be subject to the informational requirements of the Exchange Act and will file annual, quarterly and current reports, proxy statements and other information with the SEC. You can read our SEC filings, including the registration statement, at the SEC’s website at www.sec.gov. We also maintain a website at www.talaristx.com. Upon completion of the offering, you may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendment to those reported filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.

 

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TALARIS THERAPEUTICS, INC.

INDEX TO FINANCIAL STATEMENTS

 

		Page
Report of Independent Registered Public Accounting Firm			F-2
Balance Sheets			F-3
Statements of Operations and Comprehensive Loss			F-4
Statements of Convertible Preferred Stock and Stockholders’ Deficit			F-5
Statements of Cash Flows			F-6
Notes to Financial Statements			F-7

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Talaris Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Talaris Therapeutics, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of operations and comprehensive loss, convertible preferred stock and stockholders’ deficit, and cash flows, for each of the two years in the 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 two years in the 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 and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, 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.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

February 26, 2021

We have served as the Company’s auditor since 2019.

 

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TALARIS THERAPEUTICS, INC.

BALANCE SHEETS

(in thousands, except share and per share amounts)

 

		As of December 31,
		2020				2019				Pro forma 2020 (unaudited)
Assets
Current assets:
Cash and cash equivalents		$	17,589			$	38,978			$	17,589
Marketable securities			131,899				—				131,899
Prepaid and other current assets			1,263				1,816				1,263
Total current assets			150,751				40,794				150,751
Property and equipment, net			2,013				1,127				2,013
Other assets			14				20				14
Total assets		$	152,778			$	41,942			$	152,778
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
Accounts payable		$	767			$	667			$	767
Accrued expenses			2,637				1,623				2,637
Total current liabilities			3,404				2,291				3,404
Share repurchase liability			996				—				996
Contingent stock liability			373				63				373
Total liabilities			4,774				2,354				4,774
Commitments and contingencies (Note 8)
Convertible preferred stock
Series A convertible preferred stock, $0.0001 par value, 40,000,000 shares authorized, issued and outstanding (liquidation preference of $40,000) as of December 31, 2020 and 2019; no shares authorized, issued or outstanding pro forma as of December 31, 2020			37,383				37,383				—
Series A-1 convertible preferred stock, $0.0001 par value, 28,000,000 shares authorized, issued and outstanding (liquidation preference of $35,000) as of December 31, 2020 and 48,000,000 shares authorized and 16,000,000 issued and outstanding (liquidation preference of $20,000) as of December 31, 2019; no shares authorized, issued or outstanding pro forma as of December 31, 2020			34,272				19,307				—
Series B convertible preferred stock, $0.0001 par value, 62,499,993 shares authorized, issued and outstanding (liquidation preference of $114,994) as of December 31, 2020 and no shares authorized, issued and outstanding as of December 31, 2019; no shares authorized, issued and outstanding pro forma as of December 31, 2020			114,496				—				—
Total convertible preferred stock			186,151				56,690				—
Stockholders’ equity (deficit)
Common stock, $0.0001 par value, 194,558,815 shares authorized and 37,916,229 issued and outstanding as of December 31, 2020 and 150,000,000 shares authorized and 34,187,250 issued and outstanding as of December 31, 2019; 194,558,815 shares authorized and 168,416,222 issued and outstanding pro forma as of December 31, 2020			4				3				17
Additional paid-in-capital			4,876				3,202				191,015
Accumulated deficit			(43,014	)			(20,307	)			(43,014	)
Accumulated other comprehensive loss			(13	)			—				(13	)
Total stockholders’ equity (deficit)			(38,147	)			(17,102	)			148,005
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)		$	152,778			$	41,942			$	152,778

The accompanying notes are an integral part of these financial statements.

 

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TALARIS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

 

		Years Ended December 31,
		2020				2019
Operating expenses
Research and development		$	15,278			$	13,369
General and administrative			7,406				5,009
Total operating expenses			22,684				18,378
Loss from operations			(22,684	)			(18,378	)
Interest and other income (expense), net			(23	)			223
Net loss		$	(22,707	)		$	(18,155	)
Unrealized loss on marketable securities			(13	)			—
Total other comprehensive loss			(13	)			—
Total comprehensive loss		$	(22,720	)		$	(18,155	)
Net loss attributable to common stockholders		$	(22,707	)		$	(18,155	)
Net loss per common share, basic and diluted		$	(0.63	)		$	(0.53	)
Weighted average number of common shares outstanding used in computation of net loss per common share, basic and diluted			35,765,166				34,150,458
Pro forma net loss per common share, basic and diluted		$	(0.20	)
Pro forma weighted average number of common shares outstanding used in computation of net loss per common share, basic and diluted			113,380,353

The accompanying notes are an integral part of these financial statements.

 

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TALARIS THERAPEUTICS, INC.

STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT

(in thousands, except share amounts)

 

		Series A Convertible Preferred Stock								Series A-1 Convertible Preferred Stock								Series B Convertible Preferred Stock								Common Stock								Additional				Accumulated Deficit				Accumulated Other				Total
		Outstanding Shares				Amount				Outstanding Shares				Amount				Outstanding Shares				Amount				Outstanding Shares				Amount				Paid-in Capital								Comprehensive Income (Loss)				Stockholders’ Deficit
Balance at January 1, 2019			22,500,000			$	20,490				—			$	—				—			$	—				34,126,250			$	3			$	2,962			$	(2,151	)		$	—			$	814
Issuance of Series A convertible preferred stock, net of issuance costs			17,500,000				16,893				—				—				—				—				—				—				—				—				—				—
Issuance of Series A-1 convertible preferred stock, net of issuance costs			—				—				16,000,000				19,307				—				—				—				—				—				—				—				—
Issuance of common stock			—				—				—				—				—				—				40,000				0				7				—				—				7
Issuance of common stock upon exercise of stock options			—				—				—				—				—				—				21,000				0				4				—				—				4
Stock-based compensation expense			—				—				—				—				—				—				—				—				229				—				—				229
Net loss			—				—				—				—				—				—				—				—				—				(18,155	)			—				(18,155	)
Balance at December 31, 2019			40,000,000			$	37,383				16,000,000			$	19,307				—			$	—				34,187,250			$	3			$	3,202			$	(20,307	)		$	—			$	(17,102	)
Issuance of Series A-1 convertible preferred stock, net of issuance costs			—				—				12,000,000				14,966				—				—				—				—				—				—				—				—
Issuance of Series B convertible preferred stock, net of issuance costs			—				—				—				—				62,499,993				114,496				—				—				—				—				—				—
Issuance of common stock upon exercise of stock options			—				—				—				—				—				—				3,728,979				1				652				—				—				653
Stock-based compensation expense			—				—				—				—				—				—				—				—				1,022				—				—				1,022
Net loss			—				—				—				—				—				—				—				—				—				(22,707	)			—				(22,707	)
Unrealized loss on marketable securities			—				—				—				—				—				—				—				—				—				—				(13	)			(13	)
Balance at December 31, 2020			40,000,000			$	37,383				28,000,000			$	34,272				62,499,993			$	114,496				37,916,229			$	4			$	4,876			$	(43,014	)		$	(13	)		$	(38,147	)

The accompanying notes are an integral part of these financial statements.

 

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TALARIS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

(in thousands)

 

		Years Ended December 31,
		2020				2019
Cash flows from operating activities:
Net loss		$	(22,707	)		$	(18,155	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			447				379
Accretion and amortization of marketable securities, net			95				—
Stock-based compensation expense			1,022				229
Fair value adjustment of contingent stock liability			310				3
Gain on disposal of property and equipment			—				(38	)
Other			7				7
Changes in operating assets and liabilities:
Prepaid and other current assets			553				(1,461	)
Other assets			6				(20	)
Accounts payable			100				321
Accrued expenses			955				1,075
Net cash used in operating activities			(19,212	)			(17,660	)
Cash flows from investing activities:
Purchases of property and equipment			(1,286	)			(562	)
Purchases of marketable securities			(158,237	)			—
Maturities of marketable securities			26,224				—
Net cash used in investing activities			(133,300	)			(562	)
Cash flows from financing activities:
Proceeds from issuances of Series A convertible preferred stock			—				17,500
Proceeds from issuances of Series A-1 convertible preferred stock			15,000				20,000
Proceeds from issuances of Series B convertible preferred stock			115,000				—
Preferred stock issuance costs			(526	)			(1,300	)
Proceeds from exercise of stock options			1,649				4
Net cash provided by financing activities			131,123				36,204
Net increase (decrease) in cash and cash equivalents			(21,389	)			17,982
Cash and cash equivalents at beginning of period			38,978				20,997
Cash and cash equivalents at end of period		$	17,589			$	38,978
Supplemental disclosure of non-cash investing and financing activities:
Property and equipment additions included in accounts payable and accrued expenses		$	86			$	38
Preferred stock issuance costs included in accounts payable and accrued expenses		$	11			$	—

The accompanying notes are an integral part of these financial statements.

 

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TALARIS THERAPEUTICS, INC

NOTES TO FINANCIAL STATEMENTS

1. Nature of Business and Liquidity

Talaris Therapeutics, Inc. (“Talaris” or the “Company”) is a late-clinical stage, cell therapy company developing an innovative method of allogeneic hematopoietic stem cell transplantation (allo-HSCT), called Facilitated Allo-HSCT Therapy, that the Company believes has the potential to transform the standard of care in solid organ transplantation, certain severe autoimmune diseases and certain severe non-malignant blood, immune and metabolic disorders. The Company believes that these indications, individually and collectively, represent a significant unmet need and commercial opportunity. The Company is located and headquartered in Louisville, Kentucky and Wellesley, Massachusetts.

Liquidity

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Management has evaluated whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. Since its inception, the Company has incurred net losses and negative cash flows from operations. During the years ended December 31, 2020 and December 31, 2019, the Company incurred a net loss of $22.7 million and $18.2 million, respectively, and used $19.2 million and $17.7 million in cash for operations, respectively. In addition, as of December 31, 2020, the Company had an accumulated deficit of $43.0 million. The Company expects to continue to generate operating losses and negative cash flows for the foreseeable future. The Company currently expects the cash and cash equivalents on hand of $17.6 million and marketable securities of $131.9 million as of December 31, 2020, will be sufficient to fund its operating expenses and capital requirements for more than 12 months from the date the financial statements are available to be issued.

The Company is seeking to complete an initial public offering (“IPO”) of its common stock. Upon the completion of a qualified public offering on specified terms, the Company’s outstanding convertible preferred stock will automatically convert into shares of common stock (see note 9).

Additional funding will be needed to finance future clinical, pre-clinical, manufacturing and commercial activities. To date, the Company has principally financed its operations through private placements of convertible preferred stock (see Note 9), together with payments under a former research collaboration with Novartis, Inc. and research grants. In the event the Company does not complete an IPO, the Company will seek additional funding through private equity and debt financings and other arrangements. There is no assurance the Company will be successful in obtaining such additional financing on terms acceptable to it, if at all, and it may not be able to enter into other arrangements. If the Company is unable to obtain funding, it could be forced to delay, reduce or eliminate our research and development programs, portfolio expansion or commercialization efforts, which could adversely affect its business prospects and ability to continue operations.

The Company is subject to risks common to companies in the biopharmaceutical industry. There can be no assurance that the Company’s research and development will be successfully completed, that adequate protection for its intellectual property will be maintained, that any products developed will obtain required regulatory approval, or that any approved products will be commercially viable. Even if the development efforts are successful, it is uncertain when, if ever, the Company will generate significant product sales and ultimately net income.

Coronavirus Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The worldwide COVID-19 pandemic has affected and may affect in the future the Company’s ability to initiate and

 

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complete preclinical studies, delay the initiation and completion of its current and planned clinical trials, disrupt regulatory activities or have other adverse effects on its business, results of operations, financial condition and prospects. In addition, the pandemic has caused substantial disruption in the financial markets and may adversely impact economies worldwide, both of which could adversely affect the Company’s business, operations and ability to raise funds to support its operations.

The Company cannot be certain what the overall impact of the COVID-19 pandemic will be on its business, and it has the potential to adversely affect its business, financial condition, results of operations and prospects.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (US GAAP).

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make judgments, assumptions, and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of financial statements, and the reported amounts of income and expense during the reporting period. The most significant estimates relate to the determination of fair value of the Company’s common stock, determination of the fair value of stock option grants and estimates related to the amount of accrued research and development expenses as of the balance sheet date. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, and makes adjustments when the facts and circumstances dictate. These estimates are based on information available as of the date of the financial statements; therefore, actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash equivalents. As of December 31, 2020 and 2019, cash consists primarily of checking and savings deposits and money market fund holdings.

Marketable Securities

The Company classifies its marketable securities as available-for-sale securities, which are carried at their fair value based on the quoted market prices of the securities. Unrealized gains and losses are reported as accumulated other comprehensive loss, a separate component of stockholders’ deficit. Realized gains and losses on available-for-sale securities are included in net loss in the period earned or incurred.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation expense is recognized using the straight-line method over the estimated useful life of each asset. Equipment and furniture and fixtures are depreciated over five or seven year lives. Leasehold improvements are amortized over the shorter of the lease term or the five-year estimated useful life of the asset. Computer equipment and computer software are depreciated over three years. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in loss from operations. Expenditures for repairs and maintenance are expensed as incurred.

 

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Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which consist primarily of property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairments have been identified as of December 31, 2020 and 2019.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. The Company’s investment policy includes guidelines regarding the quality of the financial institutions and financial instruments and defines allowable investments that it believes minimizes the exposure to concentration of credit risk. The Company may invest in money market funds (minimum of $1 billion in assets), U.S. Treasury securities, corporate debt, bank debt, U.S. government-related agency securities, other sovereign debt, municipal debt and commercial paper. These deposits may exceed federally insured limits. The Company has not experienced any losses historically in these accounts and believes that it is not exposed to significant credit risk as our deposits are held at financial institutions that management believes to be of high credit quality.

Fair Value of Financial Instruments

Fair value is defined as the price that the Company would receive to sell an investment in a timely transaction or pay to transfer a liability in a timely transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. A framework is used for measuring fair value utilizing a three-tier hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 investments) and the lowest priority to unobservable inputs (Level 3 investments).

The three levels of the fair value hierarchy are as follows:

 

•

Level 1 inputs: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

•

Level 2 inputs: Quoted prices in markets that are not considered to be active or financial instrument valuations for which all significant inputs are observable, either directly or indirectly; and,

 

•

Level 3 inputs: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

Financial instruments are categorized in their entirety based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the investment.

The Company’s money market funds and marketable securities are carried at fair value determined according to the fair value hierarchy described above (Level 1 and Level 2, respectively).

The Company’s contingent stock liability as of December 31, 2020 and 2019 (see Note 3) is carried at fair value determined according to the fair value hierarchy described above (Level 3).

Research and Development Expenses

Research and development expenses include (i) employee-related expenses, including salaries, benefits, travel and stock-based compensation expense; (ii) external research and development expenses incurred under

 

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arrangements with third parties, such as contract research organization agreements, investigational sites, and consultants; (iii) the cost of acquiring, developing, and manufacturing clinical study materials; (iv) costs associated with preclinical and clinical activities and regulatory operations; (v) costs incurred in development of intellectual property; and (vi) an allocated portion of facilities and other infrastructure costs associated with our research and development activities. Costs incurred in connection with research and development activities are expensed as incurred.

The Company enters into consulting, research, and other agreements with commercial entities, researchers, universities, and others for the provision of goods and services. Such arrangements are generally cancelable upon reasonable notice and payment of costs incurred. Costs are considered incurred based on an evaluation of the progress to completion of specific tasks under each contract using information and data provided by the respective vendors, including the Company’s clinical sites. These costs consist of direct and indirect costs associated with specific projects, as well as fees paid to various entities that perform certain research on behalf of the Company. Depending upon the timing of payments to the service providers, the Company recognizes prepaid expenses or accrued expenses related to these costs. These accrued or prepaid expenses are based on management’s estimates of the work performed under service agreements, milestones achieved, and experience with similar contracts. The Company monitors each of these factors and adjusts estimates accordingly.

Stock-Based Compensation

The Company measures all stock options and other stock-based awards granted to employees, nonemployees, and directors based on the fair value on the date of the grant and recognizes stock-based compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock option awards with only service-based vesting conditions and records the expense for these awards using the straight-line method. The Company’s policy is to account for forfeitures when they occur.

The Company classifies stock-based compensation expense in its statement of operations in the same manner in which the award recipient’s payroll costs are classified or in which the award recipients’ service payments are classified.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company is a private company and lacks company-specific historical and implied volatility information. Therefore, it estimates its expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until it has adequate historical data regarding the volatility of its own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the US Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is zero because the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

In determining the exercise prices for options granted, the Company has considered the estimated fair value of the common stock as of the measurement date. The estimated fair value of the common stock has been determined at each grant date based upon a variety of factors, including the illiquid nature of the common stock, arm’s-length sales of the Company’s capital stock (including convertible preferred stock), the effect of the rights and preferences of the preferred shareholders, and the prospects of a liquidity event. Among other factors are the Company’s financial position and historical financial performance, forecasted future operations of the Company, an evaluation or benchmark of the Company’s competition, and the current business climate in the marketplace. Significant changes to the key assumptions underlying the factors used could result in different fair values of common stock at each valuation date.

 

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Income Taxes

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements or in the Company’s tax returns. Deferred tax assets and liabilities are determined on the basis of the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Changes in deferred tax assets and liabilities are recorded in the provision for income taxes. The Company assesses the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent it believes, based upon the weight of available evidence, that it is more likely than not that all or a portion of the deferred tax assets will not be realized, a valuation allowance is established through a charge to income tax expense. Potential for recovery of deferred tax assets is evaluated by estimating the future taxable profits expected and considering prudent and feasible tax planning strategies.

The Company accounts for uncertainty in income taxes recognized in the financial statements by applying a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination by the taxing authorities. If the tax position is deemed more likely than not to be sustained, the tax position is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. The provision for income taxes includes the effects of any resulting tax reserves, or unrecognized tax benefits, that are considered appropriate as well as the related net interest and penalties.

The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions. These reserves are based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or positions is more likely than not to be realized following resolution of any potential contingencies present related to the tax benefit. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. The Company had no significant uncertain tax positions as of December 31, 2020 and December 31, 2019.

Basic and Diluted Net Loss Per Share

The Company calculates basic and diluted net loss per share using the two-class method. The two-class method requires income available to common stockholders for the period to be allocated between common stock and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed. The Company’s Series A convertible preferred stock, Series A-1 convertible preferred stock and Series B convertible preferred stock are participating securities. These participating securities do not contractually require the holders of such shares to participate in the Company’s losses. As such, net losses for the years presented were not allocated to the Company’s participating securities. Accordingly, basic net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, without consideration of potential dilutive securities. Diluted net loss per share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the dilutive effects of potentially dilutive securities outstanding during the period. Potentially dilutive securities include vested and unexercised stock options, restricted stock issued upon early exercise of stock options, convertible preferred shares and contingent stock liabilities. The dilutive effect of stock options and contingent stock liabilities are computed using the treasury stock method and the dilutive effect of convertible preferred shares is calculated using the if-converted method. The Company has generated a net loss for all periods presented, therefore diluted net loss per share is the same as basic net loss per share since the inclusion of potentially dilutive securities would be anti-dilutive.

Segments

Operating segments are defined as components of an entity for which separate financial information is made available and is regularly evaluated by the chief operating decision maker (“CODM”) in making decisions

 

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regarding resource allocation and assessing performance. The Company’s CODM is the chief executive officer and operations are managed as a single segment for the purposes of assessing performance and making operating decisions.

Comprehensive Loss

Comprehensive loss represents net loss for the period plus the results of certain other changes in stockholders’ deficit. The Company’s comprehensive loss included unrealized losses related to marketable securities for the year ended December 31, 2020. Comprehensive loss was equal to net loss for the year ended December 31, 2019.

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses, (“ASC 326”), which introduces a new model for recognizing credit losses on financial instruments based on an estimate of current expected credit losses. The new model will apply to (1) loans, accounts receivable, trade receivables, and other financial assets measured at amortized cost; (2) loan commitments and certain other off-balance-sheet credit exposures; (3) debt securities and other financial assets measured at fair value through other comprehensive income; and (4) beneficial interests in securitized financial assets. The Company adopted ASC 326 in January 2021, and does not expect the standard to have a material impact on the 2021 financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and subsequently has issued additional guidance (collectively, “ASC 842”), which requires companies to generally recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet. ASC 842 will be effective for the Company on January 1, 2022, with early adoption permitted. The Company is in the process of evaluating its lease contracts under the new standard and the adoption of ASC 842 is expected to result in the recognition of additional lease liability and right-to-use assets on the balance sheet.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU No. 2018-13 removes certain disclosures, modifies certain disclosures, and adds additional disclosures. ASU No. 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. The adoption of ASU 2018-13 in January 2020 had no material impact on the financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Prior to the adoption of ASU 2018-07, the measurement date for non-employee awards was generally the date the services are completed, resulting in financial reporting period adjustments to equity-based compensation during the vesting terms for changes in the fair value of the awards. After the adoption of ASU 2018-07, the measurement date for non-employee awards is the date of grant without changes in the fair value of the award. The Company adopted ASU 2018-07 in January 2019. The impact of adoption was immaterial to the Company’s financial statements.

 

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3. Fair Value of Financial Assets and Liabilities

The following table presents information about the Company’s financial instruments that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the inputs the Company utilized to determine such fair value (in thousands):

 

		December 31, 2020
		Total				Level 1				Level 2				Level 3
Financial assets:
Money market funds (cash equivalents)		$	13,943			$	13,943			$	—			$	—
Marketable securities			131,899				11,169				120,730				—
Total financial assets measured at fair value		$	145,842			$	25,112			$	120,730			$	—
Financial liabilities:
Contingent stock liability		$	373			$	—			$	—			$	373
Total financial liabilities measured at fair value		$	373			$	—			$	—			$	373

 

		December 31, 2019
		Total				Level 1				Level 2				Level 3
Financial liabilities:
Contingent stock liability		$	63			$	—			$	—			$	63
Total financial liabilities measured at fair value		$	63			$	—			$	—			$	63

The contingent stock liability in the table above represents the fair value of contingent equity consideration equal to 348,750 shares of common stock contingently issuable to the University of Louisville Research Foundation Inc. (ULRF) in connection with its amended and restated exclusive license agreement with the Company (see Note 8). A rollforward of the contingent common stock liability, which is measured at fair value for the years ended December 31, 2020 and 2019, is represented as follows (in thousands):

 

Fair value as of January 1, 2019		$	60
Change in fair value			3
Fair value as of December 31, 2019			63
Change in fair value			310
Fair value as of December 31, 2020		$	373

Valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs. The Company’s contingent stock liability is classified within Level 3 of the fair value hierarchy because its fair value measurement is based, in part, on significant inputs not observed in the market, which incorporates assumptions and estimates to value the Company’s common stock. As there has been no public market for the Company’s common stock to date, the estimated fair value has been determined by the Company’s board of directors with input from management, considering the most recently available third-party valuations of common stock, and the board of directors’ assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation. Historically, these third-party valuations of the Company’s common stock were performed contemporaneously when events have occurred which management believes would have an impact on the valuation of the Company. The Company’s common stock valuation was prepared using the option-pricing method, or OPM, which uses a market approach to estimate enterprise value. Changes in the fair value of the contingent stock liability are recognized within interest and other income, net in the statement of operations. The fair values of the Company’s common stock used to value the contingent stock liability as of December 31, 2020 and December 31, 2019 were $1.07 and $0.18, respectively.

 

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4. Marketable Securities

The fair value of the Company’s marketable securities as of December 31, 2020 is based on level 1 and level 2 inputs. The Company had no marketable securities as of December 31, 2019. The Company’s investments consist mainly of U.S. government and agency securities, government-sponsored bond obligations and certain other corporate debt securities. Fair value is determined by taking into consideration valuations obtained from third-party pricing services. The third-party pricing services utilize industry standard valuation models, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities; issuer credit spreads; benchmark securities; and other observable inputs. There were no transfers between levels within the hierarchy during the year ended December 31, 2020. The Company has assessed U.S. government treasuries as level 1 and all other marketable securities as level 2 within the fair value hierarchy of ASC 820. The Company classifies its entire investment portfolio as available-for-sale as defined in ASC 320, Debt Securities. Securities are carried at fair value with the unrealized gains (losses) reported in other comprehensive loss.

As of December 31, 2020, none of the Company’s investments were determined to be other than temporarily impaired.

The following table summarizes the Company’s investments (in thousands):

 

		December 31, 2020
		Amortized Cost				Unrealized Gain				Unrealized (Loss)				Estimated Fair Value
Commercial paper		$	73,331			$	3			$	(10	)		$	73,324
Corporate debt securities			33,319				1				(11	)			33,309
Government and agency securities			25,262				4				—				25,266
Total		$	131,912			$	8			$	(21	)		$	131,899

5. Prepaid and Other Current Assets

Prepaid and other current assets consisted of the following (in thousands):

 

		December 31,
		2020				2019
Contract research organization prepaid		$	558			$	1,538
Interest receivable			374				—
Prepaid insurance			97				115
Prepaid service and maintenance contracts			88				91
Prepaid subscriptions			70				33
Other			76				39
Total prepaid expenses		$	1,263			$	1,816

 

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6. Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

		December 31,
		2020				2019
Equipment		$	2,666			$	2,521
Leasehold improvements			580				287
Computer equipment			264				47
Furniture and fixtures			255				—
Construction in progress			491				68
Total property and equipment			4,256				2,923
Less accumulated depreciation			(2,243	)			(1,796	)
Property and equipment, net		$	2,013			$	1,127

Depreciation expense was $0.4 million for the years ended December 31, 2020 and 2019.

7. Accrued Expenses

Accrued expenses consisted of the following (in thousands):

 

		December 31,
		2020				2019
Accrued bonus		$	1,159			$	1,025
Contract research organization accruals			521				91
Professional services/consulting accruals			314				134
Franchise taxes payable			156				32
Paid time off accrual			139				90
Other			348				251
Total accrued expenses		$	2,637			$	1,623

8. Commitments and Contingencies

Leases

The Company currently has three active lease agreements for office and laboratory space and related equipment. The primary lease is located on the University of Louisville campus in Louisville, Kentucky (the “Louisville Lease”). This lease has a termination date in November 2023, with an option to extend for three additional years at the Company’s discretion. In May 2020, the Company added additional office and laboratory space to the Louisville Lease. The Company maintains a lease for office space in Wellesley, Massachusetts, with a termination date in March 2021 with an option to extend. The Company maintains a third lease for ancillary office space also in Louisville, Kentucky. This lease has a termination date in December 2021.

The future minimum rent payments relating to all three of the Company’s facility operating leases under the terms and conditions existing as of December 31, 2020, are summarized as follows (in thousands):

 

Years Ending December 31,
2021		$	515
2022		$	496
2023		$	414
2024		$	—
Total		$	1,425

 

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The Company incurred rent expense of $0.6 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.

License Agreement

In October 2018, the Company entered an amended and restated exclusive license agreement with the ULRF related to certain licensed patent rights and know-how related to human facilitating cells for its Facilitated Allo-HSCT Therapy approach. Pursuant to the ULRF License Agreement, ULRF granted the Company an exclusive, worldwide license under such patents and a nonexclusive royalty-bearing, worldwide license for such know-how to research, develop, commercialize and manufacture FCR001 and products containing FCR001 in all fields, without limitation. ULRF also granted the Company the right to grant sublicenses in accordance with the ULRF License Agreement. Under the terms of the agreement, the Company is obligated to compensate ULRF three percent of net sales of all licensed products sold, one third of any non-royalty sublicensing income, and up to $1.625 million in regulatory and sales milestones on each licensed product upon the occurrence of specific events as outlined in the license agreement; and annual license maintenance fees.

In addition, upon execution of the ULRF License Agreement, the Company granted contingent equity consideration equal to 348,750 shares of common stock to ULRF. On or prior to the Company’s first underwritten public offering or any transaction that is treated as a deemed liquidation event, the Company may either issue to ULRF the 348,750 shares in common stock or make a cash payment equal to the 348,750 shares of common stock multiplied by either the price per share of common stock in the underwritten public offering or by the price per share of common stock received in connection with such deemed liquidation event. At December 31, 2020 and December 31, 2019, the Company measured the fair value of the contingent equity consideration and recorded a contingent stock liability of $0.4 million and $0.1 million, respectively, in other liabilities (see Note 3).

The Company incurred a $0.1 million milestone payment to ULRF in June 2020 which was recorded as research and development expense. The Company also incurred $0.1 million in expense in February 2020 related to an annual maintenance fee pursuant to the license agreement for the year ended December 31, 2020. The Company did not incur any expense related to the annual license maintenance fee or milestone payments during the year ended December 31, 2019.

Legal Proceedings

The Company is not currently a party to any material legal proceedings. At each reporting date, the Company evaluates whether a potential loss amount or a potential range of loss is probable and reasonably estimable under the provisions of the authoritative guidance that addresses accounting for contingencies. The Company expenses as incurred the costs related to its legal proceedings.

9. Convertible Preferred Stock

Issuances of Convertible Preferred Stock

In November 2018, the Company issued 22,500,000 shares of Series A Convertible Preferred Stock at $1.000 per share for gross cash proceeds of $22.5 million. The Company incurred issuance costs of $2.0 million, which have been recorded as a reduction to the value of Series A Convertible Preferred Stock in mezzanine equity in the accompanying balance sheets. In connection with the initial issuance of the Series A Convertible Preferred Stock, the purchasers received the right to purchase, and the Company had the obligation to sell, additional shares of Series A Convertible Preferred Stock at $1.00 per share and a unit, comprised of one share of Series A-1 Convertible Preferred Stock and one product interest right (each a “Unit”), at $1.25 per Unit (together, the “Tranche Rights”) upon achieving certain milestones related to the Company’s research and clinical developments in a series of tranches (the “Tranche 2,” “Tranche 3,” and “Tranche 4”) milestones.

 

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In December 2019, the Tranche 2 milestone was met and the Company issued an additional 17,500,000 shares of Series A Convertible Preferred Stock at $1.00 per share for gross cash proceeds of $17,500,000 and 16,000,000 Units (consisting of 16,000,000 shares of Series A-1 Convertible Preferred Stock and 16,000,000 shares of product interest rights) at $1.25 per Unit for gross cash proceeds of $20.0 million. The Company incurred issuance costs of $1.3 million in relation to Tranche 2, which have been recorded as a reduction to the value of Series A-1 Convertible Preferred Stock in mezzanine equity in the accompanying balance sheets.

In August 2020, the holders of Series A-1 Convertible Preferred Stock voted to amend the Preferred Stock and Unit Purchase Agreement (“SPA”) and waive the requirements of the Tranche 3 milestone. The Company issued an additional 12,000,000 Units (consisting of 12,000,000 shares of Series A-1 Convertible Preferred stock and 12,000,000 shares of product interest rights) at $1.25 per Unit for gross cash proceeds of $15.0 million.

In September 2020, the Company issued 62,499,993 shares of Series B Convertible Preferred Stock at $1.84 per share for gross cash proceeds of $115.0 million. The Company incurred issuance costs of $0.5 million in relation to the issuance of Series B Convertible Preferred Stock, which have been recorded as a reduction to the value of Series B Convertible Preferred Stock in mezzanine equity in the accompanying balance sheets.

In conjunction with the Series B Convertible Preferred Stock financing in September 2020, all holders of the Company’s preferred stock entered into an amendment to the SPA to terminate all rights, liabilities and obligations in respect to the Tranche 4 milestone.

Tranche Rights

The Company determined that the Tranche Rights did not meet the definition of a freestanding financial instrument because the Tranche Rights are not legally detachable from the initial Series A Convertible Preferred Stock issued. The Company made this determination due to the express prohibition of the transfer of the Tranche Rights. Further, the Company determined that the Tranche Rights do not meet the definition of an embedded derivative that would require bifurcation from the initial Series A Preferred Stock issued. Therefore, at the initial issuance of the Series A Convertible Preferred Stock in November 2018, there was no separate recognition of the Tranche Rights.

Product Interest Rights

After the first commercial sale of product, the product interest right entitles the holders to a product interest payment for each product interest right held equal to 1/48,000,000 multiplied by 9% of net product sales on a territory-by-territory basis. If the Company enters into a license of rights to develop and/or commercialize a product, the holder is entitled to a product interest payment for each product interest right equal to 1/48,000,000 multiplied by 30% of licensing income. If the holder does not participate or events occur in which the holder transfers its ownership, it must determine to transfer either its shares or the unit purchase right. If the holder elects to receive a product interest payment, then a corresponding total number of Series A-1 Convertible Preferred Stock initially underlying a Unit (the “Unit Share”), will be canceled and forfeited. The total number of Unit Shares canceled and forfeited will be determined by dividing the product interest payment received by the fair value of the Unit Share at such time. The product interest right payment term shall commence upon the first commercial sale of product, on a territory-by-territory basis, and continue until the fifteenth anniversary thereafter, or any earlier date that there are no remaining product interest rights outstanding.

If at any time, the Unit is transferred, the holder must elect to transfer either (i) the Unit share underlying the Unit or (ii) the product interest right underlying the Unit. If the holder elects to transfer the Unit Share, the corresponding product interest right underlying the Unit shall be automatically canceled, forfeited, and extinguished for no consideration. If the holder elects to transfer the product interest right, the corresponding Unit Share unit shall be automatically canceled and forfeited for no consideration.

 

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The Company determined the product interest rights did not meet the definition of a freestanding financial instrument because the product interest rights are not legally detachable or separately exercisable from the Unit Shares. Further, the Company determined that the product interest rights do not meet the definition of an embedded derivative that would require bifurcation from the Unit Share. Therefore, upon issuance of Units in December 2019, there was no separate recognition of the product interest rights.

Rights and Privileges of Convertible Preferred Stock

The rights and privileges of the Series A, Series A-1 and Series B Convertible Preferred Stock (together, “Convertible Preferred Stock”) are as follows:

Voting Rights—The holders of each series of Convertible Preferred Stock are entitled to vote on all matters and shall have the number of votes equal to the number of shares of common stock into which the preferred stock is convertible.

Dividends—The Company shall not declare, pay, or set aside any dividends on shares of any other class or series of capital stock (other than dividends on shares of common stock payable in shares of common stock), unless the holders of the Convertible Preferred Stock receive a dividend on each outstanding share of Convertible Preferred Stock in an amount at least equal to (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per share of Convertible Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock and (B) the number of shares of common stock issuable upon conversion of a share of the applicable series of Convertible Preferred Stock 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 the applicable series of Convertible Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock and (B) multiplying such fraction by an amount equal to the original issue price of the applicable series of Convertible Preferred Stock. No dividends were declared or paid during the years ended December 31, 2020 and December 31, 2019.

Liquidation Preference—In the event of any voluntary or involuntary liquidation, dissolution, or winding-up of the Company, the holders of shares of Convertible Preferred Stock will receive, in preference to any distribution to the holders of common stock an amount per share equal to the greater of (i) the applicable original issue price of such series of Convertible Preferred Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Convertible Preferred Stock been converted into common stock immediately prior to such liquidation, dissolution, winding-up, or deemed liquidation event. If upon any such liquidation, dissolution, or winding-up of the Company or deemed liquidation event, the assets available for distribution to the Company’s stockholders are not sufficient to pay the holders of Convertible Preferred Stock the full amount to which they shall be entitled, the holders of Convertible 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.

In the event of a deemed liquidation event, if the Company does not effect a dissolution within 90 days after such deemed liquidation event, each holder of Convertible Preferred Stock has the right to require the redemption of such shares, and if voting together as a majority, has the right to require redemption of all outstanding Convertible Preferred Stock in accordance with the liquidation preferences afforded to holders of the Convertible Preferred Stock. Any shares of Convertible Preferred Stock that are redeemed or otherwise acquired by the Company or any of its subsidiaries be automatically and immediately canceled and retired and shall not be reissued, sold, or transferred. Neither the Company nor any of its subsidiaries may exercise any voting or other rights granted to the holders of Convertible Preferred Stock following redemption. A Deemed Liquidation Event shall include a merger or consolidation (other than one in which the capital stock of the Company outstanding

 

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immediately prior to such merger or consolidation continue to represent a majority by voting power of the capital stock of the surviving corporation) or a sale, lease, transfer, exclusive license, or other disposition of all or substantially all of the assets of the Company.

Conversion

Conversion Ratio—Each share of Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time into such number of fully paid and nonassessable shares of common stock as is determined by dividing the applicable original issue price by the applicable conversion price (Series A original issue price and applicable conversion price is $1.00 per share; Series A-1 original issue price and applicable conversion price is $1.25 per share; Series B original issue price and applicable conversion price is $1.84 per share), subject to adjustment in the case of termination or fractional shares.

Mandatory Conversion—All outstanding shares of Convertible Preferred Stock are automatically convertible based upon either (a) the closing of a firm-commitment underwritten public offering in which the aggregate gross proceeds to the Company of at least $60,000,000 of gross proceeds to the Company and have an offering price to the public of at least $1.84 per share or (b) the vote or written consent of holders of at least a majority of the Convertible Preferred Stock outstanding at that time with respect to the conversion of the Convertible Preferred Stock then all outstanding shares of Convertible Preferred Stock shall automatically be converted into shares of common stock at the then effective conversion rate and such shares may not be reissued.

10. Common Stock

Common Stock Reserved

The number of shares of common stock that have been reserved for the potential conversion of Preferred Stock, and outstanding stock options granted and stock options available for grant under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) are as follows:

 

		December 31,
		2020				2019
Conversion of Series A Preferred Stock			40,000,000				40,000,000
Conversion of Series A-1 Preferred Stock			28,000,000				16,000,000
Conversion of Series B Preferred Stock			62,499,993				—
Restricted stock related to early exercise of common stock options			4,987,685				—
Outstanding common stock options			14,687,278				8,220,000
Common stock options available for grant			6,118,880				8,155,765
Contingent stock			348,750				348,750
Total			156,642,586				72,724,515

11. Stock-Based Compensation

2018 Equity Incentive Plan

The Company’s 2018 Plan, as amended, provides for the Company to sell or issue common stock or restricted common stock or to grant incentive stock options or nonqualified stock options for the purchase of common stock, to employees, nonemployees and members of the board of directors of the Company. The 2018 Plan is administered by the board of directors or at the discretion of the board of directors by the compensation committee of the board. The exercise prices, vesting periods, and other restrictions are determined at the discretion of the compensation committee of the board of directors, except that the exercise price per share of stock options may not be less than 100% of the fair market value of the share of common stock on the date of grant and the contractual term of stock option may not be greater than 10 years. Stock options granted to date typically vest over four years.

 

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The total number of shares of common stock that may be authorized under the 2018 Plan is 29,183,822 shares, of which 6,118,880 remained available for future grant as of December 31, 2020. 16,436,765 shares were authorized under the 2018 Plan as of December 31, 2019, of which 8,155,765 remained available for future grant as of December 31, 2019. As the 2018 Plan is designed to maintain the fully diluted percentage of total authorized shares, the shares authorized under the plan increased with the additional preferred stock issuances disclosed in Note 9.

Stock Option Valuation

The assumptions used to determine the fair values of stock options granted to employees and directors are presented as follows:

 

		For the years ended December 31,
		2020				2019
Fair value of common stock			$0.27—1.07				$0.21
Dividend yield			—%				—%
Volatility			72.8%—80.6%				72.4%—72.8%
Risk-free interest rate			0.31%—1.46%				1.43%—2.69%
Expected term (years)			6.25				6.25

Summary of Option Activity

The Company’s stock option activity regarding employees, directors, and nonemployees is summarized as follows (in thousands excepts share and per share amounts):

 

		Shares				Weighted- Average Exercise Price				Weighted- Average Remaining Contractual Life (in years)				Aggregate intrinsic value
Options outstanding—January 1, 2019			6,842,500			$	0.22				9.86			$	—
Granted			2,036,750				0.17
Exercised			(21,000	)			0.17
Forfeited			(638,250	)			0.17
Options outstanding—December 31, 2019			8,220,000			$	0.21				8.96			$	782
Granted			15,728,454				0.73
Exercised			(8,716,664	)			0.19
Cancelled			(9,686	)			0.18
Forfeited			(534,826	)			0.17
Options outstanding—December 31, 2020			14,687,278			$	0.79				9.40			$	4,183
Options exercisable—December 31, 2020			2,027,417			$	0.50				8.55
Options vested and expected to vest—December 31, 2020			5,777,396			$	0.29				8.26

The Company utilizes a third-party valuation firm to assist in determining the grant date fair market value of its common stock. In connection with the initial audit of the Company’s 2019 financial statements, the fair market value of its common stock was re-valued as of November 1, 2018 and February 7, 2020, solely for financial reporting purposes. This revaluation resulted in recognition of additional stock compensation expense. The fair value of common stock as of November 1, 2018 was determined to be $0.21 as compared to the initial $0.17 third-party fair valuation determination. The exercise price for stock options granted from November 1, 2018 through October 10, 2019 was derived from the initial valuation in November 2018. The fair value of common stock as of February 7, 2020 was determined to be $0.27 as compared to the initial $0.18 third-party fair

 

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valuation determination. The exercise price for stock options granted from February 7, 2020 through August 19, 2020 was derived from the initial valuation in February 2020.

Additional information with regard to stock option activity involving employees and directors is as follows (in thousands except per share amounts):

 

		For the years ended December 31,
		2020				2019
Weighted-average grant-date fair value per option of total options granted		$	0.52			$	0.15
Aggregate intrinsic value of stock options exercised			961				—

As of December 31, 2020, total unrecognized compensation cost related to the unvested awards to employees, directors, and nonemployees is $8.0 million, which is expected to be recognized over a weighted-average period of 3.6 years.

Stock-Based Compensation

The Company recorded stock-based compensation expense regarding its employees, directors, and nonemployees as follows (in thousands):

 

		For the years ended December 31,
		2020				2019
Research and development expense		$	357			$	66
General and administrative expense			665				163
Total		$	1,022			$	229

 

12.	Income Taxes

The Company recorded no income tax benefit for the net loss incurred for the years ended December 31, 2020 and December 31, 2019, due to its uncertainty of realizing a benefit from such losses. All of the Company’s operating losses since inception have been generated in the United States.

A reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rate is as follows:

 

		For the years ended December 31,
		2020				2019
Federal statutory rate			21.0	%			21.0	%
Federal research tax credit/orphan drug credit			(0.5	)%			(0.2	)%
Permanent items, including stock compensation			4.2	%			1.4	%
Change in valuation allowance			(26.8	)%			(20.8	)%
Other			2.2	%			(1.5	)%
			0.0	%			0.0	%

 

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Significant components of the Company’s deferred tax assets are included in the table below (in thousands):

 

		For the years ended December 31,
		2020				2019
Deferred tax assets:
Net operating loss and capital loss carryforwards		$	10,586			$	4,716
Research and development credit carryforwards			1,196				862
Accrued expenses			400				317
Stock-based compensation			171				48
Total deferred tax assets			12,353				5,943
Deferred tax liabilities—depreciation			(206	)			(297	)
Less valuation allowance			(12,147	)			(5,646	)
Net deferred tax assets		$	—			$	—

The Company’s management has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are composed primarily of net operating loss (NOL) carryforwards and research and development credit carryforwards. Management has considered the Company’s history of net losses incurred since inception and probability of future losses to conclude it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets. As a result, the Company has established a valuation allowance for the full amount of the net deferred tax assets as of December 31, 2020 and December 31, 2019. The valuation allowance increased by $6.5 million and $5.6 million during the years ended December 31, 2020 and December 31, 2019, respectively.

As of December 31, 2020, the Company has $39.9 million of US federal NOLs and $39.8 million of Kentucky state NOL carryforwards that have no expiration dates. The Company has $0.1 million in US federal and state capital loss carryforwards that expire in 2023. In addition, the Company had a US federal research and development tax credit carryforward of $1.2 million, which may be available to reduce future tax liabilities which start to expire in 2039.

Through December 31, 2020, the Company has generated research and development tax credits but has not conducted a study to document the qualified activities. Such study may result in an adjustment to the Company’s research and development credit carryforwards. Since a full valuation allowance has been provided against the Company’s research and development credits, any reduction in the gross deferred tax asset established for the research and development credit carryforwards would not result in any net impact to the Company’s financial statements.

Realization of the future tax benefits is dependent on many factors, including the Company’s ability to generate taxable income within the NOL carryforward period. Under the provisions of Sections 382 and 383 of the Internal Revenue Code, and corresponding provisions of state law, certain substantial changes in the Company’s ownership, including a sale of the Company or significant changes in ownership due to sales of equity, may have limited, or may limit in the future, the amount of NOL carryforwards, which could be used annually to offset future taxable income.

The Company files US federal and state tax returns in the United States. All tax years since incorporation remain open to examination by the major taxing jurisdictions (state and federal) to which the Company is subject, as carryforward attributes generated in years past may still be adjusted upon examination by the Internal Revenue Service (IRS) or other authorities if they have or will be used in a future period. The Company is not currently under examination by the IRS or any other jurisdictions for any tax year.

13. Defined Contribution Plan

The Company established a defined contribution savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all employees who meet minimum age and service requirements and allows

 

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participants to defer a portion of their annual compensation on a pretax basis. Company contributions to the plan are made to employees who meet minimum service requirements in the amount of 3% of gross pay, subject to certain limitations. For the years ended December 31, 2020 and December 31, 2019, the Company made contributions in the amount of $0.2 million and $0.1 million, respectively.

14. Net Loss Per Share Attributable to Common Stockholders

Net Loss Per Share

The following table summarizes the computation of basic and diluted net loss per share attributable to common stockholders of the Company (in thousands except share and per share amounts).

 

		For the years ended December 31,
		2020				2019
Net loss and net loss attributable to common stockholders		$	(22,707	)		$	(18,155	)
Net loss per share attributable to common stockholders, basic and diluted		$	(0.63	)		$	(0.53	)
Weighted average number of common shares outstanding used in computation of net loss per common share, basic and diluted			35,765,166				34,150,458

The Company’s potential dilutive securities, which include convertible preferred stock, contingent stock liabilities, restricted stock related to early exercise of common stock options and common stock options, have been excluded from the computation of diluted net loss per share as the effect would be antidilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following potential dilutive securities, presented on an as converted basis, were excluded from the calculation of net loss per share due to their anti-dilutive effect:

 

		For the years ended December 31,
		2020				2019
Convertible preferred shares (as converted to common stock)			130,499,993				56,000,000
Options to purchase common stock			14,687,278				8,220,000
Restricted stock related to early exercise of options to purchase common stock			4,987,685				—
Contingent common stock (as converted to common stock)			348,750				348,750
			150,523,706				64,568,750

Unaudited Pro Forma Net Loss Per Share

The unaudited pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2020 has been prepared to give effect to adjustments arising upon the completion of a qualified initial public offering. The pro forma net loss attributable to common stockholders used in the calculation of pro forma basic and diluted net loss per share attributable to common stockholders is the same as the net loss per share for the year ended December 31, 2020.

The unaudited pro forma basic and diluted weighted average common shares outstanding used in the calculation of pro forma basic and diluted net loss per share attributable to common stockholders for the year ended December 31, 2020 has been prepared to give effect, upon a qualified initial public offering, the automatic conversion of all outstanding shares of convertible preferred stock into common stock as if the proposed initial public offering had occurred on the later of January 1, 2020 or the issuance date of the convertible preferred shares.

 

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Unaudited pro forma basic and diluted net loss per share attributable to common stockholders was calculated as follows (in thousands, except share and per share amounts):

 

		Pro forma
		December 31, 2020
Net loss attributable to common stockholders		$	(22,707	)
Pro forma net loss per share attributable to common stockholders, basic and diluted		$	(0.20	)
Pro forma weighted average number of shares outstanding used in computation of net loss per common share, basic and diluted			113,380,353

15. Related Party Transactions

The Company engaged a firm managed by an executive of the company for professional services related to accounting, finance and other administrative functions. The costs incurred under this arrangement totaled $0.4 million for the years ended December 31, 2020 and 2019, which were recorded as general and administrative expense in the accompanying statements of operations. As of December 31, 2020 and 2019, amounts owed under this arrangement totaled an immaterial amount.

16. Subsequent Events

The Company has evaluated subsequent events through February 26, 2021, the date the financial statements were available to be issued, and has not identified any subsequent events.

 

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             Shares

 

Common Stock

 

 

PRELIMINARY PROSPECTUS

 

 

MORGAN STANLEY

SVB LEERINK

EVERCORE ISI

GUGGENHEIM SECURITIES

 

Through and including                 , 2021 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

                , 2021

 

 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following table sets forth the fees and expenses, other than underwriting discounts and commissions, payable in connection with the registration of the common stock hereunder. All amounts are estimates except the SEC registration fee.

 

		Amount to be Paid
SEC registration fee		$	*
FINRA filing fee			*
Nasdaq Global Market listing fee			*
Printing and mailing			*
Legal fees and expenses			*
Accounting fees and expenses			*
Transfer agent and registrar fees and expenses			*
Miscellaneous			*
Total			$            *

 

*	To be completed by amendment.

Item 14. Indemnification of Directors and Officers.

Section 145 of the Delaware General Corporation Law, or DGCL, authorizes a corporation to indemnify its directors and officers against liabilities arising out of actions, suits and proceedings to which they are made or threatened to be made a party by reason of the fact that they have served or are currently serving as a director or officer to a corporation. The indemnity may cover expenses (including attorneys’ fees) judgments, fines and amounts paid in settlement actually and reasonably incurred by the director or officer in connection with any such action, suit or proceeding. Section 145 permits corporations to pay expenses (including attorneys’ fees) incurred by directors and officers in advance of the final disposition of such action, suit or proceeding. In addition, Section 145 provides that a corporation has the power to purchase and maintain insurance on behalf of its directors and officers against any liability asserted against them and incurred by them in their capacity as a director or officer, or arising out of their status as such, whether or not the corporation would have the power to indemnify the director or officer against such liability under Section 145.

We have adopted provisions in our certificate of incorporation to be in effect upon the closing of this offering and bylaws to be in effect upon the effectiveness of this registration statement that limit or eliminate the personal liability of our directors to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or 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 unlawful payments related to dividends or unlawful stock purchases, redemptions or other distributions; or

 

•

any transaction from which the director derived an improper personal benefit.

These limitations of liability do not alter director liability under the federal securities laws and do not affect the availability of equitable remedies such as an injunction or rescission.

 

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In addition, our bylaws provide that:

 

•

we will indemnify our directors, officers and, in the discretion of our board of directors, certain employees to the fullest extent permitted by the DGCL, as it now exists or may in the future be amended; and

 

•

we will advance reasonable expenses, including attorneys’ fees, to our directors and, in the discretion of our board of directors, to our officers and certain employees, in connection with legal proceedings relating to their service for or on behalf of us, subject to limited exceptions.

We have entered into indemnification agreements with each of our directors and intend to enter into such agreements with our executive officers. These agreements provide that we will indemnify each of our directors, our executive officers and, at times, their affiliates to the fullest extent permitted by Delaware law. We will advance expenses, including attorneys’ fees (but excluding judgments, fines and settlement amounts), to each indemnified director, executive officer or affiliate in connection with any proceeding in which indemnification is available and we will indemnify our directors and officers for any action or proceeding arising out of that person’s services as a director or officer brought on behalf of us or in furtherance of our rights. Additionally, certain of our directors or officers may have certain rights to indemnification, advancement of expenses or insurance provided by their affiliates or other third parties, which indemnification relates to and might apply to the same proceedings arising out of such director’s or officer’s services as a director referenced herein. Nonetheless, we have agreed in the indemnification agreements that our obligations to those same directors or officers are primary and any obligation of such affiliates or other third parties to advance expenses or to provide indemnification for the expenses or liabilities incurred by those directors are secondary.

We also maintain general liability insurance which covers certain liabilities of our directors and officers arising out of claims based on acts or omissions in their capacities as directors or officers, including liabilities under the Securities Act of 1933, as amended (the Securities Act).

The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification of us and our directors and officers by the underwriters against certain liabilities under the Securities Act and the Securities Exchange Act of 1934.

Item 15. Recent Sales of Unregistered Securities.

In the three years preceding the filing of this registration statement, we have issued the following securities that were not registered under the Securities Act:

(a) Issuances of Capital Stock

Set forth below is information regarding securities we have issued within the past three years that were not registered under the Securities Act.

In November 2018, we issued and sold an aggregate of 22,500,000 shares of Series A Preferred Stock at a purchase price of $1.00 per share, for aggregate cash consideration of $22.5 million.

In December 2019, we issued and sold an aggregate of 17,500,000 shares of Series A Preferred Stock at a purchase price of $1.00 per share and 16,000,000 Units (consisting of 16,000,000 shares of Series A-1 Preferred Stock and 16,000,000 product interest rights) at a purchase price of $1.25 per Unit, for aggregate cash consideration of $37.5 million.

In August 2020, we issued and sold an aggregate of 12,000,000 Units (consisting of 12,000,000 shares of Series A-1 Preferred Stock and 12,000,000 product interest rights) at a purchase price of $1.25 per Unit for aggregate cash consideration of $15,000,000.

 

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In September 2020, we issued and sold an aggregate of 62,499,994 shares of Series B Preferred Stock at a purchase price of $1.84 per share, for aggregate cash consideration of approximately $115 million.

No underwriters were involved in the foregoing sales of securities. Unless otherwise stated, the sales of securities described above were deemed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act, including Regulation D and Rule 506 promulgated thereunder, as transactions by an issuer not involving a public offering. All of the purchasers in these transactions represented to us in connection with their purchase that they were acquiring the securities for investment and not distribution, that they could bear the risks of the investment and could hold the securities for an indefinite period of time. Such purchasers received written disclosures that the securities had not been registered under the Securities Act and that any resale must be made pursuant to a registration or an available exemption from such registration. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act.

(b) Grants and Exercises of Stock Options

Through January 31, 2021, we have granted stock options to purchase an aggregate of 24,522,704 shares of our common stock, with a weighted average exercise price of $0.53 per share, to employees, directors and consultants pursuant to the 2018 Plan. Since 2018, 8,850,466 shares of common stock have been issued upon the exercise of stock options pursuant to the 2018 Plan.

The issuances of the securities described above were deemed to be exempt from registration pursuant to Section 4(a)(2) of the Securities Act or Rule 701 promulgated under the Securities Act as transactions pursuant to compensatory benefit plans. The shares of common stock issued upon the exercise of options are deemed to be restricted securities for purposes of the Securities Act.

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits

 

Exhibit Number		Description
1.1*		Form of Underwriting Agreement.
3.1		Second Amended and Restated Certificate of Incorporation of Registrant, as currently in effect.
3.2*		Form of Third Amended and Restated Certificate of Incorporation of Registrant, to be in effect upon completion of this offering.
3.3		Amended and Restated Bylaws of Registrant, as currently in effect.
3.4*		Form of Second Amended and Restated Bylaws of Registrant, to be in effect upon the effectiveness of this registration statement.
4.1*		Specimen Common Stock Certificate.
4.2		Amended and Restated Investors’ Rights Agreement among the Registrant and certain of its stockholders, effective as of September 22, 2020.
5.1*		Opinion of Goodwin Procter LLP.
10.1#		Second Amended and Restated 2018 Equity Incentive Plan, as amended, and form of award agreements thereunder.
10.2*#		2021 Stock Option and Incentive Plan and form of award agreements thereunder.
10.3*#		2021 Employee Stock Purchase Plan.
10.4*#		Form of Indemnification Agreement between the Registrant and each of its directors and executive officers.
10.5*#		Senior Executive Cash Incentive Bonus Plan.

 

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Exhibit Number		Description
10.6*#		Form of Executive Employment Agreement.
10.7*#		Non-Employee Director Compensation Policy.
10.8		Lease Agreement between the Registrant and the University of Louisville, dated as of November 1, 2018, as amended on July 1, 2019, February 1, 2020, and May 15, 2020.
10.10*#		Employment Agreement, by and between the Registrant and Scott Requadt, dated November 1, 2018.
10.11*#		Employment Agreement, by and between the Registrant and Suzanne T. Ildstad, dated November 1, 2018.
10.12*#		Offer Letter, by and between the Registrant and Nancy Krieger, dated November 1, 2018.
10.13*#		Offer Letter, by and between the Registrant and Michael Zdanowski, dated September 29, 2020.
10.14*#		Offer Letter, by and between the Registrant and Mary Kay Fenton, as amended, dated January 21, 2021.
10.15†		Amended and Restated Exclusive License Agreement, by and between the Registrant and University of Louisville Research Foundation, Inc., dated October 31, 2018.
10.16		Deferred Compensation Plan for Non-Employee Directors of the Registrant.
23.1*		Consent of Deloitte & Touche LLP, independent registered public accounting firm.
23.2*		Consent of Goodwin Procter LLP (included in Exhibit 5.1).
24*		Power of Attorney (included on signature page).

 

*	To be filed by amendment.

†	Portions of this exhibit (indicated by asterisks) have been omitted in accordance with the rules of the Securities and Exchange Commission.

#	Indicates a management contract or any compensatory plan, contract or arrangement.

(b) Financial Statements Schedules

Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

Item 17. Undertakings.

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Act, may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The Registrant hereby undertakes that:

(a) The Registrant will provide to the underwriter at the closing as specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

 

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(b) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from a form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as amended, shall be deemed to be part of this registration statement as of the time it was declared effective.

(c) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Louisville, Kentucky, on the                  day of                 , 2021.

 

POWER OF ATTORNEY AND SIGNATURES

Each individual whose signature appears below hereby constitutes and appoints Scott Requadt and Mary Kay Fenton as such person’s true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for such person in such person’s name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement (or any Registration Statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933), and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that any said attorney-in-fact and agent, or any substitute or substitutes of any of them, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement and Power of Attorney has been signed by the following person in the capacities and on the date indicated.

 

Name		Title		Date
Scott Requadt		President and Chief Executive Officer (Principal Executive Officer)		, 2021
Mary Kay Fenton		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)		, 2021
Francois Nader, MD		Director, Chairperson		, 2021
Sandip Agarwala		Director		, 2021
Nicholas G. Galakatos, PhD		Director		, 2021
Suzanne T. Ildstad, MD		Director		, 2021
Geoff MacKay		Director		, 2021

 

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Name		Title		Date
Mark D. McDade		Director		, 2021
Gaurav D. Shah, MD		Director		, 2021
Sapna Srivastava, PhD		Director		, 2021

 

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Exhibit 3.1

Execution Version

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

TALARIS THERAPEUTICS, INC.

(Pursuant to Sections 242 and 245 of the

General Corporation Law of the State of Delaware)

TALARIS THERAPEUTICS, INC., a corporation organized and existing under and by virtue of the provisions of the General Corporation Law of the State of Delaware (the “General Corporation Law”),

DOES HEREBY CERTIFY:

1. That the name of this corporation is Talaris Therapeutics, Inc. (the “Corporation”), and that said Corporation filed a Certificate of Formation on February 15, 2002 where it was initially organized under the name of Regenerex LLC. On October 30, 2018, the Corporation filed a Certificate of Conversion along with a Certificate of Incorporation converting from a limited liability company to a corporation under the name of Regenerex, Inc. On November 1, 2018, the Corporation filed an Amended and Restated Certificated of Incorporation under the name Regenerex, Inc. On March 6, 2019, the Corporation filed a Certificate of Amendment to the Certificate of Incorporation changing the name of the corporation to Talaris Therapeutics, Inc.

2. That the Board of Directors duly adopted resolutions proposing to amend and restate the Certificate of Incorporation of this corporation, declaring said amendment and restatement to be advisable and in the best interests of this corporation and its stockholders, and authorizing the appropriate officers of this corporation to solicit the consent of the stockholders therefor, which resolution setting forth the proposed amendment and restatement is as follows:

RESOLVED, that the Certificate of Incorporation of this corporation be amended and restated in its entirety to read as follows:

FIRST: The name of this Corporation is Talaris Therapeutics, Inc.

SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Service Company, 251 Little Falls Drive, in the City of Wilmington, County of New Castle, 19808. The name of its registered agent at such address is Corporation Service Company.

THIRD: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.

FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is (i) 197,755,748 shares of Class A Common Stock, $0.0001 par value per share (“Class A Common Stock”), (ii) 133,217,386 shares of Class B Common Stock, $0.0001 par value per share (“Class B Common Stock”, and collectively with the Class A Common Stock, “Common Stock”), and (iii) 133,217,386 shares of Preferred Stock, $0.0001 par value per share (“Preferred Stock”).

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Upon the acceptance of this Second Amended and Restated Certificate of Incorporation for filing with the Secretary of State of the State of Delaware (the time of acceptance shall be referred to herein as the “Effective Time”), each share of Common Stock of the Corporation outstanding immediately prior to the Effective Time shall, without any further action by any stockholder, be reclassified as, and shall become, one share of Class A Common Stock. Any stock certificate that immediately prior to the Effective Time represented shares of the Corporation’s Common Stock shall, from and after the Effective Time, be deemed to represent the same number of shares of Class A Common Stock, without the need for surrender or exchange thereof.

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 Class A Common Stock and Class B 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 Class A Common Stock are entitled to one vote for each share of Class A Common Stock held at all meetings of stockholders (and written actions in lieu of meetings); provided, however, that, except as otherwise required by law, holders of Class A Common Stock, as such, shall not be entitled to vote on any amendment to this Second Amended and Restated Certificate of Incorporation that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Second Amended and Restated Certificate of Incorporation or pursuant to the General Corporation Law. Except as otherwise required by law, holders of Class B Common Stock shall not be entitled to vote on any matter on which the holders of Class A Common Stock or Preferred Stock shall be entitled to vote, and shares of Class B Common Stock shall not be included in determining the number of shares of Common Stock voting or entitled to vote on any such matters. There shall be no cumulative voting. The number of authorized shares of Class A Common Stock or Class B Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding or the number of shares thereof reserved for issuance pursuant to Section 1.6(b) of that certain Series B Preferred Stock Purchase Agreement, entered into on or around the date of filing of this Second Amended and Restated Certificate of Incorporation, by and among the Corporation and the investors party thereto, as may be amended (the “Series B Purchase Agreement”)) by (in addition to any vote of the holders of one or more series of Preferred Stock that may be required by the terms of this Second Amended and Restated Certificate of Incorporation) the affirmative vote of the holders of shares of capital stock of the Corporation representing a majority of the votes represented by all outstanding shares of capital stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law.

3. Equal Status. Except as expressly set forth in this Article Fourth with respect to voting rights only, the Class B Common Stock shall have the same rights and powers of, rank equally to, share ratably with, and be identical in all respects and as to all matters to, the Class A Common Stock. If the Corporation in any manner subdivides or combines the shares of Class A Common Stock, then the shares of Class B Common Stock will be subdivided or combined in the same proportion and manner, and if the Corporation in any manner subdivides or combines the shares of Class B Common Stock, then the shares of Class A Common Stock will be subdivided or combined in the same proportion and manner.

 

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B. PREFERRED STOCK

40,000,000 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series A Preferred Stock”, 28,000,000 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series A-1 Preferred Stock”, and 65,217,386 shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated “Series B Preferred Stock” each with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. Unless otherwise indicated, references to “sections” or “subsections” in this Part B of this Article Fourth refer to sections and subsections of Part B of this Article Fourth. The Series A Preferred Stock and the Series A-1 Preferred Stock are sometimes referred to collectively as the “Series A/A-1 Preferred Stock” and the Series A/A-1 Preferred Stock and the Series B Preferred Stock are sometimes referred to collectively as the “Preferred Stock”.

1. Dividends.

1.1 Series B Preferred Stock Dividends. The holders of then outstanding shares of Series B Preferred Stock shall be entitled to receive dividends, but only out of funds that are legally available therefor, prior and in preference to any declaration of payment of any dividend (other than dividends on shares of Common Stock payable in shares of Common Stock) at the rate of eight percent (8%) of the Series B Original Issue Price per share of Series B Preferred Stock per annum. Such dividends shall be payable only when, as and if declared by the Corporation’s Board of Directors and shall be non-cumulative. No dividends shall be made with respect to the Series A/A-1 Preferred Stock or Common Stock unless all declared dividends on the Series B Preferred Stock have been paid to the Series B Preferred Stock holders. The “Series B Original Issue Price” shall mean $1.84 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock.

1.2 Series A/A-1 Preferred Stock Dividends. The Corporation shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Corporation (other than dividends on shares of Common Stock payable in shares of Common Stock) unless (in addition to the obtaining of any consents required elsewhere in this Second Amended and Restated Certificate of Incorporation) following the payment in full of dividends in respect of shares of Series B Preferred Stock pursuant to Subsection 1.1, the holders of the Series A/A-1 Preferred Stock then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A/A-1 Preferred Stock in an amount at least equal to (i) in the case of a dividend on Common Stock or any class or series that is convertible into Common Stock, that dividend per share of Series A/A-1 Preferred Stock as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into Common Stock and (B) the number of shares of Common Stock issuable upon conversion of a share of the applicable series of Series A/A-1 Preferred Stock, in each case calculated on the record date for determination of holders entitled to receive such dividend or (ii) in the case of a dividend on any class or series that is not convertible into Common Stock, at a rate per share of the applicable series of Series A/A-1 Preferred Stock determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series) and (B) multiplying such fraction by an amount equal to the Applicable Original Issue Price (as defined below) of the applicable series of Series A/A-1 Preferred Stock; 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 each series of Series A/A-1 Preferred Stock pursuant to this Subsection 1.2 shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest dividend on such series. The “Series A Original Issue Price” shall mean $1.00 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A Preferred Stock. The “Series A-1 Original Issue Price” shall mean $1.25 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series A-1 Preferred Stock.

 

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The Series A Original Issue Price, the Series A-1 Original Issue Price and the Series B Original Issue Price (as defined below) are sometimes referred to collectively as the “Applicable Original Issue Price.”

2. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.

2.1 Preferential Payments to Holders of Series B Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, and in the event of a Deemed Liquidation Event (as defined below), the holders of shares of Series B 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 Series A/A-1 Preferred Stock and Common Stock by reason of their ownership thereof, an amount per share equal to the greater of (i) the Series B Original Issue Price, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series B 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 payable to Series B Preferred Stock pursuant to this sentence is hereinafter referred to as the “Series B 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 Series B Preferred Stock the full amount to which they shall be entitled under this Subsection 2.1, the holders of shares of Series B Preferred Stock shall share ratably in any distribution of the assets available for distribution in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full.

2.2 Preferential Payments to Holders of Series A/A-1 Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after the payment in full of the Series B Liquidation Amount required to be paid to the holders of shares of Series B Preferred Stock, the holders of shares of Series A/A-1 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 Series A/A-1 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, an amount per share equal to the greater of (i) the Applicable Original Issue Price of such series of Series A/A-1 Preferred Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had all shares of Series A/A-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 payable to each series of Series A/A-1 Preferred Stock pursuant to this sentence is hereinafter referred to as the “Series A/A-1 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 Series A/A-1 Preferred Stock the full amount to which they shall be entitled under this Subsection 2.2, the holders of shares of Series A/A-1 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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2.3 Payments to Holders of Common Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, after the payment in full of all Series B Liquidation Amounts and Series A/A-1 Liquidation Amounts required to be paid to the holders of shares of Preferred Stock, the remaining assets of the Corporation available for distribution to its stockholders or, in the case of a Deemed Liquidation Event, the consideration not payable to the holders of shares of Preferred Stock pursuant to Subsections 2.1 and 2.2, the remaining Available Proceeds, as the case may be, shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares held by each such holder.

2.4 Deemed Liquidation Events.

2.4.1 Definition. Each of the following events shall be considered a “Deemed Liquidation Event” unless (i) the holders of a majority of the outstanding shares of Preferred Stock, voting together as a single class and on an as-converted to Common Stock basis (the “Requisite Holders”), (ii) the holders of a majority of the outstanding shares of Series B Preferred Stock, voting as a separate class (the “Requisite Series B Holders”), and (iii) the holders of a majority of the outstanding shares of Series A/A-1 Preferred Stock, voting as a separate class (the “Requisite Series A/A-1 Holders”), elect otherwise by written notice sent to the Corporation at least five (5) days prior to the effective date of any such event:

(a) a merger or consolidation in which

 

(i)

the Corporation is a constituent party or

 

(ii)

a subsidiary of the Corporation is a constituent party and the Corporation issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Corporation or a subsidiary in which the shares of capital stock of the Corporation outstanding immediately prior to such merger or consolidation continue to represent, or are converted into or exchanged for shares of capital stock that represent, immediately following such merger or consolidation, 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) (1) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Corporation or any subsidiary of the Corporation of all or substantially all the assets of the Corporation and its subsidiaries taken as a whole, or (2) 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.

2.4.2 Effecting a Deemed Liquidation Event.

(a) The Corporation shall not have the power to effect a Deemed Liquidation Event referred to in Subsection 2.4.1(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, 2.2 and 2.3.

 

 

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(b) In the event of a Deemed Liquidation Event referred to in Subsection 2.4.1(a)(ii) or 2.4.1(b), if the Corporation does not effect a dissolution of the Corporation under the General Corporation Law within ninety (90) days after such Deemed Liquidation Event, then (i) the Corporation shall send a written notice (the “Redemption Notice”) to each holder of Preferred Stock no later than the ninetieth (90th) day after the Deemed Liquidation Event advising such holders of their right (and the requirements to be met to secure such right) pursuant to the terms of the following clause; (ii) to require the redemption of such shares of Preferred Stock, and (iii) if the Requisite Holders so request in a written instrument delivered to the Corporation not later than one hundred twenty (120) days after such Deemed Liquidation Event, the Corporation shall use the consideration received by the Corporation for such Deemed Liquidation Event (net of any retained liabilities associated with the assets sold or 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 (the “Redemption Date”), to redeem all outstanding shares of Preferred Stock at a price per share equal to the applicable Series A/A-1 Liquidation Amount or Series B Liquidation Amount (the “Applicable Redemption Price”). Notwithstanding the foregoing, in the event of a redemption pursuant to the preceding sentence, if the Available Proceeds are not sufficient to redeem all outstanding shares of Preferred Stock, the Corporation shall ratably redeem first all outstanding shares of Series B Preferred Stock, on a pari passu basis based upon the amount per share payable to each share of Series B Preferred Stock at the Series B Liquidation Amount (or a pro rata portion thereof) to the fullest extent of such Available Proceeds, then shall ratably redeem the outstanding shares of Series A/A-1 Preferred Stock, on a pari passu basis based upon the respective amount per share payable to each share of Series A/A-1 Preferred Stock at the Series A/A-1 Liquidation Amount (or a pro rata portion thereof) to the fullest extent of such Available Proceeds, and shall redeem the remaining shares as soon as it may lawfully do so under Delaware law governing distributions to stockholders. Prior to the distribution or redemption provided for in this Subsection 2.4.2(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. A redemption of the Preferred Stock pursuant to this Section 2.4.2(b) shall be effected in accordance with Section 2.4.2(c), below.

(c) Redemption Following a Deemed Liquidation Event.

 

(i)

Redemption Notice. In the event the Corporation is required to send a Redemption Notice pursuant to Subsection 2.4.2(b), the Corporation shall send such Redemption Notice to each holder of record of Preferred Stock not less than 20 days prior to the Redemption Date. Each Redemption Notice shall state: (A) the number of shares of Preferred Stock held by such holder that the Corporation shall redeem on the Redemption Date; (B) the Redemption Date and the Applicable Redemption Price for such holder’s shares of Preferred Stock; (C) the date upon which the holder’s right to convert shares of Preferred Stock terminates (as determined in accordance with Section 4.1); and (D) that the holder is to surrender to the Corporation, in the manner and at the place designated in the Redemption Notice, his, her or its certificate or certificates representing the shares of Preferred Stock, as applicable, to be redeemed.

 

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(ii)

Surrender of Certificates; Payment. On or before the Redemption Date, each holder of shares of Preferred Stock to be redeemed on the Redemption Date (unless such holder has exercised his, her or its right to convert such shares as provided in Section 4) shall surrender the certificate or certificates representing such shares (or, if such registered holder alleges that such certificate has been lost, stolen or destroyed, a lost certificate affidavit and agreement reasonably acceptable to the Corporation to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate) to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Applicable Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof.

 

(iii)

Rights Subsequent to Redemption. If the Redemption Notice shall have been duly given, and if on the Redemption Date the Applicable Redemption Price payable upon redemption of the shares of Preferred Stock to be redeemed on the Redemption Date is paid or tendered for payment or deposited with an independent payment agent so as to be available therefor in a timely manner, then notwithstanding that the certificates evidencing any of the shares of Preferred Stock so called for redemption shall not have been surrendered, all rights with respect to such shares shall forthwith after the Redemption Date terminate, except only the right of the holders to receive the Applicable Redemption Price without interest, upon surrender of their certificate or certificates therefor.

(d) To the extent that (i) the consideration payable to the stockholders of the Corporation in a Deemed Liquidation Event includes shares of a class of voting capital stock of any successor or parent corporation that is registered under Section 12(b) or 12(g) of the Exchange Act of 1934, as amended (the “Exchange Act”) and the rules and regulations promulgated thereunder, and (ii) at the time of the consummation of such Deemed Liquidation Event, there is one or more Electing Investors (as defined in the Series B Purchase Agreement), then, as a condition to the effectiveness of such Deemed Liquidation Event, the Merger Agreement (or such other agreement to effect such Deemed Liquidation Event) shall provide that the consideration payable to the Electing Investor shall be subject to, and comply with, the Limitation (as defined herein), mutatis mutandis, such that no Electing Investor would, after consummation, become in the aggregate, directly or indirectly, the beneficial owner(s) of more than the Limitation (as defined in the Series B Purchase Agreement) of such class of voting stock of such successor or parent corporation, with the balance of any shares to be issued in non-voting stock that is convertible into voting stock of such successor or parent corporation with appropriate conversion limitations. The term “beneficial owner” (and its correlates “beneficially own” and “beneficial ownership”) shall have the meaning given such terms in Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.

 

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2.4.3 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 pursuant to such Deemed Liquidation Event. If the amount deemed paid or distributed under this Subsection 2.4.3 is made in property other than in cash, the value of such distribution shall be the fair market value of such property, determined as follows:

(a) If the value of such property, rights or securities is established in the definitive documentation entered into in connection with such transaction (the “Acquisition Agreement”), then value thereof for purposes of this Subsection 2.4.3 shall be established using the method set forth in the Acquisition Agreement.

(b) If the value of such property, rights or securities is not established in the Acquisition Agreement, then for securities not subject to investment letters or other similar restrictions on free marketability,

 

(i)

if traded on a securities exchange, the value shall be deemed to be the average of the closing prices of the securities on such exchange or market over the thirty day period ending three days prior to the closing of such transaction;

 

(ii)

if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid prices over the thirty day period ending three days prior to the closing of such transaction; or

 

(iii)

if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board, including the approval of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (b) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision.

(c) If the value of such property, rights or securities is not established in the Acquisition Agreement, then the method of valuation of securities subject to investment letters or other similar restrictions on free marketability (other than restrictions arising solely by virtue of a stockholder’s status as an affiliate or former affiliate) shall take into account an appropriate discount (as determined in good faith by the Board, (i) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (ii) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision) from the market value as determined pursuant to clause (b) above so as to reflect the approximate fair market value thereof.

 

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2.4.4 Allocation of Escrow and Contingent Consideration. In the event of a Deemed Liquidation Event pursuant to Subsection 2.4.1(a)(i), if any portion of the consideration payable to the stockholders of the Corporation is payable only upon satisfaction of contingencies (the “Additional Consideration”), the Merger Agreement shall provide that (a) the portion of such consideration that is not Additional Consideration (such portion, the “Initial Consideration”) shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1, 2.2 and 2.3 as if the Initial Consideration were the only consideration payable in connection with such Deemed Liquidation Event; and (b) any Additional Consideration which becomes payable to the stockholders of the Corporation upon satisfaction of such contingencies shall be allocated among the holders of capital stock of the Corporation in accordance with Subsections 2.1, 2.2 and 2.3 after taking into account the previous payment of the Initial Consideration as part of the same transaction. For the purposes of this Subsection 2.4.4, consideration placed into escrow or retained as a holdback to be available for satisfaction of indemnification or similar obligations in connection with such Deemed Liquidation Event shall be deemed to be Additional Consideration.

3. Voting.

3.1 General. On any matter presented to the stockholders of the Corporation for their action or consideration at any meeting of stockholders of the Corporation (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of Common Stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of this Second Amended and Restated 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. The holders of record of the shares of Series A Preferred Stock, exclusively and as a separate class, shall be entitled to elect three (3) directors of the Corporation (the “Series A Directors”), the holders of record of the shares of Series B Preferred Stock, exclusively and as a separate class, shall be entitled to elect one (1) independent director of the Corporation (the “Series B Director”, and collectively with the Series A Directors, the “Preferred Directors”), and the holders of record of the shares of Class A Common Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. Any director elected as provided in the preceding sentence may be removed without cause by, and only by, the affirmative vote of the holders of the shares of the class or series of capital stock entitled to elect such director or directors, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders. If the holders of shares of Series A Preferred Stock, Series B Preferred Stock or Class A 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 Series A Preferred Stock, Series B Preferred Stock or Class A Common Stock, as the case may be, elect a person to fill such directorship by vote or written consent in lieu of a meeting; and no such directorship may be filled by stockholders of the Corporation other than by the stockholders of the Corporation that are entitled to elect a person to fill such directorship, voting exclusively and as a separate class. The holders of record of the shares of Class A Common Stock and of any other class or series of voting stock (including the Preferred Stock), exclusively and voting together as a single class, shall be entitled to elect the balance of the total number of directors of the Corporation. At any meeting held for the purpose of electing a director, the presence in person or by proxy of the holders of a majority of the outstanding shares of the class or series entitled to elect such director shall constitute a quorum for the purpose of electing such director. Except as otherwise provided in this 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. The rights of the holders of the Series A Preferred Stock under the first sentence of this Subsection 3.2 shall terminate on the first date following the Series A Original Issue Date (as defined

 

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below) on which there are issued and outstanding less than 4,000,000 shares of Series A Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization with respect to the Series A Preferred Stock). The rights of the holders of the Series B Preferred Stock under the first sentence of this Subsection 3.2 shall terminate on the first date following the Series B Original Issue Date (as defined below) on which there are issued and outstanding less than 5,163,043 shares of Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization with respect to the Series B Preferred Stock).

3.3 Preferred Stock Protective Provisions. At any time when at least (i) 4,000,000 shares of Series A/A-1 Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to any series of Series A/A-1 Preferred Stock) are outstanding or (ii) 5,163,043 shares of Series B Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series B Preferred Stock), the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following, or permit or cause any of its subsidiaries to do any of the following, without (in addition to any other vote required by law or this Second Amended and Restated Certificate of Incorporation) the written consent or affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock, voting together as a single class and on an as-converted to Common Stock basis, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:

3.3.1 liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any merger or consolidation or any other Deemed Liquidation Event, or consent to any of the foregoing;

3.3.2 amend, alter, waive or repeal any provision of this Second Amended and Restated Certificate of Incorporation or Bylaws of the Corporation;

3.3.3 create, or authorize the creation of, or issue or obligate itself to issue shares of, any additional class or series of capital stock, or increase the authorized number of shares of Preferred Stock or increase the authorized number of shares of any additional class or series of capital stock of the Corporation;

3.3.4 (i) reclassify, alter or amend any existing security of the Corporation that is pari passu with the Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to the Preferred Stock in respect of any such right, preference, or privilege or (ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends, voting rights or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Preferred Stock in respect of any such right, preference or privilege;

3.3.5 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 greater than the original purchase price and (iv) forfeitures of shares of the Corporation’s capital stock for no consideration pursuant to that certain Product Interest Rights Agreement (as defined below);

 

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3.3.6 create, or authorize the creation of, or issue, or authorize the issuance of any debt security or create any lien or security interest (except for purchase money liens or statutory liens of landlords, mechanics, materialmen, workmen, warehousemen and other similar persons arising or incurred in the ordinary course of business) or incur other indebtedness for borrowed money, including but not limited to obligations and contingent obligations under guarantees, or permit any subsidiary to take any such action with respect to any debt security lien, security interest or other indebtedness for borrowed money, if the aggregate indebtedness of the Corporation and its subsidiaries for borrowed money following such action would exceed $5,000,000, other than trade payables incurred in the ordinary course;

3.3.7 the direct or indirect license, sale, assignment or other transfer to any third party in any territory of any material Corporation-controlled intellectual property or rights relating to the Product (as defined in that certain Product Interest Rights Agreement dated on or about the Series A Original Issue Date by and among the Corporation and certain other parties thereto and as may be amended or restated from time to time (the “Product Interest Rights Agreement”)), as well as any modifications or improvements thereto, or to any aspect of how it is manufactured, purified, characterized, administered or used, with a value in excess of $5,000,000;

3.3.8 any initial public offering or listing of the Corporation’s securities on a public exchange;

3.3.9 create, or hold capital stock in, any subsidiary that is not wholly owned (either directly or through one or more other subsidiaries) by the Corporation, or permit any subsidiary to create, or authorize the creation of, or issue or obligate itself to issue, any shares of any class or series of capital stock, or sell, transfer or otherwise dispose of any capital stock of any direct or indirect subsidiary of the Corporation, or permit any direct or indirect subsidiary to sell, lease, transfer, exclusively license or otherwise dispose (in a single transaction or series of related transactions) of all or substantially all of the assets of such subsidiary;

3.3.10 increase or decrease the authorized number of directors constituting the Board of Directors; or

3.3.11 enter into any binding written agreement or commit to do any of the foregoing.

3.4 Series A/A-1 Preferred Stock Protective Provisions. At any time when at least 4,000,000 shares of Series A/A-1 Preferred Stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to any series of Series A/A-1 Preferred Stock) are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following without (in addition to any other vote required by law or this Second Amended and Restated Certificate of Incorporation) the written consent or affirmative vote of the holders of at least a majority of the outstanding shares of Series A/A-1 Preferred Stock, voting together as a single class and on an as-converted to Common Stock basis given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect

 

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3.4.1 amend, alter or repeal any provision of this Second Amended and Restated Certificate of Incorporation or Bylaws of the Corporation in a manner that adversely affects the powers, preferences or rights of the Series A/A-1 Preferred Stock;

3.4.2 (i) reclassify, alter or amend any existing security of the Corporation that is pari passu with the Series A/A-1 Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to the Series A/A-1 Preferred Stock in respect of any such right, preference, or privilege or (ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Series A/A-1 Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Series A/A-1 Preferred Stock in respect of any such right, preference or privilege;

3.4.3 purchase, redeem or otherwise acquire (or permit any subsidiary to purchase, redeem or otherwise acquire) 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 Series A/A-1 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, (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 greater than the original purchase price and (iv) forfeitures of shares of the Corporation’s capital stock for no consideration pursuant to that certain Product Interest Rights Agreement; or

3.4.4 enter into any binding written agreement to do any of the foregoing.

3.5 Series B Preferred Stock Protective Provisions. At any time when any shares of Series B Preferred Stock are outstanding, the Corporation shall not, either directly or indirectly by amendment, merger, consolidation or otherwise, do any of the following, or permit or cause any of its subsidiaries to do any of the following, without (in addition to any other vote required by law or this Second Amended and Restated Certificate of Incorporation) the written consent or affirmative vote of the Requisite Series B Holders, and any such act or transaction entered into without such consent or vote shall be null and void ab initio, and of no force or effect:

3.5.1 liquidate, dissolve or wind-up the business and affairs of the Corporation, effect any merger or consolidation or any other Deemed Liquidation Event, or consent to any of the foregoing, each in a manner that would result in payment of proceeds to the holders of Series B Preferred Stock in an amount per share of Series B Preferred Stock that is less than the Series B Original Issue Price, plus any dividends declared but unpaid thereon;

3.5.2 amend, alter, waive or repeal any provision of this Second Amended and Restated Certificate of Incorporation or Bylaws of the Corporation in a manner that adversely affects the powers, preferences or rights of the Series B Preferred Stock;

3.5.3 (i) reclassify, alter or amend any existing security of the Corporation that is pari passu with the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends, voting rights or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to the Series B Preferred Stock in respect of any such right, preference, or privilege or (ii) reclassify, alter or amend any existing security of the Corporation that is junior to the Series B Preferred Stock in respect of the distribution of assets on the liquidation, dissolution or winding up of the Corporation, the payment of dividends, voting rights or rights of redemption, if such reclassification, alteration or amendment would render such other security senior to or pari passu with the Series B Preferred Stock in respect of any such right, preference or privilege;

 

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3.5.4 purchase, redeem or otherwise acquire (or permit any subsidiary to purchase, redeem or otherwise acquire) 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 Series B 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, (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 greater than the original purchase price and (iv) forfeitures of shares of the Corporation’s capital stock for no consideration pursuant to that certain Product Interest Rights Agreement;

3.5.5 increase or decrease the authorized number of shares of Series B Preferred Stock;

3.5.6 issue any shares of Series B Preferred Stock or shares of Common Stock originally reserved for issuance upon conversion of shares of Series B Preferred Stock except pursuant to the Series B Purchase Agreement;

3.5.7 waive, amend, or alter the Product Interest Rights Agreement in a manner that is either materially adverse to the Company or adverse to the economic interests of the holders of the Series B Preferred Stock;

3.5.8 waive, amend, alter or repeal the right of the holders of the Series B Preferred Stock to elect the Series B Director pursuant to Section 3.2;

3.5.9 amend, alter, modify, waive or repeal: (i) the Series B Liquidation Amount, Series B Original Issue Price or the Series B Conversion Price (including any anti-dilution rights with respect thereto), (ii) the definition of “Requisite Series B Holders” or its use herein (including, without limitation, in Sections 2.4.1, 4.4.2, 5.1 and 7), (iii) the definition of “Exempted Securities” in a manner that would have the effect of a waiver of an adjustment to the Series B Conversion Price, or (iv) this Section 3.5; or

3.5.10 enter into any binding written agreement or commit to do any of the foregoing.

4. Optional Conversion. The holders of the Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

4.1 Right to Convert.

4.1.1 Conversion Ratio. Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and non-assessable shares of Class A Common Stock or Class B Common Stock, as applicable, 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; provided that such holder may waive such option to convert upon written notice to the Corporation. The “Series A Conversion Price” shall initially be equal to $1.00, the “Series A-1

 

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Conversion Price” shall initially be equal to $1.25 and the “Series B Conversion Price” shall initially be equal to $1.84. The Series A Conversion Price, the Series A-1 Conversion Price and the Series B Conversion Price are sometimes referred to collectively as the “Applicable Conversion Price.” The initial Applicable Conversion Price of each series of Preferred Stock, and the rate at which shares of Preferred Stock may be converted into shares of Common Stock, shall be subject to adjustment as provided below.

4.1.2 Termination of Conversion Rights. In the event of a liquidation, dissolution or winding up of the Corporation or a Deemed Liquidation Event, the Conversion Rights shall terminate at the close of business on the last full day preceding the date fixed for the payment of any such amounts distributable on such event to the holders of Preferred Stock.

4.2 Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the fair market value of a share of Common Stock as determined in good faith by the Board of Directors 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 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 Second Amended and Restated Certificate of Incorporation. Before taking any action which would cause an adjustment reducing the Applicable Conversion Price below the then par value of the shares of Common Stock issuable upon conversion of the applicable series of Preferred Stock, the Corporation will take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock at such adjusted Applicable Conversion Price.

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 shall be made for any declared but unpaid dividends on any series of Preferred Stock surrendered for conversion or on the Common Stock delivered upon conversion.

4.3.5 Taxes. The Corporation shall pay any and all issue and other similar taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Preferred Stock pursuant to this Section 4. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Preferred Stock so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid.

4.4 Adjustments to the Applicable Conversion Price for Diluting Issues.

4.4.1 Special Definitions. For purposes of this Article Fourth, the following definitions shall apply:

(a) “Option” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire Common Stock or Convertible Securities.

(b) “Series A Original Issue Date” shall mean the date on which the first share of Series A Preferred Stock was issued.

(c) “Series B Original Issue Date” shall mean the date on which the first share of Series B Preferred Stock was issued.

 

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(d) “Applicable Original Issue Date” shall mean, the Series A Original Issue Date or the Series B Original Issue Date, as applicable.

(e) “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.

(f) “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 Series A 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, 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;

 

(iii)

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, including the approval of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (b) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision;

 

(iv)

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;

 

(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, including the approval of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (b) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision; or

 

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(vi)

shares of Common Stock, Options or Convertible Securities issued to suppliers or third party service providers in connection with the provision of goods or services pursuant to transactions approved by the Board of Directors of the Corporation, including the approval of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (b) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision.

4.4.2 No Adjustment of Applicable Conversion Price. No adjustment in the Applicable Conversion Price for the Series A/A-1 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 holders of at least a majority of the outstanding shares of Series A/A-1 Preferred Stock, voting together as a single class on an as-converted to Common Stock basis, agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock. No adjustment in the Series B Conversion Price shall be made as the result of the issuance or deemed issuance of Additional Shares of Common Stock if the Corporation receives written notice from the Requisite Series B Holders agreeing that no such adjustment shall be made as the result of the issuance or deemed issuance of such Additional Shares of Common Stock.

4.4.3 Deemed Issue of Additional Shares of Common Stock.

(a) If the Corporation at any time or from time to time after the Applicable Original Issue Date shall issue any Options or Convertible Securities (excluding Options or Convertible Securities which are themselves Exempted Securities) or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares of Common Stock (as set forth in the instrument relating thereto, assuming the satisfaction of any conditions to exercisability, convertibility or exchangeability but without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date.

(b) If the terms of any Option or Convertible Security, the issuance of which resulted in an adjustment to the Applicable Conversion Price of any series of Preferred Stock 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 Applicable Conversion Price computed upon the original issue of such Option or Convertible Security (or upon the occurrence of a record date with respect thereto) shall be readjusted to such Applicable Conversion Price as would have obtained had such revised terms been in effect upon the original date of issuance of such Option or Convertible Security. Notwithstanding the foregoing, no readjustment pursuant to this clause (b) shall have the effect of increasing the Applicable Conversion Price to an amount which exceeds the lower of (i) the Applicable Conversion Price in effect immediately prior to the original adjustment made as a result of the issuance of such Option or Convertible Security, or (ii) the Applicable Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than deemed issuances of Additional Shares of Common Stock as a result of the issuance of such Option or Convertible Security) between the original adjustment date and such readjustment date.

 

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(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 Applicable Conversion Price of any series of Preferred Stock 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 Applicable Conversion Price of such series then in effect, or because such Option or Convertible Security was issued before the Applicable Original Issue Date), are revised after the Applicable 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.

(d) Upon the expiration or termination of any unexercised Option or unconverted or unexchanged Convertible Security (or portion thereof) which resulted (either upon its original issuance or upon a revision of its terms) in an adjustment to the Applicable Conversion Price of any series of Preferred Stock pursuant to the terms of Subsection 4.4.4, the Applicable Conversion Price of such series shall be readjusted to such Applicable Conversion Price as would have obtained had such Option or Convertible Security (or portion thereof) never been issued.

(e) If the number of shares of Common Stock issuable upon the exercise, conversion and/or exchange of any Option or Convertible Security, or the consideration payable to the Corporation upon such exercise, conversion and/or exchange, is calculable at the time such Option or Convertible Security is issued or amended but is subject to adjustment based upon subsequent events, any adjustment to an Applicable 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 an Applicable 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 such Applicable Conversion Price that such issuance or amendment took place at the time such calculation can first be made.

4.4.4 Adjustment of Applicable Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event the Corporation shall at any time after the Applicable Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Subsection 4.4.3), without consideration or for a consideration per share less than the Applicable Conversion Price of any series of Preferred Stock in effect immediately prior to such issuance or deemed issuance, then the Applicable Conversion Price of such series 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:

 

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CP₂ = CP₁ * (A + B) - (A + C).

For purposes of the foregoing formula, the following definitions shall apply:

(a) “CP₂” shall mean the Applicable Conversion Price of such series of Preferred Stock in effect immediately after such issuance or deemed issuance of Additional Shares of Common Stock

(b) “CP₁” shall mean the Applicable Conversion Price of such series of Preferred Stock in effect immediately prior to such issuance or deemed issuance of Additional Shares of Common Stock;

(c) “A” shall mean the number of shares of Common Stock outstanding immediately prior to such issuance or deemed issuance 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 issuance or deemed issuance 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 or deemed 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 issuance or deemed issuance 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.

 

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(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:

 

(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 an Applicable 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, such Applicable Conversion Price shall be readjusted to give effect to all such issuances as if they occurred on the date of the first such issuance (and without giving effect to any additional adjustments as a result of any such subsequent issuances within such period).

4.5 Adjustment for Stock Splits and Combinations. If the Corporation shall at any time or from time to time after the Applicable Original Issue Date effect a subdivision of the outstanding Common Stock, each Applicable Conversion Price in effect immediately before that subdivision shall be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series of Preferred Stock 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 Applicable Original Issue Date combine the outstanding shares of Common Stock, each Applicable Conversion Price in effect immediately before the combination shall be proportionately increased so that the number of shares of Common Stock issuable on conversion of each share of such series of Preferred Stock 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 Applicable 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 each Applicable Conversion Price in effect immediately before such event shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying each Applicable Conversion Price then in effect by a fraction:

(1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and

(2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution.

Notwithstanding the foregoing (a) if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, each Applicable Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter each Applicable Conversion Price 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 to the Applicable Conversion Price of a series of Preferred Stock 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 such series 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 Applicable 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 Preferred Stock had been converted into Common Stock on the date of such event.

4.8 Adjustment for Merger or Reorganization, etc. Subject to the provisions of Subsection 2.3, if there shall occur any reorganization, recapitalization, reclassification, consolidation or merger involving the Corporation in which the Common Stock (but not a series of 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 such series 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 such series 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 such series of 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 of such series) 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.

 

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4.9 Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of an Applicable Conversion Price pursuant to this Section 4, the Corporation at its expense shall, after the written request of a holder of Preferred Stock, as promptly as reasonably practicable but in any event not later than ten (10) days thereafter, compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment (including the kind and amount of securities, cash or other property into which the Preferred Stock is convertible) and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, as promptly as reasonably practicable after the written request at any time of any holder of Preferred Stock (but in any event not later than ten (10) days thereafter), furnish or cause to be furnished to such holder a certificate setting forth (i) the Applicable Conversion Price of each series of Preferred Stock 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 each 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 subscription right, and the amount and character of such dividend, distribution or subscription 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.

4.11 Beneficial Ownership Limitations. Any capitalized but undefined term used in this Section 4.11 shall have the meaning ascribed to such term in the Series B Purchase Agreement. Notwithstanding anything to the contrary herein, no Electing Investor shall be entitled to receive, and the Corporation shall not deliver to the Electing Investor, shares of Class A Common Stock upon conversion of the Preferred Stock to the extent (but only to the extent) that, after such receipt, such converting Electing Investor would beneficially own shares of Class A Common Stock in excess of the Limitation (such shares above the Limitation, the “Excess Securities”), and in lieu of the Excess Securities, the Corporation shall

 

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deliver to the Electing Investor the number of shares of Class B Common Stock equal to the number of the Excess Securities in book-entry form. Any conversion notice provided by a converting Electing Investor under Section 4.3 shall constitute the converting Electing Investor’s acknowledgement and confirmation that (i) after the acquisition of the shares of Class A Common Stock sought in the conversion, such Electing Investor will not be in the aggregate, directly or indirectly, the beneficial owner of more shares of Class A Common Stock than permitted by the Limitation and (ii) any Excess Securities to which the Electing Investor would otherwise be entitled will be satisfied solely by the delivery of Class B Common Stock equal to the number of such Excess Securities. Any purported delivery of shares of Class A Common Stock upon conversion of Preferred Stock shall be void ab initio and shall have no effect to the extent (but only to the extent) that such delivery would result in the converting Electing Investor becoming in the aggregate, directly or indirectly, the beneficial owner of more shares of Class A Common Stock than permitted by the Limitation, it being understood that the Corporation shall only deliver shares of Class B Common Stock to the Electing Investor on account of any Excess Securities. Within two (2) business days of any request by a holder of Preferred Stock, the Corporation shall inform such holder in writing of the then current number of outstanding shares of Class A Common Stock and Class B Common Stock.

5. Mandatory Conversion.

5.1 Trigger Events. Upon either (a) the closing of the sale of shares of Common Stock to the public at a price of at least $1.84 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Common Stock), 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 $60,000,000 of gross proceeds to the Corporation and in connection with such offering the Common Stock is listed for trading on the Nasdaq Stock Market’s National Market, the New York Stock Exchange or another exchange or marketplace approved the Board of Directors, including the approval of at least (1) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such decision or (2) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such decision (a “Qualified Public Offering”) or (b) the date and time, or the occurrence of an event, specified by vote or written consent of: (1) the Requisite Holders and (2) the Requisite Series B Holders (the time of such closing or the date and time specified or the time of the event specified in such vote or written consent is referred to herein as the “Mandatory Conversion Time”), then (i) all outstanding shares of Preferred Stock shall automatically be converted into shares of Common Stock, at the then effective conversion rate as calculated pursuant to Subsection 4.1.1, and (ii) such shares may not be reissued by the Corporation.

5.2 Procedural Requirements. All applicable 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 applicable 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 applicable 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

 

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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 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.

5.3 Beneficial Ownership Limitation. Notwithstanding anything to the contrary herein, in connection with any mandatory conversion pursuant to this Section 5, no Electing Investor shall be entitled to receive, and the Corporation shall not deliver to the Electing Investor, shares of Class A Common Stock to the extent (but only to the extent) that the Electing Investor would beneficially own any Excess Securities, and in lieu of the Excess Securities, the Corporation shall deliver to the Electing Investor the number of shares of Class B Common Stock equal to the number of the Excess Securities in book-entry form. Any purported delivery of shares of Class A Common Stock upon conversion of Preferred Stock shall be void ab initio and shall have no effect to the extent (but only to the extent) that, after such delivery, the converting Electing Investor would be in the aggregate, directly or indirectly, the beneficial owner of more shares of Class A Common Stock than permitted by the Limitation, it being understood that the Corporation shall only deliver shares of Class B Common Stock to the Electing Investor on account of any Excess Securities. Within two (2) business days of any request by a holder of Preferred Stock, the Corporation shall inform such holder in writing of the then current number of outstanding shares of Class A Common Stock and Class B Common Stock.

6. Redeemed or Otherwise Acquired Shares. Any shares of Preferred Stock that are redeemed or otherwise acquired by the Corporation or any of its subsidiaries (including shares of Series A-1 Preferred Stock that are forfeited pursuant to the Product Interest Rights Agreement) 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.

7. Waiver. Except as otherwise required herein, any of the rights, powers, preferences and other terms of the Preferred Stock set forth herein may be waived on behalf of all holders of Preferred Stock by the affirmative written consent or vote of the Requisite Holders; provided, however, (i) that the waiver of any approval or consent rights specifically granted thereunder to the holders of Series B Preferred Stock as a separate series shall additionally require the affirmative written consent or vote of the Requisite Series B Holders and (ii) that the waiver of any approval or consent rights specifically granted thereunder to the holders of Series A/A-1 Preferred Stock as a separate series shall additionally require the affirmative written consent or vote of the Requisite Series A/A-1 Holders. Any provision in this Second Amended and Restated Certificate of Incorporation (i) related to the limitation on the conversion of an Electing Investor’s Preferred Stock into shares of Class A Common Stock and the issuance of Class B Common Stock in lieu thereof, (ii) related to the conversion of Class B Common Stock into Class A Common Stock (including the limitation on any such conversion), or (iii) related to the limitation on the issuance to an Electing Investor of a class of voting capital stock of any successor or parent corporation that is subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act in connection with a Deemed Liquidation Event and the issuance of such other corporation’s non-voting securities in lieu thereof, in each case in accordance with this Second Amended and Restated Certificate of Incorporation, may not be amended, modified or waived without the consent of (x) each Electing Investor for so long as such Electing Investor either owns Class B Common Stock or Preferred Stock and (y) each other holder of Class B Common Stock.

 

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8. Notices. Any notice required or permitted by the provisions of this Article Fourth to be given to a holder of shares of Preferred Stock shall be mailed, postage prepaid, to the post office address last shown on the records of the Corporation, or given by electronic communication in compliance with the provisions of the General Corporation Law, and shall be deemed sent upon such mailing or electronic transmission.

9. Conversion of Class B Common Stock. Subject to the terms of this Section 9, shares of Class B Common Stock shall be convertible into a corresponding number of Class A Common Stock upon written notice by the holder thereof. Any capitalized but undefined term used in this Section 9 shall have the meaning ascribed to such term in the Series B Purchase Agreement.

9.1 Notwithstanding anything to the contrary herein (but subject to Section 9.2), no holder of Class B Common Stock shall be entitled to receive, and the Corporation shall not deliver to any such holder, any Class A Common Stock upon conversion of the Class B Common Stock to the extent (but only to the extent) that, after such receipt, such converting holder and its Affiliates (as defined in the Series B Purchase Agreement) (together, the “Related Holders”) would beneficially own in the aggregate, directly or indirectly, shares of Class A Common Stock in excess of 9.9% of such shares outstanding at such time (the “Section 16 Limitation”). For avoidance of doubt, in the event that the Related Holders beneficially own in the aggregate, directly or indirectly, shares of Class A Common Stock in excess of the Section 16 Limitation without taking account the conversion of Class B Common Stock, then none of the Class B Common Stock shall be convertible until such time as the Related Holders no longer beneficially own in the aggregate, directly or indirectly, shares of Class A Common Stock in excess of the Section 16 Limitation. Any conversion notice provided by a converting holder under this Section 9 shall constitute the converting holder’s acknowledgement and confirmation to the Corporation that (i) the acquisition of the shares of Class A Common Stock sought in the conversion notice will not result in Related Holders becoming in the aggregate, directly or indirectly, the beneficial owner of more shares of Class A Common Stock than permitted by the Section 16 Limitation and (ii) any Class A Common Stock to which the Electing Holder would be entitled but for the Section 16 Limitation will remain Class B Common Stock. Any purported delivery of shares of Class A Common Stock upon conversion of Class B Common Stock shall be void ab initio and shall have no effect to the extent (but only to the extent) that such delivery would result in the Related Holders becoming in the aggregate, directly or indirectly, the beneficial owner of more shares of Class A Common Stock than permitted by the Section 16 Limitation. Before any holder shall be entitled to exchange any shares of such Class B Common Stock pursuant to this provision, such holder shall give written notice to the Corporation at its principal corporate office, of the election to exchange the same and shall state therein the name or names in which the certificate or certificates for shares of Class A Common Stock are to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver to the Electing Investor, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Class A Common Stock to which such holder shall be entitled as aforesaid (unless shares of Class A Common Stock are then maintained in book-entry form, in which event such number of shares of Class A Common Stock shall be issued in book-entry form). Such exchange shall be deemed to have been made immediately prior to the close of business on the date of such written notice, and the person or persons entitled to receive the shares of Class A Common Stock issuable upon such exchange shall be treated for all purposes as the record holder or holders of such shares of Class A Common Stock as of such date. Each share of Class B Common Stock that is exchanged pursuant to this Section 9.1 shall be retired by the Corporation and shall not be available for reissuance. Within two (2) business days of any request by a holder of Class B Common Stock, the Corporation shall inform such holder in writing of the then current number of outstanding shares of Class A Common Stock and Class B Common Stock.

 

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9.2 Any shares of Class B Common Stock shall be exchanged for a corresponding number of fully paid and nonassessable shares of Class A Common Stock immediately upon request following a Non-Affiliate Transfer. A “Non-Affiliate Transfer” shall mean a transfer of shares of Class B Common Stock to any person that is not an Affiliate of a holder of the Class B Common Stock immediately following the issuance thereof. The Corporation shall, upon the request of each such holder and a certification from such transferee holder of such holder’s non-affiliation with the original holder of such Class B Common Stock, issue and deliver to such holder new certificates (unless shares of Class A Common Stock are then maintained in book-entry form) representing such non-Affiliate holder’s shares of Class A Common Stock. Such exchange shall be deemed to have been made immediately prior to the close of business on the date of such request and certification, and the person or persons entitled to receive the shares of Class A Common Stock issuable upon such exchange shall be treated for all purposes as the record holder or holders of such shares of Class A Common Stock as of such date. Each share of Class B Common Stock that is exchanged pursuant to this section shall be retired and canceled by the Corporation and shall not be available for reissuance.

FIFTH: Subject to any additional vote required by this Second Amended and Restated Certificate of Incorporation or Bylaws, in furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind any or all of the Bylaws of the Corporation.

SIXTH: Subject to any additional vote required by this Second Amended and Restated Certificate of Incorporation, the number of directors of the Corporation shall be determined in the manner set forth in the Bylaws of the Corporation. Each director shall be entitled to one vote on each matter presented to the Board of Directors; provided, however, that, so long as the holders of Series A Preferred Stock are entitled to elect any Series A Directors, and the holders of Series B Preferred Stock are entitled to elect any Series B Director, the affirmative vote of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board at the time of such vote or (b) three Preferred Directors, if there is a Series B Director serving on the Board at the time of such vote, shall be required for the authorization by the Board of Directors of any of the matters set forth in Section 5.4 of the Investors’ Rights Agreement (as defined in the Series B Purchase Agreement), as such agreement may be amended or restated from time to time.

SEVENTH: Elections of directors need not be by written ballot unless the Bylaws of the Corporation shall so provide.

EIGHTH: Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws of the Corporation may provide. The books of the Corporation may be kept outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation.

NINTH: To the fullest extent permitted by law, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law or any other law of the State of Delaware is amended after approval by the stockholders of this Article Ninth to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law as so amended.

Any repeal or modification of the foregoing provisions of this Article Ninth by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of, or increase the liability of any director of the Corporation with respect to any acts or omissions of such director occurring prior to, such repeal or modification.

 

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TENTH: The following indemnification provisions shall apply to the persons enumerated below.

1. Right to Indemnification of Directors and Officers. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an “Indemnified Person”) who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”), by reason of the fact that such person, or a person for whom such person is the legal representative, is or was a director or officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys” fees) reasonably incurred by such Indemnified Person in such Proceeding. Notwithstanding the preceding sentence, except as otherwise provided in Section 3 of this Article Tenth the Corporation shall be required to indemnify an Indemnified Person in connection with a Proceeding (or part thereof) commenced by such Indemnified Person only if the commencement of such Proceeding (or part thereof) by the Indemnified Person was authorized in advance by the Board of Directors.

2. Prepayment of Expenses of Directors and Officers. The Corporation shall pay the expenses (including attorneys’ fees) incurred by an Indemnified Person in defending any Proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the Proceeding shall be made only upon receipt of an undertaking by the Indemnified Person to repay all amounts advanced if it should be ultimately determined that the Indemnified Person is not entitled to be indemnified under this Article Tenth or otherwise.

3. Claims by Directors and Officers. If a claim for indemnification or advancement of expenses under this Article Tenth is not paid in full within thirty (30) days after a written claim therefor by the Indemnified Person has been received by the Corporation, the Indemnified Person may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the Corporation shall have the burden of proving that the Indemnified Person is not entitled to the requested indemnification or advancement of expenses under applicable law.

4. Indemnification of Employees and Agents. The Corporation may indemnify and advance expenses to any person who was or is made or is threatened to be made or is otherwise involved in any Proceeding by reason of the fact that such person, or a person for whom such person is the legal representative, is or was an employee or agent of the Corporation or, while an employee or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, limited liability company, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys’ fees) reasonably incurred by such person in connection with such Proceeding. The ultimate determination of entitlement to indemnification of persons who are nondirector or officer employees or agents shall be made in such manner as is determined by the Board of Directors in its sole discretion. Notwithstanding the foregoing sentence, the Corporation shall not be required to indemnify a person in connection with a Proceeding initiated by such person if the Proceeding was not authorized in advance by the Board of Directors.

5. Advancement of Expenses of Employees and Agents. The Corporation may pay the expenses (including attorneys’ fees) incurred by an employee or agent in defending any Proceeding in advance of its final disposition on such terms and conditions as may be determined by the Board of Directors.

 

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6. Non-Exclusivity of Rights. The rights conferred on any person by this Article Tenth shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of this Second Amended and Restated Certificate of Incorporation, the Bylaws of the Corporation, or any agreement, or pursuant to any vote of stockholders or disinterested directors or otherwise.

7. Other Indemnification. The Corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, officer or employee of another Corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise shall be reduced by any amount such person may collect as indemnification from such other Corporation, partnership, limited liability company, joint venture, trust, organization or other enterprise.

8. Insurance. The Board of Directors may, to the full extent permitted by applicable law as it presently exists, or may hereafter be amended from time to time, authorize an appropriate officer or officers to purchase and maintain at the Corporation’s expense insurance: (a) to indemnify the Corporation for any obligation which it incurs as a result of the indemnification of directors, officers and employees under the provisions of this Article Tenth; and (b) to indemnify or insure directors, officers and employees against liability in instances in which they may not otherwise be indemnified by the Corporation under the provisions of this Article Tenth.

9. Amendment or Repeal. Any amendment, repeal or modification of the foregoing provisions of this Article Tenth shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such amendment, repeal or modification. The rights provided hereunder shall inure to the benefit of any Indemnified Person and such person’s heirs, executors and administrators.

ELEVENTH: The Corporation renounces, to the fullest extent permitted by law, any interest or expectancy of the Corporation in, or in being offered an opportunity to participate in, any Excluded Opportunity. An “Excluded Opportunity” is any matter, transaction or interest that is presented to, or acquired, created or developed by, or which otherwise comes into the possession of (i) any director of the Corporation who is not an employee of the Corporation or any of its subsidiaries, or (ii) any holder of Preferred Stock or any partner, member, director, stockholder, employee, affiliate or agent of any such holder, other than someone who is an employee of the Corporation or any of its subsidiaries (collectively, the persons referred to in clauses (i) and (ii) are “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 while such Covered Person is performing services in such capacity. Any repeal or modification of this Article Eleventh will only be prospective and will not affect the rights under this Article Eleventh in effect at the time of the occurrence of any actions or omissions to act giving rise to liability. Notwithstanding anything to the contrary contained elsewhere in this Second Amended and Restated Certificate of Incorporation, the affirmative vote of the Requisite Holders, will be required to amend or repeal, or to adopt any provisions inconsistent with this Article Eleventh.

TWELFTH: Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery in the State of Delaware shall be the sole and exclusive forum for any stockholder (including a beneficial owner) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of fiduciary duty owed by any director, officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers or employees arising pursuant to any provision of the Delaware General Corporation Law or the Corporation’s certificate of incorporation or bylaws or (iv) any action asserting a claim against the Corporation, its directors, officers or employees governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to

 

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which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. If any provision or provisions of this Article Twelfth shall be held to be invalid, illegal or unenforceable as applied to any person or entity or circumstance for any reason whatsoever, then, to the fullest extent permitted by law, the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Article Twelfth (including, without limitation, each portion of any sentence of this Article Twelfth containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) and the application of such provision to other persons or entities and circumstances shall not in any way be affected or impaired thereby.

* * *

3. That the foregoing amendment and restatement was approved by the holders of the requisite number of shares of this corporation in accordance with Section 228 of the General Corporation Law.

4. That this Certificate of Incorporation, which restates and integrates and further amends the provisions of this Corporation’s Certificate of Incorporation, has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law.

 

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IN WITNESS WHEREOF, this Second Amended and Restated Certificate of Incorporation has been executed by a duly authorized officer of this corporation on this 22^nd day of September, 2020.

 

By:		/s/ Scott Requadt
Name:		Scott Requadt
Title:		Chief Executive Officer

SIGNATURE PAGE TO TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

Exhibit 3.3

Execution Version

AMENDED AND RESTATED BYLAWS

OF

TALARIS THERAPEUTICS, INC.

A DELAWARE CORPORATION

Effective September 22, 2020

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TABLE OF CONTENTS

 

				Page
ARTICLE I OFFICES					1
Section 1.		Registered Office			1
Section 2.		Other Offices			1
ARTICLE II MEETINGS OF STOCKHOLDERS					1
Section 1.		Place of Meetings			1
Section 2.		Annual Meetings			1
Section 3.		Special Meetings			1
Section 4.		Notice			1
Section 5.		Adjournments			1
Section 6.		Quorum			2
Section 7.		Voting			2
Section 8.		Proxies			2
Section 9.		Consent of Stockholders in Lieu of Meeting			3
Section 10.		List of Stockholders Entitled to Vote			3
Section 11.		Record Date			3
Section 12.		Stock Ledger			4
Section 13.		Conduct of Meetings			4
ARTICLE III DIRECTORS					4
Section 1.		Number and Election of Directors			4
Section 2.		Vacancies			5
Section 3.		Duties and Powers			5
Section 4.		Meetings			5
Section 5.		Organization			5
Section 6.		Resignations and Removals of Directors			5
Section 7.		Quorum			6
Section 8.		Actions of the Board by Written Consent			6
Section 9.		Meetings by Means of Conference Telephone			6
Section 10.		Committees			6
Section 11.		Compensation			6
Section 12.		Interested Directors			7
ARTICLE IV OFFICERS					7
Section 1.		General			7
Section 2.		Election			7
Section 3.		Voting Securities Owned by the Corporation			7
Section 4.		Chairman of the Board of Directors			8
Section 5.		President			8
Section 6.		Vice Presidents			8

 

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Section 7.		Secretary			8
Section 8.		Treasurer			9
Section 9.		Assistant Secretaries			9
Section 10.		Assistant Treasurers			9
Section 11.		Other Officers			9
ARTICLE V STOCK					9
Section 1.		Form of Certificates			9
Section 2.		Signatures			10
Section 3.		Lost Certificates			10
Section 4.		Transfers			10
Section 5.		Restrictions on Transfer			10
Section 6.		Dividend Record Date			13
Section 7.		Record Owners			13
Section 8.		Transfer and Registry Agents			13
ARTICLE VI NOTICES					13
Section 1.		Notices			13
Section 2.		Waivers of Notice			14
ARTICLE VII GENERAL PROVISIONS					14
Section 1.		Dividends			14
Section 2.		Disbursements			14
Section 3.		Fiscal Year			14
Section 4.		Corporate Seal			14
Section 5.		Affixing Seal			14
ARTICLE VIII INDEMNIFICATION					15
Section 1.		Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation			15
Section 2.		Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation			15
Section 3.		Authorization of Indemnification			15
Section 4.		Good Faith Defined			16
Section 5.		Indemnification by a Court			16
Section 6.		Expenses Payable in Advance			16
Section 7.		Nonexclusivity of Indemnification and Advancement of Expenses			16
Section 8.		Insurance			17
Section 9.		Certain Definitions			17
Section 10.		Survival of Indemnification and Advancement of Expenses			17
Section 11.		Limitation on Indemnification			17
Section 12.		Indemnification of Employees and Agents			17
ARTICLE IX MISCELLANEOUS					18
Section 1.		Amendments			18
Section 2.		Entire Board of Directors			18

 

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Execution Version

AMENDED AND RESTATED BYLAWS

OF

TALARIS THERAPEUTICS, INC.

(HEREINAFTER CALLED THE “CORPORATION”)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware.

Section 2. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors of the Corporation (the “Board of Directors”) may from time to time determine.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors.

Section 2. Annual Meetings. The Annual Meeting of Stockholders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the Annual Meeting of Stockholders.

Section 3. Special Meetings. Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), Special Meetings of Stockholders, for any purpose or purposes, may be called by (a) any director currently serving on the Board of Directors, (b) the President or Chief Executive Officer, (c) any Vice President, if there be one, (d) the Secretary or (e) any Assistant Secretary, if there be one, and shall be called by any such officer at the request in writing of (i) the Board of Directors, (ii) a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings or (iii) stockholders owning at least 30% of the capital stock of the Corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. At a Special Meeting of Stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto).

Section 4. Notice. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a Special Meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, written notice of any meeting 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 notice of and to vote at such meeting.

Section 5. Adjournments. Any meeting of the stockholders may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At

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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, notice of the adjourned meeting in accordance with the requirements of Section 4 of this Article II shall be given to each stockholder of record entitled to notice of and to vote at the meeting.

Section 6. Quorum. Unless otherwise required by applicable law or the Certificate of Incorporation, the holders of a majority of the Corporation’s capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, in the manner provided in Section 5 of this Article II, until a quorum shall be present or represented.

Section 7. Voting. Unless otherwise required by law, the Certificate of Incorporation or these Bylaws, any question brought before any meeting of the stockholders, other than the election of directors, shall be decided by the vote of the holders of a majority of the total number of votes of the Corporation’s capital stock represented at the meeting and entitled to vote on such question, voting as a single class. Unless otherwise provided in the Certificate of Incorporation, and subject to Section 11(a) of this Article II, each stockholder represented at a meeting of the stockholders shall be entitled to cast one (1) vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy as provided in Section 8 of this Article II. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of the stockholders, in such officer’s discretion, may require that any votes cast at such meeting shall be cast by written ballot.

Section 8. Proxies. Each stockholder entitled to vote at a meeting of the stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder as proxy, but no such proxy shall be voted upon after three (3) years from its date, unless such proxy provides for a longer period. Without limiting the manner in which a stockholder may authorize another person or persons to act for such stockholder as proxy, the following shall constitute a valid means by which a stockholder may grant such authority:

(i) A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder’s authorized officer, director, employee or agent signing such writing or causing such person’s signature to be affixed to such writing by any reasonable means, including, but not limited to, by facsimile signature.

(ii) A stockholder may authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a facsimile to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such facsimile, provided that any such facsimile must either set forth or be submitted with information from which it can be determined that the facsimile was authorized by the stockholder. If it is determined that such facsimiles are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information on which they relied.

Any copy, facsimile telecommunication or other reliable reproduction of the writing authorizing another person or persons to act as proxy for a stockholder may be substituted or used in lieu of the original writing, facsimile for any and all purposes for which the original writing, facsimile could be used; provided, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or facsimile telecommunication.

 

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Section 9. Consent of Stockholders in Lieu of Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required or permitted to be taken at any Annual or Special Meeting of Stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent 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 and shall be 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 the stockholders are recorded. Delivery made to the Corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered in the manner required by this Section 9 to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in 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 the stockholders are recorded. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing 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 holders to take the action were delivered to the Corporation as provided above in this Section 9.

Section 10. List of Stockholders Entitled to Vote. The officer of the Corporation who has charge of the stock ledger of the Corporation shall prepare and make, at least ten (10) days before every meeting of the stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting (a) either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held or (b) during ordinary business hours, at the principal place of business of the Corporation. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

Section 11. Record Date.

(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of the stockholders or any adjournment thereof, 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 record date shall 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 the 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 the stockholders shall apply to any adjournment of the meeting; provided, 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 record 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. If no record date has been fixed by the Board of Directors, 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 the 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 applicable 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.

Section 12. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 10 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of the stockholders.

Section 13. Conduct of Meetings. The Board of Directors may adopt by resolution such rules and regulations for the conduct of any meeting of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders 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 appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (c) rules and procedures for maintaining order at the meeting and the safety of those present; (d) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (e) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (f) limitations on the time allotted to questions or comments by participants.

ARTICLE III

DIRECTORS

Section 1. Number and Election of Directors. The Board of Directors shall consist of not less than one nor more than fifteen members, the exact number of which shall initially be fixed by the Incorporator and thereafter from time to time by the Board of Directors. Except as provided in Section 2 of this Article III, directors shall be elected by a majority of the votes cast at each Annual Meeting of Stockholders and each director so elected shall hold office until the next Annual Meeting of Stockholders and until such director’s successor is duly elected and qualified, or until such director’s earlier death, resignation or removal. Directors need not be stockholders.

 

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Section 2. Vacancies. Unless otherwise required by law or the Certificate of Incorporation, vacancies on the Board of Directors or any committee thereof arising through death, resignation, removal, an increase in the number of directors constituting the Board of Directors or such committee or otherwise may be filled only by a majority of the directors then in office, though less than a quorum, or by a sole remaining director. The directors so chosen shall, in the case of the Board of Directors, hold office until the next annual election and until their successors are duly elected and qualified, or until their earlier death, resignation or removal and, in the case of any committee of the Board of Directors, shall hold office until their successors are duly appointed by the Board of Directors or until their earlier death, resignation or removal.

Section 3. Duties and Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws required to be exercised or done by the stockholders.

Section 4. Meetings. The Board of Directors and any committee thereof may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors or any committee thereof may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors or such committee, respectively. Special meetings of the Board of Directors may be called by the Chairman of the Board of Directors, if there be one, the President, or by any director. Special meetings of any committee of the Board of Directors may be called by the chairman of such committee, if there be one, the President, or any director serving on such committee. Notice thereof stating the place, date and hour of the meeting shall be given to each director (or, in the case of a committee, to each member of such committee) either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone or facsimile on twenty-four (24) hours’ notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.

Section 5. Organization. At each meeting of the Board of Directors or any committee thereof, the Chairman of the Board of Directors or the chairman of such committee, as the case may be, or, in his or her absence or if there be none, a director chosen by a majority of the directors present, shall act as chairman. Except as provided below, the Secretary of the Corporation shall act as secretary at each meeting of the Board of Directors and of each committee thereof. In case the Secretary shall be absent from any meeting of the Board of Directors or of any committee thereof, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all the Assistant Secretaries, the chairman of the meeting may appoint any person to act as secretary of the meeting. Notwithstanding the foregoing, the members of each committee of the Board of Directors may appoint any person to act as secretary of any meeting of such committee and the Secretary or any Assistant Secretary of the Corporation may, but need not if such committee so elects, serve in such capacity.

Section 6. Resignations and Removals of Directors. Any director of the Corporation may resign from the Board of Directors or any committee thereof at any time, by giving notice in writing to the Chairman of the Board of Directors, if there be one, the President or the Secretary of the Corporation and, in the case of a committee, to the chairman of such committee, if there be one. Such resignation shall take effect at the time therein specified or, if no time is specified, immediately; and, unless otherwise specified in such notice, the acceptance of such resignation shall not be necessary to make it effective. Except as otherwise required by applicable law, (a) any director or the entire Board of Directors may be removed from office at any time by the affirmative vote of the holders of at least a majority in voting power of the issued and outstanding capital stock of the Corporation entitled to vote in the election of directors, and (b) any director serving on a committee of the Board of Directors may be removed from such committee at any time by the Board of Directors.

 

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Section 7. Quorum. Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors or any committee thereof, a majority of the entire Board of Directors or a majority of the directors constituting such committee, as the case may be, shall constitute a quorum for the transaction of business and the act of a majority of the directors or committee members present at any meeting at which there is a quorum shall be the act of the Board of Directors or such committee, as applicable. If a quorum shall not be present at any meeting of the Board of Directors or any committee thereof, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present.

Section 8. Actions of the Board by Written Consent. Unless otherwise provided in 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 the members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or such committee. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

Section 9. Meetings by Means of Conference Telephone. Unless otherwise provided in the Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9 shall constitute presence in person at such meeting.

Section 10. Committees. Unless otherwise required by the Certificate of Incorporation, (a) the Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation, (b) 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 any such committee, and (c) in the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another qualified member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, 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. Each committee shall keep regular minutes and report to the Board of Directors when required. Notwithstanding anything to the contrary contained in this Article III, the resolution of the Board of Directors establishing any committee of the Board of Directors and/or the charter of any such committee may establish requirements or procedures relating to the governance and/or operation of such committee that are different from, or in addition to, those set forth in these Bylaws and, to the extent that there is any inconsistency between these Bylaws and any such resolution or charter, the terms of such resolution or charter shall be controlling.

Section 11. Compensation. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary for service as director, payable in cash or securities. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for service as committee members.

 

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Section 12. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because any such director’s or officer’s vote is counted for such purpose if: (a) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (b) the material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.

ARTICLE IV

OFFICERS

Section 1. General. The officers of the Corporation shall be chosen by the Board of Directors and shall be a President, a Secretary and a Treasurer. Any one or more individuals may hold such offices. The Board of Directors, in its discretion, also may choose a Chairman of the Board of Directors (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law, the Certificate of Incorporation or these Bylaws. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

Section 2. Election. The Board of Directors, at its first meeting held after each Annual Meeting of Stockholders (or action by written consent of stockholders in lieu of the Annual Meeting of Stockholders), shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and each officer of the Corporation shall hold office until such officer’s successor is elected and qualified, or until such officer’s earlier death, resignation or removal. Any officer elected by the Board of Directors (including, without limitation, the Chairman of the Board of Directors) may be removed at any time by the Board of Directors. Except as provided in Section 4 of this Article IV with regard to the Chairman of the Board of Directors, any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors.

Section 3. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the President or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities

 

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and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.

Section 4. Chairman of the Board of Directors. The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall be designated by a majority of the Board of Directors and, except where by law the signature of the President is required, the Chairman of the Board of Directors shall possess the same power as the President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as may from time to time be assigned by these Bylaws or by the Board of Directors.

Section 5. President. The President shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these Bylaws, the Board of Directors or the President. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the President shall preside at all meetings of the stockholders and, provided the President is also a director, the Board of Directors. Unless the Board of Directors designates otherwise, the President shall be the Chief Executive Officer of the Corporation. The President shall also perform such other duties and may exercise such other powers as may from time to time be assigned to such officer by these Bylaws or by the Board of Directors.

Section 6. Vice Presidents. At the request of the President or in the President’s absence or in the event of the President’s inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President, or the Vice Presidents if there is more than one (in the order designated by the Board of Directors), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors from time to time may prescribe. If there be no Chairman of the Board of Directors and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.

Section 7. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of Directors when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors or the President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant

 

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Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officer’s signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

Section 8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer’s possession or under the Treasurer’s control belonging to the Corporation.

Section 9. Assistant Secretaries. Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretary’s inability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

Section 10. Assistant Treasurers. Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer’s inability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurer’s possession or under the Assistant Treasurer’s control belonging to the Corporation.

Section 11. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

ARTICLE V

STOCK

Section 1. Form of Certificates. The Corporation may issue some or all of the shares of any or all of the Corporation’s classes or series of Stock without certificates if authorized by the Board of Directors. In the event that the Corporation issues shares of stock represented by certificates, such certificates shall be in such form as prescribed by the Board of Directors or a duly authorized officer, shall contain the statements and information required by the General Corporation Law of the State of Delaware (the “DGCL”) and shall be signed by the officers of the Corporation in the manner permitted by the DGCL.

 

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In the event that the Corporation issues shares of stock without certificates, to the extent then required by the DGCL, the Corporation shall provide to the record holders of such shares a written statement of the information required by the DGCL to be included on stock certificates. There shall be no differences in the rights and obligations of stockholders based on whether or not their shares are represented by certificates. If a class or series of stock is authorized by the Board of Directors to be issued without certificates, no stockholder shall be entitled to a certificate of certificates representing any shares of such class or series of stock held by such stockholder unless otherwise determined by the Board of Directors and then only upon written request by such stockholder to the Secretary.

Section 2. Signatures. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate 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; provided, that if such shares have ceased to be certificated no new certificate shall be issued unless requested in writing by such stockholder and the Board of Directors has determined that such certificates may be issued. When authorizing such issuance of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner’s legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.

Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by applicable law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the record holder of the shares or by such person’s attorney lawfully constituted in writing and, if such shares are certificated, upon the surrender of the certificate therefor, properly endorsed for transfer and payment of all necessary transfer taxes; provided, that such surrender and endorsement or payment of taxes shall not be required in any case in which the officers of the Corporation shall determine to waive such requirement. Every certificate exchanged, returned or surrendered to the Corporation shall be marked “Cancelled,” with the date of cancellation, by the Secretary or Assistant Secretary of the Corporation or the transfer agent thereof. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

Section 5. Restrictions on Transfer. No stockholder shall sell, assign, pledge, or in any manner transfer any shares of Common Stock (as defined in the Certificate of Incorporation, as amended) 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 these By-laws:

(a) If the stockholder desires to sell or otherwise transfer any of his shares of Common 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.

 

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(b) In addition (i) shares of Common Stock (as defined in the Certificate of Incorporation, as amended) may only be transferred with the prior written consent of the Corporation, upon duly authorized action of its Board of Directors, and (ii) any shares of Common Stock (as defined in the Certificate of Incorporation, as amended) and any other capital stock may only be transferred with the prior written consent of the Corporation, upon duly authorized action of its Board of Directors, in the event of any transfer (A) to individuals, companies or any other form of entity that are competitors of the Corporation, or (B) if such transfer increases the risk of the Corporation having a class of security held of record by two thousand (2,000) or more persons, or five hundred (500) or more persons who are not accredited investors (as such term is defined by the Securities and Exchange Commission), as described in Section 12(g) of the Securities Exchange Act of 1934 (the “1934 Act”), and any related regulations, or otherwise requiring the Corporation to register any class of securities under the 1934 Act, or (C) if such transfer would result in the loss of any federal or state securities law exemption relied upon by the Corporation in connection with the initial issuance of such shares or the issuance of any other securities, or (D) if such transfer is facilitated in any manner by any public posting, message board, trading portal, internet site, or similar method of communication, including without limitation any trading portal or internet site intended to facilitate secondary transfers of securities; or (E) if such transfer is to be effected in a brokered transaction.

(c) For up to forty five (45) days following receipt of the notice referred to in Section 5(a) of these By-laws, the Corporation and/or its assignee(s) shall have the option to purchase all of the shares specified in the notice at the price and upon the terms set forth in such notice; provided, that, with the consent of the stockholder, the Corporation and/or its assignee(s) shall have the option to purchase a lesser portion of the shares specified in said notice at the price and upon the terms set forth therein. 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 section, 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 of the shares or, with consent of the stockholder, a lesser 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 (e).

(d) The Corporation may assign its rights under paragraph (c) above.

(e) 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, property, services, or other non-cash consideration (the fair market value of the non-cash consideration shall be as determined in good faith by the Company’s Board of Directors and as set forth in the notice) 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.

(f) 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 or waiver 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 these By-laws in the same manner as before said transfer.

 

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(g) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this Section 5 (other than clause (b)(ii) hereof which shall apply to all transfers):

(1) A stockholder’s transfer of all or a portion of shares made for bona fide estate planning purposes, either during his or her lifetime or on death by will or intestacy to a Family Member or any other person approved by the Board of Directors. “Family Member” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing a stockholder’s household (other than a tenant or employee), a trust in which these persons have more than fifty percent of the beneficial interest, a foundation in which these persons (or such stockholder) control the management of assets, and any other entity in which these persons (or such stockholder) own more than fifty percent of the voting interests.

(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 to said institution shall be conducted in the manner set forth in these By-laws.

(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 corporate stockholder’s transfer of 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.

(5) A corporate stockholder’s transfer of all of its shares to all of its stockholders on a pro rata basis.

(6) A transfer by a stockholder to an Affiliate. “Affiliate” means, with respect to any specified person or entity (“Person”), any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, limited partner, member, manager, employee, 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. For purposes of this definition, the term “control” when used with respect to any Person means the power to direct the management or policies of such Person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise, and the terms “controlling” and “controlled” shall have meanings correlative to the foregoing.

(7) A stockholder’s transfer of any or all of such stockholder’s shares of (i) Preferred Stock (as defined in the Certificate of Incorporation, as amended) of the Corporation or (ii) Common Stock (as defined in the Certificate of Incorporation, as amended) issued upon conversion of Preferred Stock (as defined in the Certificate of Incorporation, as amended).

(h) The provisions of this by-law 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 outstanding shares of preferred stock of the Corporation, voting together as a single class on an as converted to common stock basis (excluding the votes represented by those shares to be transferred by the transferring stockholder, if applicable).

 

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(i) Any sale or transfer, or purported sale or transfer, of capital stock of the Corporation shall be null and void unless the terms, conditions, and provisions of this by-law are strictly observed and followed.

(j) In the event of a conflict between this Section 5 and any other agreement that may have been entered into by a stockholder with the Corporation that contains a right of first refusal, the terms of the agreement between the stockholder and the Corporation shall control and prevail over this Section 5 and the right of first refusal herein shall be deemed satisfied by compliance with that agreement.

(k) The provisions of this Section 5 shall automatically terminate immediately prior to the earlier of (a) the date securities of the corporation are first sold to the public pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission under the Securities Act of 1933, as amended, and (b) the consummation of a Deemed Liquidation Event (as defined in the Certificate of Incorporation, as amended).

(l) The certificates representing shares of capital stock of the Corporation shall bear on their face 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 IN FAVOR OF THE COMPANY, AS PROVIDED IN THE BY-LAWS OF THE COMPANY.”

Section 6. Dividend Record Date. Except as otherwise set forth in the Certificate of Incorporation, 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 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 7. Record Owners. 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 to hold liable for calls and assessments a person registered on its books as the owner of shares, 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 required by law.

Section 8. Transfer and Registry Agents. The Corporation may from time to time maintain one or more transfer offices or agencies and registry offices or agencies at such place or places as may be determined from time to time by the Board of Directors.

ARTICLE VI

NOTICES

Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person’s address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by facsimile, telegram, telex or cable.

 

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Section 2. Waivers of Notice. Whenever any notice is required by applicable law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person 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. Neither the business to be transacted at, nor the purpose of, any Annual or Special Meeting of Stockholders or any regular or special meeting of the directors or members of a committee of directors need be specified in any written waiver of notice unless so required by law, the Certificate of Incorporation or these Bylaws.

ARTICLE VII

GENERAL PROVISIONS

Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the requirements of the DGCL and the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section 8 of Article III hereof), and may be paid in cash, in property, or in shares of the Corporation’s capital stock. 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 its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for purchasing any of the shares of capital stock, warrants, rights, options, bonds, debentures, notes, scrip or other securities or evidences of indebtedness of the Corporation, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve.

Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors.

Section 4. Corporate Seal. The Board of Directors may authorize the adoption of a seal by the Corporation. Any such seal shall contain the name of the Corporation and the year of its incorporation and the words “Corporate Seal, Delaware.” The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

Section 5. Affixing Seal. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.

 

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ARTICLE VIII

INDEMNIFICATION

Section 1. Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation), by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation. Subject to Section 3 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

Section 3. Authorization of Indemnification. Any indemnification under this Article VIII (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the present or former director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (a) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, (b) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, (c) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (d) by the stockholders. Such determination shall be made, with respect to former directors and officers, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

 

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Section 4. Good Faith Defined. For purposes of any determination under Section 3 of this Article VIII, a person shall be deemed to have acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal action or proceeding, to have had no reasonable cause to believe such person’s conduct was unlawful, if such person’s action is based on the records or books of account of the Corporation or another enterprise, or on information supplied to such person by the officers of the Corporation or another enterprise in the course of their duties, or on the advice of legal counsel for the Corporation or another enterprise or on information or records given or reports made to the Corporation or another enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Corporation or another enterprise. The provisions of this Section 4 shall not be deemed to be exclusive or to limit in any way the circumstances in which a person may be deemed to have met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be.

Section 5. Indemnification by a Court. Notwithstanding any contrary determination in the specific case under Section 3 of this Article VIII, and notwithstanding the absence of any determination thereunder, any director or officer may apply to the Court of Chancery of the State of Delaware or any other court of competent jurisdiction in the State of Delaware for indemnification to the extent otherwise permissible under Section 1 or Section 2 of this Article VIII. The basis of such indemnification by a court shall be a determination by such court that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 1 or Section 2 of this Article VIII, as the case may be. Neither a contrary determination in the specific case under Section 3 of this Article VIII nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or officer seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 5 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or officer seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

Section 6. Expenses Payable in Advance. Expenses (including attorneys’ fees) incurred by a director or officer in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VIII. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the Corporation deems appropriate.

Section 7. Nonexclusivity of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Section 1 and Section 2 of this Article VIII shall be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 1 or Section 2 of this Article VIII but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise.

 

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Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or officer of the Corporation, or is or was a director or officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article VIII.

Section 9. Certain Definitions. For purposes of this Article VIII, references to “the Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation 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 Article VIII with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued. The term “another enterprise” as used in this Article VIII shall mean any other corporation or any partnership, joint venture, trust, employee benefit plan or other enterprise of which such person is or was serving at the request of the Corporation as a director, officer, employee or agent. For purposes of this Article VIII, 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 or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person 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 Article VIII.

Section 10. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.

Section 11. Limitation on Indemnification. Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 5 of this Article VIII), the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) or advance expenses in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors.

Section 12. Indemnification of Employees and Agents. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and officers of the Corporation.

 

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ARTICLE IX

MISCELLANEOUS

Section 1. Amendments. Unless otherwise required by the Certificate of Incorporation, these Bylaws may be altered, amended or repealed, in whole or in part, or new Bylaws may be adopted by the stockholders or by the Board of Directors; provided, that notice of such alteration, amendment, repeal or adoption of new Bylaws be contained in the notice of such meeting of the stockholders or Board of Directors, as the case may be. All such amendments must be approved by either the holders of a majority of the outstanding capital stock entitled to vote thereon or by a majority of the entire Board of Directors then in office.

Section 2. Entire Board of Directors. As used in this Article IX and in these Bylaws generally, the term “entire Board of Directors” means the total number of directors which the Corporation would have if there were no vacancies.

* * *

Adopted as of: September 22, 2020

 

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Exhibit 4.2

Execution Version

AMENDED AND RESTATED

INVESTORS’ RIGHTS AGREEMENT

THIS AMENDED AND INVESTORS’ RIGHTS AGREEMENT (this “Agreement”), is made as of the 22^nd day of September, 2020 by and among TALARIS THERAPEUTICS, INC., a Delaware corporation (the “Company”), and each of the investors listed on Schedule A hereto, each of which is referred to in this Agreement as an “Investor”, each of the stockholders listed on Schedule B hereto, each of whom is referred to herein as a “Key Holder”, and any additional Investor that becomes a party to this Agreement in accordance with Subsection 6.9 hereof.

RECITALS

WHEREAS, the Company, certain of the Investors (the “Series A Investors”) and the Key Holders entered into an Investors’ Rights Agreement, dated as of November 1, 2018 (as amended from time to time, the “Original Agreement”) in connection with that certain Preferred Stock and Unit Purchase Agreement, dated as of November 1, 2018 (the “Series A Purchase Agreement”);

WHEREAS, the Company and certain of the Investors (the “Series B Investors”) are parties to that certain Preferred Stock Purchase Agreement of even date herewith (the “Series B Purchase Agreement”);

WHEREAS, in order to induce the Company to enter into the Series B Purchase Agreement and to induce the Series B Investors to invest funds in the Company pursuant to the Series B Purchase Agreement, the Series A Investors, the Key Holders and the Company wish to amend and restate the Original Agreement in its entirety to reflect the certain modifications and other terms set forth herein; and

WHEREAS, the parties hereto hereby agree that this Agreement shall govern the rights of the Investors to cause the Company to register shares of Common Stock issuable to the Investors, to receive certain information from the Company, and to participate in future equity offerings by the Company, and shall govern certain other matters as set forth in this Agreement.

NOW, THEREFORE, the Series A Investors, the Key Holders and the Company hereby agree to amend and restate the Original Agreement in its entirety as follows, and the parties hereto agree to be bound by this Agreement:

1. Definitions. For purposes of this Agreement:

1.1 “Affiliate” means, with respect to any specified Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with such Person, including without limitation any general partner, managing member, officer, director or trustee of such Person, or any venture capital fund, other investment fund or account or registered investment company now or hereafter existing that is controlled by one or more general partners, managing members or investment adviser of, or shares the same management company or investment adviser with, such Person. Without limiting the foregoing, all of the Clarus entities indicated on Schedule A hereto, as well as any other entities controlled by the same ultimate Clarus-controlling entity, shall be considered to be “Affiliates” of each other. With respect to Longitude Venture Partners III, L.P. (or any venture capital fund now or hereafter existing which is controlled by one or more general partners or managing members of, or shares the same management company with

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Longitude Venture Partners III, L.P.), an Affiliate shall include CrownWheel Opportunities 3 DAC, a designated activity company limited by shares duly incorporated under the laws of Ireland, or any other Irish designated activity company limited by shares in which Longitude Venture Partners III, L.P. (or any venture capital fund now or hereafter existing which is controlled by one or more general partners or managing members of, or shares the same management company with Longitude Venture Partners III, L.P.) controls a majority of the economic interests. With respect to Qiming, Qiming U.S. Healthcare Fund, L.P., Qiming U.S. Healthcare Fund II, L.P., Gary Rieschel and Franklin Berger shall be considered to be “Affiliates” of each other.

1.2 “Board of Directors” means the board of directors of the Company.

1.3 “Certificate of Incorporation” means the Company’s Second Amended and Restated Certificate of Incorporation, as amended and/or restated from time to time.

1.4 “Clarus” collectively refers to the Clarus entities listed on Schedule A hereto, as well as any Affiliates thereof.

1.5 “Class A Common Stock” means shares of the Company’s Class A common stock, par value $0.0001 per share.

1.6 “Class B Common Stock” means shares of the Company’s Class B common stock, par value $0.0001 per share.

1.7 “Common Stock” means, collectively, shares of the Company’s Class A Common Stock and Class B Common Stock.

1.8 “Competitor” means a Person engaged, directly or indirectly (including through any partnership, limited liability company, corporation, joint venture or similar arrangement (whether now existing or formed hereafter)), in a business that competes with the Company’s business, but shall not include (i) Clarus, (ii) Longitude, (iii) Qiming, (iv) Surveyor, (v) Viking or (vi) any other financial investment firm or collective investment vehicle that, together with its Affiliates, holds less than twenty percent (20)% of the outstanding equity of any Competitor and does not, nor do any of its Affiliates, have a right to designate any members of the board of directors of any Competitor.

1.9 “Damages” means any loss, damage, claim or liability (joint or several) to which a party hereto may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such loss, damage, claim or liability (or any action in respect thereof) arises out of or is based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement of the Company, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) an omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by the indemnifying party (or any of its agents or Affiliates) of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law.

1.10 “Derivative Securities” means any securities or rights convertible into, or exercisable or exchangeable for (in each case, directly or indirectly), Common Stock, including options and warrants.

 

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1.11 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

1.12 “Excluded Registration” means (i) a registration relating to the sale or grant of securities to employees of the Company or a subsidiary pursuant to a stock option, stock purchase, equity incentive or similar plan; (ii) a registration relating to an SEC Rule 145 transaction; (iii) a registration on any form that does not include substantially the same information as would be required to be included in a registration statement covering the sale of the Registrable Securities; or (iv) a registration in which the only Common Stock being registered is Common Stock issuable upon conversion of debt securities that are also being registered.

1.13 [Reserved].

1.14 “FOIA Party” means a Person that, in the reasonable determination of the Board of Directors, may be subject to, and thereby required to disclose non-public information furnished by or relating to the Company under, the Freedom of Information Act, 5 U.S.C. 552 (“FOIA”), any state public records access law, any state or other jurisdiction’s laws similar in intent or effect to FOIA, or any other similar statutory or regulatory requirement.

1.15 “Form S-1” means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

1.16 “Form S-3” means such form under the Securities Act as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the SEC that permits forward incorporation of substantial information by reference to other documents filed by the Company with the SEC.

1.17 “Founders” means each of Dr. Suzanne T. Ildstad, David Tollerud and Suzanne Tollerud.

1.18 “GAAP” means generally accepted accounting principles in the United States as in effect from time to time.

1.19 “Holder” means any holder of Registrable Securities who is a party to this Agreement.

1.20 “Immediate Family Member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including, adoptive relationships, of a natural person referred to herein.

1.21 “Initiating Holders” means, collectively, Holders who properly initiate a registration request under this Agreement.

1.22 “IPO” means the Company’s first underwritten public offering of its Common Stock under the Securities Act.

1.23 “Key Employee” means each Founder and any other executive-level employee (including, division director and vice president-level positions) as well as any employee who, either alone or in concert with others, develops, invents, programs, or designs any Company Intellectual Property (as defined in the Series A Purchase Agreement and the Series B Purchase Agreement).

 

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1.24 “Key Holder Registrable Securities” means (i) the shares of Common Stock held by the Key Holders, and (ii) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of such shares.

1.25 “Longitude” means Longitude Venture Partners III, L. P and its Affiliates.

1.26 “Major Investor” means any Investor that, individually or together with such Investor’s Affiliates, holds at least 1,000,000 shares of Registrable Securities (as adjusted for any stock split, stock dividend, combination, or other recapitalization or reclassification effected after the date hereof) and each Person to whom any of the rights of any such Investor are assigned pursuant to Section 6.1.

1.27 “New Securities” means, collectively, equity securities of the Company, whether or not currently authorized, as well as rights, options, or warrants to purchase such equity securities, or securities of any type whatsoever that are, or may become, convertible or exchangeable into or exercisable for such equity securities.

1.28 “Person” means any individual, corporation, partnership, trust, limited liability company, association or other entity.

1.29 “Preferred Director” means any director of the Company that the holders of record of Series A Preferred Stock and Series B Preferred Stock are entitled to elect, exclusively and as a separate class, pursuant to the Certificate of Incorporation.

1.30 “Preferred Stock” means, collectively, shares of the Company’s Series A Preferred Stock, Series A-1 Preferred Stock and Series B Preferred Stock.

1.31 “Qiming” means Qiming U.S. Healthcare Fund, L.P., Qiming U.S. Healthcare Fund II, L.P., and their respective Affiliates.

1.32 “Registrable Securities” means (i) the Common Stock issuable or issued upon conversion of the Preferred Stock; (ii) any Common Stock, or any Common Stock issued or issuable (directly or indirectly) upon conversion and/or exercise of any other securities of the Company, acquired by the Investors after the date hereof; (iii) the Key Holder Registrable Securities, provided, however, that such Key Holder Registrable Securities shall not be deemed Registrable Securities and the Key Holders shall not be deemed Holders for the purposes of Subsections 2.1 (and any other applicable Section or Subsection with respect to registrations under Subsection 2.1), 2.10, 3.1, 3.2, 4.1 and 6.6; and (iv) any Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right, or other security that is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, the shares referenced in clauses (i) and (ii) above; excluding in all cases, however, any Registrable Securities sold by a Person in a transaction in which the applicable rights under this Agreement are not assigned pursuant to Subsection 6.1 and excluding for purposes of Section 2 any shares for which registration rights have terminated pursuant to Subsection 2.13 of this Agreement.

1.33 “Registrable Securities then outstanding” means the number of shares determined by adding the number of shares of outstanding Common Stock that are Registrable Securities and the number of shares of Common Stock issuable (directly or indirectly) pursuant to then exercisable and/or convertible securities that are Registrable Securities.

 

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1.34 “Requisite Preferred Director Vote” has the meaning set forth in Subsection 3.1(f).

1.35 “Restricted Securities” means the securities of the Company required to be notated with the legend set forth in Subsection 2.12(b) hereof.

1.36 “SEC” means the Securities and Exchange Commission.

1.37 “SEC Rule 144” means Rule 144 promulgated by the SEC under the Securities Act.

1.38 “SEC Rule 145” means Rule 145 promulgated by the SEC under the Securities Act.

1.39 “Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

1.40 “Selling Expenses” means all underwriting discounts, selling commissions, and stock transfer taxes applicable to the sale of Registrable Securities, and fees and disbursements of counsel for any Holder, except for the fees and disbursements of the Selling Holder Counsel borne and paid by the Company as provided in Subsection 2.6.

1.41 “Series A Director” means any director of the Company that the holders of record of the Series A Preferred Stock are entitled to elect, exclusively and as a separate class, pursuant to the Certificate of Incorporation.

1.42 “Series B Director” means any director of the Company that the holders of record of the Series B Preferred Stock are entitled to elect, exclusively and as a separate class, pursuant to the Certificate of Incorporation.

1.43 “Series A Preferred Stock” means shares of the Company’s Series A

Preferred Stock, par value $0.0001 per share.

1.44 “Series A-1 Preferred Stock” means shares of the Company’s Series A- 1 Preferred Stock, par value $0.0001 per share.

1.45 “Series B Preferred Stock” means shares of the Company’s Series B Preferred Stock, par value $0.0001 per share.

1.46 “Surveyor” means Citadel Multi-Strategy Equities Master Fund Ltd. and its Affiliates.

1.47 “Viking” means Viking Global Opportunities Illiquid Investments Sub-Master LP and its Affiliates.

 

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2. Registration Rights. The Company covenants and agrees as follows:

2.1 Demand Registration.

(a) Form S-1 Demand. If at any time after the earlier of (i) three (3) years after the date of this Agreement or (ii) one hundred eighty (180) days after the effective date of the registration statement for the IPO, the Company receives a request from Holders of a majority of the Registrable Securities then outstanding that the Company file a Form S-1 registration statement with respect to at least thirty percent (30%) of the Registrable Securities then outstanding (or a lesser percent if the anticipated aggregate offering price, net of Selling Expenses, would exceed $10 million), then the Company shall (x within ten (10) days after the date such request is given, give notice thereof (the “Demand Notice”) to all Holders other than the Initiating Holders; and (y) as soon as practicable, and in any event within sixty (60) days after the date such request is given by the Initiating Holders, file a Form S-1 registration statement under the Securities Act covering all Registrable Securities that the Initiating Holders requested to be registered and any additional Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Subsections 2.1(c) and 2.3.

(b) Form S-3 Demand. If at any time when it is eligible to use a Form S-3 registration statement, the Company receives a request from Holders of at least twenty percent (20%) of the Registrable Securities then outstanding that the Company file a Form S-3 registration statement with respect to outstanding Registrable Securities of such Holders having an anticipated aggregate offering price, net of Selling Expenses, of at least $5 million, then the Company shall (i) within ten (10) days after the date such request is given, give a Demand Notice to all Holders other than the Initiating Holders; and (ii) as soon as practicable, and in any event within forty-five (45) days after the date such request is given by the Initiating Holders, file a Form S-3 registration statement under the Securities Act covering all Registrable Securities requested to be included in such registration by any other Holders, as specified by notice given by each such Holder to the Company within twenty (20) days of the date the Demand Notice is given, and in each case, subject to the limitations of Subsections 2.1(c) and 2.3.

(c) Notwithstanding the foregoing obligations, if the Company furnishes to Holders requesting a registration pursuant to this Subsection 2.1 a certificate signed by the Company’s chief executive officer stating that in the good faith judgment of the Board of Directors it would be materially detrimental to the Company and its stockholders for such registration statement to either become effective or remain effective for as long as such registration statement otherwise would be required to remain effective, because such action would (i) materially interfere with a significant acquisition, corporate reorganization, or other similar transaction involving the Company; (ii) require premature disclosure of material information that the Company has a bona fide business purpose for preserving as confidential; or (iii) render the Company unable to comply with requirements under the Securities Act or Exchange Act, then the Company shall have the right to defer taking action with respect to such filing, and any time periods with respect to filing or effectiveness thereof shall be tolled correspondingly, for a period of not more than ninety (90) days after the request of the Initiating Holders is given; provided, however, that the Company may not invoke this right more than once in any twelve (12) month period; and provided further that the Company shall not register any securities for its own account or that of any other stockholder during such ninety (90) day period other than an Excluded Registration.

(d) The Company shall not be obligated to effect, or to take any action to effect, any registration pursuant to Subsection 2.1(a)(i) during the period that is sixty (60) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is one hundred eighty (180) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; (ii) after the Company has effected two registrations pursuant to Subsection 2.1(a); or (iii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Subsection 2.1(b). The Company shall not

 

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be obligated to effect, or to take any action to effect, any registration pursuant to Subsection 2.1(b) (i) during the period that is thirty (30) days before the Company’s good faith estimate of the date of filing of, and ending on a date that is ninety (90) days after the effective date of, a Company-initiated registration, provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or (ii) if the Company has effected two registrations pursuant to Subsection 2.1(b) within the twelve (12) month period immediately preceding the date of such request. A registration shall not be counted as “effected” for purposes of this Subsection 2.1(d) until such time as the applicable registration statement has been declared effective by the SEC, unless the Initiating Holders withdraw their request for such registration, elect not to pay the registration expenses therefor, and forfeit their right to one demand registration statement pursuant to Subsection 2.6, in which case such withdrawn registration statement shall be counted as “effected” for purposes of this Subsection 2.1(d); provided, that if such withdrawal is during a period the Company has deferred taking action pursuant to Subsection 2.1(c), then the Initiating Holders may withdraw their request for registration and such registration will not be counted as “effected” for purposes of this Subsection 2.1(d).

2.2 Company Registration. If the Company proposes to register (including, for this purpose, a registration effected by the Company for stockholders other than the Holders) any of its Common Stock under the Securities Act in connection with the public offering of such securities solely for cash (other than in an Excluded Registration), the Company shall, at such time, promptly give each Holder notice of such registration. Upon the request of each Holder given within twenty (20) days after such notice is given by the Company, the Company shall, subject to the provisions of Subsection 2.3, cause to be registered all of the Registrable Securities that each such Holder has requested to be included in such registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Subsection 2.2 before the effective date of such registration, whether or not any Holder has elected to include Registrable Securities in such registration. The expenses (other than Selling Expenses) of such withdrawn registration shall be borne by the Company in accordance with Subsection 2.6.

2.3 Underwriting Requirements.

(a) If, pursuant to Subsection 2.1, the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Subsection 2.1, and the Company shall include such information in the Demand Notice. The underwriter(s) will be selected by the Board of Directors and shall be reasonably acceptable to a majority in interest of the Initiating Holders. In such event, the right of any Holder to include such Holder’s Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company as provided in Subsection 2.4(e)) enter into an underwriting agreement in customary form with the underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Subsection 2.3, if the managing underwriter(s) advise(s) the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, then the Initiating Holders shall so advise all Holders of Registrable Securities that otherwise would be underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting shall be allocated among such Holders of Registrable Securities, including the Initiating Holders, in proportion (as nearly as practicable) to the number of Registrable Securities owned by each Holder or in such other proportion as shall mutually be agreed to by all such selling Holders; provided, however, that the number of Registrable Securities held by the Holders to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares.

 

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(b) In connection with any offering involving an underwriting of shares of the Company’s capital stock pursuant to Subsection 2.2, the Company shall not be required to include any of the Holders’ Registrable Securities in such underwriting unless the Holders accept the terms of the underwriting as agreed upon between the Company and its underwriters, and then only in such quantity as the underwriters in their sole discretion determine will not jeopardize the success of the offering by the Company. If the total number of securities, including Registrable Securities, requested by stockholders to be included in such offering exceeds the number of securities to be sold (other than by the Company) that the underwriters in their reasonable discretion determine is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Registrable Securities, which the underwriters and the Company in their sole discretion determine will not jeopardize the success of the offering. If the underwriters determine that less than all of the Registrable Securities requested to be registered can be included in such offering, then the Registrable Securities that are included in such offering shall be allocated among the selling Holders in proportion (as nearly as practicable to) the number of Registrable Securities owned by each selling Holder or in such other proportions as shall mutually be agreed to by all such selling Holders. To facilitate the allocation of shares in accordance with the above provisions, the Company or the underwriters may round the number of shares allocated to any Holder to the nearest one hundred (100) shares. Notwithstanding the foregoing, in no event shall (i) the number of Registrable Securities included in the offering be reduced unless all other securities (other than securities to be sold by the Company) are first entirely excluded from the offering, (ii) the number of Registrable Securities included in the offering be reduced below twenty percent (20%) of the total number of securities included in such offering, unless such offering is a Qualified Public Offering (as defined in the Certificate of Incorporation), in which case the selling Holders may be excluded further if the underwriters make the determination described above and no other stockholder’s securities are included in such offering or (iii) notwithstanding (ii) above, any Registrable Securities which are not Key Holder Registrable Securities be excluded from such underwriting unless all Key Holder Registrable Securities are first excluded from such offering. For purposes of the provision in this Subsection 2.3(b) concerning apportionment, for any selling Holder that is a partnership, limited liability company, or corporation, the partners, members, retired partners, retired members, stockholders, and Affiliates of such Holder, or the estates and Immediate Family Members of any such partners, retired partners, members, and retired members and any trusts for the benefit of any of the foregoing Persons, shall be deemed to be a single “selling Holder,” and any pro rata reduction with respect to such “selling Holder” shall be based upon the aggregate number of Registrable Securities owned by all Persons included in such “selling Holder,” as defined in this sentence.

(c) For purposes of Subsection 2.1, a registration shall not be counted as “effected” if, as a result of an exercise of the underwriter’s cutback provisions in Subsection 2.3(a), fewer than fifty percent (50%) of the total number of Registrable Securities that Holders have requested to be included in such registration statement are actually included.

2.4 Obligations of the Company. Whenever required under this Section 2 to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its commercially reasonable efforts to cause such registration statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for a period of up to one hundred twenty (120) days or, if earlier, until the distribution contemplated in the registration statement has been completed; provided, however, that (i) such one hundred twenty (120) day period shall be extended for a period of time equal to the period the Holder refrains, at the request of an underwriter of Common Stock (or other securities) of the Company, from selling any securities included in such registration, and (ii) in the case of any registration

 

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of Registrable Securities on Form S-3 that are intended to be offered on a continuous or delayed basis, subject to compliance with applicable SEC rules, such one hundred twenty (120) day period shall be extended for up to twenty (120) days, if necessary, to keep the registration statement effective until all such Registrable Securities are sold;

(b) prepare and file with the SEC such amendments and supplements to such registration statement, and the prospectus used in connection with such registration statement, as may be necessary to comply with the Securities Act in order to enable the disposition of all securities covered by such registration statement;

(c) furnish to the selling Holders such numbers of copies of a prospectus, including a preliminary prospectus, as required by the Securities Act, and such other documents as the Holders may reasonably request in order to facilitate their disposition of their Registrable Securities;

(d) use its commercially reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or blue-sky laws of such jurisdictions as shall be reasonably requested by the selling Holders; provided that the Company shall not be required to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(e) in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the underwriter(s) of such offering;

(f) use its commercially reasonable efforts to cause all such Registrable Securities covered by such registration statement to be listed on a national securities exchange or trading system and each securities exchange and trading system (if any) on which similar securities issued by the Company are then listed;

(g) provide a transfer agent and registrar for all Registrable Securities registered pursuant to this Agreement and provide a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

(h) promptly make available for inspection by the selling Holders, any managing underwriter(s) participating in any disposition pursuant to such registration statement, and any attorney or accountant or other agent retained by any such underwriter or selected by the selling Holders, all financial and other records, pertinent corporate documents, and properties of the Company, and cause the Company’s officers, directors, employees, and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant, or agent, in each case, as necessary or advisable to verify the accuracy of the information in such registration statement and to conduct appropriate due diligence in connection therewith;

(i) notify each selling Holder, promptly after the Company receives notice thereof, of the time when such registration statement has been declared effective or a supplement to any prospectus forming a part of such registration statement has been filed; and

 

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(j) after such registration statement becomes effective, notify each selling Holder of any request by the SEC that the Company amend or supplement such registration statement or prospectus. In addition, the Company shall ensure that, at all times after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, its insider trading policy shall provide that the Company’s directors may implement a trading program under Rule 10b5-1 of the Exchange Act.

2.5 Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Section 2 with respect to the Registrable Securities of any selling Holder that such Holder shall furnish to the Company such information regarding itself, the Registrable Securities held by it, and the intended method of disposition of such securities as is reasonably required to effect the registration of such Holder’s Registrable Securities.

2.6 Expenses of Registration. All expenses (other than Selling Expenses) incurred in connection with registrations, filings, or qualifications pursuant to Section 2, including all registration, filing, and qualification fees; printers’ and accounting fees; fees and disbursements of counsel for the Company; and the reasonable fees and disbursements not to exceed $50,000 of one counsel for the selling Holders (“Selling Holder Counsel”), shall be borne and paid by the Company; provided, however, that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Subsection 2.1 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered (in which case all selling Holders shall bear such expenses pro rata based upon the number of Registrable Securities that were to be included in the withdrawn registration), unless the Holders of a majority of the Registrable Securities agree to forfeit their right to one registration pursuant to Subsections 2.1(a) or 2.1(b), as the case may be; provided further that if, at the time of such withdrawal, the Holders shall have learned of a material adverse change in the condition, business, or prospects of the Company from that known to the Holders at the time of their request and have withdrawn the request with reasonable promptness after learning of such information then the Holders shall not be required to pay any of such expenses and shall not forfeit their right to one registration pursuant to Subsections 2.1(a) or 2.1(b). All Selling Expenses relating to Registrable Securities registered pursuant to this Section 2 shall be borne and paid by the Holders pro rata on the basis of the number of Registrable Securities registered on their behalf.

2.7 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any registration pursuant to this Agreement as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.8 Indemnification. If any Registrable Securities are included in a registration statement under this Section 2:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Holder, and the partners, members, officers, directors, and stockholders of each such Holder; legal counsel, accountants, and investment advisers for each such Holder; any underwriter (as defined in the Securities Act) for each such Holder; and each Person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any Damages, and the Company will pay to each such Holder, underwriter, controlling Person, or other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Subsection 2.8(a) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable for any Damages to the extent that they arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of any such Holder, underwriter, controlling Person, or other aforementioned Person expressly for use in connection with such registration.

 

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(b) To the extent permitted by law, each selling Holder, severally and not jointly, will indemnify and hold harmless the Company, and each of its directors, each of its officers who has signed the registration statement, each Person (if any), who controls the Company within the meaning of the Securities Act, legal counsel and accountants for the Company, any underwriter (as defined in the Securities Act), any other Holder selling securities in such registration statement, and any controlling Person of any such underwriter or other Holder, against any Damages, in each case only to the extent that such Damages arise out of or are based upon actions or omissions made in reliance upon and in conformity with written information furnished by or on behalf of such selling Holder expressly for use in connection with such registration; and each such selling Holder will pay to the Company and each other aforementioned Person any legal or other expenses reasonably incurred thereby in connection with investigating or defending any claim or proceeding from which Damages may result, as such expenses are incurred; provided, however, that the indemnity agreement contained in this Subsection 2.8(b) shall not apply to amounts paid in settlement of any such claim or proceeding if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; and provided further that in no event shall the aggregate amounts payable by any Holder by way of indemnity or contribution under Subsections 2.8(b) and 2.8(d) exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of fraud or willful misconduct by such Holder.

(c) Promptly after receipt by an indemnified party under this Subsection 2.8 of notice of the commencement of any action (including any governmental action) for which a party may be entitled to indemnification hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Subsection 2.8, give the indemnifying party notice of the commencement thereof. The indemnifying party shall have the right to participate in such action and, to the extent the indemnifying party so desires, participate jointly with any other indemnifying party to which notice has been given, and to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party (together with all other indemnified parties that may be represented without conflict by one counsel) shall have the right to retain one separate counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such action. The failure to give notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Subsection 2.8, to the extent that such failure materially prejudices the indemnifying party’s ability to defend such action. The failure to give notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Subsection 2.8.

(d) To provide for just and equitable contribution to joint liability under the Securities Act in any case in which either: (i) any party otherwise entitled to indemnification hereunder makes a claim for indemnification pursuant to this Subsection 2.8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case, notwithstanding the fact that this Subsection 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any party hereto for which indemnification is provided under this Subsection 2.8, then, and in each such case, such parties will contribute to the aggregate losses, claims, damages, liabilities, or expenses to which they may be subject (after contribution from others) in such proportion as is appropriate to reflect the relative fault of each of the indemnifying party and the indemnified party in connection with the statements, omissions, or other

 

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actions that resulted in such loss, claim, damage, liability, or expense, as well as to reflect any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or allegedly untrue statement of a material fact, or the omission or alleged omission of a material fact, relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission; provided, however, that, in any such case (x) no Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement, and (y) no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any Person who was not guilty of such fraudulent misrepresentation; and provided further that in no event shall a Holder’s liability pursuant to this Subsection 2.8(d), when combined with the amounts paid or payable by such Holder pursuant to Subsection 2.8(b), exceed the proceeds from the offering received by such Holder (net of any Selling Expenses paid by such Holder), except in the case of willful misconduct or fraud by such Holder.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

(f) Unless otherwise superseded by an underwriting agreement entered into in connection with the underwritten public offering, the obligations of the Company and Holders under this Subsection 2.8 shall survive the completion of any offering of Registrable Securities in a registration under this Section 2, and otherwise shall survive the termination of this Agreement.

2.9 Reports Under Exchange Act. With a view to making available to the Holders the benefits of SEC Rule 144 and any other rule or regulation of the SEC that may at any time permit a Holder to sell securities of the Company to the public without registration or pursuant to a registration on Form S-3, the Company shall:

(a) make and keep available adequate current public information, as those terms are understood and defined in SEC Rule 144, at all times after the effective date of the registration statement filed by the Company for the IPO;

(b) use commercially reasonable efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act (at any time after the Company has become subject to such reporting requirements); and

(c) furnish to any Holder, so long as the Holder owns any Registrable Securities, forthwith upon request (i) to the extent accurate, a written statement by the Company that it has complied with the reporting requirements of SEC Rule 144 (at any time after ninety (90) days after the effective date of the registration statement filed by the Company for the IPO), the Securities Act, and the Exchange Act (at any time after the Company has become subject to such reporting requirements), or that it qualifies as a registrant whose securities may be resold pursuant to Form S-3 (at any time after the Company so qualifies) and (ii) such other information as may be reasonably requested in availing any Holder of any rule or regulation of the SEC that permits the selling of any such securities without registration (at any time after the Company has become subject to the reporting requirements under the Exchange Act) or pursuant to Form S-3 (at any time after the Company so qualifies to use such form).

 

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2.10 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the Registrable Securities then outstanding, enter into any agreement with any holder or prospective holder of any securities of the Company that would (i) allow such holder or prospective holder to include such securities in any registration unless, under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of such securities will not reduce the number of the Registrable Securities of the Holders that are included; or (ii) allow such holder or prospective holder to initiate a demand for registration of any securities held by such holder or prospective holder; provided that this limitation shall not apply to Registrable Securities acquired by any additional Investor that becomes a party to this Agreement in accordance with Subsection 6.9.

2.11 “Market Stand-off” Agreement. Each Holder hereby agrees that it will not, without the prior written consent of the managing underwriter, during the period commencing on the date of the final prospectus relating to the IPO, and ending on the date specified by the Company and the managing underwriter, such period not to exceed one hundred eighty (180) days in the case of the IPO, (i) 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, in each case with respect to such shares or securities held immediately prior to the effective date of such registration statement for the IPO or (ii) 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 (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash, or otherwise. The foregoing provisions of this Subsection 2.11 shall apply only to the IPO, shall not apply to distributions to current or former partners, members or stockholders of a Holder or to the transfer of any shares owned by a Holder in the Company to its Affiliates or any of the Holder’s stockholders, members, partners or other equity holders; provided that the Affiliate, stockholder member, partner or other equity holder of the Holder agrees to be bound in writing by the restrictions set forth herein, shall not apply to transactions or announcements relating to: (1) securities acquired in the IPO or (2) securities acquired in open market transactions from and after the IPO, shall not apply to the sale of any shares to an underwriter pursuant to an underwriting agreement, or the transfer of any shares to any trust for the direct or indirect benefit of the Holder or the immediate family of the Holder, provided that the trustee of the trust agrees to be bound in writing by the restrictions set forth herein, and provided further that any such transfer shall not involve a disposition for value, and shall be applicable to the Holders only if all officers, directors and stockholders individually, and together with their Affiliates, owning one percent (1%) or more of the Company’s outstanding Common Stock (after giving effect to conversion into Common Stock of all outstanding Preferred Stock) are subject to the same restrictions. The underwriters in connection with such registration are intended third-party beneficiaries of this Subsection 2.11 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto. Each Holder further agrees to execute such agreements as may be reasonably requested by the underwriters in connection with such registration that are consistent with this Subsection 2.11 or that are necessary to give further effect thereto. Any discretionary waiver or termination of the restrictions of any or all of such agreements by the Company or the underwriters shall apply pro rata to all Company stockholders that are subject to such agreements, based on the number of shares subject to such agreements.

2.12 Restrictions on Transfer.

(a) The Preferred Stock and the Registrable Securities shall not be sold, pledged, or otherwise transferred, and the Company shall not recognize and shall issue stop-transfer instructions to its transfer agent with respect to any such sale, pledge, or transfer, except upon the conditions

 

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specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. A transferring Holder will cause any proposed purchaser, pledgee, or transferee of the Preferred Stock and the Registrable Securities held by such Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. Notwithstanding the foregoing, the Company shall not require any transferee of shares pursuant to an effective registration statement or, following the IPO, pursuant to SEC Rule 144, in each case, to be bound by the terms of this Agreement.

(b) Each certificate, instrument, or book entry representing (i) the Preferred Stock, (ii) the Registrable Securities, and (iii) any other securities issued in respect of the securities referenced in clauses (i) and (ii), upon any stock split, stock dividend, recapitalization, merger, consolidation, or similar event, shall (unless otherwise permitted by the provisions of Subsection 2.12(c)) be notated with a legend substantially in the following form:

THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SHARES MAY NOT BE SOLD, PLEDGED, OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR A VALID EXEMPTION FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

THE SECURITIES REPRESENTED HEREBY MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.

The Holders consent to the Company making a notation in its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer set forth in this Subsection 2.12.

(c) The holder of such Restricted Securities, by acceptance of ownership thereof, agrees to comply in all respects with the provisions of this Section 2. Before any proposed sale, pledge, or transfer of any Restricted Securities, unless there is in effect a registration statement under the Securities Act covering the proposed transaction or, following the IPO, the transfer is made pursuant to SEC Rule 144, the Holder thereof shall give notice to the Company of such Holder’s intention to effect such sale, pledge, or transfer. Each such notice shall describe the manner and circumstances of the proposed sale, pledge, or transfer in sufficient detail and, if reasonably requested by the Company, shall be accompanied at such Holder’s expense by either (i) a written opinion of legal counsel who shall, and whose legal opinion shall, be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transaction may be effected without registration under the Securities Act; (ii) a “no action” letter from the SEC to the effect that the proposed sale, pledge, or transfer of such Restricted Securities without registration will not result in a recommendation by the staff of the SEC that action be taken with respect thereto; or (iii) any other evidence reasonably satisfactory to counsel to the Company to the effect that the proposed sale, pledge, or transfer of the Restricted Securities may be effected without registration under the Securities Act, whereupon the Holder of such Restricted Securities shall be entitled to sell, pledge, or transfer such Restricted Securities in accordance with the terms of the notice given by the Holder to the Company. The Company will not require such a legal opinion or “no action” letter (x) in any transaction in compliance with SEC Rule 144; (y) in any transaction in which such Holder distributes Restricted Securities to an Affiliate of such Holder for no consideration or (z) in any internal transaction in which such Holder transfers Restricted Securities to an Affiliate of such Holder that is an entity and that is ultimately controlled by the same parent company as the Holder (or is the ultimate parent company of the Holder) or

 

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is an investment fund controlled by one or more general partners, managing members or investment advisor of, or shares the same management company or investment adviser with, such Holder; provided that, in the case of clauses (y) and (z), each transferee agrees in writing to be subject to the terms of this Subsection 2.12. Notwithstanding the foregoing, the Company shall be obligated to reissue promptly unlegended certificates or book entries at the request of any Holder thereof if the Company has completed its IPO and the Holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification and legend, provided that the second legend listed above shall be removed only at such time as the Holder of such certificate is no longer subject to any restrictions hereunder. Each certificate, instrument, or book entry representing the Restricted Securities transferred as above provided shall be notated with, except if such transfer is made pursuant to SEC Rule 144, the appropriate restrictive legend set forth in Subsection 2.12(b), except that such certificate instrument, or book entry shall not be notated with such restrictive legend if, in the opinion of counsel for such Holder and the Company, such legend is not required in order to establish compliance with any provisions of the Securities Act.

2.13 Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Subsections 2.1 or 2.2 shall terminate upon the earliest to occur of:

(a) the closing of a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation;

(b) such time after consummation of the IPO and expiration of the applicable lock-up period associated with the IPO as Rule 144 or another similar exemption under the Securities Act is available for the sale of all of such Holder’s shares without limitation during a three-month period without registration;

(c) the three year anniversary of a Qualified Public Offering.

3. Information and Observer Rights.

3.1 Delivery of Financial Statements. The Company shall deliver to each Major Investor, provided that the Board of Directors has not reasonably determined that such Major Investor is a Competitor:

(a) as soon as practicable, but in any event within forty-five (45) days after the end of each fiscal year of the Company (i) an unaudited balance sheet as of the end of such year, (ii) unaudited statements of income and of cash flows for such year, and (iii) an unaudited statement of stockholders’ equity as of the end of such year;

(b) as soon as practicable, but in any event within one hundred eighty (180) days after the end of each fiscal year of the Company (i) a balance sheet as of the end of such year, (ii) statements of income and of cash flows for such year, and a comparison between (x) the actual amounts as of and for such fiscal year and (y) the comparable amounts for the prior year and as included in the Budget (as defined in Subsection 3.1(f)) for such year, with an explanation of any material differences between such amounts and a schedule as to the sources and applications of funds for such year, and (iii) a statement of stockholders’ equity as of the end of such year, all such financial statements audited and certified by independent public accountants of nationally recognized standing selected by the Company;

 

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(c) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, (A) unaudited statements of income and cash flows for such fiscal quarter, and an unaudited balance sheet and a statement of stockholders’ equity as of the end of such fiscal quarter, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments; (ii) not contain all notes thereto that may be required in accordance with GAAP) and (B) a comparison between (x) the actual amounts as of and for such quarter and (y) the comparable amounts as included in the Budget for such quarter, with an explanation of any material differences between such amounts, and (iii) an unaudited statement of stockholders’ equity as of the end of such quarter;

(d) as soon as practicable, but in any event within forty-five (45) days after the end of each of the first three (3) quarters of each fiscal year of the Company, a statement showing the number of shares of each class and series of capital stock and securities convertible into or exercisable for shares of capital stock outstanding at the end of the period, the Common Stock issuable upon conversion or exercise of any outstanding securities convertible or exercisable for Common Stock and the exchange ratio or exercise price applicable thereto, and the number of shares of issued stock options and stock options not yet issued but reserved for issuance, if any, all in sufficient detail as to permit the Major Investors to calculate their respective percentage equity ownership in the Company, and certified by the chief financial officer or chief executive officer of the Company as being true, complete, and correct;

(e) as soon as practicable, but in any event within thirty (30) days of the end of each month, (A) an unaudited income statement and statement of cash flows for such month, and an unaudited balance sheet and statement of stockholders’ equity as of the end of such month, all prepared in accordance with GAAP (except that such financial statements may (i) be subject to normal year-end audit adjustments and (ii) not contain all notes thereto that may be required in accordance with GAAP) and (B) a comparison between (x) the actual amounts as of and for such month and (y) the comparable amounts as included in the Budget for such month, with an explanation of any material differences between such amounts;

(f) as soon as practicable, but in any event thirty (30) days before the end of each fiscal year, a budget and business plan for the next fiscal year (collectively, the “Budget”), approved by the Board of Directors (including the vote of at least (a) two Preferred Directors, if there is not a Series B Director serving on the Board of Directors at the time of such approval or (b) three Preferred Directors, if there is a Series B Director serving on the Board of Directors at the time of such approval (the “Requisite Preferred Director Vote”)) and prepared on a monthly basis, including balance sheets, income statements, and statements of cash flow for such months and, promptly after prepared, any other budgets or revised budgets prepared by the Company;

(g) such other information relating to the financial condition, business, prospects, or corporate affairs of the Company as any Major Investor may from time to time reasonably request; provided, however, that the Company shall not be obligated under this Subsection 3.1 to provide information (i) that the Company reasonably determines in good faith to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in a form acceptable to the Company); or (ii) the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries.

 

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Notwithstanding anything else in this Subsection 3.1 to the contrary, the Company may cease providing the information set forth in this Subsection 3.1 during the period starting with the date thirty (30) days before the Company’s good-faith estimate of the date of filing of a registration statement if it reasonably concludes it must do so to comply with the SEC rules applicable to such registration statement and related offering; provided that the Company’s covenants under this Subsection 3.1 shall be reinstated at such time as the Company is no longer actively employing its commercially reasonable efforts to cause such registration statement to become effective.

3.2 Inspection. The Company shall permit each Major Investor (provided that the Board of Directors has not reasonably determined that such Major Investor is a Competitor), at such Major Investor’s expense, to visit and inspect the Company’s properties; examine its books of account and records; and discuss the Company’s affairs, finances, and accounts with its officers, during normal business hours of the Company as may be reasonably requested by the Major Investor; provided, however, that the Company shall not be obligated pursuant to this Subsection 3.2 to provide access to any information that it reasonably and in good faith considers to be a trade secret or confidential information (unless covered by an enforceable confidentiality agreement, in form acceptable to the Company) or the disclosure of which would adversely affect the attorney-client privilege between the Company and its counsel.

3.3 Observer Rights. The Company shall invite a representative of each of (a) Clarus, (b) Longitude, (c) Qiming, (d) Surveyor and (e) Viking to attend all meetings of the Board of Directors (and each committee thereof, if any) in a nonvoting observer capacity and, in this respect, shall give such representatives copies of all notices, minutes, consents, and other materials that it provides to its directors at the same time and in the same manner as provided to such directors; provided, that such representative shall agree to hold in confidence all information so provided; and provided further that the Company reserves the right to withhold any information and to exclude such representative from any meeting or portion thereof if access to such information or attendance at such meeting could adversely affect the attorney-client privilege between the Company and its counsel or result in disclosure of trade secrets or a conflict of interest; and provided further that this right shall separately terminate with respect to any of Clarus, Longitude, Qiming, Surveyor or Viking at such time as such Investor no longer owns any shares of Preferred Stock (or Common Stock issued upon conversion thereof).

3.4 Termination of Information and Observer Rights. The covenants set forth in Subsection 3.1, Subsection 3.2, and Subsection 3.3 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon the closing of a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

3.5 Confidentiality. Each Investor agrees that such Investor will keep confidential and will not disclose, divulge, or use for any purpose (other than to monitor its investment in the Company) any confidential information obtained from the Company pursuant to the terms of this Agreement (including notice of the Company’s intention to file a registration statement), unless such confidential information (a) is known or becomes known to the public in general (other than as a result of a breach of this Subsection 3.5 by such Investor), (b) is or has been independently developed or conceived by such Investor without use of the Company’s confidential information, or (c) is or has been made known or disclosed to such Investor by a third party without a breach of any obligation of confidentiality such third party may have to the Company; provided, however, that an Investor may disclose confidential information (i) to its attorneys, accountants, consultants, and other professionals to the extent necessary to obtain their services in connection with monitoring its investment in the Company; (ii) to any prospective purchaser of any Registrable Securities from such Investor, if such prospective purchaser agrees to be bound by the provisions

 

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of this Subsection 3.5; (iii) to any existing or prospective Affiliate, investor, partner, member, stockholder, or wholly owned subsidiary of such Investor in the ordinary course of business, provided that such Investor informs such Person that such information is confidential and directs such Person to maintain the confidentiality of such information; (iv) to the extent required in connection with any routine or periodic examination or similar process by any regulatory or self- regulatory body or authority not specifically directed at the Company or the confidential information obtained from the Company pursuant to the terms of the Agreement, including, without limitation, quarterly or annual reports or (v) as may otherwise be required by law, regulation, rule, court order or subpoena, provided that, with respect to this clause (v), such Investor promptly notifies the Company of such disclosure and takes reasonable steps to minimize the extent of any such required disclosure.

3.6 Material Non-Public Information. The Company understands and acknowledges that in the regular course of Surveyor’s and Viking’s businesses, Surveyor and Viking will invest in companies that have issued securities that are publicly traded (each, a “Public Company”). Accordingly, the Company covenants and agrees that it shall not provide any material non-public information about a Public Company to Surveyor, Viking or any of their respective representatives or board observers. In addition, the Company acknowledges and agrees that in no event shall Surveyor’s or Viking’s confidentiality and non-use obligations hereunder in any manner be deemed or construed as limiting Surveyor or Viking or their respective representatives’ (or any of their respective Affiliates) ability to trade any security of a Public Company.

4. Rights to Future Stock Issuances.

4.1 Right of First Offer. Subject to the terms and conditions of this Subsection 4.1 and applicable securities laws, if the Company proposes to offer or sell any New Securities, the Company shall first offer such New Securities to each Major Investor. A Major Investor shall be entitled to apportion the right of first offer hereby granted to it in such proportions as it deems appropriate, among (i) itself, (ii) its Affiliates and (iii) its beneficial interest holders, such as limited partners, members or any other Person having “beneficial ownership,” as such term is defined in Rule 13d-3 promulgated under the Exchange Act, of such Major Investor (“Investor Beneficial Owners”); provided that each such Affiliate or Investor Beneficial Owner (x) is not a Competitor unless such party’s purchase of New Securities is otherwise consented to by the Board of Directors and (y) agrees to enter into this Agreement and each of the Amended and Restated Voting Agreement and Right of First Refusal and Co-Sale Agreement of even date herewith among the Company, the Investors and the other parties named therein, as an “Investor” under each such agreement (provided that any Competitor or FOIA Party shall not be entitled to any rights as a Major Investor under Subsections 3.1, 3.2 and 4.1 hereof).

(a) The Company shall give notice (the “Offer Notice”) to each Major Investor, stating (i) its bona fide intention to offer such New Securities, (ii) the number of such New Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such New Securities.

(b) By notification to the Company within twenty (20) days after the Offer Notice is given, each Major Investor may elect to purchase or otherwise acquire, at the price and on the terms specified in the Offer Notice, up to that portion of such New Securities which equals the proportion that the Common Stock then held by such Major Investor (including all shares of Common Stock then issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held by such Major Investor) bears to the total Common Stock of the Company then outstanding (assuming full conversion and/or exercise, as applicable, of all Preferred Stock

 

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and any other Derivative Securities then outstanding). At the expiration of such twenty (20) day period, the Company shall promptly notify each Major Investor that elects to purchase or acquire all the shares available to it (each, a “Fully Exercising Investor”) of any other Major Investor’s failure to do likewise. During the ten (10) day period commencing after the Company has given such notice, each Fully Exercising Investor may, by giving notice to the Company, elect to purchase or acquire, in addition to the number of shares specified above, up to that portion of the New Securities for which Major Investors were entitled to subscribe but that were not subscribed for by the Major Investors which is equal to the proportion that the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held, by such Fully Exercising Investor bears to the Common Stock issued and held, or issuable (directly or indirectly) upon conversion and/or exercise, as applicable, of the Preferred Stock and any other Derivative Securities then held, by all Fully Exercising Investors who wish to purchase such unsubscribed shares. The closing of any sale pursuant to this Subsection 4.1(b) shall occur within the later of ninety (90) days of the date that the Offer Notice is given and the date of initial sale of New Securities pursuant to Subsection 4.1(c).

(c) If all New Securities referred to in the Offer Notice are not elected to be purchased or acquired as provided in Subsection 4.1(b), the Company may, during the ninety (90) day period following the expiration of the periods provided in Subsection 4.1(b), offer and sell the remaining unsubscribed portion of such New Securities to any Person or Persons at a price not less than, and upon terms no more favorable to the offeree than, those specified in the Offer Notice. If the Company does not enter into an agreement for the sale of the New Securities within such period, or if such agreement is not consummated within thirty (30) days of the execution thereof, the right provided hereunder shall be deemed to be revived and such New Securities shall not be offered unless first reoffered to the Major Investors in accordance with this Subsection 4.1.

(d) The right of first offer in this Subsection 4.1 shall not be applicable to (i) Exempted Securities (as defined in the Certificate of Incorporation); and (ii) shares of Common Stock issued in the IPO.

4.2 Termination. The covenants set forth in Subsection 4.1 shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO, or (ii) upon the closing of a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

5. Additional Covenants.

5.1 Insurance. The Company will use commercially reasonable efforts to cause the Directors and Officers liability insurance and term “key-person” insurance on each Founder, each in an amount and on terms and conditions satisfactory to the Board of Directors, to be maintained until such time as the Board of Directors determines that such insurance should be discontinued. The key-person policy shall name the Company as loss payee, and neither policy shall be cancelable by the Company without prior approval by the Board of Directors, including the Requisite Preferred Director Vote. Notwithstanding any other provision of this Section 5.1 to the contrary, for so long as a Series A Director or a Series B Director (in each case, as defined in the Certificate of Incorporation) is serving on the Board of Directors, the Company shall not cease to maintain a Directors and Officers liability insurance policy with a carrier and in an amount and on terms and conditions satisfactory to the Board of Directors, including at the Requisite Preferred Director Vote, and the Company shall annually, within one hundred twenty (120) days after the end of each fiscal year of the Company, deliver to the Investors a certification that such a Directors and Officers liability insurance policy remains in effect. Each Key Holder hereby covenants and agrees that, to the extent such Key Holder is named under such key-person policy, such Key Holder will execute and deliver to the Company, as reasonably requested, a written notice and consent form with respect to such policy.

 

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5.2 Employee Agreements. The Company will cause (i) each Person now or hereafter employed by it or by any subsidiary (or engaged by the Company or any subsidiary as a consultant/independent contractor) with access to confidential information and/or trade secrets to enter into a nondisclosure and proprietary rights assignment agreement; and (ii) each Key Employee to enter into a one (1) year noncompetition and nonsolicitation agreement, substantially in the form approved by the Board of Directors, including the Requisite Preferred Director Vote. In addition, the Company shall not amend, modify, terminate, waive, or otherwise alter, in whole or in part, any of the above-referenced agreements or any restricted stock agreement between the Company and any employee, without the approval by the Board of Directors, including the Requisite Preferred Director Vote.

5.3 Employee Stock. Unless otherwise approved by the Board of Directors, including the Requisite Preferred Director Vote, all future employees and consultants of the Company who purchase, receive options to purchase, or receive awards of shares of the Company’s capital stock after the date hereof shall be required to execute restricted stock or option agreements, as applicable, providing for (i) vesting of shares over a four (4) year period, with the first twenty-five percent (25%) of such shares vesting following twelve (12) months of continued employment or service, and the remaining shares vesting in equal monthly installments over the following thirty-six (36) months, and (ii) a market stand-off provision substantially similar to that in Subsection 2.11. Without the prior approval by the Board of Directors, including the Requisite Preferred Director Vote, the Company shall not amend, modify, terminate, waive or otherwise alter, in whole or in part, any stock purchase, stock restriction or option agreement with any existing employee or service provider if such amendment would cause it to be inconsistent with this Subsection 5.3. In addition, unless otherwise approved by the Board of Directors, including the Requisite Preferred Director Vote, the Company shall retain (and not waive) a “right of first refusal” on employee transfers until the Company’s IPO and shall have the right to repurchase unvested shares at cost upon termination of employment of a holder of restricted stock.

5.4 Matters Requiring Investor Director Approval. So long as the holders of Preferred Stock are entitled to elect a Preferred Director, the Company hereby covenants and agrees with each of the Investors that it shall not, without approval of the Board of Directors, which approval must include the Requisite Preferred Director Vote:

(a) consummate an acquisition or sale by the Company of any entity or assets if the purchase price is more than $1,500,000;

(b) directly or indirectly license, sell, assign or otherwise transfer to any third party in any territory of any material Company-controlled intellectual property or Product rights with a value in excess of $1,500,000;

(c) issue any stock options or warrants to purchase Common Stock or Preferred Stock (other than options or warrants issued to employees, consultants, or directors in accordance with the Company’s Amended and Restated 2018 Equity Incentive Plan or other equity incentive plans approved by the Board, including at least one Series A Director);

(d) make, or permit any subsidiary to make, any loan or advance in excess of $1,000,000 to, or own any stock or other securities of or make any investments with a value in excess of $1,000,000 in, any subsidiary or other corporation, partnership, or other entity or Person (including, without limitation, any employee or director of the Company or any subsidiary) unless it is wholly owned by the Company

 

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(e) incur any aggregate indebtedness in excess of $1,500,000, except for (x) payables arising in the ordinary course of business, or (y) loans from institutional or other third-party lenders, equipment leases and similar arrangements;

(f) make any material changes in or deviate from the nature of the business engaged in by the Company; or

(g) hire or terminate without cause any senior executive of the Company.

5.5 Board Matters. Unless otherwise determined by the vote of a majority of the directors then in office, the Board of Directors shall meet telephonically or in person at least quarterly in accordance with an agreed-upon schedule. The Company shall reimburse the nonemployee directors for all reasonable out-of-pocket travel expenses incurred in connection with attending meetings of the Board of Directors. Each Preferred Director shall be entitled in such person’s discretion to be a member of any committee of the Board of Directors.

5.6 Successor Indemnification. If the Company or any of its successors or assignees consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger, then to the extent necessary, proper provision shall be made so that the successors and assignees of the Company assume the obligations of the Company with respect to indemnification of members of the Board of Directors as in effect immediately before such transaction, whether such obligations are contained in the Company’s Bylaws, the Certificate of Incorporation, or elsewhere, as the case may be.

5.7 Expenses of Counsel. In the event of a transaction which is a Sale of the Company (as defined in the Amended and Restated Voting Agreement of even date herewith among the Investors, the Company and the other parties named therein), the reasonable fees and disbursements, not to exceed $50,000 of one counsel for the Major Investors (“Investor Counsel”), in their capacities as stockholders, shall be borne and paid by the Company. At the outset of considering a transaction which, if consummated would constitute a Sale of the Company, the Company shall obtain the ability to share with the Investor Counsel (and such counsel’s clients) and shall share the confidential information (including, without limitation, the initial and all subsequent drafts of memoranda of understanding, letters of intent and other transaction documents and related noncompete, employment, consulting and other compensation agreements and plans) pertaining to and memorializing any of the transactions which, individually or when aggregated with others would constitute the Sale of the Company. The Company shall be obligated to share (and cause the Company’s counsel and investment bankers to share) such materials when distributed to the Company’s executives and/or any one or more of the other parties to such transaction(s). In the event that Investor Counsel deems it appropriate, in its reasonable discretion, to enter into a joint defense agreement or other arrangement to enhance the ability of the parties to protect their communications and other reviewed materials under the attorney client privilege, the Company shall, and shall direct its counsel to, execute and deliver to Investor Counsel and its clients such an agreement in form and substance reasonably acceptable to Investor Counsel. In the event that one or more of the other party or parties to such transactions require the clients of Investor Counsel to enter into a confidentiality agreement and/or joint defense agreement in order to receive such information, then the Company shall share whatever information can be shared without entry into such agreement and shall, at the same time, in good faith work expeditiously to enable Investor Counsel and its clients to negotiate and enter into the appropriate agreement(s) without undue burden to the clients of Investor Counsel.

 

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5.8 Indemnification Matters. The Company hereby acknowledges that one (1) or more of the directors nominated to serve on the Board of Directors by the Investors (each an “Investor Director”) may have certain rights to indemnification, advancement of expenses and/or insurance provided by one or more of the Investors and certain of their Affiliates (collectively, the “Investor Indemnitors”). The Company hereby agrees (a) that it is the indemnitor of first resort (i.e., its obligations to any such Investor Director are primary and any obligation of the Investor Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by such Investor Director are secondary), (b) that it shall be required to advance the full amount of expenses incurred by such Investor Director and shall be liable for the full amount of all expenses, judgments, penalties, fines and amounts paid in settlement by or on behalf of any such Investor Director to the extent legally permitted and as required by the Company’s Certificate of Incorporation or Bylaws of the Company (or any agreement between the Company and such Investor Director), without regard to any rights such Investor Director may have against the Investor Indemnitors, and, (c) that it irrevocably waives, relinquishes and releases the Investor Indemnitors from any and all claims against the Investor Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Investor Indemnitors on behalf of any such Investor Director with respect to any claim for which such Investor Director has sought indemnification from the Company shall affect the foregoing and the Investor Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of such Investor Director against the Company. The Investor Directors and the Investor Indemnitors are intended third-party beneficiaries of this Subsection 5.9 and shall have the right, power and authority to enforce the provisions of this Subsection 5.8 as though they were a party to this Agreement.

5.9 Right to Conduct Activities. The Company hereby agrees and acknowledges that each Major Investor (together with their respective Affiliates) is a professional investment organization, and as such reviews the business plans and related proprietary information of many enterprises, some of which may compete directly or indirectly with the Company’s business (as currently conducted or as currently propose to be conducted). The Company hereby agrees that, to the extent permitted under applicable law, the Major Investors (and their respective Affiliates) shall not be liable to the Company for any claim arising out of, or based upon, (i) the investment by a Major Investor (or its respective Affiliates) in any entity competitive with the Company, or (ii) actions taken by any partner, officer, employee or other representative of a Major Investor (or its respective Affiliates) to assist any such competitive company, whether or not such action was taken as a member of the board of directors of such competitive company or otherwise, and whether or not such action has a detrimental effect on the Company; provided, however, that the foregoing shall not relieve (x) any of the Investors from liability associated with the unauthorized disclosure of the Company’s confidential information obtained pursuant to this Agreement, or (y) any director or officer of the Company from any liability associated with his or her fiduciary duties to the Company.

5.10 Defense Production Act. To the extent that the company engages in the design, fabrication, development, testing, production or manufacture of critical technologies within the meaning of the DPA, whether because of a new categorization of technology by the U.S. government or otherwise, the Company shall promptly provide notice to Clarus, Qiming, Surveyor and Viking.

 

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5.11 Termination of Covenants. The covenants set forth in this Section 5, except for Subsections 5.6, 5.7 and 5.8, shall terminate and be of no further force or effect (i) immediately before the consummation of the IPO or (ii) when the Company first becomes subject to the periodic reporting requirements of Section 12(g) or 15(d) of the Exchange Act, or (iii) upon a Deemed Liquidation Event, as such term is defined in the Certificate of Incorporation, whichever event occurs first.

6. Miscellaneous.

6.1 Successors and Assigns. The rights under this Agreement may be assigned (but only with all related obligations) by a Holder to a transferee of Registrable Securities that (i) is an Affiliate of a Holder; (ii) is a Holder’s Immediate Family Member or trust for the benefit of an individual Holder or one or more of such Holder’s Immediate Family Members; or (iii) after such transfer, holds at least 1,000,000 shares of Registrable Securities (subject to appropriate adjustment for stock splits, stock dividends, combinations, and other recapitalizations); provided, however, that (x) the Company is, within a reasonable time after such transfer, furnished with written notice of the name and address of such transferee and the Registrable Securities with respect to which such rights are being transferred; and (y) such transferee agrees in a written instrument delivered to the Company to be bound by and subject to the terms and conditions of this Agreement, including the provisions of Subsection 2.11. For the purposes of determining the number of shares of Registrable Securities held by a transferee, the holdings of a transferee (1) that is an Affiliate or stockholder of a Holder; (2) who is a Holder’s Immediate Family Member; or (3) that is a trust for the benefit of an individual Holder or such Holder’s Immediate Family Member shall be aggregated together and with those of the transferring Holder; provided further that all transferees who would not qualify individually for assignment of rights shall, as a condition to the applicable transfer, establish a single attorney-in-fact for the purpose of exercising any rights, receiving notices, or taking any action under this Agreement. The terms and conditions of this Agreement inure to the benefit of and are binding upon the respective successors and permitted assignees of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assignees any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein.

6.2 Governing Law. This Agreement shall be governed by the internal law of the State of Delaware, without regard to conflict of law principles that would result in the application of any law other than the law of the State of Delaware.

6.3 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.

6.4 Titles and Subtitles. The titles and subtitles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement.

 

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6.5 Notices.

(a) All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given upon the earlier of actual receipt or (i) personal delivery to the party to be notified; (ii) when sent, if sent by electronic mail or facsimile during the recipient’s normal business hours, and if not sent during normal business hours, then on the recipient’s next business day; (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (iv) one (1) business day after the business day of deposit with a nationally recognized overnight courier, freight prepaid, specifying next-day delivery, with written verification of receipt. All communications shall be sent to the respective parties at their addresses as set forth on Schedule A hereto, or to the principal office of the Company and to the attention of the Chief Executive Officer, in the case of the Company, or to such email address, facsimile number, or address as subsequently modified by written notice given in accordance with this Subsection 6.5. If notice is given to the Company, a copy shall also be sent to Proskauer Rose LLP, Eleven Times Square, New York, NY 10036, Attn: Michael Callahan and if notice is given to the Investors, a copy shall also be given to Choate Hall & Stewart LLP, Two International Place, Boston, MA 02116, Attn: Tobin P. Sullivan and Brian P. Lenihan and Cooley LLP, 500 Boylston Street, Boston, MA 02116, Attn: Josh Rottner.

(b) Consent to Electronic Notice. Each Investor and Key Holder consents to the delivery of any stockholder notice pursuant to the Delaware General Corporation Law (the “DGCL”), as amended or superseded from time to time, by electronic transmission pursuant to Section 232 of the DGCL (or any successor thereto) at the electronic mail address or the facsimile number set forth below such Investor’s or Key Holder’s name on the Schedules hereto, as updated from time to time by notice to the Company, or as on the books of the Company. To the extent that any notice given by means of electronic transmission is returned or undeliverable for any reason, the foregoing consent shall be deemed to have been revoked until a new or corrected electronic mail address has been provided, and such attempted electronic notice shall be ineffective and deemed to not have been given. Each Investor and Key Holder agrees to promptly notify the Company of any change in such stockholder’s electronic mail address, and that failure to do so shall not affect the foregoing.

6.6 Amendments and Waivers. Any term of this Agreement may be amended, modified or terminated 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 (x) the Company and (y) the Investors holding a majority of the Registrable Securities (other than Key Holder Registrable Securities) then held by all Investors; provided that the Company may in its sole discretion waive compliance with Subsection 2.12(c) (and the Company’s failure to object promptly in writing after notification of a proposed assignment allegedly in violation of Subsection 2.12(c) shall be deemed to be a waiver); and provided further that any provision hereof may be waived by any waiving party on such party’s own behalf, without the consent of any other party. Notwithstanding the foregoing, (a) this Agreement may not be amended, modified or terminated and the observance of any term hereof may not be waived with respect to any Investor without the written consent of such Investor, unless such amendment, modification, termination, or waiver applies to all Investors in the same fashion (it being agreed that a waiver of the provisions of Section 4 with respect to a particular transaction shall be deemed to apply to all Investors in the same fashion if such waiver does so by its terms, notwithstanding the fact that certain Investors may nonetheless, by agreement with the Company, purchase securities in such transaction; provided, however, that if, after giving effect to such waiver of Section 4 with respect to a particular transaction, a Major Investor purchases securities in such transaction or issuance (such Major Investor, a “Participating Investor”), such waiver of the provisions of Section 4 shall be deemed to apply to each other Major Investor whose rights were waived or amended only if such other Major Investor has been provided the opportunity to purchase a proportional number of the New Securities being offered by the Company in such transaction based on the pro rata purchase right of such other Major Investor set forth in Section 4, assuming a transaction size determined based upon the amount purchased by the Participating Investor that invested the largest percentage in such transaction, it being agreed that such opportunity may be provided subsequent to the initial closing in which such Participating Investor(s) purchase

 

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securities); (b) Subsections 3.1 and 3.2, Section 4 and any other section of this Agreement applicable to the Major Investors (including this clause (b) of this Subsection 6.6) may not be amended, modified, terminated or waived without the written consent of the holders of at least 75% of the Registrable Securities then outstanding and held by the Major Investors; (c) (i) Subsection 1.4, Subsection 1.8, Subsection 1.25, Subsection 1.26, Subsection 1.31, Subsection 2.12, Subsection 3.3, and Subsection 5.9 may not be amended, modified, terminated or waived in a manner that adversely affects the rights of Clarus, Longitude, Qiming, Surveyor or Viking contained therein or herein without the written consent of each such Investor affected by such amendment, modification, termination or waiver and (ii) Subsection 1.27, Subsection 1.46, Subsection 1.47, Subsection 2.11, Subsection 3.5, Subsection 3.6, Subsection 5.10 and this clause (c) of this Subsection 6.6 may not be amended, modified, terminated or waived in a manner that alters the rights of Clarus, Longitude, Qiming, Surveyor or Viking contained therein or herein without the written consent of each such Investor affected by such amendment, modification, termination or waiver and (d) no provision hereof may be waived in any way which would adversely affect the rights of the Key Holders hereunder in a manner disproportionate to any adverse effect such amendment, modification, termination or waiver would have on the rights of the Investors hereunder without also the written consent of the holders of at least a majority of the Registrable Securities held by the Key Holders. Notwithstanding the foregoing, Schedule A hereto may be amended by the Company from time to time to add transferees of any Registrable Securities in compliance with the terms of this Agreement without the consent of the other parties; and Schedule A hereto may also be amended by the Company after the date of this Agreement without the consent of the other parties to add information regarding any additional Investor who becomes a party to this Agreement in accordance with Subsection 6.9. The Company shall give prompt notice of any amendment, modification or termination hereof or waiver hereunder to any party hereto that did not consent in writing to such amendment, modification, termination, or waiver. Any amendment, modification, termination, or waiver effected in accordance with this Subsection 6.6 shall be binding on all parties hereto, regardless of whether any such party has consented thereto. No waivers of or exceptions to any term, condition, or provision of this Agreement, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, condition, or provision.

6.7 Severability. In case any one or more of the provisions contained in this Agreement is for any reason held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision of this Agreement, and such invalid, illegal, or unenforceable provision shall be reformed and construed so that it will be valid, legal, and enforceable to the maximum extent permitted by law.

6.8 Aggregation of Stock. All shares of Registrable Securities held or acquired by Affiliates shall be aggregated together for the purpose of determining the availability of any rights under this Agreement and such Affiliated persons may apportion such rights as among themselves in any manner they deem appropriate.

6.9 Entire Agreement. This Agreement (including any Schedules and Exhibits hereto) constitutes the full and entire understanding and agreement among the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties is expressly canceled.

6.10 Dispute Resolution. The parties (a) hereby irrevocably and unconditionally submit to the jurisdiction of the state courts of Delaware and to the jurisdiction of the United States District Court for the District of Delaware for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement, (b) agree not to commence any suit,

 

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action or other proceeding arising out of or based upon this Agreement except in the state courts of Delaware or the United States District Court for the District of Delaware, and (c) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the subject matter hereof may not be enforced in or by such court.

6.11 WAIVER OF JURY TRIAL. EACH PARTY HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OTHER TRANSACTION DOCUMENTS, THE SECURITIES OR THE SUBJECT MATTER HEREOF OR THEREOF. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS (INCLUDING NEGLIGENCE), BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THIS SECTION HAS BEEN FULLY DISCUSSED BY EACH OF THE PARTIES HERETO AND THESE PROVISIONS WILL NOT BE SUBJECT TO ANY EXCEPTIONS. EACH PARTY HERETO HEREBY FURTHER WARRANTS AND REPRESENTS THAT SUCH PARTY HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.

Each of the parties to this Agreement consents to personal jurisdiction for any equitable action sought in the U.S. District Court for the District of Delaware or any court of the State of Delaware having subject matter jurisdiction.

6.12 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party under this Agreement, upon any breach or default of any other party under this Agreement, shall impair any such right, power, or remedy of such nonbreaching or nondefaulting party, nor shall it be construed to be a waiver of or acquiescence to any such breach or default, or to any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, whether under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

[Signature Pages Follow]

 

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

 

COMPANY:
TALARIS THERAPEUTICS, INC.
By:		/s/ Scott Requadt
Name:		Scott Requadt
Title:		Chief Executive Officer
Address:		570 Preston St.
		Louisville, KY 40202

Exhibit 10.1

Execution Version

TALARIS THERAPEUTICS,

INC.

 

 

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

 

 

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TALARIS THERAPEUTICS,

INC.

 

 

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

 

 

ARTICLE I

PURPOSE

The purpose of this Second Amended and Restated 2018 Equity Incentive Plan is to enhance the profitability and value of the Company for the benefit of its stockholders by enabling the Company to offer Eligible Employees, Consultants and Non-Employee Directors stock-based incentives in the Company to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders.

ARTICLE II

DEFINITIONS

For purposes of the Plan, the following terms shall have the following meanings:

2.1 “Acquisition Event” means a merger or consolidation in which the Company is not the surviving entity, any transaction that results in the acquisition of all or substantially all of the Company’s outstanding Common Stock by a Person, or the sale or other disposition of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole. The occurrence of an Acquisition Event shall be determined by the Committee.

2.2 “Affiliate” of any specified Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. No Person shall be deemed to be an Affiliate of another Person solely by virtue of the fact that both Persons own shares of the capital stock of the Company.

2.3 “Appreciation Award” means any Stock Option or any Other Stock-Based Award that is based on the appreciation in value of a share of Common Stock in excess of an amount at least equal to the Fair Market Value on the date such Other Stock-Based Award is granted.

2.4 “Award” means any award granted or made under the Plan of any Stock Option, any Restricted Stock or any Other Stock-Based Award. All Awards shall be subject to the terms of a written or electronic agreement executed by the Company and the Participant. Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

2.5 “Board” means the Board of Directors of the Company.

2.6 “Bylaws” means the Bylaws of the Company, as amended or amended and restated from time to time.

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2.7 “Certificate of Incorporation” means the Company’s Certificate of Incorporation, as amended or amended and restated from time to time.

2.8 “Cause” means, unless otherwise defined in the applicable Award agreement, with respect to a Participant’s Termination of Employment or Termination of Consultancy, the following: (a) in the case where there is no employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate of the Company and the Participant at the time of the grant of the Award (or where there is such an agreement but it does not define “cause” (or words of like import or where it only applies upon the occurrence of a change in control and one has not yet taken place)), termination due to: (i) a Participant’s commission of, conviction of, plea of guilty or nolo contendere to, being indicted for or charged with a felony or a misdemeanor (or a comparable classification in a jurisdiction that does not use these terms); (ii) perpetration by a Participant of an illegal act, or any act of dishonesty, fraud, or moral turpitude with respect to the Company or any of its Affiliates; (iii) a Participant’s failure to attempt to perform or unsatisfactory performance of his or her duties or responsibilities for any reason; (iv) a Participant’s misconduct or negligence with regard to the Company or its Affiliates; (v) the Participant’s misappropriation of a corporate opportunity; (vi) the Participant’s violation of any policy of the Company or any of its Affiliates applicable to the Participant as in effect from time to time; (vii) the Participant’s engaging in any conduct injurious or detrimental to the Company or any of its Affiliates; or (viii) the Participant’s breach of any agreement with the Company or any of its Affiliates, including any confidentiality or restrictive covenant agreement entered into between the Participant and the Company or any of its Affiliates; or (b) in the case where there is an employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate of the Company and the Participant at the time of the grant of the Award that defines “cause” (or words of like import), “cause” as defined under such agreement; provided, however, that with regard to any agreement under which the definition of “cause” only applies upon an occurrence of a change in control, such definition of “cause” shall not apply until a change in control actually takes place and then only with regard to a termination thereafter. With respect to a Participant’s Termination of Directorship, “Cause” means an act or failure to act that constitutes cause for removal of a director under applicable Delaware law. The determination as to whether “Cause” has occurred shall be made by the Board or its designee acting in good faith, which shall have the authority to waive the consequences under the Plan of the existence or occurrence of any of the events, acts or omissions constituting “Cause.” A Termination for Cause shall be deemed to include a determination following a Participant’s Termination of employment for any reason that circumstances existing prior to such termination for the Company or one of the Subsidiaries to have terminated such Participant’s employment for Cause; provided that such determination shall be made not later than one hundred and eighty (180) days following the date on which the chairman of the Audit Committee of the Board first had detailed, specific, full information of the relevant conduct (and, for avoidance of doubt, if the Board undertakes an internal investigation of such conduct, the chairman of the Audit Committee of the Board shall not be deemed to have actual knowledge of such conduct until the conclusion of such investigation).

2.9 “Change in Control” means, unless otherwise determined by the Committee in the applicable Award agreement, the occurrence of any of the following:

(a) the acquisition (including any acquisition through purchase, reorganization, merger, consolidation or similar transaction), directly or indirectly, in one or more transactions by any Person or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), other than any acquisition by any Permitted Holder or any of its Related Parties, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of shares or other securities (as defined in Section 3(a)(10) of the Exchange Act) representing 50% or more of either (i) the voting common stock of the Company or (ii) the combined voting power of the securities of the Company entitled to vote generally in the election of directors of the Board

 

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(collectively, the “Company Voting Securities”), in each case calculated on a fully diluted basis after giving effect to such acquisition; provided, however, that none of the following acquisitions shall constitute a Change in Control as defined in this clause (a): (A) any acquisition from the Company, (B) any acquisition by (1) the Company, (2) any employee benefit plan (or any trust for an employee benefit plan) maintained by the Company or its Affiliates or (3) by any acquisition by any Person or group of Persons consisting solely of stockholders of the Company on the Effective Date, (C) any acquisition that does not result in any Person (other than any stockholder or stockholders of the Company on the Effective Date), beneficially owning shares or securities representing 50% or more of either the Common Stock or Company Voting Securities, and (D) any acquisition, after which the Permitted Holders or any of their Related Parties have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board;

(b) after the completion of an Initial Public Offering, during any period of twelve consecutive months, any election has occurred of Persons to the Board that causes two-thirds of the Board to consist of Persons other than (i) Persons who were members of the Board on the Effective Date, and (ii) Persons who were nominated for election as members of the Board at a time when two-thirds of the Board consisted of Persons who were members of the Board on the Effective Date; provided, however, that any Person nominated for election by a Board at least two-thirds of whom constituted Persons described in clauses (i) or (ii) or by Persons who were themselves nominated by such Board shall, for this purpose, be deemed to have been nominated by a Board composed of Persons described in clause (i); or

(c) the sale or other disposition (other than a merger or consolidation) of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person other than a Permitted Holder or a Related Person of a Permitted Holder; or

(d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

Notwithstanding the foregoing, unless the Committee provides otherwise in an Award agreement, the completion of an Initial Public Offering, by itself, shall not be considered a Change in Control. With respect to any payment, accelerated vesting, and/or settlement pursuant to a Section 409A Covered Award that is triggered upon a Change in Control, unless otherwise provided in the Award agreement at grant, the settlement of such Award shall not occur until the earliest of (i) the Change in Control if such Change in Control constitutes a “change in the ownership of the corporation,” a “change in effective control of the corporation” or a “change in the ownership of a substantial portion of the assets of the corporation,” within the meaning of Section 409A(a)(2)(A)(v) of the Code, (ii) the date such Award otherwise would be settled pursuant to the terms of the applicable Award agreement and (iii) the Participant’s “separation from service” within the meaning of Section 409A of the Code, subject to Section 13.16.

2.10 “Chief Executive Officer” means the chief executive officer of the Company.

2.11 “CIC Notice” has the meaning set forth in Section 10.3(b).

2.12 “Code” means the Internal Revenue Code of 1986, as amended. Any reference to any section of the Code shall also be a reference to any successor provision and any Treasury Regulation promulgated thereunder.

 

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2.13 “Committee” means (a) prior to a Registration Date, a committee or subcommittee of the Board appointed from time to time by the Board, or, if none, the full Board and (b) upon and following a Registration Date, a committee or subcommittee of the Board appointed from time to time by the Board that may consist solely of two or more “non-employee directors” each of whom is intended to be (i) to the extent required by Rule 16b-3, a “nonemployee director” as defined in Rule 16b-3, and (ii) as applicable, an “independent director” as defined under the Nasdaq Listing Rules, the NYSE Listed Company Manual or other applicable stock exchange rules; provided that if for any reason the appointed Committee does not meet the requirements of Rule 16b-3, such noncompliance shall not affect the validity of grants, interpretations or other actions of the Committee. With respect to the application of the Plan to Non-Employee Directors, the Committee shall mean the Board. Notwithstanding the foregoing, if and to the extent that no Committee exists that has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board and all references herein to the Committee shall be deemed references to the Board.

2.14 “Common Stock” means the Class A Common Stock of the Company, par value $0.0001 per share.

2.15 “Company” means Talaris Therapeutics, Inc., a Delaware corporation, or its successors by operation of law.

2.16 “Consultant” means any natural person who (a) provides, either directly or through a limited liability company or a similar entity, bona fide consulting or advisory services to the Company or any of its Affiliates, which services are not in connection with the offer or sale of securities in a capital-raising transaction, and (b) who does not, directly or indirectly, promote or maintain a market for the Company’s or any of its Affiliates’ securities.

2.17 “control” means, with respect to any Person, the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and words such as “controlled” and “controlling” have meanings correlative to the foregoing.

2.18 “Customers” means any Person who is a customer or client of the Company or any of its Affiliates and with whom the Participant had business-related contact (whether in person, by telephone, or by paper or electronic correspondence) on behalf of the Company or any of its Affiliates.

2.19 “Detrimental Activity” means, unless otherwise set forth in an Award agreement:

(a) disclosing, divulging, furnishing or making available to any Person, except as necessary in the furtherance of Participant’s responsibilities to the Company or any of its Affiliates, either during or subsequent to Participant’s service relationship with the Company or any of its Affiliates, any knowledge or information with respect to trade secrets or confidential or proprietary information, methods, processes, plans or materials of the Company or any of its Affiliates, or with respect to any other confidential or proprietary aspects of the business of the Company or any of its Affiliates, acquired by the Participant at any time prior to the Participant’s Termination;

(b) any activity while employed by, or performing services for, the Company or any of its Affiliates that results in a termination for Cause, or a determination by the Committee in good faith during the twelve months following the termination of Participant’s employment for any reason that circumstances existed prior to such Termination for the Company to have terminated the Participant’s employment for Cause;

 

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(c) the Committee’s determination, made in good faith, that the Participant, directly or indirectly, has engaged in any of the following activities: competition; interference with key business relationships; solicitation of customers or suppliers; solicitation or hiring of employees; disparagement; or other similar activities; or

(d) a breach of any agreement between the Participant and the Company or an Affiliate of the Company.

Unless otherwise determined by the Committee at grant or unless a longer post-Termination recoupment period is provided in the applicable Award agreement, Detrimental Activity shall not be deemed to occur after the end of the one-year period following the later of the Participant’s Termination or the date the Award is exercisable, if applicable.

For purposes of subsections (a), (c) and (d) above, the Committee has the authority to provide the Participant with written authorization to engage in the activities contemplated thereby and no other Person shall have authority to provide the Participant with such authorization.

2.20 “Disability” means with respect to a Participant’s Termination, a permanent and total disability as defined in Section 22(e)(3) of the Code. A Disability shall only be deemed to occur at the time of the determination by the Committee of the Disability. Notwithstanding the foregoing, for an Award that provides for vesting and/or payment or settlement triggered upon a Disability and that constitutes “non-qualified deferred compensation” pursuant to Section 409A of the Code, the foregoing definition shall apply for purposes of vesting of such Award, provided that for purposes of payment or settlement of such Award, such Award shall not be paid (or otherwise settled) until the earliest of: (A) the Participant’s “disability” within the meaning of Section 409A(a)(2)(C)(i) or (ii) of the Code, (B) the Participant’s “separation from service” within the meaning of Section 409A of the Code and (C) the date such Award would otherwise be settled pursuant to the terms of the Award agreement.

2.21 “Effective Date” means the effective date of the Plan as defined in Article XIII.

2.22 “Eligible Employee” means each employee of the Company or one of its Affiliates.

2.23 “Exchange Act” means the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder. Any references to any section of the Exchange Act shall also be a reference to any successor provision.

2.24 “Exercisable Awards” has the meaning set forth in Section 4.2(d).

2.25 “Fair Market Value” means, unless otherwise required by any applicable provision of the Code or other applicable law, as of any date and except as provided below, (a) the last sales price reported for the Common Stock on the applicable date as reported on the principal established securities market on which it is then traded or if the Common Stock has not been reported or quoted on such date, on the first day prior thereto on which the Common Stock was reported or quoted; or (b) if the Company’s Common Stock is not traded on any established securities market, the price as determined by the Committee in whatever manner it considers appropriate, taking into account the requirements of Section 422, if applicable, and Section 409A of the Code. For purposes of the grant of any Award, the applicable date shall be the trading day on which the Award is granted, or if such grant date is not a trading day, the trading day immediately prior to the date on which the Award is granted. For purposes of the exercise of any Award, the applicable date shall be the date a notice of exercise is received by the Company or, if not a day on which the applicable market is open, the next day that it is open.

 

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2.26 “Family Member” means “family member” as defined in Rule 701 under the Securities Act and, following the filing of a Form S-8 pursuant to the Securities Act with respect to the Plan, as defined in Section A.1.(5) of the general instructions of Form S-8, as may be amended from time to time.

2.27 “Good Reason” with respect to a Participant’s voluntary Termination of Employment shall have the meaning ascribed to such term under an employment or similar agreement in effect between the Company and the Participant; a Participant shall not have “Good Reason” in the absence of such an agreement providing for and defining such term. With regard to any agreement under which “Good Reason” only applies upon an occurrence of a change in control, a Participant shall not have “Good Reason” until a change in control actually takes place and then only with regard to a termination thereafter that satisfies such “Good Reason” requirements.

2.28 “Incentive Stock Option” means any Stock Option awarded to an Eligible Employee of the Company, its Subsidiaries or its Parent (if any) under the Plan intended to be and designated as an “Incentive Stock Option” within the meaning of Section 422 of the Code.

2.29 “Initial Public Offering” means (i) an initial public offering of Common Stock pursuant to an effective registration statement filed under the Securities Act (excluding registration statements filed on Form S-8, any similar successor form or another form used for a purpose similar to the intended use of such forms), or (ii) the Committee has determined that Common Stock has otherwise become publicly-traded for this purpose.

2.30 “Issued Shares” means shares of Common Stock acquired by a Participant (or his or her estate or legal representative) upon vesting or exercise of an outstanding Award granted under the Plan. For purposes of Section 10.3, “Issued Shares” shall include all of a Participant’s or his or her Permitted Transferee’s Issued Shares that presently or as a result of any such transaction may be acquired upon the exercise or vesting of an Award (following the payment of any applicable exercise or purchase price therefor).

2.31 “Joinder Agreement” means an adoption agreement to any of the Stockholders Agreements or any similar joinder agreement to a stockholders agreement (or similar agreement) entered into by the Company after the Effective Date.

2.32 “Lead Underwriter” has the meaning set forth in Section 13.23.

2.33 “Lock-Up Period” has the meaning set forth in Section 13.23.

2.34 “Non-Employee Director” means a non-employee director of the Company as defined in Rule 16b-3.

2.35 “Non-Qualified Stock Option” means any Stock Option awarded under the Plan that is not an Incentive Stock Option.

2.36 “Other Extraordinary Event” has the meaning set forth in Section 4.2(b).

2.37 “Other Stock-Based Award” means an Award under Article VIII of this Plan that is valued in whole or in part by reference to, or is payable in or otherwise based on, Common Stock, including an Award valued by reference to an Affiliate.

2.38 “Parent” means any parent corporation of the Company within the meaning of Section 424(e) of the Code.

 

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2.39 “Participant” means an Eligible Employee, Consultant or Non-Employee Director to whom an Award has been granted pursuant to the Plan.

2.40 “Permitted Holder” means any holder of Voting Securities on the Effective Date and their respective Affiliates and Permitted Transferees, and any group consisting solely of such Persons.

2.41 “Permitted Transferee” means:

(a) with respect to a Participant or any stockholder of the Company who is a natural person, (i) such person’s spouse, parents, parents-in-law, descendants, nephews, nieces, brothers, sisters, brothers-in-law, sisters-in-law and children-in-law, (ii) such person’s heirs, legatees, beneficiaries or devisees and (iii) any trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners or other owners of which consist entirely of such person or such other persons referred to in clauses (i) and (ii) above;

(b) with respect to a trust that is a Permitted Transferee pursuant to section (a)(iii) above, any other trust, corporation, partnership or other entity, the beneficiaries, stockholders, partners or other owners of which consist entirely of such trust or such trust’s beneficiaries;

(c) with respect to any stockholder of the Company that is an investment fund, an investment partnership or an investment account, any Related Person of such stockholder; and

(d) with respect to any stockholder of the Company that is an entity and to which clause (c) above is not applicable, any controlled Affiliate of such stockholder so long as such transferee remains a controlled Affiliate of such stockholder of the Company following the applicable Transfer;

provided that, in any of such cases, such Permitted Transferee is (x) an accredited investor within the meaning of Regulation D under the Securities Act or (y) is otherwise eligible to be a Permitted Transferee under Section 4(a)(2) or Rule 701 of the Securities Act, and provided, further, that the Committee may at any time restrict or prevent any Transfer if the Committee determines, in its sole discretion, that such restriction or prevention is necessary or advisable to avoid a violation of, or to prevent the Company from becoming subject to, any applicable Federal or state securities law, rule or regulation.

2.42 “Person” means any individual, entity (including any employee benefit plan or any trust for an employee benefit plan) or group (within the meaning of Section 13(d)(3) or Section 14(d)(2) of the Exchange Act, or any successor provision).

2.43 “Plan” means this Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as amended from time to time.

2.44 “Proposed Transferee” has the meaning set forth in Section 10.2(b).

2.45 “Registration Date” means the first date after the Effective Date (a) on which the Company consummates an Initial Public Offering or (b) any class of common equity securities of the Company is required to be registered under Section 12 of the Exchange Act.

2.46 “Related Person” means, with respect to any Person, (a) an Affiliate of such Person, (b) any investment manager, investment advisor, managing member or general partner of such Person, (c) any investment fund, investment partnership, investment account or other investment Person whose investment manager, investment advisor, managing member or general partner is such Person or a Related Person of such Person, or (d) any equity investor, member, partner or officer of such Person.

 

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2.47 “Restricted Stock” means an Award of shares of Common Stock that is subject to restrictions under Article VII.

2.48 “Restriction Period” has the meaning set forth in Section 7.1(b).

2.49 “Rule 16b-3” means Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provision.

2.50 “Sale Proposal” has the meaning set forth in Section 10.3(a).

2.51 “Section 4.2 Event” has the meaning set forth in Section 4.2(b).

2.52 “Section 409A Covered Award” has the meaning set forth in Section 13.16.

2.53 “Section 409A of the Code” means the nonqualified deferred compensation rules under Section 409A of the Code and any applicable Treasury Regulation or other official guidance promulgated thereunder.

2.54 “Securities Act” means the Securities Act of 1933, as amended, and all rules and regulations promulgated thereunder. Any reference to any section of the Securities Act shall also be a reference to any successor provision.

2.55 “Stock Option” or “Option” means any option to purchase shares of Common Stock granted to Eligible Employees, Non-Employee Directors or Consultants pursuant to Article VI.

2.56 “Stockholders Agreements” means the Investors’ Rights Agreement and the Voting Agreement.

2.57 “Subsidiary” means any subsidiary corporation of the Company within the meaning of Section 424(f) of the Code.

2.58 “Supplier” means any Person who supplies products or services to the Company or any Subsidiary and with whom a Participant had business-related contact (whether in person, by telephone or by paper or electronic correspondence) on behalf of the Company or any of its Affiliates.

2.59 “Ten Percent Stockholder” means an individual who owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company, its Subsidiaries or its Parent.

2.60 “Termination” means a Termination of Consultancy, Termination of Directorship or Termination of Employment, as applicable.

2.61 “Termination of Consultancy” means: (a) that the Participant is no longer acting as a consultant to the Company or one of its Affiliates; or (b) that an entity that is retaining a Participant as a Consultant ceases to be an Affiliate of the Company unless the Participant otherwise is, or thereupon becomes, a Consultant to the Company or another of its Affiliates at the time the entity ceases to be an Affiliate of the Company. In the event that a Consultant becomes an Eligible Employee or a Non-Employee Director upon the termination of his or her consultancy, unless otherwise determined by the Committee, in

 

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its sole discretion, no Termination of Consultancy shall be deemed to occur until such time as such Consultant is no longer a Consultant, an Eligible Employee or a Non-Employee Director. Notwithstanding the foregoing, the Committee may, in its sole discretion, otherwise define Termination of Consultancy in the Award agreement or, if no rights of a Participant are reduced, may otherwise define Termination of Consultancy thereafter.

2.62 “Termination of Directorship” means that a Participant has ceased to be a Non-Employee Director; except that if such Participant becomes an Eligible Employee or a Consultant upon the termination of his or her directorship, his or her ceasing to be a director of the Company shall not be treated as a Termination of Directorship unless and until such Participant has a subsequent Termination of Employment or Termination of Consultancy, as the case may be.

2.63 “Termination of Employment” means: (a) a termination of employment (for reasons other than a military or approved personal leave of absence granted by the Company) of a Participant from the Company and its Affiliates; or (b) that an entity that is employing a Participant ceases to be an Affiliate of the Company, unless the Participant otherwise is, or thereupon becomes, employed by the Company or another Affiliate of the Company at the time the entity ceases to be an Affiliate of the Company. In the event that an Eligible Employee becomes a Consultant or a Non-Employee Director upon the termination of his or her employment, unless otherwise determined by the Committee, in its sole discretion, no Termination of Employment shall be deemed to occur until such time as such Eligible Employee is no longer an Eligible Employee, a Consultant or a Non-Employee Director. Notwithstanding the foregoing, the Committee may, in its sole discretion, otherwise define Termination of Employment in the Award agreement or, if no rights of a Participant are reduced, may otherwise define Termination of Employment thereafter.

2.64 “Transfer” means: (a) when used as a noun, any direct or indirect transfer, offer, sale, assignment, pledge, lease, donation, grant, gift, bequest, hypothecation, encumbrance or other disposition (including the issuance of equity in a Person), whether for value or no value and whether voluntary or involuntary (including by operation of law), and (b) when used as a verb, to directly or indirectly transfer, offer, sell, assign, pledge, lease, donate, grant, gift, bequest, encumber, charge, hypothecate or otherwise dispose of (including the issuance of equity in a Person) whether for value or for no value and whether voluntarily or involuntarily (including by operation of law). “Transferable” and “Transferred” shall have a correlative meaning.

2.65 “Transfer Notice” has the meaning set forth in Section 10.2(b).

2.66 “Voting Securities” means the securities of the Company entitled to vote in the election of directors of the Board.

ARTICLE III

ADMINISTRATION

3.1 The Committee. The Plan shall be administered and interpreted by the Committee.

3.2 Grants of Awards. The Committee shall have full authority to grant Awards pursuant to the terms of the Plan, to Eligible Employees, Consultants and Non-Employee Directors. Without limiting the foregoing, the Committee shall have the authority:

(a) to select the Eligible Employees, Consultants and Non-Employee Directors to whom Awards may from time to time be granted hereunder;

 

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(b) to determine whether and to what extent Awards are to be granted hereunder to one or more Eligible Employees, Consultants or Non-Employee Directors;

(c) to determine, in accordance with the terms of the Plan, the number of shares of Common Stock to be covered by each Award granted hereunder;

(d) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Award granted hereunder (including, but not limited to, the exercise or purchase price (if any), any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof), based on such factors, if any, as the Committee shall determine, in its sole discretion;

(e) to determine whether and under what circumstances the exercise price of any Exercisable Award may be paid in cash or Common Stock;

(f) to determine whether, to what extent and under what circumstances to provide loans (which may be on a recourse basis and shall bear interest at the rate the Committee shall provide) to Participants in order to exercise Awards or to purchase or pay for shares of Common Stock issuable pursuant to Awards under the Plan; provided that (i) on and after the Registration Date executive officers and directors are not eligible to receive such loans, and (ii) all outstanding loans with respect to such executive officers and directors shall be repaid before the Registration Date;

(g) to determine whether a Stock Option is an Incentive Stock Option or Non-Qualified Stock Option;

(h) to determine whether to require an Eligible Employee, Non-Employee Director or Consultant, as a condition of the granting of any Stock Option, not to Transfer shares of Common Stock acquired pursuant to the exercise of a Stock Option for a period of time as determined by the Committee, in its sole discretion, following the date of acquisition of such shares of Common Stock;

(i) to modify, extend or renew an Award, subject to Article X and Section 6.4(l), provided, however, that such action shall be implemented in a manner intended to comply with Section 409A of the Code; and

(j) generally, to exercise such powers and to perform such acts as the Committee deems necessary or expedient to promote the best interests of the Company that are not in conflict with the provisions of the Plan.

3.3 Guidelines. Subject to Article X, the Committee shall, in its sole discretion, have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan and perform all acts, including the delegation of its responsibilities (to the extent permitted by applicable law and applicable stock exchange rules), as it shall, from time to time, deem necessary or advisable; to construe and interpret the terms and provisions of the Plan and any Award granted under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may, in its sole discretion, correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to effectuate the purpose and intent of the Plan. The Committee may, in its sole discretion, adopt special guidelines and provisions for Persons who are residing in or employed in, or subject to the taxes of, any domestic or foreign jurisdictions to comply with applicable tax and securities laws of such domestic or foreign jurisdictions, and may impose such limitations and restrictions that it deems necessary or advisable to comply with such laws. To the extent applicable, the Plan is intended to comply with the applicable requirements of Rule 16b-3 and shall be limited, construed and interpreted in a manner so as to comply therewith.

 

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3.4 Delegation; Advisors. The Committee may, as it from time to time as it deems advisable, to the extent permitted by applicable law and stock exchange rules:

(a) delegate its responsibilities to officers or employees of the Company and its Affiliates, including delegating authority to officers to grant Awards or execute agreements or other documents on behalf of the Committee; and

(b) engage legal counsel, consultants, professional advisors and agents to assist in the administration of the Plan and rely upon any opinion or computation received from any such Person. Expenses incurred by the Committee or the Board in the engagement of any such person shall be paid by the Company.

3.5 Decisions Final. Any decision, interpretation, determination, evaluation, election, approval, authorization, appointment, consent or other action made or taken by or at the direction of the Company, the Board or the Committee (or any of its members) arising out of or in connection with the Plan or any agreement relating to an Award or the Plan shall be within the sole and absolute discretion of all and each of them, as the case may be, and shall be final, binding and conclusive on the Company and all employees and Participants, Permitted Transferees and their respective beneficiaries, heirs, executors, administrators, successors and assigns. Nothing in the Plan shall obligate the Company, the Board or the Committee (or any of its members) to treat any Participants alike, and the exercise of any power or discretion by any such Person with respect to any Participant shall not create any obligation on the part of such Person to take any similar action in the case of any other Participant; it being understood that any power or discretion of the Company, the Board or the Committee (or any of its members) shall be treated as having been so conferred as to each Participant separately.

3.6 Procedures. If the Committee is appointed, the Board may designate one of the members of the Committee as chairperson and the Committee shall hold meetings, subject to the Bylaws of the Company, at such times and places as it shall deem advisable, including by telephone conference or by written consent to the extent permitted by applicable law. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. Any decision or determination reduced to writing and signed by all of the Committee members in accordance with the Bylaws of the Company, shall be as fully effective as if it had been made by a vote at a meeting duly called and held. The Committee shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

3.7 Limitation of Liability; Indemnification.

(a) The Committee, its members and any Person designated pursuant to Section 3.4 shall not be liable for any action or determination made in good faith with respect to the Plan. To the maximum extent permitted by applicable law, no current or former officer or employee of the Company or any of its Subsidiaries or member or former member of the Committee or of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it.

(b) To the maximum extent permitted by applicable law and the Certificate of Incorporation and Bylaws of the Company and to the extent not covered by insurance directly insuring such person, each current and former officer or employee of the Company or any of its Affiliates and member or former member of the Committee or the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Committee) or liability (including any sum paid in settlement of a claim with the approval of the Committee), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with the administration of the Plan, except to the

 

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extent arising out of such officer’s, employee’s, member’s or former officer’s, employee’s or member’s own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the employees, officers, directors or members or former employees, officers, directors or members may have under applicable law, under the Certificate of Incorporation or Bylaws of the Company or any of its Affiliates, or under any individual agreement. Notwithstanding anything else herein, this indemnification will not apply to the actions or determinations made by an individual with regard to Awards granted to him or her under the Plan.

3.8 Stockholders Agreements. Notwithstanding anything herein to the contrary, the Plan and the operation and administration of the Plan (including any action taken by the Committee) shall be subject to the applicable terms and conditions set forth in the Stockholders Agreements to the greatest extent permissible under applicable law.

ARTICLE IV

SHARE LIMITATIONS

4.1 General Limitations. The aggregate number of shares of Common Stock that may be issued or used for reference purposes under the Plan or with respect to which Awards may be granted under the Plan, including with respect to Incentive Stock Options, shall not exceed 27,665,664 shares of Common Stock (subject, in each case, to any increase or decrease pursuant to Section 4.2), which may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company or both. If any Award granted under the Plan expires, terminates, is canceled or is forfeited for any reason (in the case of any Stock Option, without having been exercised in full), or is settled in cash, the number of shares of Common Stock underlying such Award (in the case of any Stock Option, to the extent unexercised) shall again be available for issuance under the Plan. Shares of Common Stock tendered to the Company by a Participant to (a) purchase shares of Common Stock upon the exercise of an Award or (b) satisfy tax withholding obligations (including shares retained from the Award that was exercised or that created the tax obligation) shall be added back to the number of shares available for the future grant of Awards. No fractional shares of Common Stock shall be issued under the Plan.

4.2 Changes.

(a) The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize (i) any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, (ii) any merger or consolidation of the Company or any of its Affiliates, (iii) any issuance of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock, (iv) the dissolution or liquidation of the Company or any of its Affiliates, (v) any sale or Transfer of all or part of the assets or business of the Company or any of its Affiliates, (vi) any Section 4.2 Event or (vii) any other corporate act or proceeding.

(b) Subject to the provisions of this Section 4.2(b), in the event of any change in the capital structure or business of the Company by reason of any stock split, reverse stock split, stock dividend, special dividend, combination or reclassification of shares, recapitalization, merger, consolidation, spin off, split off, reorganization or partial or complete liquidation, issuance of rights or warrants to purchase Common Stock or securities convertible into Common Stock, sale or transfer of all or part of the Company’s assets or business, or other corporate transaction or event that would be considered an “equity restructuring” within the meaning of FASB ASC Topic 718 (each, a “Section 4.2 Event”) then (i) the aggregate number and/or kind of shares that thereafter may be issued under the Plan, (ii) the number and/or kind of shares or other property (including cash) subject to an Award, or (iii) the purchase or exercise price of Awards, shall

 

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be adjusted by the Committee as the Committee determines, in good faith, to be necessary or advisable to prevent substantial dilution or enlargement of the rights of Participants under the Plan. Any such adjustment determined by the Committee in good faith shall be final, binding, and conclusive on the Company and all Participants and their respective heirs, executors, administrators, successors and assigns. Without limiting the scope of Section 9.1, in connection with any Section 4.2 Event, the Committee may provide, in its sole discretion, for the cancellation of any outstanding Awards and payment in cash or other property in exchange therefor equal to the fair value (as determined in good faith by the Committee) which, in the case of Options may equal the excess, if any, of the value of the consideration to be paid to holders of the same number of shares of Common Stock subject to such Options (or, if no consideration is paid, the Fair Market Value of the shares of Common Stock subject to such Options) over the aggregate exercise price of such Options, provided that, if such value (or Fair Market Value, as applicable) shall be less than or equal to the aggregate exercise price of such Options, the Options may be cancelled for no consideration. In addition, subject to Section 4.2(d), in the event of any change in the capital structure or business of the Company that is not a Section 4.2 Event (an “Other Extraordinary Event”), then the Committee may make the adjustments described in clauses (i) through (iv) above as it determines, in good faith, to be necessary or advisable to prevent substantial dilution or enlargement of the rights of Participants under the Plan. Notice of any such adjustment shall be given by the Committee to each Participant whose Award has been adjusted and such adjustment (whether or not such notice is given) shall be binding for all purposes of the Plan. Except as expressly provided in this Section 4.2 or in the applicable Award agreement, a Participant shall have no rights by reason of any Section 4.2 Event or any Other Extraordinary Event. Notwithstanding the foregoing, (x) any adjustments made pursuant to this Section 4.2(b) to Awards that are considered “non-qualified deferred compensation” within the meaning of Section 409A of the Code shall be made in a manner intended to comply with the requirements of Section 409A of the Code; and (y) any adjustments made pursuant to this Section 4.2(b) to Awards that are not considered “non-qualified deferred compensation” subject to Section 409A of the Code shall be made in a manner intended to ensure that after such adjustment, the Awards either (A) continue not to be subject to Section 409A of the Code or (B) comply with the requirements of Section 409A of the Code.

(c) Fractional shares of Common Stock resulting from any adjustment in Awards pursuant to Section 4.2(a) or (b) shall be eliminated at the time of such adjustment by rounding-down for any fractional shares. No fractional shares of Common Stock shall be issued under the Plan. Notice of any adjustment shall be given by the Committee to each Participant whose Award has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan.

(d) Upon the occurrence of an Acquisition Event, the Committee may terminate all outstanding and unexercised Stock Options or any Other Stock-Based Award that provides for a Participant-elected exercise (collectively, “Exercisable Awards”), effective as of the date of the Acquisition Event, by delivering notice of termination to each Participant at least 20 days prior to the date of consummation of the Acquisition Event, in which case during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each such Participant shall have the right to exercise in full all of such Exercisable Awards that are then outstanding to the extent vested on the date such notice of termination is given (or, at the discretion of the Committee, without regard to any limitations on exercisability otherwise contained in the Award agreements), but any such exercise shall be contingent on the occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise pursuant thereto shall be null and void and the applicable provisions of Section 4.2(b) and Article IX shall apply. For the avoidance of doubt, in the event of an Acquisition Event, the Committee may terminate any Exercisable Award for which the exercise price is equal to or exceeds the Fair Market Value on the date of the Acquisition Event without payment of consideration therefor. If an Acquisition Event occurs but the Committee does not terminate the outstanding Awards pursuant to this Section 4.2(d), then the applicable provisions of Section 4.2(b) and Article IX shall apply.

 

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4.3 Minimum Purchase Price. Notwithstanding any provision of the Plan to the contrary, if authorized but previously unissued shares of Common Stock are issued under the Plan, such shares shall not be issued for a consideration that is less than as permitted under applicable law.

ARTICLE V

ELIGIBILITY AND GENERAL REQUIREMENTS FOR AWARDS

5.1 General Eligibility. All current Eligible Employees, Consultants and Non-Employee Directors and prospective Eligible Employees, Consultants and Non-Employee Directors are eligible to be granted Non-Qualified Stock Options, Restricted Stock and Other Stock-Based Awards. Eligibility for the grant of Awards and actual participation in the Plan shall be determined by the Committee in its sole discretion. Notwithstanding anything herein to the contrary, no Award under which a Participant may receive shares of Common Stock may be granted to an Eligible Employee, Consultant or Non-Employee Director if such shares of Common Stock do not constitute “service recipient stock” for purposes of Section 409A of the Code with respect to such Eligible Employee, Consultant or Non-Employee Director if such shares are required to constitute “service recipient stock” for such Award to comply with, or be exempt from, Section 409A of the Code.

5.2 Incentive Stock Options. Notwithstanding anything herein to the contrary, only Eligible Employees of the Company, its Subsidiaries and its Parent (if any) are eligible to be granted Incentive Stock Options under the Plan. Eligibility for the grant of an Incentive Stock Option and actual participation in the Plan shall be determined by the Committee in its sole discretion.

5.3 General Requirement. The grant of Awards to a prospective Eligible Employee, Consultant or Non-Employee Director and the vesting and exercise of such Awards shall be conditioned upon such Person actually becoming an Eligible Employee, Consultant, or Non-Employee Director; provided, however, that no Award may be granted to a prospective Eligible Employee, Consultant, or Non-Employee Director unless the Company determines that the Award will comply with applicable laws, including the securities laws of all relevant jurisdictions (and, in the case of an Award to an Eligible Employee or Consultant pursuant to which Common Stock would be issued prior to such Person performing services for the Company, the Company may require payment of not less than the par value of the Common Stock by cash or check in order to ensure proper issuance of the shares in compliance with applicable law). Awards may be awarded in consideration for past services actually rendered to the Company or any of its Affiliates. To the extent that the vesting of any Award, or lapse of restrictions with respect to any Award, is conditioned in part or in full on the satisfaction of one or more performance metrics, criteria, objective, or similar requirement, the achievement of such metric shall be determined in accordance with the Generally Accepted Accounting Principles, or such other method of accounting that the Committee may determine from time to time.

ARTICLE VI

STOCK OPTIONS

6.1 Stock Options. Each Stock Option granted under the Plan shall be one of two types: (a) an Incentive Stock Option; or (b) a Non-Qualified Stock Option.

6.2 Grants. The Committee shall, in its sole discretion, have the authority to grant to any Eligible Employee (subject to Section 5.2) Incentive Stock Options, Non-Qualified Stock Options or both types of Stock Options. To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof that does not qualify, shall constitute a separate Non-Qualified Stock Option. The Committee shall, in its sole discretion, have the authority to grant any Consultant or Non-Employee Director one or more Non-Qualified Stock Options.

 

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6.3 Incentive Stock Options. Notwithstanding anything in the Plan to the contrary, no term of the Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify the Plan under Section 422 of the Code, or, without the consent of the Participants affected, to disqualify any Incentive Stock Option under Section 422 of the Code.

6.4 Terms of Stock Options. Stock Options granted under the Plan shall be subject to the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee, in its sole discretion, shall determine:

(a) Exercise Price. The exercise price per share of Common Stock subject to a Stock Option shall be determined by the Committee at the time of grant, provided that the per share exercise price of a Stock Option shall not be less than 100% (or, in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, 110%) of the Fair Market Value of the Common Stock at the time of grant, unless such Stock Option is being converted by reason of a corporate transaction within the meaning of Treasury Regulation Section 1.409A-1(b)(5)(v)(D) issued under Section 409A of the Code, in which case the exercise price of the Stock Option shall be determined in accordance with the requirements of Section 424 of the Code to the extent required by Section 409A of the Code.

(b) Stock Option Term. The term of each Stock Option shall be fixed by the Committee; provided, that (i) no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted; and (ii) the term of an Incentive Stock Option granted to a Ten Percent Stockholder shall not exceed five years.

(c) Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at the time of grant. If the Committee provides, in its discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, that such Stock Option is exercisable only in installments or within certain time periods or upon the attainment of certain financial results or other criteria), the Committee may waive such limitations on the exercisability at any time at or after grant in whole or in part (including, without limitation, waiver of the installment exercise provisions or acceleration of the time at which such Stock Option may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion. In the event that a written employment agreement between the Company and a Participant provides for a vesting schedule that is more favorable than the vesting schedule provided in the form of Stock Option award agreement, the vesting schedule in such employment agreement shall govern, provided that such agreement is in effect on the date of grant and applicable to the specific Stock Option.

(d) Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, to the extent vested, a Stock Option may be exercised in whole or in part at any time and from time to time during the Stock Option term by giving written notice of exercise to the Company specifying the number of shares of Common Stock to be acquired. Such notice shall be in a form acceptable to the Committee and shall be accompanied by (x) at the Company’s request, Joinder Agreements executed by the holder thereof and (y) payment in full of the exercise price as follows: (i) in cash or by check, bank draft or money order payable to the order of the Company; (ii) solely to the extent permitted by applicable law and authorized by the Committee, if the Common Stock is traded on a national securities exchange or quoted on a national quotation system sponsored by the Financial Industry Regulatory Authority, through a procedure whereby the Participant delivers irrevocable instructions to a

 

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broker reasonably acceptable to the Committee to deliver promptly to the Company an amount equal to the purchase price; or (iii) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, the relinquishment of Stock Options or by payment in full or in part in the form of Common Stock owned by the Participant (for which the Participant has good title free and clear of any liens and encumbrances)). No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for.

(e) Non-Transferability of Options. No Stock Option shall be Transferable by the Participant other than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the Participant’s lifetime, only by the Participant. Notwithstanding the foregoing, the Committee may determine that a Non-Qualified Stock Option that otherwise is not Transferable pursuant to this section is Transferable to a Family Member in whole or in part, and in such circumstances, and under such conditions as specified by the Committee. A Non-Qualified Stock Option that is Transferred to a Family Member pursuant to the preceding sentence (i) may not be Transferred subsequently other than by will or by the laws of descent and distribution and (ii) remains subject to the terms of the Plan and the applicable Award agreement.

(f) Termination by Death or Disability. Unless otherwise determined by the Committee at grant (or, if no rights of the Participant (or, in the case of his death, his estate) are reduced, thereafter), if a Participant’s Termination is by reason of death or Disability, all Stock Options that are held by such Participant that are vested and exercisable on the date of the Participant’s Termination may be exercised by the Participant (or, in the case of death, by the legal representative of the Participant’s estate) at any time within a period of one year after the date of such Termination, but in no event beyond the expiration of the stated term of such Stock Options.

(g) Involuntary Termination Without Cause. Unless otherwise determined by the Committee at grant (or, if no rights of the Participant (or, in the case of his death, his estate) are reduced, thereafter), if a Participant’s Termination is by involuntary termination without Cause, all Stock Options that are held by such Participant that are vested and exercisable on the date of the Participant’s Termination may be exercised by the Participant at any time within a period of 90 days after the date of such Termination, but in no event beyond the expiration of the stated term of such Stock Options.

(h) Voluntary Termination. Unless otherwise determined by the Committee at grant (or, if no rights of the Participant (or, in the case of his death, his estate) are reduced, thereafter), if a Participant’s Termination is voluntary (other than a voluntary Termination described in subsection (i)(ii) below), all Stock Options that are held by such Participant that are vested and exercisable on the date of the Participant’s Termination may be exercised by the Participant at any time within a period of 30 days after the date of such Termination, but in no event beyond the expiration of the stated term of such Stock Options.

(i) Termination for Cause. Unless otherwise determined by the Committee at grant (or, if no rights of the Participant (or, in the case of his death, his estate) are reduced, thereafter), if a Participant’s Termination (i) is for Cause or (ii) is a voluntary Termination after the occurrence of an event that would be grounds for a Termination for Cause, all Stock Options, whether vested or not vested, that are held by such Participant shall terminate and expire on the date of such Termination.

(j) Unvested Stock Options. Unless otherwise determined by the Committee, Stock Options that are not vested as of the date of a Participant’s Termination for any reason shall terminate and expire on the date of such Termination.

 

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(k) Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Eligible Employee during any calendar year under the Plan and/or any other stock option plan of the Company, any Subsidiary or any Parent exceeds $100,000, such Options shall be treated as Non-Qualified Stock Options. In addition, if an Eligible Employee does not remain employed by the Company, any Subsidiary or any Parent at all times from the time an Incentive Stock Option is granted until three months prior to the date of exercise thereof (or such other period as required by applicable law), such Stock Option shall be treated as a Non-Qualified Stock Option. Should any provision of the Plan not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may, in its sole discretion, amend the Plan accordingly, without the necessity of obtaining the approval of the stockholders of the Company.

(l) Form, Modification, Extension and Renewal of Stock Options. Subject to the terms and conditions and within the limitations of the Plan, Stock Options shall be evidenced by such form of agreement or grant as is approved by the Committee. The Committee may, in its sole discretion, (i) modify, extend or renew outstanding Stock Options (provided that (A) the rights of a Participant are not reduced or materially and adversely affected without his or her consent and (B) such action does not subject the Stock Options to Section 409A of the Code), and (ii) accept the surrender of outstanding Stock Options and authorize the granting of new Stock Options in substitution therefor. Notwithstanding anything herein to the contrary, an outstanding Stock Option may not be modified to reduce the exercise price thereof nor may a new Stock Option at a lower price be substituted for a surrendered Stock Option (other than adjustments or substitutions in accordance with Section 4.2), unless such action is approved by the stockholders of the Company.

(m) Early Exercise. The Committee may provide that a Stock Option include a provision whereby the Participant may elect at any time before the Participant’s Termination to exercise the Stock Option as to any part or all of the shares of Common Stock subject to the Stock Option prior to the full vesting of the Stock Option and such shares shall be subject to certain restrictions as determined by the Committee and be treated as Restricted Stock. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Committee determines to be appropriate.

(n) Detrimental Activity. Unless otherwise determined by the Committee at grant, with respect to Stock Options, (i) in the event the Participant engages in Detrimental Activity prior to any exercise of the Stock Option, all Stock Options (whether vested or unvested) held by the Participant shall thereupon terminate and expire, (ii) as a condition of the exercise of a Stock Option, the Participant shall be required to certify (or shall be deemed to have certified) at the time of exercise in a manner acceptable to the Company that the Participant is in compliance with the terms and conditions of the Plan and that the Participant has not engaged in, and does not intend to engage in, any Detrimental Activity, and (iii) in the event the Participant engages in Detrimental Activity during the one year period following the later of (x) Participant’s Termination of Employment or (y) the date the Stock Option is exercised, that any Stock Options shall be immediately forfeited (whether or not then vested) and the Company shall be entitled to recover from the Participant at any time within one year after the later of (x) or (y), and the Participant shall pay over to the Company, an amount equal to any gain realized as a result of the exercise of any Stock Options (whether at the time of exercise or thereafter).

(o) Other Terms and Conditions. Stock Options may contain such other provisions, which shall not be inconsistent with any of the terms of the Plan, as the Committee shall, in its sole discretion, deem appropriate.

 

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ARTICLE VII

RESTRICTED STOCK

7.1 Awards of Restricted Stock.

(a) Restricted Stock may be issued either alone or in addition to other Awards granted under the Plan. The Committee shall, in its sole discretion, determine the Eligible Employees, Consultants and Non-Employee Directors to whom, and the time or times within which, grants of Restricted Stock will be made, the number of shares to be awarded, the purchase price (if any) to be paid by the Participant (subject to Section 7.2), the time or times at which such Awards may be subject to forfeiture (if any), the vesting schedule (if any) and rights to acceleration thereof (if any), and all other terms and conditions of the Awards. The Committee may condition the grant or vesting of Restricted Stock upon the attainment of specified performance targets or such other factors as the Committee may determine, in its sole discretion.

(b) Restriction Period. The Participant shall not be permitted to Transfer shares of Restricted Stock awarded under the Plan during a period set by the Committee (if any) (the “Restriction Period”) commencing with the date of such Award, as set forth in the applicable Award agreement and such agreement shall set forth a vesting schedule and any events that would accelerate vesting of the shares of Restricted Stock. Within these limits, based on service and/or such other factors or criteria as the Committee may determine in its sole discretion, the Committee may condition the grant or provide for the lapse of such restrictions in installments in whole or in part, or may accelerate the vesting of all or any part of any Restricted Stock Award.

(c) Detrimental Activity. Unless otherwise determined by the Committee at grant, each Award of Restricted Stock shall provide that (A) in the event the Participant engages in Detrimental Activity prior to any vesting of Restricted Stock, all unvested Restricted Stock shall be immediately forfeited, and (B) in the event the Participant engages in Detrimental Activity during the one year period after any vesting of such Restricted Stock, the Committee shall be entitled to recover from the Participant (at any time within one year after such engagement in Detrimental Activity) an amount equal to the Fair Market Value as of the vesting date(s) of any Restricted Stock that had vested in the period referred to above.

7.2 Awards and Certificates. An Eligible Employee, Consultant and Non-Employee Director selected to receive Restricted Stock shall not have any rights with respect to such Award, unless and until such Participant has delivered a fully executed copy of the Award agreement evidencing the Award to the Company and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions:

(a) Purchase Price. The purchase price of Restricted Stock, if any, shall be determined by the Committee, but shall be not less than as permitted under applicable law.

(b) Legend. Each Participant receiving Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and shall, in addition to such legends required by applicable securities laws, bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form:

“The securities represented hereby have been acquired for investment and have not been registered under the Securities Act of 1933. Such shares may not be sold, pledged, or transferred in the absence of such registration or a valid exemption from the registration and prospectus delivery requirements of said Act.

 

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The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Talaris Therapeutics, Inc. (the “Company”) Second Amended and Restated 2018 Equity Incentive Plan (as amended from time to time) (the “Plan”), and an Award agreement entered into between the registered owner and the Company dated. Copies of such Plan and Award agreement are on file at the principal office of the Company.”

(c) Custody. If stock certificates are issued in respect of shares of Restricted Stock, the Committee may require that such stock certificates be held in custody by the Company until the restrictions on the shares shall have lapsed, and that, as a condition of any grant of Restricted Stock, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such Award.

(d) Rights as Stockholder. Except as otherwise determined by the Committee, the Participant shall have all the rights of a holder of shares of Common Stock of the Company with respect to Restricted Stock, subject to the following provisions of this Section 7.2(d). Except as otherwise determined by the Committee, (i) the Participant shall have no right to tender shares of Restricted Stock, (ii) dividends or other distributions (collectively, “dividends”) on shares of Restricted Stock shall be withheld, in each case, while the Restricted Stock is subject to restrictions, and (iii) in no event shall dividends or other distributions payable thereunder be paid unless and until the shares of Restricted Stock to which they relate no longer are subject to a risk of forfeiture. Dividends that are not paid currently shall be credited to bookkeeping accounts on the Company’s records for purposes of the Plan and, except as otherwise determined by the Committee, shall not accrue interest. Such dividends shall be paid to the Participant in the same form as paid on the Common Stock upon the lapse of the restrictions.

(e) Termination. Upon a Participant’s Termination for any reason during the Restriction Period, all Restricted Stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee at grant, or, if no rights of a Participant are reduced, thereafter.

(f) Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant, and any and all unpaid distributions or dividends payable thereunder shall be paid. The second paragraph of the legend referred to in subsection (b) above shall be removed from said certificates at the time of delivery to the Participant except as otherwise required by applicable law, the Stockholders Agreements, or other limitations imposed by the Committee. Notwithstanding the foregoing, actual certificates shall not be issued to the extent that book entry recordkeeping is used.

ARTICLE VIII

OTHER STOCK-BASED AWARDS

8.1 Other Awards. The Committee is authorized to grant Other Stock-Based Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Common Stock, including but not limited to, shares of Common Stock awarded purely as a bonus and not subject to any restrictions or conditions, shares of Common Stock in payment of the amounts due under an incentive or performance plan sponsored or maintained by the Company or any of its Affiliates, stock appreciation rights, stock equivalent units, restricted stock units, deferred stock units, phantom stock, phantom stock units, cash awards, and Awards valued by reference to book value of shares of Common Stock.

 

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The Committee shall have authority to determine the Participants, to whom, and the time or times at which, Other Stock-Based Awards shall be made, the number of shares of Common Stock to be awarded pursuant to such Awards, and all other terms and conditions of the Awards.

The Committee may condition the grant or vesting of Other Stock-Based Awards upon the attainment of performance goals or such other factors as the Committee may determine.

To the extent permitted by law, the Committee may permit Eligible Employees or Non-Employee Directors to defer all or a portion of their cash compensation in the form of Other Stock-Based Awards granted under this Plan, subject to the terms and conditions of any deferred compensation arrangement established by the Company, which shall be carried out in a manner intended to comply with Section 409A of the Code.

8.2 Terms and Conditions. Other Stock-Based Awards made pursuant to this Article VIII shall be subject to the following terms and conditions:

(a) Non-Transferability. The Participant may not Transfer Other Stock-Based Awards or the Common Stock underlying such Awards prior to the date on which the underlying Common Stock is issued, or, if later, the date on which any restriction, performance or deferral period applicable to such Common Stock lapses.

(b) Dividends. The Committee shall determine to what extent, and under what conditions, the Participant shall have the right to receive dividends, dividend equivalents or other distributions (collectively, “dividends”) with respect to shares of Common Stock covered by Other Stock-Based Awards. Except as otherwise determined by the Committee, dividends with respect to unvested Other Stock-Based Awards shall be withheld until such Other Stock-Based Awards vest. Dividends that are not paid currently shall be credited to bookkeeping accounts on the Company’s records for purposes of the Plan and, except as otherwise determined by the Committee, shall not accrue interest. Such dividends shall be paid to the Participant in the same form as paid on the Common Stock or such other form as is determined by the Committee upon the lapse of the restrictions.

(c) Vesting. Other Stock Based Awards and any underlying Common Stock shall vest or be forfeited to the extent set forth in the applicable Award agreement or as otherwise determined by the Committee. The Committee may, at or after grant, accelerate the vesting of all or any part of any Other Stock-Based Award.

(d) Price. Common Stock issued on a bonus basis under this Article VIII may be issued for no cash consideration; Common Stock purchased pursuant to a purchase right awarded under this Article VIII shall be priced as determined by the Committee.

(e) Payment. Form of payment for the Other Stock-Based Award shall be specified in the Award agreement.

(f) Detrimental Activity. Unless otherwise determined by the Committee at grant, each Other Stock-Based Award shall provide that (A) in the event the Participant engages in Detrimental Activity prior to any vesting of such Other Stock-Based Award, all unvested Other Stock-Based Award shall be immediately forfeited, and (B) in the event the Participant engages in Detrimental Activity during the one year period after any vesting of such Other Stock-Based Award, the Committee shall be entitled to

 

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recover from the Participant (at any time within the one- year period after such engagement in Detrimental Activity) an amount equal to any gain the Participant realized from any Other Stock-Based Award that had vested in the period referred to above. Unless otherwise determined by the Committee at grant, this Section 8.2(f) shall cease to apply upon a Change in Control.

ARTICLE IX

CHANGE IN CONTROL PROVISIONS

9.1 Except as otherwise provided by the Committee in an Award agreement, in the event of a Change in Control of the Company after the Effective Date, the Committee may, but shall not be obligated to:

(a) accelerate the vesting, in whole or in part, of the Award (and, if applicable, the time at which the Award may be exercised) to a date prior to the effective time of such Change in Control as the Committee determines (or, if the Committee does not determine such a date, to the date that is five days prior to the effective date of the Change in Control), with such Award terminating if not exercised (if applicable) at or prior to the effective time of the Change in Control; provided, however, that the Committee may require Participants to complete and deliver to the Company a notice of exercise before the effective date of a Change in Control, which exercise is contingent upon the effectiveness of such Change in Control

(b) in the case of Options, accelerate the expiration of the stated term of such Options to the date of the Change in Control by delivering notice of such acceleration to each affected Participant at least 10 days prior to the date of consummation of the Change in Control;

(c) cancel unvested Awards for no consideration, and cancel vested Awards for fair value (as determined in good faith by the Committee) which, in the case of vested Options may equal the excess, if any, of the value of the consideration to be paid in the Change in Control transaction to holders of the same number of shares of Common Stock subject to such Options (or, if no consideration is paid in any such transaction, the Fair Market Value of the shares of Common Stock subject to such Options) over the aggregate exercise price of such Options, provided that, if such value (or Fair Market Value, as applicable) shall be less than or equal to the aggregate exercise price of such Options, the Options may be cancelled for no consideration; and/or

(d) provide for the issuance of substitute Awards that will substantially preserve the otherwise applicable terms of any affected Award previously granted hereunder as determined by the Committee in its sole discretion.

Without limiting the foregoing, as a condition to receipt of any consideration in respect of an Award in connection with a Change in Control, the Committee may require that the Participant execute a release of claims, become a party to all or a part of the definitive transaction agreement effecting the Change in Control, become party to a non-competition or similar agreement, and/or become party to an indemnification agreement, provided that any indemnification obligation shall not exceed the proceeds received by the Participant with respect to the Award. In addition, payments under Section 9.1(c) above may be delayed to the same extent that payment of consideration to the holders of the Company’s Common Stock in connection the Change in Control transaction is delayed as a result of escrows, earn outs, holdbacks or any other contingencies. Notwithstanding anything else herein, the Committee may take different actions with respect to different groups of Participants and may provide for accelerated vesting or lapse of restrictions with respect to all or any portion of an Award at any time.

 

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9.2 IPO not a Change in Control. Notwithstanding the foregoing, for purposes of the Plan, the completion of an IPO by itself shall not be considered a Change in Control.

ARTICLE X

COMPANY CALL RIGHTS; RIGHT OF FIRST REFUSAL; DRAG ALONG RIGHT

10.1 Company Call Rights.

(a) With respect to Awards, unless otherwise determined by the Committee in the applicable Award agreement, in the event of a Termination for Cause or the discovery that the Participant engaged in Detrimental Activity, then the Company shall have the right but not the obligation exercisable at any time during the period commencing on the date of such Termination for Cause or the discovery that the Participant engaged in Detrimental Activity and ending on the ninety (90) day anniversary thereof, to repurchase from the Participant any shares of Common Stock previously acquired by the Participant under the Plan at a repurchase price equal to the lesser of (i) the original purchase price or exercise price (as applicable), if any, and (ii) Fair Market Value as of the date of repurchase or the date of Termination (or discovery that the Participant engaged in Detrimental Activity).

(b) Unless otherwise determined by the Committee in the applicable award agreement, if the Company elects to exercise the call rights under this Section 10.1, it shall do so by delivering to the Participant a notice of such election, specifying the number of shares to be purchased and the closing date and time of such purchase. Such closing shall take place at the Company’s principal executive offices or as otherwise determined by the Company within sixty (60) days after the exercise of the right contained in this Section 10.1. At such closing, the Company will pay the Participant the repurchase price as specified in this Section 10.1 in cash, or by cancellation of indebtedness of the Participant to the Company; provided, however, the Company may elect to pay the repurchase price in three (3) equal installments with the first installment paid at the closing and subsequent installments paid on the first two (2) anniversaries of the closing. The installment payments shall bear interest at the applicable federal rate.

(c) Notwithstanding anything herein to the contrary, the Company shall not be obligated to repurchase any shares of Common Stock previously acquired pursuant to an Award under the Plan from the Participant, or from the estate of the Participant, and may defer such repurchase, if (i) there exists and is continuing a default or an event of default on the part of the Company or under any guarantee or other agreement under which the Company or any of its Subsidiaries has borrowed money, (ii) such repurchase would constitute a breach of, or result in a default or an event of default on the part of the Company or any of its Subsidiaries under, any such guarantee or agreement, (iii) such repurchase would not be permitted under any applicable laws or stock exchange rules or regulations, or (iv) such repurchase would result in adverse accounting consequences for the Company. If the Company is unable to make a re-purchase generally in accordance with the preceding sentence, the Company shall pay the Participant for such Common Stock as soon as possible, with interest at the federal short-term interest rate in effect on the first day of the month of exercise of the repurchase right, to be recalculated on the first day of each month thereafter until all payments due are made.

10.2 Transfer Restrictions; Right of First Refusal.

(a) No Participant may Transfer all or any fraction of any shares of Common Stock previously acquired by the Participant under the Plan to any Person other than a Permitted Transferee unless in each such instance the Participant (or his or her estate or legal representative) shall have first offered to the Company the shares of Common Stock proposed to be Transferred pursuant to a bona fide offer to a third party.

 

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(b) Notice of Proposed Transfer. Prior to any proposed Transfer of shares of Common Stock, the Participant shall give a written notice (the “Transfer Notice”) to the Company describing fully the proposed Transfer, including the number of shares of Common Stock, the name and address of the proposed Transferee (the “Proposed Transferee”) and if the Transfer is voluntary, the proposed Transfer price, and containing such information necessary to show that the Participant has obtained a bona fide binding offer to Transfer the shares of Common Stock for case from a third party. The Participant shall provide a separate Transfer Notice with regard to each Proposed Transferee. The Transfer Notice shall be signed by both the Participant and the Proposed Transferee and must constitute a binding and unconditional commitment of the Participant and the Proposed Transferee for the Transfer of the shares of Common Stock to the Proposed Transferee for cash subject only to the right of first refusal specified herein.

(c) Bona Fide Transfer. If the Company determines that the information provided by the Participant in the Transfer Notice is insufficient to establish the bona fide nature of a proposed voluntary Transfer, the Company shall give the Participant written notice of the Participant’s failure to comply with the procedure described herein, and that the Participant shall have no right to Transfer the Issued Shares without first complying with this procedure. The Participant shall not be permitted to Transfer any shares of Common Stock if the Proposed Transfer is not bona fide.

(d) Exercise of Right of First Refusal. If the Company determines the proposed Transfer to be a bona fide Transfer, the Company shall have the right to repurchase all or any part of the shares of Common Stock at the proposed Transfer price per share, by delivering to the Participant (or his or her estate or legal representative) written notice of such exercise within twenty (20) days after the date the Company has determined that the proposed Transfer is bona fide. The Company’s exercise or failure to exercise the right of first refusal with respect to any proposed Transfer described in a Transfer Notice shall not affect the Company’s right to exercise the right of first refusal with respect to any proposed Transfer described in any other Transfer Notice, whether or not such other Transfer Notice is issued by the Participant or issued by a person other than the Participant with respect to a proposed Transfer to the same Proposed Transferee. If the Company exercises the right of first refusal, the Company and the Participant shall thereupon consummate the sale of shares of Common Stock to the Company within twenty (20) days after the date the Company has determined that the proposed Transfer is bona fide (unless a longer period is offered by the Proposed Transferee); provided, however, that in the event the Transfer Notice provides for the payment for the shares of Common Stock other than in cash, the Company shall have the option of paying for the shares of Common Stock by the present value cash equivalent of the consideration described in the Transfer Notice as reasonably determined by the Company. For purposes of the foregoing, cancellation of any indebtedness of the Participant to the Company shall be treated as payment to the Participant in cash to the extent of the unpaid principal and any accrued interest canceled.

(e) Failure to Exercise Right of First Refusal. If the Company fails to exercise the right of first refusal with respect to any shares of Common Stock within the period specified in Section 10.2(d) above, and the Company has not given notice to the Participant that the proposed Transfer is not a bona fide Transfer pursuant to Section 10.2(d), the Participant may conclude a Transfer to the Proposed Transferee of the Issued Shares on the terms and conditions described in the Transfer Notice, provided such Transfer occurs not later than twenty (20) days after the date the Company has determined that the proposed Transfer is bona fide. The Company shall have the right to demand further assurances from the Participant and the Proposed Transferee (in a form satisfactory to the Company) that the Transfer of the Common Stock was actually carried out on the terms and conditions described in the Transfer Notice. No shares of Common Stock shall be transferred on the books of the Company until the Company has received such assurances, if so demanded, and has approved the proposed Transfer as bona fide. Any proposed Transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed Transfer by the Participant (or his or her estate or legal representative), shall again be subject to the right of first refusal and shall require compliance by the Participant with the procedure described in this Section 10.2.

 

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(f) Assignment of Right of First Refusal. The Company shall have the right to assign the right of first refusal at any time, whether or not there has been an attempted Transfer, to one or more persons as may be selected by the Company, from time to time.

(g) Application to Transferees. This Section 10.2 shall apply to any transferee (other than to a transferee who acquires the shares of Common Stock pursuant to Section 10.2(d) above) in the same manner as it applies to a Participant.

10.3 Drag Along Right.

(a) In the event the Board receives or is otherwise presented with a bona fide offer from an independent third party to consummate a Change in Control (a “Sale Proposal”) and approves such Change in Control, then the Participants shall be required to participate in the Change in Control in the manner set forth in this Section 10.3.

(b) Upon the Board’s approval of a Change in Control, the Company shall deliver a notice (a “CIC Notice”) with respect to such Change in Control to all Participants no more than five Business Days after the execution and delivery by all of the parties thereto of the definitive agreement or letter of intent or similar document entered into with respect to such Change in Control and, in any event, no later than fifteen (15) Business Days prior to the closing date of such Change in Control. The CIC Notice shall include the terms of the Sale Proposal (including the name of the purchaser, the proposed date of the closing of the Change in Control, the purchase price for the shares of Common Stock and any other material terms and conditions, and the copy of any form of agreement proposed to be executed in connection with the Change in Control).

(c) Each Participant, upon receipt of a CIC Notice, shall be obligated (and such obligation shall be enforceable by the Company and the other Participants), to (i) sell its Issued Shares and participate in the Change in Control contemplated by the CIC Notice, (ii) to vote, if applicable, its Issued Shares in favor of the change in Control at any meeting of stockholders called to vote on or approve the Change in Control and/or to consent in writing to the Change in Control, (iii) waive all dissenters’ or appraisal rights in connection with the Change in Control, (iv) enter into agreements of sale or merger agreements relating to the Change in Control and otherwise execute and deliver all agreements, releases and instruments requested by the Company in order to effectuate or that are otherwise incident to such Change in Control, (v) otherwise to take all actions and execute all documents necessary or desirable to cause the Company and the Participants to consummate the Change in Control, and (vi) upon request of the Company, deliver an executed instrument of transfer with respect to its Issued Shares to counsel designated by the Company, which instrument will be held in escrow by such counsel (pending receipt of the purchase price therefor). Any such Sale Proposal, and the terms of any Change in Control, may be amended or modified from time to time, and any such CIC Notice may be rescinded, upon the approval of the. The Company shall give prompt written notice of any such amendment, modification or rescission to all of the Participants.

(d) Each Board member shall have full and plenary power and authority, as the agent of the Company, to cause the Company to enter into a transaction providing for a Change in Control and to take any and all such further action in connection therewith as such Board member may deem necessary or appropriate in order to consummate such Change in Control. Each Board member shall have complete discretion over the terms and conditions of any Change in Control effected hereby, including, without limitation, price, type of consideration, payment terms, conditions to closing, representations, warranties, affirmative covenants, negative covenants, indemnification, holdbacks and escrows.

 

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(e) The obligations of the Participants pursuant to this Section 10.3 are subject to the satisfaction of the following conditions:

(i) each of the Participants shall receive the same form of consideration and the same proportion of the aggregate consideration from such Change in Control that such Participants would have received if such aggregate consideration had been distributed by the Company to its stockholders in complete liquidation in accordance with applicable law and any organizational documents of the Company as in effect immediately prior to the Change in Control;

(ii) each Participant shall make or provide the same representations, warranties, covenants, indemnities and agreements in connection with the Change in Control (except that in the case of representations, warranties, covenants, indemnities and agreements pertaining specifically to any Participant, each other Participant shall make the comparable representations, warranties, covenants, indemnities and agreements pertaining specifically to itself); and

(iii) any expenses incurred for the benefit of the Company or all Participants, and any indemnities, holdbacks, escrows and similar items relating to the Change in Control, that are not paid or established by the Company (other than those that relate to representations or indemnities concerning a Participant’s valid ownership of his Issued Shares free and clear of all liens, claims and encumbrances or a Participant’s authority, power and legal right to enter into and consummate a purchase or merger agreement or ancillary documentation) shall be paid or established by the Participants in proportion to the reduced amount of consideration each Participant would have received if the aggregate consideration from such Change in Control had been reduced by the aggregate amount of such expenses, indemnities, holdbacks, escrows or similar items.

(iv) EACH PARTICIPANT SHALL BE OBLIGATED IN ITS INDIVIDUAL AWARD AGREEMENT TO APPOINT EACH MEMBER OF THE BOARD AND HIS OR HER SUCCESSORS AND ASSIGNS AS SUCH PARTICIPANT’S PROXY AND ATTORNEY-IN-FACT TO VOTE SUCH PARTICIPANT’S ISSUED SHARES AND TAKE ANY AND ALL SUCH OTHER ACTION WITH RESPECT TO SUCH PARTICIPANT’S ISSUED SHARES AND OTHER SECURITIES OF THE COMPANY AS SUCH BOARD MEMBER MAY DIRECT IN CONNECTION WITH A CHANGE IN CONTROL EFFECTED BY THE COMPANY IN ACCORDANCE WITH THIS SECTION 10.3 SOLELY IN THE EVENT THAT SUCH PARTICIPANT FAILS TO VOTE SUCH PARTICIPANT’S ISSUED SHARES OR TAKE ANY AND ALL SUCH OTHER ACTION IN CONNECTION WITH A CHANGE IN CONTROL IN ACCORDANCE WITH THIS SECTION 10.3. SUCH APPOINTMENT OF EACH BOARD MEMBER AS PROXY AND ATTORNEY-IN-FACT SHALL BE COUPLED WITH AN INTEREST AND SHALL BE VALID THROUGH THE DATE THERE SHALL BE CONSUMMATED A CHANGE IN CONTROL.

10.4 Effect of Public Offering. Notwithstanding the foregoing, neither the Company nor any other Person shall have any rights pursuant to this Article X following the completion of an Initial Public Offering of the Common Stock.

 

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ARTICLE XI

TERMINATION OR AMENDMENT

11.1 Notwithstanding any other provision of the Plan, the Board or the Committee (to the extent permitted by law) may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of the Plan (including any amendment deemed necessary to ensure that the Company may comply with any regulatory requirement referred to in Section 409A of the Code as described below), or suspend or terminate it entirely, retroactively or otherwise; provided that if the Committee, in its sole discretion, determines that the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may be materially and adversely impaired, the consent of such Participant shall be required; and provided further, without the approval of the majority of stockholders of the Company entitled to vote in accordance with applicable law, no amendment may be made that would (a) require stockholder approval in order for the Plan to continue to comply with the applicable provisions of Section 422 of the Code (to the extent applicable to Incentive Stock Options), or (b) require stockholder approval under the rules of any exchange or system on which the Company’s securities are listed or traded at the request of the Company.

The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively; provided that no such amendment materially reduces the rights of any Participant without the Participant’s consent. Actions taken by the Committee in accordance with Article IV shall not be deemed to reduce the rights of any Participant.

Notwithstanding anything herein to the contrary, the Board or the Committee may amend the Plan or any Award at any time without a Participant’s consent to comply with Section 409A of the Code or any other applicable law. Nothing in the Plan is intended to provide a guarantee of particular tax treatment to any Participant.

ARTICLE XII

UNFUNDED PLAN

12.1 The Plan is intended to constitute an “unfunded” plan. With respect to any payments as to which a Participant has a fixed and vested interest but that are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general unsecured creditor of the Company.

ARTICLE XIII

GENERAL PROVISIONS

13.1 Legend. The Committee may require each Person receiving shares of Common Stock pursuant to an Award granted under the Plan to represent to and agree with the Company in writing that such Person is acquiring the shares without a view to distribution thereof and such other securities law related representations as the Committee shall request. In addition to any legend required by the Plan, the certificates and/or book entry accounts for such shares may include any legend that the Committee deems appropriate to reflect any restrictions on Transfer.

 

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All certificates and/or book entry accounts for shares of Common Stock delivered under the Plan shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national automated quotation system on which the Common Stock is then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. If determined by the Committee, in its sole discretion, to be necessary or advisable in order to prevent a violation of applicable securities laws or to avoid the imposition of public company reporting requirements, then, notwithstanding anything herein to the contrary, any stock-settled Awards shall be paid in cash in an amount equal to the Fair Market Value on the date of settlement of such Awards.

13.2 Other Plans. Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

13.3 No Right to Employment/Consultancy/Directorship. Neither the Plan nor the grant of any Award hereunder shall give any Participant or other Person any right to employment, consultancy or directorship by the Company or any of its Affiliates, or shall limit in any way the right of the Company or any of its Affiliates by which an employee is employed or a Consultant or Non-Employee Director is retained to terminate his or her employment, consultancy or directorship at any time.

13.4 Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. Upon the vesting of Restricted Stock (or any other Award that is taxable upon vesting), or upon making an election under Section 83(b) of the Code, a Participant shall pay or otherwise provide for all required withholding taxes to the Company. Any statutorily required withholding obligation with regard to any Participant may be satisfied, subject to the consent of the Committee, by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant.

13.5 No Assignment of Benefits. No Award or other benefit payable under the Plan shall, except as otherwise specifically provided in the Plan or permitted by the Committee, be Transferable in any manner, and any attempt to Transfer any such benefit shall be void, and any such benefit shall not in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such benefit, nor shall it be subject to attachment or legal process for or against such person.

13.6 Listing and Other Conditions.

(a) Unless otherwise determined by the Committee, if at any time the Common Stock is listed on a national securities exchange, national automated quotation system, or system sponsored by a national securities association, the issuance of any shares of Common Stock pursuant to an Award shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Award with respect to such shares shall be suspended until such listing has been effected.

(b) If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company under the statutes, rules or regulations of any applicable jurisdiction, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Award shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful and will not result in the imposition of excise taxes on the Company.

 

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(c) Upon termination of any period of suspension under this Section 13.6, an Award affected by such suspension that shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares that would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Award.

(d) A Participant shall be required to supply the Company with any certificates, representations and information that the Company requests and otherwise cooperate with the Company in obtaining any listing, registration, qualification, exemption, consent or approval the Company deems necessary or appropriate.

(e) The Company shall not be obligated to issue any shares of Common Stock to a Participant if, in the opinion of counsel for the Company, the issuance of such Common Stock will constitute a violation by the Participant or the Company of any provisions of any rule or regulation of any governmental authority or any national securities exchange.

13.7 Stockholders Agreements and Other Requirements. Notwithstanding anything herein to the contrary, as a condition to the receipt of shares of Common Stock pursuant to an Award granted under the Plan, the Participant (or, if applicable, a Permitted Transferee) shall execute and deliver Joinder Agreements or such other documentation as required by the Committee which shall set forth certain restrictions on transferability of the shares of Common Stock acquired upon exercise or purchase, a right of first refusal or a right of first offer of the Company and other Persons with respect to shares, and such other terms or restrictions as the Board or Committee shall from time to time establish, including any drag along rights, tag along rights, transfer restrictions and registration rights. The Stockholders Agreements or other documentation shall apply to the Common Stock acquired under the Plan and covered by the Stockholders Agreements or other documentation. The Company may require, as a condition of exercise, the Participant or any Permitted Transferee to become a party to the Stockholders Agreements or any other existing stockholders agreement or other agreement.

13.8 Permitted Conduct. Nothing in the Plan, an Award agreement or the Stockholders Agreements shall prohibit or restrict any Participant from: (i) making any disclosure of relevant and necessary information as required by law or legal process; or (ii) initiating, participating, cooperating, or testifying in any action, investigation, or proceeding with, or providing information to, any governmental agency or legislative body, any self-regulatory organization, or the Company’s legal department. Federal law provides criminal and civil immunity to federal and state claims for trade secret misappropriation to individuals who disclose a trade secret to their attorney, a court, or a government official in certain confidential circumstances that are set forth in the Defend Trade Secrets Act of 2016 at 18 U.S.C. §§ 1833(b)(1) and 1833(b)(2), related to the reporting or investigation of a suspected violation of the law, or in connection with a lawsuit for retaliation for reporting a suspected violation of the law.

13.9 Governing Law. All matters arising out of or relating to the Plan, the actions taken in connection herewith and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to its principles of conflict of laws, and the State of Delaware shall be the exclusive venue of any actions or causes of action arising hereunder. Each Participant, and each beneficiary or other Person claiming under or through the Participant by accepting the grant of an Award consents to the exclusive jurisdiction of any state or federal court located within the State of Delaware, agrees that all actions or proceedings relating to the Plan shall be litigated in such courts,

 

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waives any defense of forum non conveniens, and agrees to be bound by any final and nonappealable judgment rendered thereby in connection with the Plan. To the extent the Participant is a party to an employment agreement with the Company or any of its Affiliates that provides for binding arbitration of employment disputes, then any disputes between the Company and such Participant arising under the Plan shall be arbitrated in accordance with the procedures set forth in such employment agreement, and the award of the arbitrator may be confirmed in any state or federal court having jurisdiction over the location in which the arbitration hearing was held.

13.10 Construction. Wherever any words are used in the Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or”, (ii) “including” or “include” shall mean “including, without limitation”, and (iii) wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would apply. Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

13.11 Other Benefits. No Award granted or paid out under the Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its Affiliates nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation, unless expressly provided to the contrary in such benefit plan.

13.12 Costs. The Company shall bear all expenses associated with administering the Plan, including expenses of issuing Common Stock pursuant to any Award granted hereunder.

13.13 No Right to Same Benefits. The provisions of Awards need not be the same with respect to each Participant, and Awards granted to individual Participants need not be the same.

13.14 Death/Disability. The Committee may in its sole discretion require the transferee of a Participant to supply it with written notice of the Participant’s death or Disability and to supply it with a copy of the will (in the case of the Participant’s death) or such other evidence as the Committee deems necessary or advisable to establish the validity of the transfer of an Award. The Committee may, in its sole discretion, also require that the transferee agree to be bound by all of the terms and conditions of the Plan.

13.15 Section 16(b) of the Exchange Act. On and after the Registration Date, all elections and transactions under the Plan by Persons subject to Section 16 of the Exchange Act involving shares of Common Stock are intended to comply with any applicable exemptive condition under Rule 16b-3. The Committee may, in its sole discretion, establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder.

13.16 Section 409A. Although the Company does not guarantee to a Participant the particular tax treatment of any Award, all Awards are intended to comply with, or be exempt from, the requirements of Section 409A of the Code and the Plan and any Award agreement shall be limited, construed and interpreted in accordance with such intent. To the extent that any Award constitutes “non-qualified deferred compensation” pursuant to Section 409A of the Code (a “Section 409A Covered Award”), it is intended to be paid in a manner that will comply with Section 409A of the Code. In no event shall the Company be liable for any additional tax, interest or penalties that may be imposed on a Participant by Section 409A of the Code or for any damages for failing to comply with Section 409A of the Code. Notwithstanding anything in the Plan or in an Award to the contrary, the following provisions shall apply to Section 409A Covered Awards:

 

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(a) A termination of employment shall not be deemed to have occurred for purposes of any provision of a Section 409A Covered Award providing for payment upon or following a termination of the Participant’s employment unless such termination is also a “separation from service” within the meaning of Section 409A of the Code and, for purposes of any such provision of a Section 409A Covered Award, references to a “termination,” “termination of employment” or like terms shall mean separation from service. Notwithstanding any provision to the contrary in the Plan or the Award, if the Participant is deemed on the date of the Participant’s Termination to be a “specified employee” within the meaning of that term under Section 409A(a)(2)(B) of the Code and using the identification methodology selected by the Company from time to time, or if none, the default methodology set forth in Section 409A of the Code, then with regard to any such payment under a Section 409A Covered Award, to the extent required to be delayed in compliance with Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six-month period measured from the date of the Participant’s separation from service, and (ii) the date of the Participant’s death. All payments delayed pursuant to this Section 13.16(a) shall be paid to the Participant on the first day of the seventh month following the date of the Participant’s separation from service or, if earlier, on the date of the Participant’s death.

(b) With respect to any payment pursuant to a Section 409A Covered Award that is triggered upon a Change in Control, the settlement of such Award shall not occur until the earliest of (i) the Change in Control if such Change in Control constitutes a “change in the ownership of the corporation,” a “change in effective control of the corporation” or a “change in the ownership of a substantial portion of the assets of the corporation,” within the meaning of Section 409A(a)(2)(A)(v) of the Code, (ii) the date such Award otherwise would be settled pursuant to the terms of the applicable Award agreement and (iii) the Participant’s “separation from service” within the meaning of Section 409A of the Code, subject to Section 13.16(a).

(c) For purposes of Section 409A of the Code, a Participant’s right to receive any installment payments under the Plan or pursuant to an Award shall be treated as a right to receive a series of separate and distinct payments.

(d) Whenever a payment under the Plan or pursuant to an Award specifies a payment period with reference to a number of days (e.g., “payment shall be made within 30 days following the date of termination”), the actual date of payment within the specified period shall be within the sole discretion of the Company.

13.17 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan.

13.18 Securities Act Compliance. Except as the Company or Committee shall otherwise determine, the Plan is intended to comply with Section 4(2) or Rule 701 of the Securities Act, and any provisions inconsistent with such Section or Rule of the Securities Act shall be inoperative and shall not affect the validity of the Plan.

13.19 Successors and Assigns. The Plan shall be binding on all successors and permitted assigns of a Participant, including the estate of such Participant and the executor, administrator or trustee of such estate.

13.20 Payments to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other Person incapable of receipt thereof shall be deemed paid when paid to such Person’s guardian or to the party providing or reasonably appearing to provide for the care of such Person, and such payment shall fully discharge the Committee, the Board, the Company, its Affiliates and their employees, agents and representatives with respect thereto.

 

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13.21 Reformation. If any provision regarding Detrimental Activity or any other provision set forth in the Plan or an Award Agreement is found by any court of competent jurisdiction or arbitrator to be invalid, void or unenforceable or to be excessively broad as to duration, activity, geographic application or subject, such provision or provisions shall be construed, by limiting or reducing them to the extent legally permitted, so as to be enforceable to the maximum extent compatible with then applicable law.

13.22 Electronic Communications. Notwithstanding anything else herein to the contrary, any Award agreement, notice of exercise of an Exercisable Award, or other document or notice required or permitted by the Plan or an Award that is required to be delivered in writing may, to the extent determined by the Committee, be delivered and accepted electronically. Signatures also may be electronic if permitted by the Committee. The term “written agreement” as used in the Plan shall include any document that is delivered and/or accepted electronically.

13.23 Agreement. As a condition to the grant of an Award, if requested by the Company or the lead underwriter of any public offering of the Common Stock (the “Lead Underwriter”), a Participant shall irrevocably agree not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise Transfer or dispose of, any interest in any Common Stock or any securities convertible into, derivative of, or exchangeable or exercisable for Common Stock, or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during such period of time following the effective date of a registration statement of the Company filed under the Securities Act that the Lead Underwriter shall specify (the “Lock-up Period”). The Participant shall further agree to sign such documents as may be requested by the Lead Underwriter or the Company to effect the foregoing and agree that the Company may impose stop-transfer instructions with respect to Common Stock acquired pursuant to an Award until the end of such Lock-up Period.

13.24 No Rights as Stockholder. Subject to the provisions of the Award agreement, no Participant or Permitted Transferee shall have any rights as a stockholder of the Company with respect to any Award until such individual becomes the holder of record of the shares of Common Stock underlying the Award.

ARTICLE XIV

EFFECTIVE DATE OF PLAN

The Plan became as originally adopted effective as of November 1, 2018 (the “Effective Date”). The Plan is hereby amended and restated in the form set forth herein, effective upon approval of the amended and restated Plan by the Board and the stockholders of the Company.

ARTICLE XV

TERM OF PLAN

No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but Awards granted prior to such tenth anniversary may, and the Committee’s authority to administer the terms of such Awards shall, extend beyond that date.

 

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TALARIS THERAPEUTICS, INC.

AMENDMENT NO. 1 TO THE

2018 EQUITY INCENTIVE PLAN

The Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan (the “Plan”) is hereby amended by the Board of Directors and stockholders of Talaris Therapeutics, Inc., a Delaware corporation, as follows:

Section 4.1 of the Plan is hereby amended by deleting it and replacing it with the following:

“General Limitations. The aggregate number of shares of Common Stock that maybe issued or used for reference purposes under the Plan or with respect to which Awards may be granted under the Plan, including with respect to Incentive Stock Options, shall not exceed 29,583,822 shares of Common Stock (subject, in each case, to any increase or decrease pursuant to Section 4.2), which may be either authorized and unissued Common Stock or Common Stock held in or acquired for the treasury of the Company or both. If any Award granted under the Plan expires, terminates, is canceled or is forfeited for any reason (in the case of any Stock Option, without having been exercised in full), or is settled in cash, the number of shares of Common Stock underlying such Award (in the case of any Stock Option, to the extent unexercised) shall again be available for issuance under the Plan. Shares of Common Stock tendered to the Company by a Participant to (a) purchase shares of Common Stock upon the exercise of an Award or (b) satisfy tax withholding obligations (including shares retained from the Award that was exercised or that created the tax obligation) shall be added back to the number of shares available for the future grant of Awards. No fractional shares of Common Stock shall be issued under the Plan.”

 

ADOPTED BY BOARD OF DIRECTORS:		September 30, 2020
ADOPTED BY STOCKHOLDERS:		September 30, 2020

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Form of Early Exercise Stock Purchase Agreement

TALARIS THERAPEUTICS, INC.

EARLY EXERCISE STOCK PURCHASE AGREEMENT

PURSUANT TO THE

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

This Early Exercise Stock Purchase Agreement (the “Agreement”) is made as of [●] by and between Talaris Therapeutics, Inc., a Delaware corporation (the “Company”), and [●] (the “Purchaser”).

Preliminary Statement

Whereas the Purchaser has elected “Early Exercise” with respect to the Shares set forth in Section 1 below, pursuant to that certain Stock Option Grant Notice and Agreement, by and between the Purchaser and the Company, dated as of [●] (the “Option Agreement”),pursuant to the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as amended from time to time (the “Plan”), the Committee hereby sells to the Purchaser as an [Eligible Employee] of the Company or any of its Affiliates, and the Purchaser agrees to purchase from the Company, as of the Closing (as defined in Section 2 below), the number of shares of the Company’s Common Stock set forth in Section 1 below. Except as otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan. A copy of the Plan has been delivered to the Purchaser. By signing and returning this Agreement, the Purchaser acknowledges having received and read a copy of the Plan and agrees to comply with the Plan, this Agreement and all applicable laws and regulations.

In consideration of the mutual covenants and representations set forth below, the Company and the Purchaser agree as follows:

1. Purchase and Sale of the Shares. Subject to the terms and conditions of this Agreement, the Company agrees to sell to the Purchaser and the Purchaser agrees to purchase from the Company on the Closing (as defined below) [●] shares of the Company’s Common Stock, par value $[●] per Share (the “Shares”), at a price of $[●] per share (the “Purchase Price”), for an aggregate purchase price of $[●].

2. Closing. The purchase and sale of the Shares shall occur at a closing (the “Closing”) to be held on the date first set forth above, or at any other time mutually agreed upon by the Company and the Purchaser. The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company.

3. Repurchase Option.

(a) Option. In the event the Purchaser’s Termination for any or no reason, including, without limitation, by reason of the Purchaser’s death or Disability, resignation or involuntary termination, the Company shall, from such time (as determined by the Company in its discretion), have the right, but not the obligation (the “Repurchase Option”), for a period of 90 days from the date of the Purchaser’s Termination, to repurchase any Shares which have not yet been released from the Repurchase Option (the “Unreleased Shares”) at a price per share equal to the lesser of (x) the fair market value of the shares at the time the Repurchase Option is exercised, as determined by the Company’s board of directors (the “Board”) in its sole discretion and (y) the Purchase Price (such lesser amount, the “Repurchase Price”). The Repurchase Option shall be exercised by the Company by delivering written notice to the Purchaser or, in the event of the Purchaser’s death, the Purchaser’s executor and, at the Company’s option, (i) by delivering to the Purchaser or the Purchaser’s executor a check in the amount of the aggregate Repurchase Price, or (ii) by canceling an amount of the Purchaser’s indebtedness to the Company equal to the aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) such that the combined payment and cancellation of indebtedness equals the aggregate Repurchase Price. Upon delivery of such notice and the payment of the aggregate Repurchase Price, the Company shall become the legal and beneficial owner of the Unreleased Shares being repurchased and all rights and interests therein or relating thereto, and the Company shall have the right to retain and transfer to its own name the number of Unreleased Shares being repurchased by the Company.

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(b) Assignability. The Company in its sole discretion may assign all or part of the Repurchase Option to one or more employees, officers, directors or stockholders of the Company or other persons or organizations.

4. Release of Shares from Repurchase Option; Vesting.

(a) Vesting. [Subject to the Purchaser not experiencing a Termination prior to each such date, the Shares shall be released from the Repurchase Option over a [●] period commencing on [●], with [●]% of the Shares vesting [●].]¹

(b) Delivery of Released Shares. Subject to the provisions of Section 6, the Shares that have been released from the Company’s Repurchase Option shall be delivered to the Purchaser at the Purchaser’s request.

5. Restrictions on Transfer.

(a) Investment Representations and Legend Requirements. The Purchaser hereby makes the investment representations listed on Exhibit A to the Company as of the date of this Agreement and as of the date of the Closing, and agrees that such representations are incorporated into this Agreement by this reference, such that the Company may rely on them in issuing the Shares and for any other lawful purpose. The Purchaser understands and agrees that the Company shall cause the legends set forth below, or substantially equivalent legends, to be placed upon any certificate(s) evidencing ownership of the Shares, together with any other legends that may be required by the Company or by applicable state or federal securities laws:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER, A RIGHT OF FIRST REFUSAL, A LOCK-UP PERIOD IN THE EVENT OF A PUBLIC OFFERING AND A REPURCHASE OPTION HELD BY THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EARLY EXERCISE STOCK PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS, RIGHT OF FIRST REFUSAL, LOCK-UP PERIOD AND REPURCHASE OPTION ARE BINDING ON TRANSFEREES OF THESE SHARES.

 

1	Note to Company: Vesting schedule should be the same as the vesting schedule of the options that were unvested at the time of early exercise.

 

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(b) Stop-Transfer Notices. The Purchaser agrees that 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.

(c) Refusal to Transfer. The Company shall not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares shall have been so transferred.

(d) Lock-Up Period. The Purchaser hereby agrees that the Purchaser shall not sell, offer, pledge, contract to sell, grant any option or contract to purchase, purchase any option or contract to sell, grant any right or warrant to purchase, lend or otherwise transfer or encumber, directly or indirectly, any Shares or other securities of the Company, nor shall the Purchaser enter into any swap, hedging or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any Shares or other securities of the Company, during the period from the filing of the first registration statement of the Company filed under the Securities Act, that includes securities to be sold on behalf of the Company to the public in an underwritten public offering under the Securities Act through the end of the 180-day period following the effective date of such registration statement (or such other period as may be requested by the Company or the underwriters 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 NASD Rule 2711(f)(4) or NYSE Rule 472(f)(4), or any successor provisions or amendments thereto). The obligations described in this section shall not apply to a registration relating solely to employee benefit plans on Form S-l or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future. The Purchaser further agrees, if so requested by the Company or any representative of its underwriters, to enter into such underwriter’s standard form of “lockup” or “market standoff” agreement in a form satisfactory to the Company and such underwriter. In the event that the Purchaser refuses to execute any such agreement, the Purchaser hereby agrees to comply with all of the transfer restrictions set forth above in this section for an additional 30 days beyond each 180-day (or other) period otherwise called for above. The Purchaser agrees that the Company may assign any or all of its rights under this section to the managing underwriter for any registered offering described in this section, and that such managing underwriter shall be able to further assign such rights in its sole discretion, in each case without any notice to or consent from the Purchaser being required. The Purchaser further agrees that any assignee of the Company’s rights under this section shall not be subject to any obligation of the Company set forth in this Agreement. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of any such restriction period.

(e) Unreleased Shares. No Unreleased Shares subject to the Repurchase Option contained in Section 3 of this Agreement, nor any beneficial interest in such Shares, shall be sold, transferred, encumbered or otherwise disposed of in any way (whether by operation of law or otherwise) by the Purchaser, other than as expressly permitted or required by Section 3. Notwithstanding the foregoing, the Shares may be transferred by the Purchaser to the Purchaser’s Permitted Transferees in accordance with, and subject to, the terms of the Plan and the Stockholders Agreements.

(f) Released Shares. No Shares purchased pursuant to this Agreement, nor any beneficial interest in such Shares, shall be sold, transferred, encumbered or otherwise disposed of in any way (whether by operation of law or otherwise) by the Purchaser or any subsequent transferee, other than in compliance with the Company’s right of first refusal provisions contained in the Company’s Bylaws.

 

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(g) No Transfers to Bad Actors. The Purchaser agrees not to sell, assign, transfer, pledge, encumber or otherwise dispose of any securities of the Company, or any beneficial interest therein, to any person (other than the Company) unless and until the proposed transferee confirms to the reasonable satisfaction of the Company that neither the proposed transferee nor any of its directors, executive officers, other officers that may serve as a director or officer of any company in which it invests, general partners or managing members nor any person that would be deemed a beneficial owner of those securities (in accordance with Rule 506(d) of the Securities Act) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(1)(i) through (viii) under the Securities Act (“Bad Actor Disqualifications”), except as set forth in Rule 506(d)(2)(ii) or (iii) or (d)(3) under the Securities Act and disclosed, reasonably in advance of the transfer, in writing in reasonable detail to the Company. The Purchaser will promptly notify the Company in writing if the Purchaser or, to the Purchaser’s knowledge, any person specified in Rule 506(d)(1) under the Securities Act becomes subject to any Bad Actor Disqualification.

(h) Restrictions Binding on Transferees. All transferees of Shares or any interest therein shall receive and hold such Shares or interest subject to all of the provisions of this Agreement as if the transferee were the Purchaser, and there shall be no further transfer of such Shares except in accordance with the terms of this Agreement.

6. Escrow.

(a) Deposit. As security for the faithful performance of this Agreement, the Purchaser agrees, immediately upon receipt of the certificate(s) evidencing the Shares, to deliver such certificate(s), together with a stock power in the form of Exhibit B attached to this Agreement, executed by the Purchaser and by the Purchaser’s spouse, if any (with the date and number of Shares left blank), to the Secretary of the Company or to another designee of the Company (the “Escrow Agent”). These documents shall be held by the Escrow Agent pursuant to the Joint Escrow Instructions of the Company and the Purchaser set forth in Exhibit C attached to this Agreement, which instructions are incorporated into this Agreement by this reference, and which instructions shall also be delivered to the Escrow Agent after the Closing.

(b) Rights in Escrow Shares. Subject to the terms hereof, the Purchaser shall have all the rights of a stockholder with respect to such Shares while they are held in escrow, including without limitation, the right to vote the Shares. If, from time to time during the term of the Company’s Repurchase Option, there is any stock dividend, stock split or other change in the Shares, any and all new, substituted or additional securities to which the Purchaser is entitled by reason of the Purchaser’s ownership of the Shares shall immediately become subject to this escrow, deposited with the Escrow Agent and included thereafter as “Shares” for purposes of this Agreement and the Company’s Repurchase Option.

7. Tax Consequences. The Purchaser has reviewed with the Purchaser’s own tax advisors the federal, state, local and foreign tax consequences of this investment and the transactions contemplated by this Agreement. The Purchaser is relying solely on such advisors and not on any statements or representations of the Company or any of its agents. The Purchaser understands that the Purchaser (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by this Agreement. The Purchaser understands that Section 83 of the Code, taxes as ordinary income the difference between the purchase price for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, “restriction” includes the right of the Company to buy back the Shares pursuant to the Repurchase Option. The Purchaser understands that the Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Repurchase Option expires by filing an election under Section 83(b) of the Code with the IRS within 30 days from the date of purchase. THE FORM FOR MAKING THIS SECTION 83(B) ELECTION IS ATTACHED TO THIS AGREEMENT AS EXHIBIT D AND THE PURCHASER (AND NOT THE COMPANY OR ANY OF ITS AGENTS) SHALL BE SOLELY RESPONSIBLE FOR APPROPRIATELY FILING SUCH FORM, EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS AGENTS TO MAKE THIS FILING ON THE PURCHASER’S BEHALF.

 

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8. General Provisions.

(a) Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to principles of conflict of laws which would result in the application of the laws of any other jurisdiction.

(b) Successors. The Company will require any successors or assigns to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession or assignment had taken place. The terms of this Agreement and all of the rights of the parties hereunder will be binding upon, inure to the benefit of, and be enforceable by, the Purchaser’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.

(c) Integration. This Agreement, together with all exhibits hereto, the Plan, the Option Agreement, and the Stockholders Agreements, represents the entire agreement between the parties with respect to the purchase of the Shares by the Purchaser and supersedes and replaces any and all prior written or oral agreements regarding the subject matter of this Agreement including, but not limited to, any representations made during any interviews, relocation discussions or negotiations whether written or oral.

(d) Notices. Any notice or communication given hereunder shall be in writing or by electronic means as set forth in Section 8(e) below and, if in writing, shall be deemed to have been duly given: (i) when delivered in person or by electronic means; (ii) three days after being sent by United States mail; or (iii) on the first business day following the date of deposit if delivered by a nationally recognized overnight delivery service, to the appropriate party at the following address (or such other address as the party shall from time to time specify): (i) if to the Company, to Talaris Therapeutics, Inc. at its then current headquarters, which shall initially be [570 S. Preston Street, Suite 421, Louisville, Kentucky 40202]; and (ii) if to the Purchaser, to the address on file with the Company.

(e) Mode of Communications. The Purchaser agrees, to the fullest extent permitted by applicable law, in lieu of receiving documents in paper format, to accept electronic delivery of any documents that the Company or any of its Affiliates may deliver in connection with this grant of Restricted Stock and any other grants offered by the Company, including, without limitation, prospectuses, grant notifications, account statements, annual or quarterly reports, and other communications. The Purchaser further agrees that electronic delivery of a document may be made via the Company’s email system or by reference to a location on the Company’s intranet or website or the online brokerage account system.

(f) WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT, FOR ITSELF AND ITS AFFILIATES, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE ACTIONS OF THE PARTIES HERETO OR THEIR RESPECTIVE AFFILIATES PURSUANT TO THIS AGREEMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT.

 

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(g) Assignment; Transfers. Except as set forth in this Agreement, this Agreement, and any and all rights, duties and obligations hereunder, shall not be assigned, transferred, delegated or sublicensed by the Purchaser without the prior written consent of the Company. Any attempt by the Purchaser without such consent to assign, transfer, delegate or sublicense any rights, duties or obligations that arise under this Agreement shall be void. Except as set forth in this Agreement, any transfers in violation of any restriction upon transfer contained in any section of this Agreement shall be void, unless such restriction is waived in accordance with the terms of this Agreement.

(h) Purchaser Investment Representations and Further Documents. The Purchaser agrees upon request to execute any further documents or instruments necessary or reasonably desirable in the view of the Company to carry out the purposes or intent of this Agreement, including (but not limited to) the applicable exhibits and attachments to this Agreement.

(i) Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to the Purchaser pursuant to this Agreement or the Plan, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Purchaser of, any Federal, state or local taxes required by law to be withheld.

(j) No Right to Employment or Consultancy Service. This Agreement is not an agreement of employment or to provide consultancy services. None of this Agreement, the Plan or the grant of the Shares hereunder shall (a) guarantee that the Company will employ or retain the Purchaser as an employee or consultant for any specific time period or (b) modify or limit in any respect the Company’s right to terminate or modify the Purchaser’s employment, consultancy arrangement or compensation. Moreover, this Agreement is not intended to and does not amend the Purchaser’s employment agreement with the Company, if any, and to the extent there is a conflict between this Agreement and such employment agreement, such employment agreement shall govern and take priority.

(k) Certain Legal Restrictions. The Plan, this Agreement, the purchase and vesting of the Shares, and any obligations of the Company under the Plan and this Agreement, shall be subject to all applicable federal, state and local laws, rules and regulations, and to such approvals by any regulatory or governmental agency as may be required, and to any rules or regulations of any exchange on which the Common Stock is listed.

(l) Severability of Provisions. If at any time any of the provisions of this Agreement shall be held invalid or unenforceable, or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of the activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement and the Company and the Purchaser agree that the provisions of this Agreement, as so amended, shall be valid and binding as though any invalid or unenforceable provisions had not been included; provided that if the Company’s call rights and rights of first refusal or rights of first offer set forth in the Stockholder Agreements or any other agreement shall be held invalid or unenforceable, the Restricted Stock shall be cancelled and terminated.

(m) No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

 

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(n) Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Purchaser with respect to the subject matter hereof.

(o) Rights as Stockholder. Subject to the terms and conditions of this Agreement, the Purchaser shall have all of the rights of a stockholder of the Company with respect to the Shares from and after the date that the Purchaser delivers a fully executed copy of this Agreement (including the applicable exhibits and attachments to this Agreement) and full payment for the Shares to the Company, and until such time as the Purchaser disposes of the Shares in accordance with this Agreement. Upon such transfer, the Purchaser shall have no further rights as a holder of the Shares so purchased except (in the case of a transfer to the Company) the right to receive payment for the Shares so purchased in accordance with the provisions of this Agreement, and the Purchaser shall forthwith cause the certificate(s) evidencing the Shares so purchased to be surrendered to the Company for transfer or cancellation.

(p) Adjustment for Stock Split. All references to the number of Shares and the purchase price of the Shares in this Agreement shall be adjusted to reflect any stock split, stock dividend or other change in the Shares which may be made after the date of this Agreement.

(q) Employment at Will. THE PURCHASER ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THIS AGREEMENT IS EARNED ONLY BY CONTINUING TO PROVIDE SERVICES TO THE COMPANY AT WILL (AND NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). THE PURCHASER FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT OR ENGAGEMENT BY THE COMPANY FOR THE VESTING PERIOD, OR FOR ANY PERIOD AT ALL, AND SHALL NOT INTERFERE WITH THE PURCHASER’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE PURCHASER’S RELATIONSHIP WITH THE COMPANY AT ANY TIME, WITH OR WITHOUT CAUSE OR NOTICE.

(r) Reliance on Counsel and Advisors. The Purchaser acknowledges that Proskauer Rose LLP is representing only the Company in this transaction. The Purchaser acknowledges that he or she has had the opportunity to review this Agreement, including all attachments hereto, and the transactions contemplated by this Agreement with his or her own legal counsel, tax advisors and other advisors. The Purchaser is relying solely on his or her own counsel and advisors and not on any statements or representations of the Company or its agents for legal or other advice with respect to this investment or the transactions contemplated by this Agreement.

(s) Construction. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement. Wherever any words are used in this Agreement in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or” and (ii) “including” or “include” shall mean “including, without limitation.” Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

 

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(t) Spousal Consent. If the Purchaser is a resident of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, or the Commonwealth of Puerto Rico and is married on the date of this Agreement, the Purchaser’s spouse shall execute and deliver to the Company a consent of spouse in the form of Exhibit E hereto (“Consent of Spouse”), effective on the date hereof. Notwithstanding the execution and delivery thereof, such consent shall not be deemed to confer or convey to the spouse any rights in the Purchaser’s Shares that do not otherwise exist by operation of law or the agreement of the parties. If the Purchaser should marry or remarry subsequent to the date of this Agreement, the Purchaser shall within ninety (90) days thereafter obtain his/her new spouse’s acknowledgement of and consent to the existence and binding effect of all restrictions contained in this Agreement by causing such spouse to execute and deliver a Consent of Spouse acknowledging the restrictions and obligations contained in this Agreement and agreeing and consenting to the same.

(u) Recoupment Policy. The Purchaser acknowledges and agrees that the Restricted Stock shall be subject to the terms and provisions of any “clawback” or recoupment policy that may be adopted by the Company from time to time or as may be required by any applicable law (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules and regulations thereunder).

(v) Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. If and to the extent that any provision of this Agreement conflicts or is inconsistent with the terms set forth in the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.

(w) Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. Facsimile copies of signed signature pages shall be binding originals.

(signature page follows)

 

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Form of Early Exercise Stock Purchase Agreement

The parties represent that they have read this Agreement in its entirety, have had an opportunity to obtain the advice of counsel prior to executing this Agreement and fully understand this Agreement. The Purchaser agrees to notify the Company of any change in his or her contact information below.

 

PURCHASER:
Signature
Print Name
Address:
Email
TALARIS THERAPEUTICS, INC.
Signature
Print Name
Print Title
Address:

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Exhibit A

INVESTMENT REPRESENTATION STATEMENT

 

PURCHASER		:		[●]
COMPANY		:		Talaris Therapeutics, Inc.
SECURITY		:		Restricted Common Stock
AMOUNT		:		[●] shares
DATE		:		[●]

 

 

In connection with the purchase of the above-listed shares, I, the undersigned purchaser, represent to the Company as follows:

1. The Company may rely on these representations. I understand that the Company’s sale of the shares to me has not been registered under the Securities Act of 1933, as amended (the “Securities Act”), because the Company believes, relying in part on my representations in this document, that an exemption from such registration requirement is available for such sale. I understand that the availability of this exemption depends upon the representations I am making to the Company in this document being true and correct.

2. I am purchasing for investment. I am purchasing the shares solely for investment purposes, and not for further distribution. My entire legal and beneficial ownership interest in the shares is being purchased and shall be held solely for my account, except to the extent I intend to hold the shares jointly with my spouse. I am not a party to, and do not presently intend to enter into, any contract or other arrangement with any other person or entity involving the resale, transfer, grant of participation with respect to or other distribution of any of the shares. My investment intent is not limited to my present intention to hold the shares for the minimum capital gains period specified under any applicable tax law, for a deferred sale, for a specified increase or decrease in the market price of the shares, or for any other fixed period in the future.

3. I can protect my own interests. I can properly evaluate the merits and risks of an investment in the shares and can protect my own interests in this regard, whether by reason of my own business and financial expertise, the business and financial expertise of certain professional advisors unaffiliated with the Company with whom I have consulted, or my preexisting business or personal relationship with the Company or any of its officers, directors or controlling persons.

4. I am informed about the Company. I am sufficiently aware of the Company’s business affairs and financial condition to reach an informed and knowledgeable decision to acquire the shares. I have had an opportunity to discuss the plans, operations and financial condition of the Company with its officers, directors or controlling persons, and have received all information I deem appropriate for assessing the risk of an investment in the shares.

5. I recognize my economic risk. I realize that the purchase of the shares involves a high degree of risk, and that the Company’s future prospects are uncertain. I am able to hold the shares indefinitely if required, and am able to bear the loss of my entire investment in the shares.

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6. I know that the shares are restricted securities. I understand that the shares are “restricted securities” in that the Company’s sale of the shares to me has not been registered under the Securities Act in reliance upon an exemption for non-public offerings. In this regard, I also understand and agree that:

A. I must hold the shares indefinitely, unless any subsequent proposed resale by me is registered under the Securities Act, or unless an exemption from registration is otherwise available (such as Rule 144);

B. the Company is under no obligation to register any subsequent proposed resale of the shares by me; and

C. the certificate evidencing the shares will be imprinted with a legend which prohibits the transfer of the shares unless such transfer is registered or such registration is not required in the opinion of counsel for the Company.

7. I am familiar with Rule 144. I am familiar with Rule 144 adopted under the Securities Act, which in some circumstances permits limited public resales of “restricted securities” like the shares acquired from an issuer in a non-public offering. I understand that my ability to sell the shares under Rule 144 in the future is uncertain, and may depend upon, among other things: (i) the availability of certain current public information about the Company; (ii) the resale occurring more than a specified period after my purchase and full payment (within the meaning of Rule 144) for the shares; and (iii) if I am an affiliate of the Company (A) the sale being made in an unsolicited “broker’s transaction”, transactions directly with a market maker or riskless principal transactions, as those terms are defined under the Securities Exchange Act of 1934, as amended, (B) the amount of shares being sold during any three-month period not exceeding the specified limitations stated in Rule 144, and (C) timely filing of a notice of proposed sale on Form 144, if applicable.

8. I know that Rule 144 may never be available. I understand that the requirements of Rule 144 may never be met, and that the shares may never be saleable under the rule. I further understand that at the time I wish to sell the shares, there may be no public market for the Company’s stock upon which to make such a sale, or the current public information requirements of Rule 144 may not be satisfied, either of which may preclude me from selling the shares under Rule 144 even if the relevant holding period had been satisfied.

9. I know that I am subject to further restrictions on resale. I understand that in the event Rule 144 is not available to me, any future proposed sale of any of the shares by me will not be possible without prior registration under the Securities Act, compliance with some other registration exemption (which may or may not be available), or each of the following: (i) my written notice to the Company containing detailed information regarding the proposed sale, (ii) providing an opinion of my counsel to the effect that such sale will not require registration, and (iii) the Company notifying me in writing that its counsel concurs in such opinion. I understand that neither the Company nor its counsel is obligated to provide me with any such opinion. I understand that although Rule 144 is not exclusive, the Staff of the SEC has stated that persons proposing to sell private placement securities other than in a registered offering or pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk.

10. I know that I may have tax liability due to the uncertain value of the shares. I understand that the board of directors believes its valuation of the shares represents a fair appraisal of their worth, but that it remains possible that, with the benefit of hindsight, the Internal Revenue Service may successfully assert that the value of the shares on the date of my purchase is substantially greater than the board of directors’ appraisal. I understand that any additional value ascribed to the shares by such an IRS determination will constitute ordinary income to me as of the purchase date, and that any additional taxes and interest due as a result will be my sole responsibility payable only by me, and that the Company need not and will not reimburse me for that tax liability.

 

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11. Residence. The address of my principal residence is set forth on the signature page below.

12. No “bad actor” disqualification events. Neither I nor any person that would be deemed a beneficial owner of the shares (in accordance with Rule 506(d) of the Securities Act) is subject to any of the “bad actor” disqualifications described in Rule 506(d)(l)(i) through (viii) under the Securities Act, except as set forth in Rule 506(d)(2)(h) or (iii) or (d)(3) under the Securities Act and disclosed, reasonably in advance of the purchase or acquisition of the shares, in writing in reasonable detail to the Company.

By signing below, I acknowledge my agreement with each of the statements contained in this Investment Representation Statement as of the date first set forth above, and my intent for the Company to rely on such statements in issuing the shares to me.

 

Purchaser’s Signature

Print Name

Address of the Purchaser’s principal residence:

 

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Exhibit B

STOCK POWER AND ASSIGNMENT

SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Early Exercise Stock Purchase Agreement dated as of [●], the undersigned hereby sells, assigns and transfers unto ____________________________, _______________________________(___________) shares of Common Stock of Talaris Therapeutics, Inc., a Delaware corporation, standing in the undersigned’s name on the books of said corporation represented by certificate number _____ delivered herewith, and does hereby irrevocably constitute and appoint ___________________________ as attorney-in-fact, with full power of substitution, to transfer said stock on the books of said corporation.

Dated:

 

(Signature)

(Print Name)

(Spouse’s Signature, if any)

(Print Name)

This Assignment Separate From Certificate was executed in conjunction with the terms of an Early Exercise Stock Purchase Agreement between the above assignor and the above corporation, dated as of [●].

Instruction: Please do not fill in any blanks other than the signature and name lines.

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Exhibit C

JOINT ESCROW INSTRUCTIONS

[●]

Talaris Therapeutics, Inc.

Attn: ____________

                                         

Dear [____________]:

As Escrow Agent for both Talaris Therapeutics, Inc., a Delaware corporation (the “Company”), and [●] (the “Purchaser”), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Early Exercise Stock Purchase Agreement (the “Agreement”), dated as of [●], to which a copy of these Joint Escrow Instructions is attached, in accordance with the following instructions:

1. In the event that the Company and/or any assignee of the Company (referred to collectively for convenience herein as the “Company”) exercises the Repurchase Option set forth in the Agreement, the Company shall give to the Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. The Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice.

2. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (by check or such other form of consideration mutually agreed to by the parties) for the number of shares of stock being purchased pursuant to the exercise of the Repurchase Option.

3. The Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement. The Purchaser does hereby irrevocably constitute and appoint you as his or her attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 3, the Purchaser shall exercise all rights and privileges of a stockholder of the Company while the stock is held by you.

4. Upon written request of the Purchaser after each successive one-year period from the date of the Agreement, unless the Repurchase Option has been exercised, you will deliver to the Purchaser a certificate or certificates representing so many shares of stock remaining in escrow as are not then subject to the Repurchase Option. On or prior to the date that is 95 days after the date the Purchaser’s status as a service provider (as defined in the Agreement) to the Company terminates, you will deliver to the Purchaser a certificate or certificates representing the aggregate number of shares sold and issued pursuant to the Agreement and not purchased by the Company or its assignees pursuant to the exercise of the Repurchase Option.

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5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to the Purchaser, you shall deliver all of same to the Purchaser and shall be discharged of all further obligations hereunder.

6. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto.

7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for the Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith.

8. The Company and the Purchaser hereby jointly and severally expressly agree to indemnify and hold harmless you and your designees against any and all claims, losses, liabilities, damages, deficiencies, costs and expenses, including reasonable attorneys’ fees and expenses of investigation and defense incurred or suffered by you and your designees, directly or indirectly, as a result of any of your actions or omissions or those of your designees while acting in good faith and in the exercise of your judgment under the Agreement, these Joint Escrow Instructions, exhibits hereto or written instructions from the Company or the Purchaser hereunder.

9. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction.

10. You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder.

11. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. The Company shall reimburse you for any such disbursements.

12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint a successor Escrow Agent.

13. You are expressly authorized to delegate your duties as Escrow Agent hereunder to the law firm of Proskauer Rose LLP or any other law firm, which delegation, if any, may change from time to time and shall survive your resignation as Escrow Agent.

14. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments.

 

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15. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings.

16. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or four days following deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid and return receipt requested, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by written notice to each of the other parties hereto.

 

COMPANY:				Talaris Therapeutics, Inc.
				,
				Attn:
PURCHASER:
ESCROW AGENT:

17. By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement.

18. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns.

19. These Joint Escrow Instructions shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

[Signature page follows]

 

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Very truly yours,
TALARIS THERAPEUTICS, INC.
By:
Print Name: [Scott Requadt]
Title: [Chief Executive Officer]
PURCHASER:
[●]
(signature)

 

ESCROW AGENT:

Name:

Title: Secretary

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IF YOU WISH TO MAKE A SECTION 83(B)

ELECTION, THE FILING OF SUCH

ELECTION IS YOUR RESPONSIBILITY.

THE FORM FOR MAKING THIS

SECTION 83(B) ELECTION IS ATTACHED

TO THIS AGREEMENT AS EXHIBIT D.

YOU MUST FILE THIS FORM WITHIN 30

DAYS OF PURCHASING THE SHARES.

YOU (AND NOT THE COMPANY OR ANY OF

ITS AGENTS) SHALL BE SOLELY

RESPONSIBLE FOR FILING SUCH FORM

WITH THE IRS, EVEN IF YOU REQUEST

THE COMPANY OR ITS AGENTS TO MAKE

THIS FILING ON YOUR BEHALF AND EVEN

IF THE COMPANY OR ITS AGENTS HAVE

PREVIOUSLY MADE THIS FILING ON YOUR

BEHALF.

The election should be filed by mailing a signed election form by certified mail, return receipt requested to the IRS Service Center where you file your tax returns. See www.irs.gov

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Exhibit D

ELECTION UNDER SECTION 83(b) OF THE

INTERNAL REVENUE CODE OF 1986, AS AMENDED

The undersigned taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include in his or her gross income for the current taxable year, the amount of any compensation taxable to him or her in connection with his or her receipt of the property described below:

1. The name, address, taxpayer identification number and taxable year of the undersigned are as follows:

NAME OF TAXPAYER: _______________ SPOUSE: __________________

TAXPAYER’S ADDRESS: ________________________________________

TAXPAYER ID #: ___________________ SPOUSE’S ID #: _____________________

2. The property with respect to which the election is made is described as follows: ___________ shares (the “Shares”) of the Common Stock of Talaris Therapeutics, Inc. (the “Company”).

3. The date on which the property was transferred is: _________ _____, ______. The taxable year to which this election relates is calendar year 20___.

4. The property is subject to the following restrictions: The Shares may be repurchased by the Company, or its assignee, upon the occurrence of certain events. This right lapses with regard to a portion of the Shares over time.

5. The fair market value at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, of such property is: $___________.

6. The amount, if any, paid for such property: $___________.

The undersigned has submitted a copy of this statement to the person for whom the services were performed in connection with the undersigned’s receipt of the above-described property. The transferee of such property is the person performing the services in connection with the transfer of said property.

The undersigned understand(s) that the foregoing election may not be revoked except with the consent of the Commissioner.

 

Dated:
				, Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated:
				, Spouse of Taxpayer

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Exhibit E

CONSENT OF SPOUSE

I, [NAME], spouse of [●], have read and approve of the foregoing Early Exercise Stock Purchase Agreement, dated as of [●], together with all exhibits and attachments thereto (collectively, the “Agreement”), by and between my spouse and Talaris Therapeutics, Inc., a Delaware corporation (the “Company”). In consideration of the Company’s granting of the right to [●] to purchase [●] shares of Common Stock of the Company as set forth in the Agreement, I hereby appoint [●] as my attorney-in-fact in respect to the exercise or waiver of any rights under the Agreement, and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement or any shares issued pursuant thereto under the community property laws of the State of [●], or under similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement.

Dated: [●]

 

(Signature)

(Print Name)

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TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

INCENTIVE STOCK OPTION GRANT NOTICE AND AGREEMENT

Talaris Therapeutics, Inc. (the “Company”), pursuant to its Second Amended and Restated 2018 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Incentive Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Incentive Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:		[●]
Grant Date:		[●]
Vesting Commencement Date:		[●]
Exercise Price per Share:		[$0.18]
Total Number of Shares Subject to Option:		[●]
Expiration Date:		[●]
Type of Option:		Incentive Stock Option
Exercise Schedule:		The Option is exercisable after the applicable vesting date in accordance with Section 3 of the Agreement or prior to the applicable vesting date in accordance with Section 4 of the Agreement (i.e. Early Exercise Permitted).
Vesting Schedule:		Subject to Section 3 of the Agreement, the Option shall vest and become exercisable commencing on the Vesting Commencement Date, with [●]/48ths of the Option vesting on [●], 2020, and the remainder of the Option vesting in [●]1 equal installments beginning on the date that is the one-month anniversary of [●], 2020, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or the Agreement.

 

1	Note to Draft: Number of months to equal the portion of the Option that is unvested after the initial cliff-vesting (e.g., if 10/48ths of the Option vests on [●], 2020, the remainder of the Option will vest over the subsequent 38 months).

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IN WITNESS WHEREOF, the parties hereto have executed this Incentive Stock Option Grant Notice and Agreement on and as of the day and year first above written.

 

TALARIS THERAPEUTICS, INC.				PARTICIPANT:
By:		/s/ Scott Requadt		By:

Print Name:		Scott Requadt		Print Name:

Title:		Chief Executive Officer				State of Residence:

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EXHIBIT A

TO STOCK OPTION GRANT NOTICE

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

Preliminary Statement

The Committee hereby grants this stock option (the “Option”) as of the Grant Date pursuant to the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as it may be amended from time to time (the “Plan”), to purchase the number of shares of the common stock of the Company, $0.0001 par value per share (the “Common Stock”), set forth below, to the Participant, as an Eligible Employee of the Company or one of its Affiliates (collectively, the Company and all of its Affiliates shall be referred to as the “Employer”). Except as otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Grant Notice or the Plan, as applicable. A copy of the Plan has been delivered to the Participant. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations.

Accordingly, the parties hereto agree as follows:

1. Tax Matters. The Option is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, the Option will not qualify as an “incentive stock option,” among other events, (i) if the Participant disposes of any shares of Common Stock acquired pursuant to the Option at any time during the two (2) year period following the date of this Agreement or the one (1) year period following the date on which the Option is exercised; (ii) except in the event of the Participant’s death or disability, as defined in Section 22(e)(3) of the Code, if the Participant is not employed by the Company, any “parent corporation” of the Company within the meaning of Section 424(e) of the Code (“Parent”), or any “subsidiary corporation” within the meaning of Section 424(f) of the Code (“Subsidiary”), at all times during the period beginning on the Grant Date (as defined herein) and ending on the day three (3) months before the date of exercise of the Option; or (iii) to the extent the aggregate Fair Market Value (determined as of the time the Option is granted) of the shares of Common Stock subject to “incentive stock options” which become exercisable for the first time by the Participant in any calendar year exceeds $100,000. To the extent that the Option does not qualify as an “incentive stock option,” it shall not affect the validity of the Option and shall constitute a separate non-qualified stock option.

2. Common Stock Subject to Option; Exercise Price. Subject in all respects to the Plan and the terms and conditions set forth herein and therein, the Option entitles the Participant to purchase from the Company, upon exercise, the Total Number of Shares Subject to Option (as set forth in the Grant Notice) at the Exercise Price per Share (as set forth in the Grant Notice).

3. Vesting; Exercise.

(a) Subject to this Section 3, the Option shall vest and become exercisable as noted in the Exercise Schedule and Vesting Schedule shown on the Grant Notice.

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Notwithstanding anything herein to the contrary, upon the occurrence of a Change in Control (as defined in the Plan):

 

•

the vesting on the Options granted pursuant to this Grant Notice shall accelerate by one year, provided that Participant remains employed by the Company at the time of the Change in Control; and

 

•

if Participant is Terminated without Cause, within 3 months prior to or 12 months following, a Change in Control, then the vesting on all of Participant’s Options granted pursuant to this Grant Notice shall become fully vested and exercisable pursuant to Section 9.1(a) of the Plan as follows: (1) in the case of a Termination within 3 months prior to, or concurrently with, a Change of Control, then immediately prior to, and contingent upon, a Change in Control occurring, or (2) in the case of a Termination within 12 months after a Change of Control, then immediately upon such Termination. Notwithstanding anything herein or in Section 6.4 of the Plan to the contrary, in the event that prior to a Change in Control, the Participant experiences a Termination without Cause, then (1) the Participant’s unvested Options shall terminate and expire no earlier than 120 days following the date of such Termination (but in no event later than the Expiration Date), and (2) the Participant’s vested and exercisable Options may be exercised by the Participant at any time within a period of 120 days following the date of such Termination (but in no event later than the Expiration Date).

(b) To the extent that the Option has become vested and exercisable with respect to a number of shares of Common Stock, the Option may thereafter be exercised by the Participant, in whole or in part, at any time or from time to time prior to the expiration of the Option in accordance with Section 5 and the Plan. Notwithstanding the foregoing, the Participant may not exercise the Option unless the offering of shares of Common Stock issuable upon such exercise (i) is then registered under the Securities Act, or, if such offering is not then so registered, the Company has determined that such offering is exempt from the registration requirements of the Securities Act and (ii) complies with all other applicable laws and regulations governing the Option, and the Participant may not exercise the Option if the Committee determines that such exercise would not be so registered or exempt and otherwise in compliance with such laws and regulations.

(c) To exercise the Option, unless otherwise directed or permitted by the Committee, the Participant must:

(i) execute and deliver to the Company a properly completed Notice of Exercise in the form attached hereto as Exhibit I.

(ii) execute and deliver such other documentation as required by the Committee (including, without limitation, the Stockholder Agreements) which may set forth certain restrictions on transferability of the shares of Common Stock acquired upon exercise, a right of first refusal or a right of first offer of the Company and other Persons with respect to shares, and such other terms or restrictions as the Board or Committee may from time to time establish, including any drag along rights, tag along rights, transfer restrictions and registration rights, and

(iii) remit the aggregate Exercise Price to the Company in full, payable (A) in cash or by check, bank draft or money order payable to the order of the Company; or (B) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such Exercise Price withheld from other compensation).

 

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(d) In addition, unless otherwise directed or permitted by the Committee, the Participant must pay or provide for all applicable withholding taxes in respect of the exercise of the Option, by (i) remitting the aggregate amount of such taxes to the Company in full, in cash or by check, bank draft or money order payable to the order of the Company, or (ii) such other arrangements on terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such taxes withheld from other compensation).

4. Exercise Prior to Vesting (“Early Exercise”). If permitted in the Grant Notice (i.e., the “Exercise Schedule” indicates “Early Exercise Permitted”) and subject to the provisions of this Agreement, provided that the Participant has not experienced a Termination, the Participant may elect at any time during the term of the Option, to exercise all or part of the Option, including the unvested portion of the Option; provided, however, that:

(a) a partial exercise of the Option will be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise will be subject to a purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement;

(c) the Participant shall enter into the Company’s form of 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) to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the shares of Common Stock with respect to which the Option plus all other Incentive Stock Options the Participant holds are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, the Participant’s option(s) or portions thereof that exceed such limit (according to the order in which they were granted) will be treated as Nonstatutory Stock Options.

5. Termination. The term of the Option shall be until the tenth anniversary of the Grant Date, after which time it shall expire (the “Expiration Date”), subject to earlier termination in the event of the Participant’s Termination as specified in the Plan and this Agreement. Notwithstanding anything herein to the contrary, upon the Expiration Date, the Option (whether vested or not) shall be immediately forfeited, canceled and terminated for no consideration and no longer shall be exercisable. The provisions in the Plan regarding Termination shall apply to the Option, provided that, to the extent applicable, if the Participant’s employment agreement or other written agreement with the Company expressly provides more favorable rights with respect to the Option in the event of Termination, such rights shall apply.

6. Market Stand-Off. If requested by the Company or the lead underwriter of any public offering of the Common Stock (the “Lead Underwriter”), the Participant shall irrevocably agree not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise Transfer or dispose of, any interest in any Common Stock or any securities convertible into, derivative of, or exchangeable or exercisable for Common Stock, or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during such period of time following the effective date of a registration statement of the Company filed under the Securities Act that the Lead Underwriter shall specify (the “Lock-up Period”). The Participant shall further agree to sign such documents as may be requested by the Lead Underwriter or the Company to effect the foregoing and agree that the Company may impose stop transfer instructions with respect to Common Stock acquired pursuant to an Award until the end of such Lock-up Period.

 

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7. Restriction on Transfer of Option. Unless otherwise determined by the Committee in accordance with the Plan, (a) no part of the Option shall be Transferable other than by will or by the laws of descent and distribution and (b) during the lifetime of the Participant, the Option may be exercised only by the Participant. Any attempt to Transfer the Option other than in accordance with the Plan shall be void.

8. No Rights as Stockholder. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock covered by the Option unless and until the Participant has become the holder of record of such shares, and no adjustments shall be made for dividends (whether in cash, in kind or other property), distributions or other rights in respect of any such shares, except as otherwise specifically provided for in the Plan.

9. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. If and to the extent that this Agreement conflicts or is inconsistent with the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.

10. Recoupment Policy. The Participant acknowledges and agrees that the Common Stock underlying the Option shall be subject to the terms and provisions of any “clawback” or recoupment policy that may be adopted by the Company from time to time or as may be required by any applicable law (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules and regulations thereunder).

11. Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to the Participant pursuant to this Agreement, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld.

12. No Right to Employment. This Agreement is not an agreement of employment. None of this Agreement, the Plan or the grant of the Option hereunder shall (a) guarantee that the Employer will employ the Participant for any specific time period or (b) modify or limit in any respect the Employer’s right to terminate or modify the Participant’s employment or compensation. Moreover, this Agreement is not intended to and does not amend any existing employment contract between the Participant and the Company or any of its Affiliates; to the extent there is a conflict between this Agreement and such an employment contract, the employment contract shall govern and take priority.

13. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement must be in writing or by electronic means as set forth in Section 14 below and sent to the party to which the notice, demand or request is being made:

(a) unless otherwise specified by the Company in a notice delivered by the Company in accordance with this Section 13, any notice required to be delivered to the Company shall be properly delivered if delivered to:

 

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Talaris Therapeutics, Inc.

570 S. Preston Street, Suite 421

Louisville, Kentucky 40202

(b) if to the Participant, to the address on file with the Company.

Any notice, demand or request, if made in accordance with this Section 13 shall be deemed to have been duly given: (i) when delivered in person or by electronic means; (ii) three days after being sent by United States mail; or (iii) on the first business day following the date of deposit if delivered by a nationally recognized overnight delivery service.

14. Mode of Communications. The Participant agrees, to the fullest extent permitted by applicable law, in lieu of receiving documents in paper format, to accept electronic delivery of any documents that the Company or any of its Affiliates may deliver in connection with this Option grant and any other grants offered by the Company, including, without limitation, prospectuses, grant notifications, account statements, annual or quarterly reports, and other communications. The Participant further agrees that electronic delivery of a document may be made via the Company’s email system or by reference to a location on the Company’s intranet or website or the online brokerage account system.

15. Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the [State of Delaware], without giving effect to principles of conflict of laws which would result in the application of the laws of any other jurisdiction.

16. Dispute Resolution. All controversies and claims arising out of or relating to this Agreement, or the breach hereof, shall be settled by the Employer’s mandatory dispute resolution procedures as may be in effect from time to time with respect to matters arising out of or relating to Participant’s employment with the Employer.

17. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT, FOR ITSELF AND ITS AFFILIATES, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE ACTIONS OF THE PARTIES HERETO OR THEIR RESPECTIVE AFFILIATES PURSUANT TO THIS AGREEMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT.

18. Construction. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement. Wherever any words are used in this Agreement in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or” and (ii) “including” or “include” shall mean “including, without limitation.” Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

 

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19. Severability of Provisions. If at any time any of the provisions of this Agreement shall be held invalid or unenforceable, or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of the activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement and the Company and the Participant agree that the provisions of this Agreement, as so amended, shall be valid and binding as though any invalid or unenforceable provisions had not been included; provided that if the Company’s call rights and rights of first refusal or rights of first offer set forth in the Stockholder Agreements or any other agreement shall be held invalid or unenforceable, the Option shall be cancelled and terminated.

20. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

21. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

22. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

[Remainder of Page Left Intentionally Blank]

 

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Exhibit I

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NOTICE OF EXERCISE

Date: [●], 20__

Talaris Therapeutics, Inc.

 

_____________Attention: [●]

Ladies and Gentlemen:

This document constitutes notice under my stock option agreement that I elect to purchase the number of shares for the aggregate payment set forth below.

 

Type of option (check one):		Incentive ☒     Nonqualified ☐
Option number and grant date:		[●] options – [●], 20__
Number of shares as to which option is exercised:
Per share exercise price:		$[●]
Aggregate exercise price (number of shares as to which option is exercised multiplied by per share exercise price):		$

I (i) agree that the shares purchased pursuant to this Notice of Exercise will be bound by and subject to the terms of that certain Voting Agreement dated as of November 1, 2018 (the “Voting Agreement”), by and among Talaris Therapeutics, Inc. and certain of its stockholders, as such Voting Agreement may be amended or restated; (ii) hereby adopt the Voting Agreement with the same force and effect as if I were originally a party thereto; (iii) acknowledge that I will be considered a “Key Holder” for all purposes of the Voting Agreement; and (iv) agree to sign any such documents as may be required in connection with my becoming a party to the Voting Agreement.

Any notice required or permitted by the Voting Agreement will be given to me at the address listed below my signature hereto.

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (aggregate exercise price).

 

Estimated withholding taxes:		$

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (estimated withholding taxes).

☐ I have made arrangements with Talaris Therapeutics, Inc. to have the aggregate exercise price and/or the applicable withholding taxes withheld from other compensation.

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By signing below, I (i) acknowledge that I remain subject to the applicable provisions of my option award agreement, (ii) acknowledge and make the representations and warranties set forth below, and (iii) acknowledge that the Company is relying in part upon such representations and warranties:

(a) I am acquiring and will hold the shares of Common Stock for investment for my account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act or other applicable securities laws.

(b) I have been advised that offerings of the shares of Common Stock have not been registered under the Securities Act or other applicable securities laws, on the ground that no public offering of the shares of Common Stock is to be effected (it being understood, however, that the shares of Common Stock are being offered in reliance on the exemption provided under Rule 701 under the Securities Act), and that the shares of Common Stock must be held indefinitely, unless they are subsequently registered under the applicable securities laws or I obtain an opinion of counsel (in the form and substance satisfactory to the Company and its counsel) that registration is not required. I further acknowledge and understand that the Company is under no obligation hereunder to register offerings of the shares of Common Stock.

(c) I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. I acknowledge that I am familiar with the conditions for resale set forth in Rule 144, and I acknowledge and understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.

(d) I will not sell, transfer or otherwise dispose of the shares of Common Stock in violation of the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, my option award agreement, the Voting Agreement, the Securities Act (or the rules and regulations promulgated thereunder) or under any other applicable securities laws. I agree that I will not dispose of the Common Stock unless and until I have complied with all requirements applicable to the disposition of the shares of Common Stock.

(e) I have been furnished with, and have had access to, such information as I consider necessary or appropriate for deciding whether to invest in the shares of Common Stock, and I have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Common Stock.

(f) I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Common Stock for an indefinite period and to suffer a complete loss of my investment in the Common Stock.

 

[Name of Participant]

Address:

Telephone:

Attention:

 

 

 

 

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TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

INCENTIVE STOCK OPTION GRANT NOTICE AND AGREEMENT

Talaris Therapeutics, Inc. (the “Company”), pursuant to its Second Amended and Restated 2018 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Incentive Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Incentive Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:		[●]
Grant Date:		[●]
Vesting Commencement Date:		[●]
Exercise Price per Share:		[$0.18]
Total Number of Shares Subject to Option:		[●]
Expiration Date:		[●]
Type of Option:		Incentive Stock Option
Exercise Schedule:		The Option is exercisable after the applicable vesting date in accordance with Section 3 of the Agreement or prior to the applicable vesting date in accordance with Section 4 of the Agreement (i.e. Early Exercise Permitted).
Vesting Schedule:		Subject to Section 3 of the Agreement, the Option shall vest and become exercisable over a four-year period commencing on the Vesting Commencement Date, vesting in 48 equal installments beginning on the date that is the one-month anniversary of the Vesting Commencement Date, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or the Agreement.

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IN WITNESS WHEREOF, the parties hereto have executed this Incentive Stock Option Grant Notice and Agreement on and as of the day and year first above written.

 

TALARIS THERAPEUTICS, INC.						PARTICIPANT:
By:		/s/ Scott Requadt				By:

Print Name:		Scott Requadt						Print Name:

Title:		Chief Executive Officer						State of Residence:

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EXHIBIT A

TO STOCK OPTION GRANT NOTICE

INCENTIVE STOCK OPTION AGREEMENT

PURSUANT TO THE

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

Preliminary Statement

The Committee hereby grants this stock option (the “Option”) as of the Grant Date pursuant to the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as it may be amended from time to time (the “Plan”), to purchase the number of shares of the common stock of the Company, $0.0001 par value per share (the “Common Stock”), set forth below, to the Participant, as an Eligible Employee of the Company or one of its Affiliates (collectively, the Company and all of its Affiliates shall be referred to as the “Employer”). Except as otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Grant Notice or the Plan, as applicable. A copy of the Plan has been delivered to the Participant. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations.

Accordingly, the parties hereto agree as follows:

1. Tax Matters. The Option is intended to qualify as an “incentive stock option” under Section 422 of the Internal Revenue Code of 1986, as amended. Notwithstanding the foregoing, the Option will not qualify as an “incentive stock option,” among other events, (i) if the Participant disposes of any shares of Common Stock acquired pursuant to the Option at any time during the two (2) year period following the date of this Agreement or the one (1) year period following the date on which the Option is exercised; (ii) except in the event of the Participant’s death or disability, as defined in Section 22(e)(3) of the Code, if the Participant is not employed by the Company, any “parent corporation” of the Company within the meaning of Section 424(e) of the Code (“Parent”), or any “subsidiary corporation” within the meaning of Section 424(f) of the Code (“Subsidiary”), at all times during the period beginning on the Grant Date (as defined herein) and ending on the day three (3) months before the date of exercise of the Option; or (iii) to the extent the aggregate Fair Market Value (determined as of the time the Option is granted) of the shares of Common Stock subject to “incentive stock options” which become exercisable for the first time by the Participant in any calendar year exceeds $100,000. To the extent that the Option does not qualify as an “incentive stock option,” it shall not affect the validity of the Option and shall constitute a separate non-qualified stock option.

2. Common Stock Subject to Option; Exercise Price. Subject in all respects to the Plan and the terms and conditions set forth herein and therein, the Option entitles the Participant to purchase from the Company, upon exercise, the Total Number of Shares Subject to Option (as set forth in the Grant Notice) at the Exercise Price per Share (as set forth in the Grant Notice).

3. Vesting; Exercise.

(a) Subject to this Section 3, the Option shall vest and become exercisable as noted in the Exercise Schedule and Vesting Schedule shown on the Grant Notice.

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Notwithstanding anything herein to the contrary, upon the occurrence of a Change in Control (as defined in the Plan):

 

•

the vesting on the Options granted pursuant to this Grant Notice shall accelerate by one year, provided that Participant remains employed by the Company at the time of the Change in Control; and

 

•

if Participant is Terminated without Cause, within 3 months prior to or 12 months following, a Change in Control, then the vesting on all of Participant’s Options granted pursuant to this Grant Notice shall become fully vested and exercisable pursuant to Section 9.1(a) of the Plan as follows: (1) in the case of a Termination within 3 months prior to, or concurrently with, a Change of Control, then immediately prior to, and contingent upon, a Change in Control occurring, or (2) in the case of a Termination within 12 months after a Change of Control, then immediately upon such Termination. Notwithstanding anything herein or in Section 6.4 of the Plan to the contrary, in the event that prior to a Change in Control, the Participant experiences a Termination without Cause, then (1) the Participant’s unvested Options shall terminate and expire no earlier than 120 days following the date of such Termination (but in no event later than the Expiration Date), and (2) the Participant’s vested and exercisable Options may be exercised by the Participant at any time within a period of 120 days following the date of such Termination (but in no event later than the Expiration Date).

(b) To the extent that the Option has become vested and exercisable with respect to a number of shares of Common Stock, the Option may thereafter be exercised by the Participant, in whole or in part, at any time or from time to time prior to the expiration of the Option in accordance with Section 5 and the Plan. Notwithstanding the foregoing, the Participant may not exercise the Option unless the offering of shares of Common Stock issuable upon such exercise (i) is then registered under the Securities Act, or, if such offering is not then so registered, the Company has determined that such offering is exempt from the registration requirements of the Securities Act and (ii) complies with all other applicable laws and regulations governing the Option, and the Participant may not exercise the Option if the Committee determines that such exercise would not be so registered or exempt and otherwise in compliance with such laws and regulations.

(c) To exercise the Option, unless otherwise directed or permitted by the Committee, the Participant must:

(i) execute and deliver to the Company a properly completed Notice of Exercise in the form attached hereto as Exhibit I.

(ii) execute and deliver such other documentation as required by the Committee (including, without limitation, the Stockholder Agreements) which may set forth certain restrictions on transferability of the shares of Common Stock acquired upon exercise, a right of first refusal or a right of first offer of the Company and other Persons with respect to shares, and such other terms or restrictions as the Board or Committee may from time to time establish, including any drag along rights, tag along rights, transfer restrictions and registration rights, and

(iii) remit the aggregate Exercise Price to the Company in full, payable (A) in cash or by check, bank draft or money order payable to the order of the Company; or (B) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such Exercise Price withheld from other compensation).

 

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(d) In addition, unless otherwise directed or permitted by the Committee, the Participant must pay or provide for all applicable withholding taxes in respect of the exercise of the Option, by (i) remitting the aggregate amount of such taxes to the Company in full, in cash or by check, bank draft or money order payable to the order of the Company, or (ii) such other arrangements on terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such taxes withheld from other compensation).

4. Exercise Prior to Vesting (“Early Exercise”). If permitted in the Grant Notice (i.e., the “Exercise Schedule” indicates “Early Exercise Permitted”) and subject to the provisions of this Agreement, provided that the Participant has not experienced a Termination, the Participant may elect at any time during the term of the Option, to exercise all or part of the Option, including the unvested portion of the Option; provided, however, that:

(a) a partial exercise of the Option will be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise will be subject to a purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement;

(c) the Participant shall enter into the Company’s form of 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) to the extent that the aggregate Fair Market Value (determined at the Date of Grant) of the shares of Common Stock with respect to which the Option plus all other Incentive Stock Options the Participant holds are exercisable for the first time by the Participant during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, the Participant’s option(s) or portions thereof that exceed such limit (according to the order in which they were granted) will be treated as Nonstatutory Stock Options.

5. Termination. The term of the Option shall be until the tenth anniversary of the Grant Date, after which time it shall expire (the “Expiration Date”), subject to earlier termination in the event of the Participant’s Termination as specified in the Plan and this Agreement. Notwithstanding anything herein to the contrary, upon the Expiration Date, the Option (whether vested or not) shall be immediately forfeited, canceled and terminated for no consideration and no longer shall be exercisable. The provisions in the Plan regarding Termination shall apply to the Option, provided that, to the extent applicable, if the Participant’s employment agreement or other written agreement with the Company expressly provides more favorable rights with respect to the Option in the event of Termination, such rights shall apply.

6. Market Stand-Off. If requested by the Company or the lead underwriter of any public offering of the Common Stock (the “Lead Underwriter”), the Participant shall irrevocably agree not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise Transfer or dispose of, any interest in any Common Stock or any securities convertible into, derivative of, or exchangeable or exercisable for Common Stock, or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during such period of time following the effective date of a registration statement of the Company filed under the Securities Act that the Lead Underwriter shall specify (the “Lock-up Period”). The Participant shall further agree to sign such documents as may be requested by the Lead Underwriter or the Company to effect the foregoing and agree that the Company may impose stop transfer instructions with respect to Common Stock acquired pursuant to an Award until the end of such Lock-up Period.

 

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7. Restriction on Transfer of Option. Unless otherwise determined by the Committee in accordance with the Plan, (a) no part of the Option shall be Transferable other than by will or by the laws of descent and distribution and (b) during the lifetime of the Participant, the Option may be exercised only by the Participant. Any attempt to Transfer the Option other than in accordance with the Plan shall be void.

8. No Rights as Stockholder. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock covered by the Option unless and until the Participant has become the holder of record of such shares, and no adjustments shall be made for dividends (whether in cash, in kind or other property), distributions or other rights in respect of any such shares, except as otherwise specifically provided for in the Plan.

9. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. If and to the extent that this Agreement conflicts or is inconsistent with the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.

10. Recoupment Policy. The Participant acknowledges and agrees that the Common Stock underlying the Option shall be subject to the terms and provisions of any “clawback” or recoupment policy that may be adopted by the Company from time to time or as may be required by any applicable law (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules and regulations thereunder).

11. Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to the Participant pursuant to this Agreement, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld.

12. No Right to Employment. This Agreement is not an agreement of employment. None of this Agreement, the Plan or the grant of the Option hereunder shall (a) guarantee that the Employer will employ the Participant for any specific time period or (b) modify or limit in any respect the Employer’s right to terminate or modify the Participant’s employment or compensation. Moreover, this Agreement is not intended to and does not amend any existing employment contract between the Participant and the Company or any of its Affiliates; to the extent there is a conflict between this Agreement and such an employment contract, the employment contract shall govern and take priority.

13. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement must be in writing or by electronic means as set forth in Section 14 below and sent to the party to which the notice, demand or request is being made:

(a) unless otherwise specified by the Company in a notice delivered by the Company in accordance with this Section 13, any notice required to be delivered to the Company shall be properly delivered if delivered to:

 

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Talaris Therapeutics, Inc.

570 S. Preston Street, Suite 421

Louisville, Kentucky 40202

(b) if to the Participant, to the address on file with the Company.

Any notice, demand or request, if made in accordance with this Section 13 shall be deemed to have been duly given: (i) when delivered in person or by electronic means; (ii) three days after being sent by United States mail; or (iii) on the first business day following the date of deposit if delivered by a nationally recognized overnight delivery service.

14. Mode of Communications. The Participant agrees, to the fullest extent permitted by applicable law, in lieu of receiving documents in paper format, to accept electronic delivery of any documents that the Company or any of its Affiliates may deliver in connection with this Option grant and any other grants offered by the Company, including, without limitation, prospectuses, grant notifications, account statements, annual or quarterly reports, and other communications. The Participant further agrees that electronic delivery of a document may be made via the Company’s email system or by reference to a location on the Company’s intranet or website or the online brokerage account system.

15. Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the [State of Delaware], without giving effect to principles of conflict of laws which would result in the application of the laws of any other jurisdiction.

16. Dispute Resolution. All controversies and claims arising out of or relating to this Agreement, or the breach hereof, shall be settled by the Employer’s mandatory dispute resolution procedures as may be in effect from time to time with respect to matters arising out of or relating to Participant’s employment with the Employer.

17. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT, FOR ITSELF AND ITS AFFILIATES, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE ACTIONS OF THE PARTIES HERETO OR THEIR RESPECTIVE AFFILIATES PURSUANT TO THIS AGREEMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT.

18. Construction. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement. Wherever any words are used in this Agreement in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or” and (ii) “including” or “include” shall mean “including, without limitation.” Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

 

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19. Severability of Provisions. If at any time any of the provisions of this Agreement shall be held invalid or unenforceable, or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of the activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement and the Company and the Participant agree that the provisions of this Agreement, as so amended, shall be valid and binding as though any invalid or unenforceable provisions had not been included; provided that if the Company’s call rights and rights of first refusal or rights of first offer set forth in the Stockholder Agreements or any other agreement shall be held invalid or unenforceable, the Option shall be cancelled and terminated.

20. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

21. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

22. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

[Remainder of Page Left Intentionally Blank]

 

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Exhibit I

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NOTICE OF EXERCISE

 

Date: [●], 20__

Talaris Therapeutics, Inc.

_____________Attention: [●]

Ladies and Gentlemen:

This document constitutes notice under my stock option agreement that I elect to purchase the number of shares for the aggregate payment set forth below.

 

Type of option (check one):		Incentive ☒ Nonqualified ☐
Option number and grant date:		[●] options – [●], 20
Number of shares as to which option is exercised:
Per share exercise price:		$[●]
Aggregate exercise price (number of shares as to which option is exercised multiplied by per share exercise price):		$

I (i) agree that the shares purchased pursuant to this Notice of Exercise will be bound by and subject to the terms of that certain Voting Agreement dated as of November 1, 2018 (the “Voting Agreement”), by and among Talaris Therapeutics, Inc. and certain of its stockholders, as such Voting Agreement may be amended or restated; (ii) hereby adopt the Voting Agreement with the same force and effect as if I were originally a party thereto; (iii) acknowledge that I will be considered a “Key Holder” for all purposes of the Voting Agreement; and (iv) agree to sign any such documents as may be required in connection with my becoming a party to the Voting Agreement.

Any notice required or permitted by the Voting Agreement will be given to me at the address listed below my signature hereto.

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (aggregate exercise price).

 

Estimated withholding taxes:		$

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (estimated withholding taxes).

☐ I have made arrangements with Talaris Therapeutics, Inc. to have the aggregate exercise price and/or the applicable withholding taxes withheld from other compensation.

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By signing below, I (i) acknowledge that I remain subject to the applicable provisions of my option award agreement, (ii) acknowledge and make the representations and warranties set forth below, and (iii) acknowledge that the Company is relying in part upon such representations and warranties:

(a) I am acquiring and will hold the shares of Common Stock for investment for my account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act or other applicable securities laws.

(b) I have been advised that offerings of the shares of Common Stock have not been registered under the Securities Act or other applicable securities laws, on the ground that no public offering of the shares of Common Stock is to be effected (it being understood, however, that the shares of Common Stock are being offered in reliance on the exemption provided under Rule 701 under the Securities Act), and that the shares of Common Stock must be held indefinitely, unless they are subsequently registered under the applicable securities laws or I obtain an opinion of counsel (in the form and substance satisfactory to the Company and its counsel) that registration is not required. I further acknowledge and understand that the Company is under no obligation hereunder to register offerings of the shares of Common Stock.

(c) I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. I acknowledge that I am familiar with the conditions for resale set forth in Rule 144, and I acknowledge and understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.

(d) I will not sell, transfer or otherwise dispose of the shares of Common Stock in violation of the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, my option award agreement, the Voting Agreement, the Securities Act (or the rules and regulations promulgated thereunder) or under any other applicable securities laws. I agree that I will not dispose of the Common Stock unless and until I have complied with all requirements applicable to the disposition of the shares of Common Stock.

(e) I have been furnished with, and have had access to, such information as I consider necessary or appropriate for deciding whether to invest in the shares of Common Stock, and I have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Common Stock.

(f) I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Common Stock for an indefinite period and to suffer a complete loss of my investment in the Common Stock.

 

[Name of Participant]

Address:

Telephone:

Attention:

 

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TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NONQUALIFIED STOCK OPTION GRANT NOTICE AND AGREEMENT

Talaris Therapeutics, Inc. (the “Company”), pursuant to its Second Amended and Restated 2018 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Nonqualified Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Nonqualified Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:		[●]
Grant Date:		[●]
Vesting Commencement Date:		[●]
Exercise Price per Share:		[$0.18]
Total Number of Shares Subject to Option:		[●]
Expiration Date:		[●]
Type of Option:		Nonqualified Stock Option
Exercise Schedule:		The Option is exercisable after the applicable vesting date in accordance with Section 3 of the Agreement or prior to the applicable vesting date in accordance with Section 4 of the Agreement (i.e. Early Exercise Permitted).
Vesting Schedule:		Subject to Section 3 of the Agreement, the Option shall vest and become exercisable over a four-year period commencing on the Vesting Commencement Date, vesting in 48 equal installments beginning on the date that is the one-month anniversary of the Vesting Commencement Date, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or the Agreement.

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IN WITNESS WHEREOF, the parties hereto have executed this Nonqualified Stock Option Grant Notice and Agreement on and as of the day and year first above written.

 

TALARIS THERAPEUTICS, INC.				PARTICIPANT:
By:                                                                                   Print Name: Scott Requadt Title: Chief Executive Officer				By: ________________________________ Print Name: _________________________ State of Residence: ____________________

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EXHIBIT A

TO STOCK OPTION GRANT NOTICE

NONQUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO THE

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

Preliminary Statement

The Committee hereby grants this stock option (the “Option”) as of the Grant Date pursuant to the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as it may be amended from time to time (the “Plan”), to purchase the number of shares of the common stock of the Company, $0.0001 par value per share (the “Common Stock”), set forth below, to the Participant, as an Eligible Employee of the Company. Except as otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Grant Notice or the Plan, as applicable. A copy of the Plan has been delivered to the Participant. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations.

Accordingly, the parties hereto agree as follows:

1. Tax Matters. No part of the Option granted hereby is intended to qualify as an “incentive stock option” under section 422 of the Code.

2. Common Stock Subject to Option; Exercise Price. Subject in all respects to the Plan and the terms and conditions set forth herein and therein, the Option entitles the Participant to purchase from the Company, upon exercise, the Total Number of Shares Subject to Option (as set forth in the Grant Notice ) at the Exercise Price per Share (as set forth in the Grant Notice).

3. Vesting; Exercise.

(a) Subject to this Section 3, the Option shall vest and become exercisable over a four-year period commencing on the Vesting Commencement Date, vesting in 48 equal installments beginning on the date that is the one-month anniversary of the Vesting Commencement Date, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

Notwithstanding anything herein to the contrary, upon the occurrence of a Change in Control (as defined in the Plan):

 

•

the vesting on the Options granted pursuant to this Grant Notice shall accelerate by one year, provided that Participant remains employed by the Company at the time of the Change in Control; and

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•

if Participant is Terminated without Cause or leaves for Good Reason, in each case within 3 months prior to or 12 months following, a Change in Control, then the vesting on all of Participant’s Options granted pursuant to this Grant Notice shall become fully vested and exercisable pursuant to Section 9.1(a) of the Plan as follows: (1) in the case of a Termination within 3 months prior to, or concurrently with, a Change of Control, then immediately prior to, and contingent upon, a Change in Control occurring, or (2) in the case of a Termination within 12 months after a Change of Control, then immediately upon such Termination. Notwithstanding anything herein or in Section 6.4 of the Plan to the contrary, in the event that prior to a Change in Control, the Participant experiences a Termination without Cause or leaves for Good Reason, then (1) the Participant’s unvested Options shall terminate and expire no earlier than 120 days following the date of such Termination (but in no event later than the Expiration Date), and (2) the Participant’s vested and exercisable Options may be exercised by the Participant at any time within a period of 120 days following the date of such Termination (but in no event later than the Expiration Date).

(b) To the extent that the Option has become vested and exercisable with respect to a number of shares of Common Stock, the Option may thereafter be exercised by the Participant, in whole or in part, at any time or from time to time prior to the expiration of the Option in accordance with Section 5 and the Plan. Notwithstanding the foregoing, the Participant may not exercise the Option unless the offering of shares of Common Stock issuable upon such exercise (i) is then registered under the Securities Act, or, if such offering is not then so registered, the Company has determined that such offering is exempt from the registration requirements of the Securities Act and (ii) complies with all other applicable laws and regulations governing the Option, and the Participant may not exercise the Option if the Committee determines that such exercise would not be so registered or exempt and otherwise in compliance with such laws and regulations.

(c) To exercise the Option, unless otherwise directed or permitted by the Committee, the Participant must:

(i) execute and deliver to the Company a properly completed Notice of Exercise in the form attached hereto as Exhibit I.

(ii) execute and deliver such other documentation as required by the Committee (including, without limitation, the Stockholder Agreements) which may set forth certain restrictions on transferability of the shares of Common Stock acquired upon exercise, a right of first refusal or a right of first offer of the Company and other Persons with respect to shares, and such other terms or restrictions as the Board or Committee may from time to time establish, including any drag along rights, tag along rights, transfer restrictions and registration rights, and

(iii) remit the aggregate Exercise Price to the Company in full, payable (A) in cash or by check, bank draft or money order payable to the order of the Company; or (B) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such Exercise Price withheld from other compensation).

(d) In addition, unless otherwise directed or permitted by the Committee, the Participant must pay or provide for all applicable withholding taxes in respect of the exercise of the Option, by (i) remitting the aggregate amount of such taxes to the Company in full, in cash or by check, bank draft or money order payable to the order of the Company, or (ii) such other arrangements on terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such taxes withheld from other compensation).

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4. Exercise prior to Vesting (“Early Exercise”). If permitted in the Grant Notice (i.e., the “Exercise Schedule” indicates “Early Exercise Permitted”) and subject to the provisions of this Agreement, provided that the Participant has not experienced a Termination, the Participant may elect at any time during the term of the Option, to exercise all or part of the Option, including the unvested portion of the Option; provided, however, that:

(a) a partial exercise of the Option will be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise will be subject to a purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement; and

(c) the Participant shall enter into the Company’s form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred.

5. Termination. The term of the Option shall be until the tenth anniversary of the Grant Date, after which time it shall expire (the “Expiration Date”), subject to earlier termination in the event of the Participant’s Termination as specified in the Plan and this Agreement. Notwithstanding anything herein to the contrary, upon the Expiration Date, the Option (whether vested or not) shall be immediately forfeited, canceled and terminated for no consideration and no longer shall be exercisable. Except as otherwise provided in Section 3, the provisions in the Plan regarding Termination shall apply to the Option; provided, that, to the extent applicable, if the Participant’s employment agreement, consulting agreement, or other written agreement with the Company expressly provides more favorable rights with respect to the Option in the event of Termination, such rights shall apply.

6. Market Stand-Off. If requested by the Company or the lead underwriter of any public offering of the Common Stock (the “Lead Underwriter”), the Participant shall irrevocably agree not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise Transfer or dispose of, any interest in any Common Stock or any securities convertible into, derivative of, or exchangeable or exercisable for Common Stock, or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during such period of time following the effective date of a registration statement of the Company filed under the Securities Act that the Lead Underwriter shall specify (the “Lock-up Period”). The Participant shall further agree to sign such documents as may be requested by the Lead Underwriter or the Company to effect the foregoing and agree that the Company may impose stop transfer instructions with respect to Common Stock acquired pursuant to an Award until the end of such Lock-up Period.

7. Restriction on Transfer of Option. Unless otherwise determined by the Committee in accordance with the Plan, (a) no part of the Option shall be Transferable other than by will or by the laws of descent and distribution and (b) during the lifetime of the Participant, the Option may be exercised only by the Participant. Any attempt to Transfer the Option other than in accordance with the Plan shall be void.

8. No Rights as Stockholder. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock covered by the Option unless and until the Participant has become the holder of record of such shares, and no adjustments shall be made for dividends (whether in cash, in kind or other property), distributions or other rights in respect of any such shares, except as otherwise specifically provided for in the Plan.

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9. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. If and to the extent that this Agreement conflicts or is inconsistent with the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.

10. Recoupment Policy. The Participant acknowledges and agrees that the Common Stock underlying the Option shall be subject to the terms and provisions of any “clawback” or recoupment policy that may be adopted by the Company from time to time or as may be required by any applicable law (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules and regulations thereunder).

11. Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to the Participant pursuant to this Agreement, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld.

12. No Right to Employment or Consultancy Service. This Agreement is not an agreement of employment or to provide consultancy services. None of this Agreement, the Plan or the grant of the Option hereunder shall (a) guarantee that the Company will employ or retain the Participant as an employee or consultant for any specific time period or (b) modify or limit in any respect the Company’s right to terminate or modify the Participant’s employment, consultancy arrangement or compensation. Moreover, this Agreement is not intended to and does not amend any existing employment or consulting contract between the Participant and the Company or any of its Affiliates; to the extent there is a conflict between this Agreement and such an employment or consulting contract, the employment or consulting contract shall govern and take priority.

13. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement must be in writing or by electronic means as set forth in Section 14 below and sent to the party to which the notice, demand or request is being made:

(a) unless otherwise specified by the Company in a notice delivered by the Company in accordance with this Section 13, any notice required to be delivered to the Company shall be properly delivered if delivered to:

Talaris Therapeutics, Inc.

570 S. Preston Street, Suite 421

Louisville, Kentucky 40202

(b) if to the Participant, to the address on file with the Company.

Any notice, demand or request, if made in accordance with this Section 13 shall be deemed to have been duly given: (i) when delivered in person or by electronic means; (ii) three days after being sent by United States mail; or (iii) on the first business day following the date of deposit if delivered by a nationally recognized overnight delivery service.

14. Mode of Communications. The Participant agrees, to the fullest extent permitted by applicable law, in lieu of receiving documents in paper format, to accept electronic delivery of any documents that the Company or any of its Affiliates may deliver in connection with this Option grant and any other grants offered by the Company, including, without limitation, prospectuses, grant notifications, account statements, annual or quarterly reports, and other communications. The Participant further agrees that electronic delivery of a document may be made via the Company’s email system or by reference to a location on the Company’s intranet or website or the online brokerage account system.

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15. Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to principles of conflict of laws which would result in the application of the laws of any other jurisdiction.

16. Dispute Resolution. All controversies and claims arising out of or relating to this Agreement, or the breach hereof, shall be settled by the Company’s mandatory dispute resolution procedures as may be in effect from time to time with respect to matters arising out of or relating to Participant’s employment or consultancy arrangement with the Company.

17. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT, FOR ITSELF AND ITS AFFILIATES, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE ACTIONS OF THE PARTIES HERETO OR THEIR RESPECTIVE AFFILIATES PURSUANT TO THIS AGREEMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT.

18. Construction. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement. Wherever any words are used in this Agreement in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or” and (ii) “including” or “include” shall mean “including, without limitation.” Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

19. Severability of Provisions. If at any time any of the provisions of this Agreement shall be held invalid or unenforceable, or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of the activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement and the Company and the Participant agree that the provisions of this Agreement, as so amended, shall be valid and binding as though any invalid or unenforceable provisions had not been included; provided that if the Company’s call rights and rights of first refusal or rights of first offer set forth in the Stockholder Agreements or any other agreement shall be held invalid or unenforceable, the Option shall be cancelled and terminated.

20. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

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21. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

22. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

[Remainder of Page Left Intentionally Blank]

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Exhibit I

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NOTICE OF EXERCISE

Date: [●], 20__

Talaris Therapeutics, Inc.

 

                                             

 

                                             

Attention: [●]

Ladies and Gentlemen:

This document constitutes notice under my stock option agreement that I elect to purchase the number of shares for the aggregate payment set forth below.

 

Type of option (check one):		Incentive ☐    Nonqualified ☒
Option number and grant date:		[●] options – [●], 20__
Number of shares as to which option is exercised:
Per share exercise price:		$[●]
Aggregate exercise price (number of shares as to which option is exercised multiplied by per share exercise price):		$

I (i) agree that the shares purchased pursuant to this Notice of Exercise will be bound by and subject to the terms of that certain Voting Agreement dated as of November 1, 2018 (the “Voting Agreement”), by and among Talaris Therapeutics, Inc. and certain of its stockholders, as such Voting Agreement may be amended or restated; (ii) hereby adopt the Voting Agreement with the same force and effect as if I were originally a party thereto; (iii) acknowledge that I will be considered a “Key Holder” for all purposes of the Voting Agreement; and (iv) agree to sign any such documents as may be required in connection with my becoming a party to the Voting Agreement.

Any notice required or permitted by the Voting Agreement will be given to me at the address listed below my signature hereto.

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (aggregate exercise price).

 

Estimated withholding taxes:		$

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (estimated withholding taxes).

☐ I have made arrangements with Talaris Therapeutics, Inc. to have the aggregate exercise price and/or the applicable withholding taxes withheld from other compensation.

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By signing below, I (i) acknowledge that I remain subject to the applicable provisions of my option award agreement, (ii) acknowledge and make the representations and warranties set forth below, and (iii) acknowledge that the Company is relying in part upon such representations and warranties:

(a) I am acquiring and will hold the shares of Common Stock for investment for my account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act or other applicable securities laws.

(b) I have been advised that offerings of the shares of Common Stock have not been registered under the Securities Act or other applicable securities laws, on the ground that no public offering of the shares of Common Stock is to be effected (it being understood, however, that the shares of Common Stock are being offered in reliance on the exemption provided under Rule 701 under the Securities Act), and that the shares of Common Stock must be held indefinitely, unless they are subsequently registered under the applicable securities laws or I obtain an opinion of counsel (in the form and substance satisfactory to the Company and its counsel) that registration is not required. I further acknowledge and understand that the Company is under no obligation hereunder to register offerings of the shares of Common Stock.

(c) I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. I acknowledge that I am familiar with the conditions for resale set forth in Rule 144, and I acknowledge and understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.

(d) I will not sell, transfer or otherwise dispose of the shares of Common Stock in violation of the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, my option award agreement, the Voting Agreement, the Securities Act (or the rules and regulations promulgated thereunder) or under any other applicable securities laws. I agree that I will not dispose of the Common Stock unless and until I have complied with all requirements applicable to the disposition of the shares of Common Stock.

(e) I have been furnished with, and have had access to, such information as I consider necessary or appropriate for deciding whether to invest in the shares of Common Stock, and I have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Common Stock.

(f) I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Common Stock for an indefinite period and to suffer a complete loss of my investment in the Common Stock.

 

[Name of Participant]
Address:
Telephone:
Attention:

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TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NONQUALIFIED STOCK OPTION GRANT NOTICE AND AGREEMENT

Talaris Therapeutics, Inc. (the “Company”), pursuant to its Second Amended and Restated 2018 Equity Incentive Plan (the “Plan”), hereby grants to Participant an Option to purchase the number of shares of the Company’s Common Stock (referred to herein as “Shares”) set forth below. This Option is subject to all of the terms and conditions as set forth herein and in the Nonqualified Stock Option Agreement attached hereto as Exhibit A (the “Agreement”) and the Plan, each of which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings in this Nonqualified Stock Option Grant Notice (“Grant Notice”) and the Agreement.

 

Participant:		[●]
Grant Date:		[●]
Vesting Commencement Date:		[●]
Exercise Price per Share:		[$0.18]
Total Number of Shares Subject to Option:		[●]
Expiration Date:		[●]
Type of Option:		Nonqualified Stock Option
Exercise Schedule:		The Option is exercisable after the applicable vesting date in accordance with Section 3 of the Agreement or prior to the applicable vesting date in accordance with Section 4 of the Agreement (i.e. Early Exercise Permitted).
Vesting Schedule:		Subject to Section 3 of the Agreement, the Option shall vest and become exercisable over a four-year period commencing on the Vesting Commencement Date, vesting in 48 equal installments beginning on the date that is the one-month anniversary of the Vesting Commencement Date, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

By his or her signature and the Company’s signature below, Participant agrees to be bound by the terms and conditions of the Plan, the Agreement and this Grant Notice. Participant has reviewed the Agreement, the Plan and this Grant Notice in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Grant Notice and fully understands all provisions of this Grant Notice, the Agreement and the Plan. Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Plan or the Agreement.

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IN WITNESS WHEREOF, the parties hereto have executed this Nonqualified Stock Option Grant Notice and Agreement on and as of the day and year first above written.

 

TALARIS THERAPEUTICS, INC.						PARTICIPANT:
By:						By:
Print Name:     Scott Requadt						Print Name:
Title:                Chief Executive Officer						State of Residence:

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EXHIBIT A

TO STOCK OPTION GRANT NOTICE

NONQUALIFIED STOCK OPTION AGREEMENT

PURSUANT TO THE

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

Pursuant to the Grant Notice to which this Agreement is attached, the Company has granted to Participant an Option under the Plan to purchase the number of Shares indicated in the Grant Notice.

Preliminary Statement

The Committee hereby grants this stock option (the “Option”) as of the Grant Date pursuant to the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, as it may be amended from time to time (the “Plan”), to purchase the number of shares of the common stock of the Company, $0.0001 par value per share (the “Common Stock”), set forth below, to the Participant, as a Non-Employee Director of the Company. Except as otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Grant Notice or the Plan, as applicable. A copy of the Plan has been delivered to the Participant. By signing and returning this Agreement, the Participant acknowledges having received and read a copy of the Plan and agrees to comply with it, this Agreement and all applicable laws and regulations.

Accordingly, the parties hereto agree as follows:

1. Tax Matters. No part of the Option granted hereby is intended to qualify as an “incentive stock option” under section 422 of the Code.

2. Common Stock Subject to Option; Exercise Price. Subject in all respects to the Plan and the terms and conditions set forth herein and therein, the Option entitles the Participant to purchase from the Company, upon exercise, the Total Number of Shares Subject to Option (as set forth in the Grant Notice ) at the Exercise Price per Share (as set forth in the Grant Notice).

3. Vesting; Exercise.

(a) Subject to this Section 3, the Option shall vest and become exercisable over a four-year period commencing on the Vesting Commencement Date, vesting in 48 equal installments beginning on the date that is the one-month anniversary of the Vesting Commencement Date, and each one-month anniversary date thereafter; provided, however, that the Participant has not experienced a Termination prior to each applicable vesting date.

Notwithstanding anything herein to the contrary, upon the occurrence of a Change in Control (as defined in the Plan):

 

•

the vesting on the Options granted pursuant to this Grant Notice shall accelerate by one year, provided that Participant remains employed by the Company at the time of the Change in Control; and

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•

if Participant is Terminated without Cause or leaves for Good Reason, in each case within 3 months prior to or 12 months following, a Change in Control, then the vesting on all of Participant’s Options granted pursuant to this Grant Notice shall become fully vested and exercisable pursuant to Section 9.1(a) of the Plan as follows: (1) in the case of a Termination within 3 months prior to, or concurrently with, a Change of Control, then immediately prior to, and contingent upon, a Change in Control occurring, or (2) in the case of a Termination within 12 months after a Change of Control, then immediately upon such Termination. Notwithstanding anything herein or in Section 6.4 of the Plan to the contrary, in the event that prior to a Change in Control, the Participant experiences a Termination without Cause or leaves for Good Reason, then (1) the Participant’s unvested Options shall terminate and expire no earlier than 120 days following the date of such Termination (but in no event later than the Expiration Date), and (2) the Participant’s vested and exercisable Options may be exercised by the Participant at any time within a period of 120 days following the date of such Termination (but in no event later than the Expiration Date).

(b) To the extent that the Option has become vested and exercisable with respect to a number of shares of Common Stock, the Option may thereafter be exercised by the Participant, in whole or in part, at any time or from time to time prior to the expiration of the Option in accordance with Section 5 and the Plan. Notwithstanding the foregoing, the Participant may not exercise the Option unless the offering of shares of Common Stock issuable upon such exercise (i) is then registered under the Securities Act, or, if such offering is not then so registered, the Company has determined that such offering is exempt from the registration requirements of the Securities Act and (ii) complies with all other applicable laws and regulations governing the Option, and the Participant may not exercise the Option if the Committee determines that such exercise would not be so registered or exempt and otherwise in compliance with such laws and regulations.

(c) To exercise the Option, unless otherwise directed or permitted by the Committee, the Participant must:

(i) execute and deliver to the Company a properly completed Notice of Exercise in the form attached hereto as Exhibit I.

(ii) execute and deliver such other documentation as required by the Committee (including, without limitation, the Stockholder Agreements) which may set forth certain restrictions on transferability of the shares of Common Stock acquired upon exercise, a right of first refusal or a right of first offer of the Company and other Persons with respect to shares, and such other terms or restrictions as the Board or Committee may from time to time establish, including any drag along rights, tag along rights, transfer restrictions and registration rights, and

(iii) remit the aggregate Exercise Price to the Company in full, payable (A) in cash or by check, bank draft or money order payable to the order of the Company; or (B) on such other terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such Exercise Price withheld from other compensation).

(d) In addition, unless otherwise directed or permitted by the Committee, the Participant must pay or provide for all applicable withholding taxes in respect of the exercise of the Option, by (i) remitting the aggregate amount of such taxes to the Company in full, in cash or by check, bank draft or money order payable to the order of the Company, or (ii) such other arrangements on terms and conditions as may be acceptable to the Committee (including, without limitation, making arrangements with the Company to have such taxes withheld from other compensation).

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4. Exercise prior to Vesting (“Early Exercise”). If permitted in the Grant Notice (i.e., the “Exercise Schedule” indicates “Early Exercise Permitted”) and subject to the provisions of this Agreement, provided that the Participant has not experienced a Termination, the Participant may elect at any time during the term of the Option, to exercise all or part of the Option, including the unvested portion of the Option; provided, however, that:

(a) a partial exercise of the Option will be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise will be subject to a purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement; and

(c) the Participant shall enter into the Company’s form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred.

5. Termination. The term of the Option shall be until the tenth anniversary of the Grant Date, after which time it shall expire (the “Expiration Date”), subject to earlier termination in the event of the Participant’s Termination as specified in the Plan and this Agreement. Notwithstanding anything herein to the contrary, upon the Expiration Date, the Option (whether vested or not) shall be immediately forfeited, canceled and terminated for no consideration and no longer shall be exercisable. Except as otherwise provided in Section 3, the provisions in the Plan regarding Termination shall apply to the Option; provided, that, to the extent applicable, if the Participant’s employment agreement, consulting agreement, or other written agreement with the Company expressly provides more favorable rights with respect to the Option in the event of Termination, such rights shall apply.

6. Market Stand-Off. If requested by the Company or the lead underwriter of any public offering of the Common Stock (the “Lead Underwriter”), the Participant shall irrevocably agree not to sell, contract to sell, grant any option to purchase, transfer the economic risk of ownership in, make any short sale of, pledge or otherwise Transfer or dispose of, any interest in any Common Stock or any securities convertible into, derivative of, or exchangeable or exercisable for Common Stock, or any other rights to purchase or acquire Common Stock (except Common Stock included in such public offering or acquired on the public market after such offering) during such period of time following the effective date of a registration statement of the Company filed under the Securities Act that the Lead Underwriter shall specify (the “Lock-up Period”). The Participant shall further agree to sign such documents as may be requested by the Lead Underwriter or the Company to effect the foregoing and agree that the Company may impose stop transfer instructions with respect to Common Stock acquired pursuant to an Award until the end of such Lock-up Period.

7. Restriction on Transfer of Option. Unless otherwise determined by the Committee in accordance with the Plan, (a) no part of the Option shall be Transferable other than by will or by the laws of descent and distribution and (b) during the lifetime of the Participant, the Option may be exercised only by the Participant. Any attempt to Transfer the Option other than in accordance with the Plan shall be void.

8. No Rights as Stockholder. The Participant shall have no rights as a stockholder with respect to any shares of Common Stock covered by the Option unless and until the Participant has become the holder of record of such shares, and no adjustments shall be made for dividends (whether in cash, in kind or other property), distributions or other rights in respect of any such shares, except as otherwise specifically provided for in the Plan.

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9. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee and as may be in effect from time to time. The Plan is incorporated herein by reference. If and to the extent that this Agreement conflicts or is inconsistent with the Plan, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.

10. Recoupment Policy. The Participant acknowledges and agrees that the Common Stock underlying the Option shall be subject to the terms and provisions of any “clawback” or recoupment policy that may be adopted by the Company from time to time or as may be required by any applicable law (including, without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and rules and regulations thereunder).

11. Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to the Participant pursuant to this Agreement, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld.

12. No Right to Employment or Consultancy Service. This Agreement is not an agreement of employment or to provide consultancy services. None of this Agreement, the Plan or the grant of the Option hereunder shall (a) guarantee that the Company will employ or retain the Participant as an employee or consultant for any specific time period or (b) modify or limit in any respect the Company’s right to terminate or modify the Participant’s employment, consultancy arrangement or compensation. Moreover, this Agreement is not intended to and does not amend any existing employment or consulting contract between the Participant and the Company or any of its Affiliates; to the extent there is a conflict between this Agreement and such an employment or consulting contract, the employment or consulting contract shall govern and take priority.

13. Notices. All notices, demands or requests made pursuant to, under or by virtue of this Agreement must be in writing or by electronic means as set forth in Section 14 below and sent to the party to which the notice, demand or request is being made:

(a) unless otherwise specified by the Company in a notice delivered by the Company in accordance with this Section 13, any notice required to be delivered to the Company shall be properly delivered if delivered to:

Talaris Therapeutics, Inc.

570 S. Preston Street, Suite 421

Louisville, Kentucky 40202

(b) if to the Participant, to the address on file with the Company.

Any notice, demand or request, if made in accordance with this Section 13 shall be deemed to have been duly given: (i) when delivered in person or by electronic means; (ii) three days after being sent by United States mail; or (iii) on the first business day following the date of deposit if delivered by a nationally recognized overnight delivery service.

14. Mode of Communications. The Participant agrees, to the fullest extent permitted by applicable law, in lieu of receiving documents in paper format, to accept electronic delivery of any documents that the Company or any of its Affiliates may deliver in connection with this Option grant and any other grants offered by the Company, including, without limitation, prospectuses, grant notifications, account statements, annual or quarterly reports, and other communications. The Participant further agrees that electronic delivery of a document may be made via the Company’s email system or by reference to a location on the Company’s intranet or website or the online brokerage account system.

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15. Governing Law. All matters arising out of or relating to this Agreement and the transactions contemplated hereby, including its validity, interpretation, construction, performance and enforcement, shall be governed by and construed in accordance with the internal laws of the State of Delaware, without giving effect to principles of conflict of laws which would result in the application of the laws of any other jurisdiction.

16. Dispute Resolution. All controversies and claims arising out of or relating to this Agreement, or the breach hereof, shall be settled by the Company’s mandatory dispute resolution procedures as may be in effect from time to time with respect to matters arising out of or relating to Participant’s employment or consultancy arrangement with the Company.

17. WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT, FOR ITSELF AND ITS AFFILIATES, HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THE ACTIONS OF THE PARTIES HERETO OR THEIR RESPECTIVE AFFILIATES PURSUANT TO THIS AGREEMENT OR IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT.

18. Construction. All section titles and captions in this Agreement are for convenience only, shall not be deemed part of this Agreement, and in no way shall define, limit, extend or describe the scope or intent of any provisions of this Agreement. Wherever any words are used in this Agreement in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply. As used herein, (i) “or” shall mean “and/or” and (ii) “including” or “include” shall mean “including, without limitation.” Any reference herein to an agreement in writing shall be deemed to include an electronic writing to the extent permitted by applicable law.

19. Severability of Provisions. If at any time any of the provisions of this Agreement shall be held invalid or unenforceable, or are prohibited by the laws of the jurisdiction where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of the activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement and the Company and the Participant agree that the provisions of this Agreement, as so amended, shall be valid and binding as though any invalid or unenforceable provisions had not been included; provided that if the Company’s call rights and rights of first refusal or rights of first offer set forth in the Stockholder Agreements or any other agreement shall be held invalid or unenforceable, the Option shall be cancelled and terminated.

20. No Waiver. No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

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21. Entire Agreement. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes any prior agreements between the Company and the Participant with respect to the subject matter hereof.

22. Counterparts. This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.

[Remainder of Page Left Intentionally Blank]

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Exhibit I

TALARIS THERAPEUTICS, INC.

SECOND AMENDED AND RESTATED 2018 EQUITY INCENTIVE PLAN

NOTICE OF EXERCISE

Date: [●], 20__

Talaris Therapeutics, Inc.

 

 

Attention: [●]

Ladies and Gentlemen:

This document constitutes notice under my stock option agreement that I elect to purchase the number of shares for the aggregate payment set forth below.

 

Type of option (check one):		Incentive ☐     Nonqualified ☒
Option number and grant date:		[●] options – [●], 20__
Number of shares as to which option is exercised:
Per share exercise price:		$[●]
Aggregate exercise price (number of shares as to which option is exercised multiplied by per share exercise price):		$

I (i) agree that the shares purchased pursuant to this Notice of Exercise will be bound by and subject to the terms of that certain Voting Agreement dated as of November 1, 2018 (the “Voting Agreement”), by and among Talaris Therapeutics, Inc. and certain of its stockholders, as such Voting Agreement may be amended or restated; (ii) hereby adopt the Voting Agreement with the same force and effect as if I were originally a party thereto; (iii) acknowledge that I will be considered a “Key Holder” for all purposes of the Voting Agreement; and (iv) agree to sign any such documents as may be required in connection with my becoming a party to the Voting Agreement.

Any notice required or permitted by the Voting Agreement will be given to me at the address listed below my signature hereto.

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (aggregate exercise price).

 

Estimated withholding taxes:		$

☐ Attached is [cash, or] a check, bank draft or money order payable to Talaris Therapeutics, Inc. in the amount of $___________ (estimated withholding taxes).

☐ I have made arrangements with Talaris Therapeutics, Inc. to have the aggregate exercise price and/or the applicable withholding taxes withheld from other compensation.

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By signing below, I (i) acknowledge that I remain subject to the applicable provisions of my option award agreement, (ii) acknowledge and make the representations and warranties set forth below, and (iii) acknowledge that the Company is relying in part upon such representations and warranties:

(a) I am acquiring and will hold the shares of Common Stock for investment for my account only and not with a view to, or for resale in connection with, any “distribution” thereof within the meaning of the Securities Act or other applicable securities laws.

(b) I have been advised that offerings of the shares of Common Stock have not been registered under the Securities Act or other applicable securities laws, on the ground that no public offering of the shares of Common Stock is to be effected (it being understood, however, that the shares of Common Stock are being offered in reliance on the exemption provided under Rule 701 under the Securities Act), and that the shares of Common Stock must be held indefinitely, unless they are subsequently registered under the applicable securities laws or I obtain an opinion of counsel (in the form and substance satisfactory to the Company and its counsel) that registration is not required. I further acknowledge and understand that the Company is under no obligation hereunder to register offerings of the shares of Common Stock.

(c) I am aware of the adoption of Rule 144 by the Securities and Exchange Commission under the Securities Act, which permits limited public resales of securities acquired in a non-public offering, subject to the satisfaction of certain conditions. I acknowledge that I am familiar with the conditions for resale set forth in Rule 144, and I acknowledge and understand that the conditions for resale set forth in Rule 144 have not been satisfied and that the Company has no plans to satisfy these conditions in the foreseeable future.

(d) I will not sell, transfer or otherwise dispose of the shares of Common Stock in violation of the Talaris Therapeutics, Inc. Second Amended and Restated 2018 Equity Incentive Plan, my option award agreement, the Voting Agreement, the Securities Act (or the rules and regulations promulgated thereunder) or under any other applicable securities laws. I agree that I will not dispose of the Common Stock unless and until I have complied with all requirements applicable to the disposition of the shares of Common Stock.

(e) I have been furnished with, and have had access to, such information as I consider necessary or appropriate for deciding whether to invest in the shares of Common Stock, and I have had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Common Stock.

(f) I am aware that my investment in the Company is a speculative investment that has limited liquidity and is subject to the risk of complete loss. I am able, without impairing my financial condition, to hold the Common Stock for an indefinite period and to suffer a complete loss of my investment in the Common Stock.

 

[Name of Participant]
Address:
Telephone:
Attention:

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Execution Version

ADOPTION AGREEMENT

This Adoption Agreement (“Adoption Agreement”) is executed on ___________________, 20__, by the undersigned (the “Holder”) pursuant to the terms of that certain Voting Agreement dated as of November 1, 2018 (the “Agreement”), by and among the Company and certain of its Stockholders, as such Agreement may be amended or amended and restated hereafter. Capitalized terms used but not defined in this Adoption Agreement shall have the respective meanings ascribed to such terms in the Agreement. By the execution of this Adoption Agreement, the Holder agrees as follows.

1.1 Acknowledgement. Holder acknowledges that Holder is acquiring certain shares of the capital stock of the Company (the “Stock”) or options, warrants, or other rights to purchase such Stock (the “Options”), for one of the following reasons (Check the correct box):

 

☐

As a transferee of Shares from a party in such party’s capacity as an “Investor” bound by the Agreement, and after such transfer, Holder shall be considered an “Investor” and a “Stockholder” for all purposes of the Agreement.

 

☐

As a transferee of Shares from a party in such party’s capacity as a “Key Holder” bound by the Agreement, and after such transfer, Holder shall be considered a “Key Holder” and a “Stockholder” for all purposes of the Agreement.

 

☐

As a new Investor in accordance with Subsection 7.1(a) of the Agreement, in which case Holder will be an “Investor” and a “Stockholder” for all purposes of the Agreement.

 

☐

In accordance with Subsection 7.1(b) of the Agreement, as a new party who is not a new Investor, in which case Holder will be a “Stockholder” for all purposes of the Agreement.

1.2 Agreement. Holder hereby (a) agrees that the Stock, and any other shares of capital stock or securities required by the Agreement to be bound thereby, shall be bound by and subject to the terms of the Agreement and (b) adopts the Agreement with the same force and effect as if Holder were originally a party thereto.

1.3 Notice. Any notice required or permitted by the Agreement shall be given to Holder at the address or facsimile number listed below Holder’s signature hereto.

 

HOLDER:						ACCEPTED AND AGREED:
By:						TALARIS THERAPEUTICS, INC.
Name and Title of Signatory
Address:						By:
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Exhibit 10.8

EXECUTION COPY

UNIVERSITY OF LOUISVILLE

LEASE AGREEMENT

This Lease Agreement (“Agreement”), made and entered into with effect as of November 1, 2018 (the “Effective Date”), by and between the University of Louisville, an agency of the Commonwealth of Kentucky and an institution of higher education (“Lessor”), and Regenerex, Inc. (“Lessee”). The parties agree as follows:

1. Leased Premises. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, certain property located at 570 S. Preston Street, Louisville, Kentucky, commonly referred to as the Donald E. Baxter Biomedical Research Building Center (Baxter 1), consisting of approximately 6,780.97 (exclusively 6,418.74) square feet of space on the first and fourth floors, as more particularly described on Exhibit A, attached hereto and incorporated herein (“Principal Space”), and approximately 2,401.36 square feet of space on the fourth floor, as more particularly described on Exhibit B, attached hereto and incorporated herein (“Cleanroom Space”). For purposes of this Agreement, Principal Space and Cleanroom Space shall be collectively referred to as the “Leased Premises.” The lease of the Leased Premises includes the right, together with other tenants of Baxter 1 and such tenants’ invitees, to use the common and public areas within Baxter 1 (“Common Areas”).

2. Equipment. Lessor hereby permits Lessee to use the equipment identified on Exhibit C, attached hereto and incorporated herein, during the Term of this Agreement (“Equipment”). Lessee shall have the right, upon thirty (30) days’ prior written notice to Lessor, to discontinue its use of any of the Equipment, in which case, as of the effective date of such discontinuation, such Equipment shall be removed from Exhibits C and F, the applicable dollar amounts in Exhibit F shall be adjusted or removed accordingly (as applicable), and Lessee shall not have any further obligation to pay any fees with respect to such Equipment. Lessee shall immediately cease the use of any such Equipment and shall permit the Lessor reasonable access to the Leased Premises to remove the Equipment, or if moving the Equipment is impractical, as determined in Lessor’s reasonable discretion, then simultaneous with notice to Lessor of discontinued use, Lessee shall provide a statement of assurance of discontinued use. Lessee shall have no rights or other property interest in the Equipment, except for the right to use the Equipment pursuant to the terms of this Agreement. Lessee shall be responsible for any loss, damage to or necessary repairs to the Equipment caused by the acts of Lessee, its agents or its employees. No improvements or modifications (normal operational adjustments excepted) shall be made to the Equipment without the prior written consent of Lessor.

3. Permitted Use(s). Lessee shall use the Leased Premises and the Equipment only for the operations described in Exhibit D, attached hereto and incorporated herein (“Permitted Use”). The Permitted Use shall be subject to the Rules and Regulations set forth on Exhibit E, as may be amended from time to time, attached hereto and incorporated herein (“Rules and Regulations”). During the Term of this Agreement, Lessor will acquire the services of consultant(s) to conduct periodic monitoring and audits of the Leased Premises to verify compliance with then applicable laws, regulations, FDA requirements, cGMP standards and other applicable rule, regulation, requirement or standard relating to the Permitted Use on a frequency

 

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not to exceed quarterly. Lessee will be responsible for reimbursement to Lessor for the expenses of consultant(s) and any remediation necessary to address any deficiencies. During the Term of this Agreement, Lessee shall provide Lessor, on an annual basis, with written reports certifying compliance with then-applicable laws and regulations, FDA requirements, cGMP standards, and any other applicable rule, regulation, requirement or standard relating to the Permitted Use.

4. Rent. In exchange for the rights afforded herein with respect to the Leased Premises and Equipment, Lessee shall pay to Lessor the amounts set forth on Exhibit F on a monthly basis. Such payments shall be made to Lessor via wire transfer pursuant to wire instructions provided by Lessor to Lessee on or before the first day of each month. Unless otherwise specified in this Agreement, all then- applicable assessments and fees are included in this Agreement.

The Lessor shall furnish to the Lessee during the occupancy of the Leased Premises, under the terms of this Agreement, as part of the rental consideration the following:

            None             Gas              ☒              Water              ☒              Sewer              ☒              Electric              ☒

Custodial ☒ (excluding hazardous waste, which shall be considered as Specialized Maintenance, as further defined herein)         Parking            

Trash Removal             ☒ (excluding hazardous waste, which shall be considered as Specialized Maintenance)___ Snow Removal ___

Other                                                                                                                                                                         .

5. Term. The initial term of this Agreement shall commence as of the Effective Date hereof and shall last for a period of five (5) years (“Term”). This Agreement may be renewed by Lessee upon six (6) months’ prior written notice to Lessor for up to three (3) successive one (1) year renewal periods (each a “Renewal Term”).During the Term or any Renewal Term hereof, Lessee shall notify Lessor of its intent not to renew this Agreement by providing at least six (6) months’ prior written notice. For purposes of this Agreement, references to the Term shall include a Renewal Term.

6. Termination. Either party may terminate this Agreement upon the material breach of the other party of either one of the terms or conditions of this Agreement or the Rules and Regulations, provided the non-breaching party provides the breaching party of written notice of the material breach and the breaching party does not cure the material breach within an applicable reasonable cure period, and in the event no such cure period is specified, the default shall be thirty (30) days of the date of notice.

7. Alterations or Improvements. Except as noted in the following sentence, Lessee may make no alterations to the Leased Premises, but may request in writing that Lessor make alterations or improvements to the Leased Premises. Notwithstanding the foregoing sentence, Lessee may, in consultation with Lessor and upon Lessor’s approval, make such alterations or improvements to the Leased Premises as are necessary to enable Lessee to use the Leased Premises for the Permitted Use. Lessee shall pay all costs with regard to such alterations or improvements. Any alterations or improvements approved by Lessor will be performed by the Lessor or by a contractor selected by Lessor, in consultation with Lessee, in accordance with its Office of Procurement procedures. Any such alterations or improvements shall become the property of

 

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Lessor upon the expiration or termination of this Agreement. At the written request of Lessor upon the expiration or termination of this Agreement, Lessee shall pay to remove any alterations or improvements and restore the Leased Premises to its original condition, normal wear and tear excepted.

Lessee hereby expressly acknowledges and agrees that no alterations, additions, repairs or improvements to the Leased Premises of any kind are required or contemplated to be performed as a prerequisite to the execution of this Agreement and the effectiveness thereof according to its terms. Lessee acknowledges that, to its knowledge, the Leased Premises are complete and usable for the purposes set forth in this Agreement and that this Agreement is in no way conditional on Lessee making or being able to make alterations, additions, repairs or improvements to the Leased Premises.

All trade fixtures and equipment installed by Lessee in the Leased Premises shall be new or in good working condition and shall remain the property of Lessee. Lessee shall have the right, at the termination of this Agreement, to remove any and all trade fixtures, equipment and other items of personal property not constituting a part of the Leased Premises, which it may have stored or installed in the Leased Premises, which are susceptible of being moved without damage to the Leased Premises; provided this right is exercised before this Agreement expires or during the ten (10) day period immediately following such termination; provided Lessee pays Lessor the prorated amount on a per diem basis for each day beyond Lessee’s scheduled termination date that such items are being removed. Lessee, at no cost to Lessor, shall repair any damage to the Leased Premises caused by Lessee’s removal of its trade fixtures, equipment and other items of personal property. The right granted to Lessee in this Section shall not include the right to remove any plumbing or electrical fixtures or equipment, heating or air conditioning equipment, floor-coverings (including wall-to-wall carpeting) glued or fastened to the floors or any paneling, tile or other materials fastened or attached to the walls ceilings, all of which shall be deemed to constitute a part of the Leased Premises, and as a matter of course, shall not include the right to remove any furniture, fixtures or machinery that were furnished or paid for by Lessor.

8. Repairs and Maintenance. Lessor shall keep or cause to be kept in good operating order and condition (reasonable wear and tear excepted) and, in a reasonable and timely manner, repair and maintain the Leased Premises, including but not limited to, the basic plumbing, heating, ventilating, air conditioning, roofing systems, and electrical systems installed or furnished by Lessor, unless such maintenance and repairs are caused in part or in whole by the act, neglect, fault of or omission of any duty by Lessee, its agents, servants, employees or invitees, in which case Lessee shall pay to Lessor, in addition to the amounts due hereunder, the reasonable cost of such maintenance and repairs. Lessor shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for ten (10) working days, or an unreasonable time given the circumstances, after Lessee gives written notice of the need of such repairs or maintenance. There shall be no abatement of the amounts due hereunder and no liability of Lessor by reason of any injury to or interference with Lessee’s operations arising from the making of any repairs, alterations or improvements in or to any portion of the Leased Premises, or in or to fixtures, appurtenances and equipment therein, unless Lessor determines in its reasonable discretion that the Leased Premises are not habitable or useable for the Permitted Use. In the event Lessor declares that the Leased Premises are not useable, in its reasonable discretion and in consultation with Lessee, Lessor shall first have the right to provide alternative space substantially

 

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comparable, as determined in the Lessor’s reasonable discretion, to the Leased Premises (the “Alternative Space”). Should Alternative Space be offered to the Lessee, there shall be no abatement of the amounts due hereunder. If Lessor declares that the Leased Premises are not useable and does not offer Lessee Alternative Space, the amounts due hereunder shall be abated based on the number of days that Lessor determines in its reasonable discretion the Leased Premises are not useable for the Permitted Use.

Lessee waives the right to make repairs at Lessor’s expense under any law, statute or ordinance now or hereafter in effect. Lessee shall bear the costs of all maintenance and repairs which are uniquely attributed to its use of the Leased Premises, including but not limited to any repairs or services by the Lessor’s Physical Plant Department beyond what is customary for Physical Plant to provide, as determined by Lessor, and any repairs, maintenance, consulting services or monitoring of the Leased Premises necessary to maintain GMP status or required for the Permitted Use by Lessee (“Specialized Maintenance”) provided by Lessor or by third parties at Lessor’s request. Lessee shall work with Lessor to secure services contracts for all Specialized Maintenance, in full observance of the Lessor’s procurement policies and rules. The parties acknowledge that this Agreement shall supersede in its entirety that certain Service Level Agreement by and between the University of Louisville Physical Plant Department, Lessee, and the Institute for Cellular Therapeutics, dated January 1, 2015.

So long as Lessee pays the prescribed rent and costs of Specialized Maintenance, and performs or observes all of the terms, conditions, covenants, and obligations of this Agreement required to be performed or observed by it hereunder, Lessee shall, at all times during the Term hereof, have the peaceable, quiet and effective enjoyment, possession, occupancy, and use of the Leased Premises and the associated Common Areas without any unreasonable interference from Lessor; provided, however, Lessor shall have the right to enter the Leased Premises in accordance with Section 12 of this Agreement.

9. Surrender. Upon expiration or termination of this Agreement, Lessee shall immediately surrender possession of the Leased Premises to Lessor together with all keys or other access devices or passes. If Lessee shall fail to remove its trade fixtures or other property at the expiration of this Agreement or during the ten business (10) day period immediately following such termination, such fixtures and other property not removed by Lessee shall be deemed abandoned by Lessee, and Lessor may either remove such items at Lessee’ expense or, at the option of Lessor, shall become the property of Lessor.

10. Indemnification. Except to the extent of Lessor’s gross negligence, intentional act or willful misconduct, Lessee hereby agrees to indemnify and hold harmless Lessor, its trustees, administrators, officers, agents, and employees, from and against any and all claims, demands, causes of action, liabilities, loss or expense, including reasonable attorneys’ fees, arising out of or related to the acts or omissions of Lessee, its agents, employees, invitees, volunteers or guests.

 

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11. Insurance. Lessee shall be responsible for procuring and continuously maintaining insurance coverages in the type and amounts set forth below:

MINIMUM COVERAGE AMOUNT

 

Type of Insurance		Minimum Limits of Liability
General Liability*   Including: Completed Products   Personal and Advertising Injury   Products/Completed Operations   Sexual Abuse & Molestation		$5,000,000.00 Each Occurrence   $10,000,000.00 General Aggregate
Professional Liability (E&O)		$1,000,000 Each Occurrence   $3,000,000 General Aggregate
Auto Liability* (all owned, hired and non-owned vehicles)		$1,000,000 Combined Single Limit (Bodily Injury, Property Damage)
Workers Compensation		Statutory Limits — Kentucky and the state(s) of domicile of Lessor’s contractor and any subcontractor(s). The all state and voluntary compensation endorsement is to be attached to the policy.
Employers Liability		$1,000,000 (each employee, each accident and policy limit)

 

*	Occurrence coverage is required. Claims-made coverage is not acceptable.

These policies (except Workers’ Compensation) shall name the Lessor, its trustees, officers, employees and agents as Additional Insured and shall contain a covenant requiring no less than thirty (30) days written notice to the Lessor before cancellation, reduction or other modification of coverage/s.

These policies shall be primary and noncontributing with any insurance carried by the Lessor, and shall contain a severability of interests clause in respect to cross liability, protecting each Additional Insured as though a separate policy had been issued to each. Certificates of the above policies shall be furnished, to the Lessor, at least thirty (30) days prior to the commencement of this Agreement.

All Certificates of Insurance must clearly state that the Lessee’s insurance(s) is PRIMARY. If Lessee’s policy has deductibles, self-insured retentions or co-insurance penalties, then all such costs shall be solely borne by Lessee and not by the Lessor. The Lessor will not share in any policy deductibles.

 

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It is hereby agreed that in the event of a claim arising under this policy, the insurance provider(s) will not deny liability by reason of the Additional Insured being a state, county, municipal corporation or governmental agency.

The limits listed above may be accomplished through a combination of primary and excess/umbrella liability policies written on a “follow form” basis or forms no more restrictive than the primary policies.

12. Right of Entry. Subject to Lessee’s reasonable policies, Lessor reserves, and shall with reasonable notice, have the right to enter the Leased Premises to monitor and inspect the same and to alter, improve or repair the Leased Premises, all without being deemed guilty of any eviction of Lessee, and without abatement of any amounts due hereunder, and may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, provided that the business and Permitted Use of the Lessee shall not be unduly interfered with, and provided further that if Lessor proposes to enter Cleanroom Space, Lessee may require Lessor’s agent to follow standard cGMP practices for access to such space. In the case of an emergency, as determined in the sole reasonable discretion of Lessor, no notice whatsoever shall be required for Lessor to enter into the Leased Premises. For each of the aforesaid purposes, Lessor shall at all times have and retain a key with which to unlock all of the doors in, upon and about the Leased Premises, and Lessor shall have the right to use any and all means which Lessor may deem proper to open said doors in an emergency in order to obtain entry to the Leased Premises, and any entry to the Leased Premises obtained by Lessor by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Leased Premises, or an eviction of Lessee from the Leased Premises or any portion thereof, and any damages caused on account thereof shall be paid by Lessee.

It is understood and agreed that no provision of this Agreement shall be construed as obligating Lessor to perform any maintenance, repairs, alterations or decorations except as otherwise expressly agreed herein to be performed by Lessor. Lessee shall not change the locks on the entries to the Leased Premises without first obtaining the written consent of Lessor, and in such event Lessee’s new locks shall be tied into Lessor’s master locking system.

Notwithstanding the foregoing, Lessor acknowledges and agrees that research and other activities to be conducted in the Leased Premises may result in the generation of data and the development of inventions, know-how, works of authorship and other developments (collectively, the “Research Developments”), and Lessee asserts that the Research Developments constitute valuable confidential information of Lessee. Lessor will implement appropriate access controls limiting access to the Leased Premises to those authorized to access the Leased Premises, in consultation with Lessee, subject to and in compliance with any applicable regulation or laws that govern access to the Leased Premises and the Research Developments.

13. Assignment. Lessee may assign this Agreement (a) to their successor in interest in connection with an investment in Lessee or as part of a Change in Control, as further defined herein, provided that, if Lessee is then in material breach of any provision of this Agreement and Lessor has provided written notice to Lessee of such material breach, Lessee must obtain Lessor’s prior written consent to such assignment, which Lessor shall not unreasonably withhold, condition or delay, and (b) to an Affiliate, as further defined herein, of Lessee. Notwithstanding the foregoing, any permitted assign shall execute an assignment and assumption agreement upon one of the events specified in the foregoing subsection a or b.

 

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For purposes of this Agreement, Change in Control shall mean and refer to (a) the sale of all or substantially all the assets of a Party; (b) any merger, consolidation or acquisition of a party with, by or into another corporation, entity or person; or (c) any change in the ownership of more than fifty percent (50%) of the voting capital stock of a Party in one or more related transactions.

For purposes of this Agreement, Affiliate shall mean any entity that, as of the applicable point in time during the Term of this Agreement, directly or indirectly controls Lessee, is controlled by Lessee, or is under common control with Lessee. For purposes of this definition, “control” means (a) having the actual, present capacity to elect a majority of the directors of such entity, or (b) having the power to direct at least fifty percent (50%) of the voting rights entitled to elect directors for such entity.

14. Fire or Other Casualty. If the Leased Premises are destroyed by fire or other casualty, this Agreement shall immediately terminate. In the case of partial destruction or damage so as to render the Leased Premises untenantable or unsuitable for the Permitted Use, as determined in the reasonable discretion of Lessor, the Lessee may terminate or suspend this Agreement by giving written notice to the Lessor within fifteen (15) days after such partial destruction or damage, and, if so suspended, no rent shall accrue after the date of such partial destruction or damage until such damage is repaired and premises are considered tenantable. If the Lessee so suspends, but does not terminate, the Agreement within such fifteen (15) day period based on the Lessor’s commitment to repair such damage and render the Leased Premises tenantable or suitable for the Permitted Use, as the case may be, within one hundred-twenty (120) days following such partial destruction or damage, and the Lessor fails to do so, then the Lessee may terminate this Agreement effective upon notice to the Lessor.

15. Limitation of Remedies, Remedies Cumulative. In the event that any court or governmental authority shall limit any amount that Lessor may be entitled to recover under this Agreement, Lessor shall be entitled to recover the maximum amount permitted under law. Nothing in this paragraph or in this Agreement shall be deemed to limit Lessor’s recovery from Lessee of the additional amount permitted under law or of any other sums or damages which Lessor may be entitled to recover in addition to the damages set forth herein. No remedy conferred or reserved to either party in this Agreement or in law or equity will be considered exclusive of any other remedy, but the same shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute, and every power and remedy given by this Agreement to a party hereto may be exercised from time to time and as often as the occasion may rise or as may be deemed expedient. No delay or omission of either party to exercise any right or power arising from any default shall impair any such right or power or shall be construed to be a waiver of any such default or any acquiescence therein. No waiver of any breach of any of the covenants of this Agreement shall be construed, taken or held to be a waiver of any other breach or waiver, acquiescence in or consent to any further or subsequent breach of the same covenant.

 

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16. Relationship of the Parties. Lessor shall not by virtue of this Agreement or occupancy of the Leased Premises by Lessee become or be deemed a partner, joint venturer or controlling party of Lessee in the conduct of Lessee’ business.

17. Additional Covenants. Lessee shall keep the Leased Premises free from any Hens or claims of Hen arising out of work performed, materials furnished or obligations incurred by or for Lessee. In the event that any liens are filed arising out of work performed, materials furnished or obligations incurred by, for or at the insistence of Lessee and Lessee fails to bond, pay or otherwise extinguish such liens within thirty (30) days after Lessor notifies Lessee of the existence thereof, Lessor may, without waiver of any other rights or remedies, bond, pay or otherwise extinguish such hens and any expenses incurred by Lessor in connection with these hens shall be paid by Lessee to Lessor upon demand as additional costs hereunder. Lessor shall maintain reasonable insurance on the Leased Premises and the building and facilities in which it is located. Notwithstanding anything to the contrary contained in this Agreement or under statutory or common law, Lessor shall have no lien rights against any personal property, equipment or fixtures owned by Lessee and located in the Leased Premises.

18. Conflicts of Interest. Lessee represents and warrants that upon careful inquiry, no fee, commission or other pecuniary or real benefit has been provided or promised to any person or organization, other than the Lessor on account of this Agreement or related benefits. Lessee covenants that it will notify University Counsel’s Office in writing promptly upon learning of any change in this warranty or proposal for such change, upon establishment of any pecuniary relationship with any employee or Trustee of the Lessor, including investments or grants of equity. Lessee, its agents, officers, shareholders, and employees hereby agrees to abide by and comply with Lessor’s Conflicts of Interest policies at all times during the Term of this Agreement.

19. Party Names. Neither party shall use the name or logo of the other party or any of its respective affiliates for any purpose without prior written permission of the other party.

20. Notices. Any notices required or desired to be given under this Agreement shall be in writing and shall be deemed given when hand-delivered, emailed with receipt acknowledgement, or mailed postage prepaid registered or certified mail return receipt requested to the following address:

 

		To LESSOR:		University of Louisville
				323 E. Chestnut Street
				Louisville, Kentucky 40202
				Attn: AVP for Facilities and Management
		To LESSEE:		Regenerex, Inc.
				201 East Jefferson Street, Suite 110B
				Louisville, KY 40202

21. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Kentucky, without giving effect to any choice or conflict of law provision or rule that would cause the application of laws of any jurisdiction other than those of the Commonwealth of Kentucky.

 

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22. Intellectual Property Developed within Leased Premises. Ownership of any Intellectual Property developed in the Leased Premises or with the Equipment shall be governed by Lessor’s Intellectual Property Policy, as amended from time to time, and other agreements between the parties.

23. Entire Understanding. This Agreement represents the entire understanding and agreement between the parties relating to the use of the Leased Premises and Equipment, and supersedes all prior negotiations and agreements relative thereto. The language in all parts of this Agreement shall in all cases be construed as a whole according to its fail meaning and not strictly for or against either Lessor or Lessee. No provision of this Agreement may be amended or added to except by agreement in writing signed by the parties hereto or their respective successors in interest.

24. Partial Invalidity. If any term, covenant or condition of this Agreement or the application thereof to any person or circumstances shall, to any extent, be invalid or unenforceable, the remainder of this Agreement, or the application of such term, covenant or condition to persons or circumstances other than those to which it is held shall be valid and be enforced to the fullest extent permitted by law.

25. Applicable Laws/Standards. Lessee agrees to comply with all laws, regulations and other legal requirements applicable to Lessee in its use/occupation of the Leased Premises and Equipment. Lessee shall comply with all standards set by the Department of Housing, Buildings and Construction, Division of Building Codes Enforcement, and that of the Kentucky Occupational Safety and Health Standards Board and the Americans with Disabilities Act (ADA).

26. Ownership. The Lessee agrees to notify the Lessor within ten (10) days of all persons owning or upon any change or transfer of ownership involving five percent (5%) or more ownership interest or the power to direct the conduct and management of Lessee’s business affairs. Non-compliance may result in termination of this Agreement.

[Signatures appear on next page.]

 

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

 

LESSOR:				UNIVERSITY OF LOUISVILLE
				By:		/s/ Dan Durbin
						Dan Durbin, CFO
LESSEE:				REGENEREX, INC.
				By:		/s/ Suzanne Tollerud
						Suzanne Tollerud
						Director of Business Operations

 

[Signature Page to Lease Agreement]

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Execution Copy

 

FIRST AMENDMENT TO

LEASE AGREEMENT

THIS FIRST AMENDMENT TO LEASE AGREEMENT (“Amendment”) is made and entered into effective as of the 1st day of July, 2019, by and between the University of Louisville (“Lessor”), and Talaris Therapeutics, Inc. (“Lessee”).

W I T N E S S E T H:

WHEREAS, Lessor and Lessee, under its former name Regenerex, Inc., are parties to that certain Lease Agreement dated November 1, 2018 (the “Agreement”); and

WHEREAS, the parties mutually desire to modify the Agreement upon the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as follows:

1. Defined Terms. Capitalized terms contained but not defined in this Amendment shall have the meaning ascribed to such terms in the Agreement.

2. Modification to Section 1. Section 1, Leased Premises, is hereby deleted and replaced in its entirety with the following:

Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, certain property located at 570 S. Preston Street, Louisville, Kentucky, commonly referred to as the Donald E. Baxter Biomedical Research Building Center (“Baxter 1”), consisting of specified space on the first and fourth floors, and certain property located at 580 S. Preston Street, Louisville, Kentucky, commonly referred to as the Delia B. Baxter Biomedical Research Building (“Baxter 2”), consisting of specified space on the first floor, as more particularly described on Exhibit A, attached hereto and incorporated herein (“Leased Premises”). The lease of the Leased Premises includes the right, together with other tenants of Baxter 1 and Baxter 2, and such tenants’ invitees, to use the common and public areas within Baxter 1 and Baxter 2 (“Common Areas”).

3. Modification to Section 7. Section 7, Alterations or Improvements, is hereby modified to delete the last sentence of the first paragraph, and replace with the following:

Upon the termination or expiration of this Agreement, Lessee shall pay to remove any alterations or improvements, including but not limited to communications and/or electronic wiring, and restore the Leased Premises or other affected space of Lessor to its original condition, normal wear and tear excepted.

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4. Modification to Section 12. Section 12, Right of Entry, is hereby modified to add the following language at the end of the first paragraph:

Following the Changeover Date (as defined in Exhibit A), Lessor shall retain the right, on its own behalf and on behalf of its tenants, to access and pass through Baxter I 499E hallway for purposes of loading or unloading materials or equipment on the freight elevator adjacent to Baxter 1 499H and for other ordinary business use, as determined by Lessor. Lessor or its tenant shall, when practicable, provide reasonable advance notice to Lessee of any such proposed use and access, with reasonable details of the proposed time and materials or cargo to transit through Lessee’s premises.

5. Modifications to Exhibit A and Exhibit B. Exhibit A, Principal Space, and Exhibit B, Cleanroom Space, are hereby deleted and replaced in their entirety by Exhibit A, Leased Premises, attached hereto and incorporated herein. References to Principal Space and Cleanroom Space are hereinafter referred to collectively as Leased Premises, and all references individually to the space shall refer to the Leased Premises in its entirety.

6. Modification to Exhibit C. Exhibit C, Equipment, is hereby renamed Exhibit B, Equipment.

7. Modification to Exhibit D. Exhibit D, Permitted Use(s), is hereby renamed Exhibit C, Permitted Use(s).

8. Modification to Exhibit E. Exhibit E, Rules and Regulations, is hereby renamed Exhibit D, Rules and Regulations.

9. Modification to Exhibit F. Exhibit F, Rent and Equipment Use Fee, is hereby deleted and replaced in its entirety by and renamed Exhibit E, Rent and Equipment Use Fee, attached hereto and incorporated herein.

10. Miscellaneous. This Amendment may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which will constitute one and the same Amendment and may be delivered by facsimile or PDF via electronic mail in a legally binding manner. This Amendment shall be governed and construed in accordance with the laws of the Commonwealth of Kentucky and shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns.

11. No Further Modification. In the event of any inconsistency between the Agreement and this Amendment, the terms of this Amendment shall control. Except as otherwise modified herein, all terms and conditions in the Agreement shall remain in full force and effect.

[Signatures appear on next page.]

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IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment effective as of the date first shown above.

 

LESSOR:				University of Louisville
				By:		/s/ Mark Watkins
				Print Name: Mark Watkins
				Title: Sr Associate VP Operations 6-20-2019
LESSEE:				Talaris Therapeutics, Inc.
				By:		/s/ Scott Requadt
				Print Name: Scott Requadt
				Title: Chief Executive Officer

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EXECUTION COPY

 

SECOND AMENDMENT TO

LEASE AGREEMENT

THIS SECOND AMENDMENT TO LEASE AGREEMENT (“Second Amendment”) is effective as of the 1st day of February, 2020 (“Effective Date”), by and between the University of Louisville (“Lessor”), and Talaris Therapeutics, Inc. (“Lessee”) (collectively the “Parties”).

W I T N E S E T H:

WHEREAS, Lessor and Lessee are parties to that certain Lease Agreement dated November 1, 2018 (“Original Lease Agreement”), as subsequently amended on July 1, 2019 (“Amendment”) (collectively, the “Agreement”);

WHEREAS, Lessor and Lessee are parties to that certain Additional Space Agreement effective November 15, 2019 (“Additional Space Agreement”), pursuant to which Lessor granted Lessee the use of additional space; and

WHEREAS, the parties mutually desire to modify the Agreement upon the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as follows:

1. Defined Terms. Capitalized terms contained but not defined in this Second Amendment shall have the meaning ascribed to such terms in the Agreement.

2. Modification to Section 2. Section 2, Equipment, is hereby deleted and all references to Equipment in the Lease Agreement are hereby deleted. Lessor and Lessee acknowledge that the Parties are entering into a separate Equipment Lease Agreement contemporaneously with the execution of this Second Amendment, which shall govern all matters related to Equipment as of the Effective Date hereof.

3. Modification to Section 4. Section 4, Rent, is hereby amended to reflect the following revised list of services Lessor shall provide to Lessee:

            None             Gas              ☒              Water              ☒              Sewer              ☒              Electric              ☒

Custodial    ☒*         Parking                      Trash Removal         ☒*     Snow Removal

Other                                                                                                                                                                    

 

*	only in restrooms on 4th floor

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4. Modification to Section 7. Section 7, Alterations or Improvements, is hereby modified to delete the last sentence of the first paragraph, and replace with the following:

Upon the termination or expiration of this Agreement, Lessee shall pay to remove any alterations or improvements, including but not limited to communications and/or electronic wiring, and restore the Leased Premises or other affected space of Lessor to its original condition, normal wear and tear excepted, as depicted, in part, in the attached Exhibit E, attached hereto and incorporated herein. Lessee shall provide Lessor with an annual report on the anniversary of this Agreement with a summary and depiction of all alterations or improvements made to the Leased Premises. If Lessee requests in writing for Lessor to review proposed alterations or improvements to the Leased Premises then, as part of the review and response, Lessor shall indicate in writing whether it will require Lessee to reverse such alteration or improvement at the termination or expiration of this Agreement. If Lessor consents in writing to retain such alteration or improvement, then Exhibit E shall be updated to include such alteration or improvement.

5. Modification to Section 8. Section 8, Repairs and Maintenance, is hereby modified to add the following new paragraph at the end of such Section:

Lessor acknowledges that Lessee is obligated by the FDA to maintain the Leased Premises in accordance with cGMP standards applicable to the processing of human cell therapies for clinical and commercial use in human subjects. These standards include the requirement that all personnel involved in processing or handling of cell therapies for use in humans shall not be exposed to animals, animal waste or animal-derived products or tissues (collectively, “Animal Materials”) within or while in transit to Lessee’s cell processing facility within the Leased Premises. Accordingly, Lessor will notify in writing the heads of all research labs using Animal Materials located in Baxter I of the presence of GMP cleanroom facilities in the building and of the responsibility to comply with the Lessor’s policy on the Transportation of Research Animals which requires that personnel of the Lessor must use freight elevators when transporting animals.

6. Modification to Section 12. Section 12, Right of Entry, is hereby modified to add the following to the end of the last paragraph:

The foregoing shall apply to any key card access given by Lessor to its agents, representatives, vendors, etc., which access shall be governed by University policies and procedures related to access controls, as amended from time to time, and as provided to Lessee by Lessor’s Assistant Vice President for Facilities on the Health Sciences Center.

7. Modification to Section 26. Section 26, Ownership, is hereby amended and restated in its entirety as follows:

The Lessee agrees to notify the Lessor of any change or transfer of ownership that would constitute a Change of Control of Lessee. Non-compliance with this provision may result in termination of this Agreement by Lessor if Lessee fails to timely cure the non-notification in accordance with Section 6 of this Agreement.

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8. Modification to Exhibit A. Exhibit A, Leased Premises, is hereby amended and restated in its entirety with Exhibit A, Leased Premises.

9. Modification to Exhibit B. Exhibit B, Equipment, is hereby deleted in its entirety.

10. Modification to Exhibit C. Exhibit C, Permitted Use(s), is hereby renamed Exhibit B, Permitted Use(s).

11. Modification to Exhibit D. Exhibit D, Rules and Regulations, is hereby renamed Exhibit C, Rules and Regulations.

12. Modification to Exhibit E. Exhibit E, Rent and Equipment Use Fee, is hereby deleted and replaced in its entirety by and renamed Exhibit D, Rent, attached hereto and incorporated herein.

13. Miscellaneous. This Second Amendment may be executed by the parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which will constitute one and the same Second Amendment and may be delivered by facsimile or PDF via electronic mail in a legally binding manner. This Second Amendment shall be governed and construed in accordance with the laws of the Commonwealth of Kentucky and shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns.

14. No Further Modification. In the event of any inconsistency between the Original Lease Agreement, the Amendment, and this Second Amendment, the terms of this Second Amendment shall control. Except as otherwise modified herein, all terms and conditions in the Agreement shall remain in full force and effect.

[Signatures appear on next page.]

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IN WITNESS WHEREOF, Lessor and Lessee have executed this Second Amendment effective as of the date first shown above.

 

LESSOR:				University of Louisville
				By:		/s/ Mark Watkins
				Print Name: Mark Watkins
				Title: Chief Operating Officer
LESSEE:				Talaris Therapeutics, Inc.
				By:		/s/ Scott Requadt
				Print Name: Scott Requadt
				Title: Chief Executive Officer

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ADDITIONAL SPACE AGREEMENT

THIS ADDITIONAL SPACE AGREEMENT (“Additional Space Agreement”) is made and executed as of the 15th day of May 2020, by and between the University of Louisville (“Lessor”), and Talaris Therapeutics, Inc. (“Lessee”) (collectively the “Parties”).

W I T N E S S E T H:

WHEREAS, Lessor and Lessee are parties to that certain Lease Agreement dated November 1, 2018 (“Original Lease Agreement”), as subsequently amended on July 1, 2019 (“Amendment”) and on February 1, 2020 (collectively, the “Agreement”);

WHEREAS, Lessor granted Lessee use of additional space as more particularly described on and at the rental rates set forth on Exhibit A, attached hereto and incorporated herein (“Additional Space”); and

WHEREAS, the parties desire to define the terms and conditions of Lessee’s use of the Additional Space.

NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as follows:

1. Defined Terms. Capitalized terms contained but not defined in this Additional Space Agreement shall have the meaning ascribed to such terms in the Amendment.

2. Use of Additional Space. Lessor and Lessee hereby agree and acknowledge that Lessor permitted Lessee the use of the Additional Space as of the dates and at the rates set forth on Exhibit A, and that such use is governed by the terms and conditions of the Amendment. Lessee hereby agrees to remit the total rental amount set forth on Exhibit A to Lessor upon execution of this Additional Space Agreement via wire transfer.

3. Term. This Additional Space Agreement shall be effective upon November 15, 2019, and shall continue in effect until the latter of the following: (1) such time as Lessee fully discharges its obligations hereunder; or (2) February 1, 2020.

4. Miscellaneous. This Additional Space Agreement may be executed by the Parties hereto individually or in combination, in one or more counterparts, each of which shall be an original and all of which will constitute one and the same Additional Space Agreement, and may be delivered by facsimile or PDF via electronic mail in a legally binding manner. This Additional Space Agreement shall be governed and construed in accordance with the laws of the State of Kentucky, and shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns.

 

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[Signatures appear on next page].

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IN WITNESS WHEREOF, Lessor and Lessee have executed this Additional Space Agreement as of the date first shown above.

 

LESSOR:				University of Louisville
				By:		/s/ Mark Watkins
				Print Name: Mark Watkins
				Title: Chief Operating Officer
LESSEE:				Talaris Therapeutics, Inc.
				By:		/s/ Scott Requadt
				Print Name: Scott Requadt
				Title: Chief Executive Officer

Exhibit 10.15

Certain identified information has been excluded from this exhibit because it is both not material and is the type that the registrant treats as private or confidential. Information that was omitted has been noted in this document with a placeholder identified by the mark “[***]”.

AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT

This Amended and Restated Exclusive License Agreement (“Agreement”) is executed this 31^st day of October, 2018 (the “Execution Date”) and is effective as of February 26, 2017 (the “Effective Date”) and is made by and between University of Louisville Research Foundation, Inc. (“ULRF”), a Kentucky 501(c)3 non-profit corporation having an office at 300 East Market Street, Suite 300, Louisville, Kentucky, 40202, as the agent of the University of Louisville (“UofL”) for licensing intellectual property owned and controlled by ULRF on behalf of UofL and Regenerex, Inc. (“Licensee”), a Delaware corporation with a principal place of business at 201 East Jefferson Street, Suite 110B, Louisville, KY. ULRF and Licensee are referred to herein, on occasion, separately each as a “Party” or together as the “Parties”.

BACKGROUND IN CONNECTION WITH THE AMENDMENT AND RESTATEMENT

 

1.	ULRF and Licensee previously entered into that certain Exclusive License Agreement effective as of August 23, 2013 (the “Original Effective Date”) relating to ULRF-owned technologies related to Human Facilitating Cells (the “Original Agreement”).

 

2.	Licensee’s commercialization plans and partnerships have changed prompting the desire of the Parties to amend and restate the Original License Agreement to better reflect Licensee’s revised commercialization plans.

 

3.	ULRF and Licensee now wish to amend, restate and supersede the Original Agreement in its entirety to, among other things, maximize the commercial potential for the Inventions in the interests of the Parties and the public good.

BACKGROUND

 

1.	ULRF was established by UofL to enter into and administer research agreements with external funding sources and to own, control, and license intellectual property on behalf of UofL in order to foster the transfer and development of technology for public benefit.

 

2.

Valuable inventions relating to Human Facilitating Cells, as described in ULRF Case No. 04042, 05010, 08076, 08083, 10094 10098, and 18053 (the “Inventions”), were developed during the course of research conducted at UofL by the Inventors (as defined below), of which Dr. Suzanne T. Ildstad (“Dr. Ildstad”) was, and is, principal investigator.

 

3.	ULRF has acquired through assignment of all rights, title and interest of said Inventors (and all personnel working under the Inventors’ direction or supervision) in said valuable Inventions and the related Licensed Technology, as hereinafter defined and identified.

 

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4.	The Parties have entered into a Reciprocal Nondisclosure Agreement effective as of the Effective Date (ULRF Ref. 18204-NDA) (the “Confidentiality Agreement”), which governs Confidential Information (as defined in the Confidentiality Agreement) relating to this Agreement.

 

5.	Development of the Invention was sponsored in part by the United States government, and as a consequence, this Agreement is subject to overriding obligations to the federal government under 35 U.S.C. §§ 200-212 and applicable regulations.

 

6.	ULRF and Licensee desire to have the Inventions developed and commercialized so that products resulting therefrom may be available for public use and benefit.

 

7.	Licensee desires to acquire, and ULRF desires to grant, a license under the Licensed Technologies to make, use, sell, offer for sale, and import products, methods, and services in accordance with the terms herein.

NOW, THEREFORE, in consideration of the mutual covenants and obligations set forth herein, the Parties hereby agree that the Original License Agreement is amended, restated and superseded by this Agreement in its entirety, effective as of the Effective Date.

1. DEFINITIONS

 

1.1

“Affiliate” means, with respect to Licensee (or a Sublicensee, respectively), any entity that, as of the applicable point in time during the term of this Agreement, directly or indirectly controls Licensee (or a Sublicensee, respectively), is controlled by Licensee (or a Sublicensee, respectively), or is under common control with Licensee (or a Sublicensee, respectively). For purposes of this definition, “control” means (a) having the actual, present capacity to elect a majority of the directors of such entity, or (b) having the power to direct at least fifty percent (50%) of the voting rights entitled to elect directors of such entity.

 

1.2

“Change of Control” means (a) the sale of all or substantially all the assets of a Party; (b) any merger, consolidation or acquisition of a Party with, by or into another corporation, entity or person; or (c) any change in the ownership of more than fifty percent (50%) of the voting capital stock of a Party in one or more related transactions.

 

1.3	“Commercialization” or “Commercialize” means any and all activities directed to marketing, promoting, detailing, distributing, pricing and price reporting, importing, having imported, exporting, having exported, selling or offering to sell a product or therapy.

 

1.4

“Commercially Reasonable Efforts” means the good faith use of efforts and resources consistent with the usual practices of Licensee or similarly situated pharmaceutical and biotechnology companies in pursuing the research, Development, Manufacturing or Commercialization of a similarly situated pharmaceutical product or therapy at a similar stage of research, Development or Commercialization as the applicable product or therapy, taking into account efficacy, safety, proprietary position of the product or therapy,

 

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including patent and regulatory exclusivity, regulatory structure involved including anticipated or approved labeling and anticipated or approved post-approval requirements, present and future market and commercial potential including competitive market conditions and probability of the profitability of the product or therapy in light of pricing and reimbursement issues, and all other relevant factors including technical, legal, scientific or medical factors.

 

1.5

“Control” or “Controlled” means, with respect to any intellectual property right or other intangible property, the possession by a Party (including whether by ownership, license, “control,” as defined in the definition of “Affiliate” above, over an Affiliate having possession by ownership or license, or otherwise) of the ability to grant access to, or a license or sublicense of, such right or property.

 

1.6

“Cover,” “Covered” or “Covering” means, with respect to a Licensed Patent, that, in the absence of a license granted to a Person under a Valid Claim included in such Licensed Patent, making, having made, using, selling, having sold or importing a Licensed Product or other product or therapy, as applicable, by such Person would infringe such Valid Claim.

 

1.7

“Develop” or “Development” means any and all preclinical and clinical drug development activities including test method development and stability testing, toxicology, animal efficacy studies, formulation, quality assurance/quality control development, statistical analysis, clinical studies, clinical trials and testing, regulatory affairs, preparation and submission of applications for obtaining Regulatory Approvals, chemical or biological development and development manufacturing, process development, upscaling, validation, packaging and labeling development and manufacturing and development documentation efforts in support of development activities anywhere in the world.

 

1.8	“FCRx” or “FCR001” means any manipulated cellular composition containing hematopoietic stem cells, T-Cells and Human Facilitating Cells.

 

1.9	“Field of Use” means all fields (without limitation).

 

1.10

“Governmental Authority” means any domestic or foreign entity, including any multi-national, national, federal, state, local, municipal, provincial or other governmental authority of any nature, exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including any governmental division, prefecture, subdivision, department, agency, bureau, branch, office, commission, council, court or other tribunal.

 

1.11

“Human Facilitating Cells” means a heterogeneous population of cells derived from bone marrow and/or blood, which (a) support hematopoietic stem cell survival and/or (b) facilitate chimerism and/or immunological tolerance. By way of example, and without limitation, Human Facilitating Cells known to the Parties as of the Effective Date contain cells that express (i) CD8+; (ii) alpha beta TCR-; (iii) gamma delta TCR-; and (iv) CD45+.

 

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1.12

“Improvements” means (a) any Know-How or Patent Rights created, developed, obtained or made after the Effective Date by any member of the ULRF Group (including by the Inventors or any employees, agents or paid students of the ULRF Group) which are created, developed or made from, derived using, or an improvement to, Licensed Technical Information, Licensed Patents or Improvements to any of the foregoing in the course of Lab Activities, and (b) any Know-How or Patent Rights created, developed, obtained or made after the Effective Date by any member of the ULRF Group outside of Lab Activities which are created, developed or made from or derived using Confidential Information (as defined in the Confidentiality Agreement) related to Human Facilitating Cells provided that ULRF Group members were informed of the obligations herein upon their receipt of the Confidential Information.

 

1.13	“Indication” means a specific disease or condition.

 

1.14	“Inventors” means Dr. Ildstad and Ms. Mary Jane Elliott.

 

1.15

“Know-How” means any data, information, unpatented inventions, proprietary information, trade secrets or technology (whether or not protectable under patent, copyright or similar law and whether stored or transmitted in oral, documentary, electronic or other form), including, without limitation, ideas, concepts, formulas, methods, procedures, designs, compositions, plans, documents, discoveries, developments, techniques, protocols, specifications, works of authorship, biological materials, and any information relating to research and development plans, experiments, results, compounds, therapeutic leads, candidates and products, clinical and preclinical data, clinical trial results, and manufacturing information, plans and standard operating procedures, including any scientific, regulatory, pre-clinical or clinical information or data regarding specific Indications and any marketing, financial, commercial, personnel and other business information and plans; provided, however, that Know-How shall not include Patent Rights.

 

1.16	“Lab Activities” means all research, work and other activities with respect to which Dr. Ildstad is the principal investigator for ULRF or Licensee that are conducted by the ULRF Group or any employees, agents or paid students thereof.

 

1.17

“Licensed Method” means any process or method, the use or practice of which, absent the license granted pursuant to this Agreement, infringes or contributes to or induces the infringement of a Licensed Patent and/or embodies, contains, uses, is used or made through the use of, or was in whole or part derived from Licensed Technical Information.

 

1.18

“Licensed Patents” means: the Patent Rights identified in Exhibit A (provided that, with respect to the Jointly-Owned Patent Rights identified on Exhibit A and any other Jointly Owned Licensed Patent, only ULRF’s interest in and to such Jointly Owned Licensed Patent shall be included in the definition of “Licensed Patents”). Any issued claim of an unexpired Licensed Patent is presumed to be valid if it meets the definition of a Valid Claim.

 

1.19

“Licensed Product” means (a) FCRx or FCR001, and (b) any product, material, kit, or other article of manufacture or composition of matter or service (i) the research, Development, Manufacturing, making, use, Commercialization, Sale, offer for Sale, or import of which, absent the license granted pursuant to this Agreement, infringes, induces infringement, or contributes to infringement of a Licensed Patent and/or (ii) that embodies, contains, uses, is used or made through the use of, or was in whole or part derived from Licensed Technical Information.

 

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1.20	“Licensed Technical Information” means any Know-How owned or Controlled by any member of the ULRF Group as of the Effective Date that has been developed or made in the course of Lab Activities.

 

1.21	“Licensed Technology” means, collectively, the Licensed Patents and the Licensed Technical Information.

 

1.22

“License Year” means a year in which this Agreement is in effect. The first License Year will begin on the Effective Date and run until December 31 of the same calendar year. Thereafter, each subsequent License Year will mean each subsequent calendar year, beginning January 1 and ending December 31, provided that the final License Year will end on the date of expiration or termination of this Agreement.

 

1.23	“Manufacture” or “Manufacturing” means any and all activities and operations involved in or relating to the manufacturing, quality control testing (including in process, release and stability testing), releasing, labeling or packaging for pre-clinical, clinical or commercial purposes.

 

1.24

“Net Sales” means the gross amount of any payments, and the fair market value of any non-cash consideration, actually received by Licensee, Affiliates or Sublicensees for the Sale of Licensed Products, less (a) cash, trade or quantity discounts, charge-back payments and rebates actually granted to trade customers, managed healthcare organizations, pharmaceutical benefit managers, group purchasing organizations and national, state and local government, (b) credits, rebates or allowances actually allowed upon prompt payment or upon on account of claims, damaged goods, rejections or product returns, (c) Licensed Product distribution expenses, including packaging, freight, warehousing, handling and insurance costs that are included in amounts billed, and (d) taxes (other than income taxes), customs duties, import fees or other government charges included in amounts billed.

 

1.25

“Non-Royalty Sublicensing Income” means the gross amount of any payments, and the fair market value of all other consideration, actually received by Licensee for the grant of rights to Commercialize Licensed Technology under a Sublicense, excluding (a) payments made to Licensee as a royalty based on Sales by the Sublicensee, (b) any amounts included in the calculation of Net Sales, and (c) any amounts paid to Licensee in exchange for an equity interest in Licensee or any amounts paid to Licensee pursuant to a royalty financing or in exchange for a royalty interest, provided that, in the case of amounts paid to Licensee in exchange for an equity interest in Licensee, such amount is a fair market value, as determined in good faith by Licensee and the applicable purchaser.

 

1.26

“Patent Rights” means patents and all continuations, continuations-in-part, divisionals, reissues, reexaminations and extensions or substitutions thereof and supplemental protection certificates relating thereto, any confirmation patents or registration patents or patents of addition based on any such patents, and all counterparts thereof or substantial equivalents in any country, including utility models and industrial designs (collectively, “Patents”) and any applications or provisional applications for any of the foregoing (“Patent Applications”).

 

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1.27

“RDP” means protection of pre-clinical and clinical data that is part of a marketing authorization dossier for a limited duration of time wherein (a) such data (i) may not be relied upon by third parties in their marketing authorization applications and/or (ii) will not be accepted by the responsible health authority for any other marketing authorization application and/or (b) a medicinal product will not be placed on the market if its marketing authorization relies upon such data.

 

1.28

“Regulatory Approval” means, with respect to a Licensed Product in any country or jurisdiction, all approvals, registrations, licenses or authorizations from a Governmental Authority that are necessary for the commercial sale of the Licensed Product for any Indication, which shall include satisfaction of all applicable regulatory and notification requirements, but exclude any pricing or reimbursement approvals.

 

1.29	“Sale” means the act of selling, leasing, or otherwise transferring or providing Licensed Products for any consideration. Correspondingly, “Sell” means to make or cause to be made a Sale, and “Sold” means to have made or cause to be made a Sale.

 

1.30

“Sublicense” means any agreement between Licensee and a third party that contains a grant to Licensed Patents and/or Licensed Technical Information regardless of the name given to the agreement by the parties. “Sublicense” also includes approved further sublicense to any third party by a Sublicensee.

 

1.31	“Sublicensee” means any third party to whom Licensee has granted a Sublicense. “Sublicensee” also includes sublicensees of approved further Sublicenses by a Sublicensee.

 

1.32	“Term” has the meaning set forth in Section 15.1.

 

1.33	“ULRF Group” means, collectively, ULRF, UofL and, centers, institutes, departments or other entities that are a part of UofL, including, without limitation, what is known, as of the Effective Date, as the Institute for Cellular Therapeutics.

 

1.34

“Valid Claim” means, with respect to any country, a claim of an issued and unexpired Licensed Patent owned by ULRF in such country which has not been revoked or held to be invalid or unenforceable by a court, administrative agency or other Governmental Authority of competent jurisdiction in a final judgment or proceeding which cannot be appealed or, if capable of appeal, which has not been appealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through reissue, disclaimer or otherwise.

 

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2. GRANT

 

2.1

Grant. Subject to the terms and conditions of this Agreement, ULRF hereby grants to Licensee an exclusive, worldwide license under the Licensed Patents and a nonexclusive royalty bearing, worldwide license for Licensed Technical Information in the Field of Use to (a) research, Develop, Manufacture, make, have made, use, offer for Sale, import, Commercialize and Sell Licensed Products, and (b) to practice Licensed Methods. During the Term of this Agreement, ULRF agrees not to further commercially license the Licensed Technical Information.

 

2.2

Post-Term License to Licensed Technical Information. Upon the expiration (but not an earlier termination) of the Term: (a) the nonexclusive license granted to Licensed Technical Information pursuant to Section 2.1 shall survive in perpetuity (i.e., shall be perpetual) and be royalty-free following such expiration and (b) no further fees, royalties or other amounts shall be due or payable by Licensee with respect to such surviving perpetual license or any period following such expiration or termination.

 

2.3

Independent Licensee Developments. It is agreed and understood that there have been, and there may be on or after the Effective Date, inventions, discoveries, developments or other findings made, conceived, developed or reduced to practice by Licensee independently of UofL and ULRF, and not by UofL and/or ULRF and not incorporating or using Licensed Technology, and that all of the foregoing shall be owned, as between the Parties, by Licensee and shall not constitute Improvements. No right, title or interest in or to any of the foregoing is or shall be licensed, transferred or assigned to ULRF by virtue of this Agreement.

 

2.4

Options to Improvements. ULRF will notify Licensee in writing of any Improvements and any applicable Patent Costs (as defined in Section 9.2) with respect thereto within thirty (30) days of its receipt of a complete research disclosure form. After being informed by ULRF, Licensee must notify ULRF in writing within ninety (90) days that it elects subject to the terms and conditions of this Agreement, to include such Improvements in the license granted in Section 2.1 as described below:

 

(a)

License Grant to Improvements Developed Within [***] of the Effective Date. Upon the above required notifications and with payment of all Patent Costs for such Improvements that are reimbursable pursuant to Section 9.2, Improvements developed and disclosed within [***] after the Effective Date shall be deemed Licensed Patents or Licensed Technical Information (as applicable) and included in the licenses to Licensed Technology granted to Licensee under this Agreement. If Licensee does not elect to include such Improvements within the ninety (90) day period or pay for the reimbursable Patent Costs for such Improvements, ULRF will be free to license such Improvements (but, for the avoidance of doubt, not any Licensed Technology) to third parties.

 

(b)

License Grant to Improvements Developed [***] After the Effective Date. Improvements developed and disclosed [***] after the Effective Date shall be deemed Licensed Patents or Licensed Technical Information (as applicable) and included in the licenses to Licensed Technology granted to Licensee under this Agreement upon Licensee’s meeting the following obligations:

 

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a.

Licensee has elected in writing the include such Improvement in this Agreement within the ninety (90) day notification period;

 

b.

Licensee has paid ULRF a Five Thousand Dollar ($5,000.00) improvement fee (the “Improvement Fee”) for such disclosure and underlying Patent Rights and/or Know-How; and

 

c.

Licensee has reimbursed ULRF for any Patent Costs (if incurred by ULRF) for such Improvements that are reimbursable by Licensee pursuant to Section 9.2.

If Licensee does not elect to include such Improvements within the ninety (90) day period or pay the Improvement Fee or the reimbursable Patent Costs for such Improvements, ULRF will be free to license such Improvements (but, for the avoidance of doubt, not any Licensed Technology) to third parties.

 

2.5

Retained Rights. ULRF reserves the right, on behalf of itself and UofL, to do any one or more of the following: (a) to the extent and in the form approved in writing in advance by Licensee, publish Licensed Technology in accordance with Section 6 of the Confidentiality Agreement; and (b) practice the Licensed Patents and use the Licensed Technology, in each case solely for not-for-profit educational and non-commercial research purposes; provided, however, that ULRF shall not retain or have any right to do any of the foregoing regarding License Technology (i) for clinical, preclinical, patient care or therapeutic activities, (ii) in humans, or (iii) using commercial funding from any third party, and ULRF shall not have any right to file for or obtain, or to grant any third party a license to file for or obtain, Regulatory Approval for, or to Develop, Commercialize or Manufacture for any purpose, any Licensed Product. Without limiting the foregoing and for the avoidance of doubt, ULRF shall not have any right to, and shall not, grant any licenses to any third party to Commercialize any Licensed Technology.

 

2.6

Government Rights. It is understood that if the United States Government (through any of its agencies or otherwise) has funded research, during the course of or under which any inventions of the Licensed Patents were conceived or made, the United States Government is entitled, as a right, under the provisions of 35 U.S.C. §§ 200-212 and applicable regulations of Chapter 37 of the Code of Federal Regulations, to a nonexclusive, nontransferable, irrevocable, paid-up license to practice or have practiced the invention of such Licensed Patents for governmental purposes. These provisions also impose the obligation that Licensed Products Sold or produced in the United States be “manufactured substantially in the United States.” Licensee will ensure that all obligations under these provisions are met.

 

2.7

Specific Exclusions. Nothing in this Agreement is or will be construed as: (a) conferring by implication, estoppel, or otherwise any license or rights under any patent applications or patents of ULRF other than the Licensed Patents, regardless of whether such patent applications or patents are dominant or subordinate to the Licensed Patents; or (b) an obligation to furnish to Licensee any know-how not provided in the patents and patent applications of the Licensed Patents.

 

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3. SUBLICENSING

 

3.1

Permitted Sublicensing. Subject to the requirements of Section 3.4, Licensee may grant Sublicenses in the Field of Use. For purposes of this Agreement, the operations of any Sublicensee under their respective Sublicense will be deemed to be the operations of Licensee, for which Licensee will be responsible. Affiliates will have no licenses under the Licensed Patents except as granted by Licensee in a Sublicense.

 

3.2	Required Sublicensing.

 

(a)

In the event that ULRF and Licensee each own an undivided interest in any Licensed Patent, including, without limitation, the Jointly-Owned Patent Rights (as defined in Exhibit A) (each a “Jointly Owned Licensed Patent”), Licensee will not attempt to separately grant a license to any third party under its rights in such Jointly Owned Licensed Patent without concurrently granting a Sublicense under ULRF’s rights in the same.

 

(b)

If Licensee licenses to a third party patent rights assigned to or otherwise acquired by it (“Licensee’s Patent Rights”) and it believes, in good faith, that the recipient of such license will infringe Licensed Patents in practicing Licensee’s Patent Rights, then Licensee will not separately grant a license to such recipient under Licensee’s Patent Rights without using Commercially Reasonable Efforts to grant a Sublicense to such recipient of the applicable Licensed Patents.

 

3.3

Bayh-Dole Act Acknowledgement. The Parties acknowledge that, under certain circumstances, the Bayh-Dole Act provides the Federal agency under whose funding agreement a subject invention is made with a “march-in right” to require the sublicensing of such invention by the licensee of such invention (35 U.S.C. § 203).

 

3.4

Sublicense Requirements. Any Sublicense: (a) is subject to this Agreement, and (b) will not permit the grant of further Sublicenses by the Sublicensee without the express written consent of ULRF (provided, however, that no such consent shall be required with respect to Sublicenses granted by a Sublicensee to service providers for the purpose of providing services for or on behalf of the Sublicensee). Written consent, which shall not be unreasonably withheld, from ULRF may be requested by Licensee on behalf of a Sublicensee at least ten (10) business days before further Sublicensing.

 

3.5

Notice and Copy of Sublicense. Within thirty (30) days of execution of each Sublicense, or amendment thereof, Licensee will notify ULRF of such executed Sublicense or amendment and provide to ULRF a copy of such Sublicense or amendment; provided, however, that Licensee shall have the right to redact parts of such Sublicense or amendment to the extent such parts are not necessary to determine Licensee’s compliance with this Agreement.

 

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3.6

License Termination. Upon termination of this Agreement for any reason, all Sublicenses will automatically terminate, unless ULRF, at its sole discretion, agrees in writing to an assignment to ULRF of any Sublicense. In the event of termination of this Agreement and if ULRF accepts assignment of any Sublicense, ULRF will not be bound by any grant of rights broader than, and will not be required to perform any obligation other than, those rights and obligations contained in this Agreement. ULRF will, as between ULRF and Licensee, have the sole right to modify each such assigned Sublicense to include all of the rights of ULRF contained in this Agreement.

4. DILIGENCE

 

4.1

Commercially Reasonable Efforts by Licensee. During the Term: (a) Licensee shall use Commercially Reasonable Efforts to Develop a Licensed Product with the goal of achieving Regulatory Approval thereof; and (b) following such time as Regulatory Approval of a Licensed Product is obtained in any country or countries, use Commercially Reasonable Efforts with respect to the country or countries for which such Regulatory Approval of a Licensed Product has been obtained to Commercialize such Licensed Product in such country or countries, except to the extent that Licensee determines that doing so is not commercially viable or is not commercially desirable. ULRF agrees that the efforts and activities of Licensee’s Affiliates and Licensee’s Sublicensees and their Affiliates shall be taken into account as the efforts and activities of Licensee for purposes of determining Licensee’s compliance with the obligations set forth in this Section 4.1.

 

4.2	Milestones. In addition to Licensee’s obligations under Section 4.1, Licensee will accomplish the diligence milestones (“Milestones”) set forth in Exhibit C, subject to Section 2 of Exhibit C.

 

4.3	Material Failure. Licensee’s material failure to perform in accordance with Sections 4.1 or 4.2 may, subject to Section 2 of Exhibit C, constitute a material failure to which Section 15.3 applies.

5. PAYMENTS AND ACCOUNTING

 

5.1	Fees and Royalties. In consideration for the rights granted herein, Licensee will pay to ULRF the fees, royalties and other amounts specified in Exhibit B, and will reimburse ULRF for costs incurred in connection with the Licensed Patents as provided in Section 9.2.

 

5.2

Payment Procedures. All payments due to ULRF will be made in United States currency preferably by electronic funds transfer (EFT), e.g., ACH, wire or book transfer. Bank information will be provided upon request. Alternatively, payments due to ULRF hereunder may be made by check or money order payable to “University of Louisville Research Foundation, Inc.” with reference to tax identification number [***], and remitted to the address for ULRF specified in Section 14.1. Licensee or its Sublicensees will be responsible for payments of any fees associated with the transfer or other delivery of amounts payable to ULRF hereunder.

 

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5.3

Calculation and Payment of Royalties. When Licensed Products are Sold for monies other than United States dollars, Royalties will first be determined in the foreign currency of the country in which the Sale was made and then converted into equivalent United States dollars. The exchange rate will be that rate quoted in the Wall Street Journal on the last business day of the reporting period. Royalties will be paid to the ULRF free and clear of all foreign taxes except to the extent that any deduction or withholding (including of value added taxes) for tax purposes is required by applicable law, in which case Licensee shall have the right to deduct or withhold the amounts required by applicable law, without any obligation to gross-up ULRF for any amount of such deduction or withholding, so long as ULRF has been allowed the timely opportunity to complete file documentation that may exempt such deduction or withholding from being applied. If any Licensed Patent, or any claim thereof, expires or is held invalid by a final decision of a court of competent jurisdiction from which no appeal can be or is taken, all obligations to pay Royalties based on such Licensed Patent, or claim, will cease as of the date of such expiration or final decision. Licensee will not, however, be relieved from paying any Royalties that accrued before such expiration or final decision or that are based on another Licensed Patent, or claim within any Licensed Patent, which is not expired, or which is not held invalid or unpatentable in such final decision.

 

5.4

Books and Records. Licensee will keep full, true, and accurate books of accounts containing all particulars that may be necessary for the purpose of showing the amount of Royalties and Non-Royalty Sublicensing Income payable to ULRF as well verifying the Net Sales volume for triggering the Milestone Payment based on Net Sales as set forth in Exhibit B. For six (6) years following the end of the calendar year to which they pertain, upon ULRF’s request no more than one (1) time per calendar year, said books and the supporting data will be made open, during normal business hours upon reasonable notice, to inspection and audit by an independent, nationally-recognized certified public accountant solely for purposes of verifying Licensee’s Royalty Reports under Article 6 and calculations of Non-Royalty Sublicensing Income amounts payable to ULRF (the “Independent Accountant”). Such Independent Accountant will be required to execute a non-disclosure agreement for the benefit of Licensee, which shall (a) be at least as protective of Licensee’s Confidential Information as the Confidentiality Agreement and shall obligate such Independent Accountant to hold all information in confidence except as necessary to communicate to ULRF such Independent Accountant’s determination of the whether Licensee’s Royalty Reports and Licensee’s calculation of Non-Royalty Sublicensing income amounts payable to ULRF are accurate and, if they are not, also the dollar amount by which Licensee’s Royalty Reports or calculations are lower or higher than the actual, correctly-calculated dollar amount (the “Determination”), and (b) prohibit such Independent Accountant from disclosing any information other than disclosing the Determination to ULRF. The fees and expenses of the representatives performing such an examination will be borne by ULRF, provided that if an error in underpaid Royalties, Non-Royalty Sublicensing Income or Milestone Payments to ULRF of more than [***] percent ([***]%) for any calendar year is discovered, then the fees and expenses of these representatives in conducting such examination will be borne by Licensee.

 

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5.5

Self-audit. At ULRF’s written request to Licensee at any time after the first commercial sale of a Product, Licensee will conduct an independent audit of Sales and Royalties at least [***] if Net Sales exceed [***] dollars ($[***]) in any given calendar year. The audit will address, at a minimum, the amount of Net Sales by or on behalf of Licensee during the audit period, the amount of funds owed to ULRF under this Agreement, and whether the amount owed has been paid to ULRF and is reflected in Licensee’s records. Licensee will submit the auditor’s report promptly to ULRF upon completion. Licensee will pay for the entire cost of the audit.

 

5.6

Late Payments. In the event any payment due hereunder is not made when due, the payment will accrue interest, calculated at the monthly rate of one and one-half percent (1.5%), the interest being compounded on the last day of each calendar month. Each such payment when made will be accompanied by all interest so accrued. Said interest and the payment and acceptance thereof will not negate or waive the right of ULRF to seek any other remedy, legal or equitable, to which it may be entitled because of the delinquency of any payment including, but not limited to, termination of this Agreement as provided in Article 15.

6. DEVELOPMENT AND ROYALTY REPORTS

 

6.1

Development Reports. Until the first Sale occurs in the United States, Licensee will submit to ULRF a semi-annual development report (“Development Report”) within sixty (60) days of each June 30 and December 31 following the end of such six (6) month period. Development Reports will cover Licensee’s activities related to the development and testing of Licensed Products, including efforts related to obtaining necessary government approvals, if any, for marketing in the United States and foreign countries. Each Development Report will provide a sufficiently detailed summary of activities of Licensee and any Sublicensees so that ULRF may evaluate and determine Licensee’s progress in the development of Licensed Products, and in meeting Licensee’s diligence obligations under Article 4, and include at least the following: (a) summary of work completed and in progress; (b) current schedule of anticipated events and milestones, including the diligence Milestones under Article 4; (c) anticipated market introduction dates; (d) names and addresses of Sublicensees for any new Sublicenses entered into during the reporting period; (e) Sublicensees’ activities during the reporting period; and (f) description of any Sublicensing Income received by Licensee. In the Development Report immediately subsequent to the first Sale by Licensee or by a Sublicensee, Licensee will report the date of such first Sale. Upon ULRF’s reasonable request from time to time during the Term, Licensee shall provide to ULRF supporting documentation with respect to any matters set forth in a Development Report that ULRF’s request specifically relates to.

 

6.2

Royalty Reports. After the first Sale, within sixty (60) days of each June 30 and December 31 following the end of such six (6) month period, Licensee will submit to ULRF a semi-annual royalty report (“Royalty Report”), accompanied by the corresponding Royalty payment as required in Exhibit B, Section 1. Each Royalty Report will include at least the following: (a) the volume of Licensed Products Sold (if no Sales have occurred during the report period, the Royalty Report will contain a statement to this

 

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effect); (b) gross amounts of any payments or other consideration received in connection with Sales, (c) Net Sales and the calculation of Net Sales, including all deductions taken, so that ULRF can confirm the calculation; (d) total Royalties due to ULRF; (e) description of any Sublicensing Income received by Licensee; and (f) names and addresses of Sublicensees for any new Sublicenses entered into during the reporting period.

 

6.3	Submission of Development and Royalty Reports. All Development and Royalty Reports will be submitted electronically via email with reference to this Agreement [***].

7. REPRESENTATIONS, EXCLUSIONS AND NEGATIONS OF WARRANTIES, AND LIMITATION OF LIABILITY

 

7.1	Representations by ULRF. ULRF hereby represents and certifies to Licensee, as of the Effective Date and throughout the Term, as follows:

 

(a)

Entity Existence and Power. It is an entity duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is organized, and has full power and authority and the legal right to own and operate its property and assets and to carry on its business or other activities as they are now being conducted and as contemplated in this Agreement.

 

(b)

Authority and Binding Agreement. (i) It has the power and authority and the legal right to enter into this Agreement on behalf of itself and the ULRF Group and grant the licenses to License under the Licensed Technology as set forth herein; (ii) it has taken all necessary corporate or other action on its part required to authorize the execution and delivery of this Agreement and the performance of its and the ULRF Group’s obligations herein, including obtaining all necessary consents (if any) from any member of the ULRF Group; and (iii) this Agreement has been duly executed and delivered on behalf of ULRF, and constitutes a legal, valid, and binding obligation of ULRF that is enforceable against them in accordance with its terms.

 

(c)

No Conflict. Neither ULRF, UofL, nor any other member of the ULRF Group is a party to any agreement or commitment that would prevent ULRF from granting the licenses to Licensee under and to the Licensed Technology as set forth herein, or that otherwise conflicts with this Agreement.

 

(d)

Ownership of Licensed Technology. Except for the Jointly-Owned Patent Rights, which ULRF and Licensee jointly own, ULRF is the sole and exclusive owner, or exclusive licensee, of all of the Licensed Technology in existence as of the Effective Date, free from any lien, mortgage, pledge, option, license, assignment, power of sale, right of first refusal, equitable interest or security interest, other than the overriding obligations to the United States government, as set forth in Public Law 96-517 (35 U.S.C. §§200-204), as amended, or any similar obligations under the Laws of any other country or jurisdiction.

 

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(e)

Government and Foundation Funding. Schedule 7.1(e) sets forth all government and foundation funding relationships to which ULRF or any other member of the ULRF Group is a party that would result in rights to the Licensed Technology or any Licensed Product residing in the United States Government, National Institute of Health, National Institute for Drug Abuse or any other Governmental Authority and private foundations.

 

(f)

Third-Party In-Licenses. There are not and will not be, without Licensee’s prior written consent, any license, assignment, distribution or other agreements between ULRF and any third party under which it is or has been granted a license or other rights relating to the Licensed Technology (“Third Party In-Licenses”). To the extent Licensee consents in writing to any Third Party In-License, ULRF (i) shall comply with and maintain in full force such Third Party In-License, (ii) shall not amend of modify such Third Party In-License without the prior written consent of Licensee, and (iii) shall promptly provide written notice to Licensee describing any breach, alleged breach or potential breach of a Third Party In-License of which it becomes aware and provide Licensee with copies of any correspondence related thereto. ULRF will cooperate with Licensee in attempting to cure any such breach.

 

(g)

No Rights of UofL. UofL does not (separate from ULRF) own or Control any Licensed Technology, any Patent Rights covering any Invention or any Know-How relating to any Invention and need not be a party to this Agreement in order for the purposes of this Agreement to be realized.

 

7.2

Negation of Warranties. Except as otherwise expressly set forth in this Agreement, (a) ULRF provides Licensee the rights granted in this Agreement AS IS and WITH ALL FAULTS, and (b) ULRF makes no representations and extends no warranties of any kind, either express or implied. Among other things, ULRF disclaims any express or implied warranty: (a) of merchantability, or of fitness for a particular purpose; or (b) arising out of any course of dealing.

 

7.3	No Representation of Licensed Patent. Licensee also acknowledges that ULRF does not represent or warrant: (a) the validity or scope of any Licensed Patent; or (b) that the exploitation of the Invention or Licensed Patents will be successful.

 

7.4	No Warranties to Third Parties. Licensee will not make any statements, representations or warranties or accept any liabilities or responsibilities whatsoever to or with regard to any person or entity that are inconsistent with any disclaimer or limitation included in this Article.

 

7.5

Limitation of Liability. THE ENTIRE RISK AS TO PERFORMANCE OF LICENSED PRODUCTS, LICENSED METHODS AND UNDERLYING RESEARCH IS ASSUMED BY LICENSEE OR ANY SUBLICENSEES. IN NO EVENT WILL ULRF, UOFL, INCLUDING ITS TRUSTEES, FELLOWS, OFFICERS, EMPLOYEES, STUDENTS AND AGENTS, BE RESPONSIBLE OR LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES WHATSOEVER, OR LOST PROFITS, WITH RESPECT TO THE PRACTICE OF THE INVENTION OR LICENSED PATENTS (INCLUDING MAKING, USING, SELLING, OFFERING TO

 

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SELL, OR IMPORTING LICENSED PRODUCTS OR LICENSED METHODS) WHETHER GROUNDED IN TORT (INCLUDING NEGLIGENCE AND PRODUCT LIABILITY), STRICT LIABILITY, CONTRACT OR OTHERWISE. THE ABOVE LIMITATIONS ON LIABILITY APPLY EVEN THOUGH ULRF, UOFL, ITS TRUSTEES, FELLOWS, OFFICERS, EMPLOYEES, STUDENTS OR AGENTS MAY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. TO THE EXTENT PERMITTED BY LAW, THE ABOVE LIMITATION OF LIABILITY SHALL NOT APPLY TO A PARTY’S BREACH OF ITS CONFIDENTIALITY OBLIGATIONS UNDER SECTION 13 OR OF THE CONFIDENTIALITY AGREEMENT.

8. INDEMNITY AND INSURANCE

 

8.1

Indemnity. Licensee will indemnify, hold harmless, and defend ULRF, UofL, and its trustees, fellows, officers, employees, students, and agents from and against any and all claims, suits, losses, damage, costs, fees, and expenses (including attorneys’ fees) resulting from or arising out of the exercise of the license granted hereunder, or any Sublicense thereof, by Licensee, Affiliates or Sublicensees, including product liability claims relating to Licensed Products Sold by Licensee, a Sublicensee or an Affiliate of either of the foregoing.

 

8.2

Insurance. During the term of this Agreement, Licensee will obtain and maintain at all times and will require Affiliates and Sublicensees, and any subcontractors of any of the foregoing, to obtain and maintain (a) insurance for all statutory workers’ compensation and employers’ liability requirements covering any and all employees with respect to activities performed under this Agreement; and (b) commercial general liability insurance, with limits of insurance not less than $5,000,000 per occurrence and $10,000,000 aggregate, including products liability insurance, written on a claims made basis, from reputable and financially secure insurance carriers (having an A.M. Best rating of A IX or above) to cover their respective activities. Such insurance will provide an appropriate and standard level of coverage considering the size of the company and for the product and industry, and will list ULRF, UofL, its trustees, fellows, officers, employees, students, and agents as additional insureds. Such insurance will be written to cover claims resulting from or arising out of the exercise of the licenses granted hereunder, or any Sublicense thereof, by Licensee, Affiliates or Sublicensees incurred, discovered, manifested, or made at any time during or after the expiration or termination of this Agreement. At ULRF’s request, Licensee will furnish a certificate of insurance evidencing primary coverage, indicating that ULRF and UofL have been listed as an additional insured under commercial general liability, and requiring thirty (30) days prior written notice to ULRF of cancellation or material change. All such insurance of Licensee will be primary coverage; the insurance of ULRF will be deemed to be excess and noncontributory. ULRF will notify Licensee in writing of any claim brought against ULRF in respect to which ULRF intends to invoke the provisions of this Section 8.2. Licensee will keep ULRF informed in writing and on a current basis of Licensee’s defense(s) of any known claim under this Section 8.2.

 

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9. PATENT PROSECUTION AND MAINTENANCE

 

9.1

Responsibility for Licensed Patents. ULRF is the owner of the Licensed Patents (excluding the Jointly-Owned Patent Rights, which ULRF and Licensee jointly own). Licensee shall have the right to prosecute and maintain the Licensed Patents for ULRF and the Jointly-Owned Patent Rights for itself and ULRF. This action is not intended nor should it be construed to be an assignment of ownership of the Licensed Patents by ULRF. Provided that Licensee timely makes all of its payments owed to ULRF, Licensee may select any counsel of its choosing to prosecute and maintain some or all of the Licensed Patents, subject to approval of ULRF, which consent will not be unreasonably withheld. In order to be approved, counsel must agree to represent both parties in the patent prosecution pursuant to this Agreement. ULRF’s approval shall be deemed to be given for Licensee’s selection of either Fish & Richardson PC or Proskauer Rose LLP, so long as a mutually agreeable joint representation documents are executed and maintained as follows. Both parties shall execute any mutually agreeable documents necessary to allow such joint representation, with such documents being prepared by Licensee’s proposed counsel to effectuate the joint representation. Licensee shall be directly billed by the selected counsel and be solely responsible for payment for services rendered. Selected counsel shall provide concurrently to both parties, copies of all prosecution documents and correspondence for all Licensed Patents., “IP Counsel”). Licensee may direct patent prosecution, provided that ULRF is given reasonable opportunity to review and comment on any patent prosecution actions. If the Parties cannot timely agree on a patent prosecution decision, the final decision shall vest in Licensee except for any proposed changes to inventorship or ownership of a Licensed Patent, in which case ULRF shall have the right to direct patent counsel. For any Licensed Patents not prosecuted and maintained by IP Counsel, ULRF shall, in its name as owner, use reasonable efforts consistent with its normal practices to prosecute and maintain the Licensed Patents, and in so doing shall provide Licensee a reasonable opportunity to review and comment on any patent prosecution and maintenance actions.

 

9.2

Patent Costs. Subject to Section 9.3, Licensee will reimburse ULRF for all reasonable, documented out-of-pocket costs incurred on or after August 30, 2018 in connection with preparing, filing, prosecuting and maintaining Licensed Patents (including, without limitation, the cost of any patent filings, reexaminations, oppositions, post-grant review, inter partes review, supplemental examinations, and other patent office administrative proceedings, and their appeals), which have not been previously reimbursed to ULRF (“Patent Costs”). Licensee will reimburse ULRF for all Patent Costs incurred on or after the Effective Date that Licensee is required to reimburse ULRF for pursuant to this Section 9.2 within thirty (30) days of receipt by Licensee of invoice from ULRF for the same. For the avoidance of doubt, this Section 9.2 shall not apply with respect to any costs relating to Option Patent Rights with respect to which Licensee does not exercise its Improvement rights under Section 2.4.

 

9.3

Cessation of Licensee Patent Prosecution. Licensee’s obligation to pay Patent Costs under Section 9.2 will continue for so long as this Agreement remains in effect, provided that Licensee may terminate Licensee’s obligations with respect to any given Patent Application or Patent within the Licensed Patents in any designated country upon ninety (90) days written notice to ULRF. In the event of such notice to ULRF, ULRF will

 

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undertake to curtail applicable Patent Costs reimbursable by Licensee pursuant to Section 9.2. ULRF may continue prosecution and maintenance of such Patent Applications or Patents at ULRF’s sole discretion and expense, provided that such Patent Applications or Patents shall no longer be deemed Licensed Patents as of the effective date of Licensee’s election to terminate its obligations with respect thereto.

10. CONTEST OF PATENT VALIDITY

 

10.1

In the event Licensee files any action contesting the validity of any Licensed Patent and such Licensed Patent is held to be valid by a final judgment of a court of competent jurisdiction, then the Royalty percentage(s) applicable with respect to Licensed Products that are Covered by such Licensed Patent (as set forth in Section 1(a) of Exhibit B) shall be increased by two percent (2%) with respect to periods following the date of such final determination; provided, however, that if such final judgment is overturned on appeal, then such increase in Royalty percentage shall be reversed, retroactive to and effective as of the date on which the increase was implemented, and any amounts overpaid by Licensee as a result of such increase shall be credited against subsequent Royalty payments made by Licensee.

11. INFRINGEMENT

 

11.1	Infringement Procedure. Each Party will promptly notify the other Party if it believes a third party infringes a Licensed Technology in the Field of Use.

 

11.2

Licensee Suit. Licensee will have the first right to institute suit, and may name ULRF as a party to such suit for standing purposes. If Licensee decides to institute suit, it will notify ULRF in writing and, in such a case, (a) ULRF will assign and hereby does assign to Licensee all rights, causes of action, and damages resulting from the alleged infringement, (b) Licensee will bear the entire cost of the litigation and will reimburse ULRF for any costs, expenses, and counsel fees reasonably incurred by ULRF, and (c) from any recovery or damages derived therefrom, Licensee will first be reimbursed its out-of-pocket costs and attorney fees, and the remaining sums will be split, with [***] percent ([***]%) of such remaining sums going to Licensee, and [***] percent ([***]%) of such remaining sums going to ULRF. In the event that a non-cash cross license is awarded or a non-cash settlement is reached, both Parties agree to negotiate appropriate compensation in good faith. Licensee will not prosecute, settle or otherwise compromise any such suit in a manner that adversely affects the interests of ULRF without ULRF’s prior written consent.

 

11.3

Joint Suit. If ULRF and Licensee so agree, they may institute suit jointly. If so, they will: (a) prosecute the suit in both their names; (b) bear the out-of-pocket costs equally; (c) share any recovery or settlement equally; and (d) agree in a separate written document how they will exercise control over the action. In the event that a non-cash cross license is awarded or a non-cash settlement is reached, both Parties agree to negotiate appropriate compensation in good faith.

 

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11.4

ULRF Suit. If Licensee elects to not pursue a suit pursuant to either of Sections 11.2 or 11.3, ULRF may institute and prosecute a suit so long as it conforms with the requirements of this Section 11.4. ULRF will diligently pursue the suit and will bear the entire cost of the litigation, and will reimburse Licensee for any costs, expenses, and counsel fees reasonably incurred by Licensee. ULRF will keep Licensee reasonably apprised of all developments in the suit, and will seek Licensee’s input and approval on any substantive submissions or positions taken in the litigation regarding the scope, validity and enforceability of the Licensed Technologies. ULRF will not prosecute, settle or otherwise compromise any such suit in a manner that adversely affects the interests of Licensee without Licensee’s prior written consent. Licensee may be named as a party only if: (a) Licensee’s, ULRF’s and UofL’s respective counsel recommend that such action is necessary in their reasonable opinion to achieve standing; (b) Licensee is not the first named party in the action; and (c) the pleadings and any public statements about the action state that ULRF is pursuing the action and that ULRF has the right to join Licensee as a party plaintiff thereto.

 

11.5

Recovery. If ULRF institutes suit pursuant to Section 11.4, any recovery in excess of any unrecovered litigation costs and fees (including expenses paid to Licensee) will be shared with Licensee as follows: Any recovery will be split, with [***] percent ([***]%) of such sums going to ULRF, and [***] ([***]%) of such sums going to Licensee. In the event that a non-cash cross license is awarded or a non-cash settlement is reached, both Parties agree to negotiate appropriate compensation to ULRF in good faith.

 

11.6

Abandonment of Suit. If either ULRF or Licensee commences a suit and thereafter intends to abandon the suit, it will give timely notice to the other Party. The other Party may continue prosecution of the suit, in which case Section 11.2 shall apply if such other Party is Licensee and Sections 11.4 and 11.5 shall apply if such other Party is ULRF.

12. DECLARATORY JUDGMENT

 

12.1

Against Licensee. In the event a declaratory judgment action alleging invalidity or noninfringement of any Licensed Patent is brought against Licensee, then Licensee, at its option and sole discretion, will have the right to control the sole defense of the action at its own expense; provided, however, that if Licensee does not begin to do so within thirty (30) days after the commencement of such action, then ULRF shall have the right to intervene and take over the sole defense of the action at its own expense.

 

12.2

Against ULRF. In the event a declaratory judgment action alleging invalidity or noninfringement of any Licensed Patent is brought against ULRF, then Licensee, at its option and sole discretion, will have the right, within thirty (30) days after commencement of such action, to intervene and take over control the sole defense of the action at its own expense; provided, however, that if Licensee does not begin to do so within thirty (30) days after such commencement, then ULRF shall have the right to control the sole defense of the action at its own expense.

 

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13. CONFIDENTIALITY

Confidentiality Agreement. The Reciprocal Non-Disclosure Agreement is hereby incorporated into this Agreement and made a part hereof, and a breach of the Reciprocal Non-Disclosure Agreement by a Party with respect to Confidential Information relating to this Agreement shall be deemed a breach by such Party of this Agreement.

14. NOTICES AND INVOICES

 

14.1

Notices. All notices required or permitted to be given hereunder will be effective when given in writing, with reference to this Agreement and when (a) sent by email with receipt confirmed, (b) sent by registered or certified mail, return receipt requested, or (c) by overnight courier, such as Federal Express or UPS, to the other Party at its respective address set forth below or to such other address as such other Party may designate by written notice from time to time hereunder. Notices will be deemed effective when received.

 

If to Licensee:		Regenerex, Inc.
		201 East Jefferson Street, Suite 110B
		Louisville, KY 40202
		[***]
		With a copy (which shall not constitute notice) to:
		Proskauer Rose LLP
		Eleven Times Square
		New York, NY 10036
		Attention: [***]
If to ULRF:		University of Louisville Technology Transfer
		300 East Market Street, Suite 300
		Louisville, KY 40202
		Email: [***]
		Attn.: [***]
		ULRF Ref. [***]
		With a copy (which shall not constitute notice) to:
		University of Louisville Office of the V.P. for Strategy and
		General Counsel
		206 Grawemeyer Hall
		Louisville, KY 40292

 

14.2	Invoices. ULRF may submit invoices for any payments due in electronic form via email sent to the email address supplied by Licensee from time to time. An invoice directed to the last email address provided by Licensee to ULRF will be deemed received by Licensee when sent by ULRF.

 

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15. TERM AND TERMINATION

 

15.1

Term. This Agreement will continue in full force and effect from the Effective Date until the expiration or earlier invalidation of the last Valid Claim of any of the Licensed Patents, unless sooner terminated by operation of law or by acts of either of the Parties in accordance with the terms of this Agreement (the “Term”).

 

15.2	Termination by Licensee. Licensee may terminate this Agreement by providing written notice to ULRF in accordance with Section 14.1 at least ninety (90) days in advance of the effective date of termination selected by Licensee.

 

15.3

Termination by ULRF for Licensee’s Material Breach. If Licensee materially violates or materially fails to perform any term or provision of this Agreement (a “Material Breach”), then ULRF may give written notice of such default (“Notice of Default”) to Licensee and Licensee shall have thirty (30) days from receiving the Notice of Default to cure that Material Breach or, if not capable of being cured during that period, shall commence curing it during that period and thereafter diligently pursue curing. If Licensee fails to (a) cure that Material Breach or to commence curing it during that thirty (30)-day period or (b) with respect to Material Breaches that are not capable of being cured during that period, fails to cure it within a reasonable time based upon the nature of the breach (the applicable period in the case of (a) or (b), the “Cure Period”), then ULRF may give written notice of termination of this Agreement (“Notice of Termination”) stating an effective date that is not less than thirty (30) days after Licensee’s receipt thereof (the “Termination Effective Date”). If Licensee contests the existence of an asserted Material Breach or an asserted failure to timely commence curing the Material Breach or to cure the Material Breach within the applicable Cure Period, it may give written notice of such dispute (“Notice of Dispute”) at any time prior to any Termination Effective Date and the senior executives of each Party shall commence meeting as soon as practicable thereafter for a period of ninety (90) days to attempt in good faith to agree on a resolution of such dispute, during which time any Cure Period, termination period, or Termination Effective Date shall be tolled. If the parties are unable to resolve such dispute amicably during that dispute resolution period of ninety (90) days, then the tolling of any Cure Period, termination period, or Termination Effective Date shall continue for a further thirty (30) days. At the conclusion of those further thirty (30) days all such tolling shall end. For the avoidance of doubt, Licensee may seek, and nothing in this Agreement shall prohibit Licensee from seeking injunctive or other judicial relief with respect to any Notice of Default or Notice of Termination by ULRF pursuant to this Section 15.3, including, without limitation, to stay the Cure Period, termination period or the Termination Effective Date (regardless of any expiration of a contractual tolling period) or to dispute whether an uncured Material Breach has occurred or ULRF’s purported termination is valid. Termination of this Agreement will not relieve Licensee of Licensee’s obligation to pay any Royalty or fees owing at the time of such termination and will not impair any accrued rights of ULRF. Notices given under this Section will be subject to Section 14.1.

 

15.4

Termination for Bankruptcy or Insolvency. Notwithstanding Section 15.3: ULRF may terminate this Agreement immediately upon notice to Licensee in the event of: (a) the dissolution of Licensee, (b) the making of an assignment by Licensee for the benefit of its creditors, or an offer of settlement, extension, or composition to its unsecured creditors

 

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generally (c) the appointment of a trustee, conservator, receiver, or similar fiduciary for Licensee for substantially all of the assets of Licensee, or (d) in the event of the filing by Licensee of a petition for relief under the United States Bankruptcy Code by or against Licensee as a debtor or alleged debtor.

 

15.5

Consequences of Termination. Upon termination of this Agreement for any reason, nothing herein is to be construed to release either Party from any obligation that matured prior to the effective date of such termination. Licensee may, however, (a) for one (1) year following the date of termination, Sell inventoried Licensed Products, provided that Licensee pays to ULRF Royalties thereon as required under Article 5 and submits the related reports as required under Article 6, and (b) in perpetuity, in the event of the expiration of this Agreement, without restriction or any obligation to pay any royalties thereon to ULRF, Sell Licensed Products that are not Covered by any Licensed Patent and otherwise exercise Licensee’s rights under Section 2.2. Upon termination, Licensee will remain obligated to provide, in the form specified in Section 6.2, an accounting for and pay Royalties earned up to the date of termination and for the one (1) year period thereafter with respect to clause (a), as specified above. Any such payments or reports due hereunder will be sent to ULRF within thirty (30) days of termination. In the event of termination, ULRF will have no obligation to refund any royalties, fees, or other amounts paid to ULRF under this Agreement or any other agreement between the Parties.

 

15.6

Surviving Provisions. Surviving any termination or expiration are: (a) Licensee’s obligation to pay royalties or other amounts accrued or accruable with respect to the Term or as set forth in Section 15.5(a); (b) any claim of Licensee or ULRF, accrued or to accrue, because of any breach or default by the other Party; and (c) the provisions of Sections 2.2, 2.3, 3.1 (solely with respect to the nonexclusive grant Licensed Technical Information in Section 2.2), 3.6, 5.1-5.5 (inclusive) and 5.6 (solely with respect to amounts payable with respect to the Term or the Royalties payable pursuant to Section 15.5(a)), 6.2 (solely with respect to the Term and the one (1) year period thereafter), Articles 7, 8, 12, 13, 14, 15, and 17, Exhibit B (solely with respect to amounts payable with respect to the Term or the one (1) year period thereafter) and Exhibit B, Section 5, and any other provision that by its nature is intended to survive.

16. ASSIGNMENT

 

16.1

Permitted Assignment by Licensee. Subject to Section 16.3, Licensee may assign this Agreement (a) to their successor in interest in connection with an investment in Licensee or as part of a Change of Control, provided that, if Licensee is then in material breach of any provision of this Agreement and ULRF has provided written notice to Licensee of such material breach, Licensee must obtain ULRF’s prior written consent to such assignment, which ULRF shall not unreasonably withhold, condition or delay, and (b) to an Affiliate of Licensee.

 

16.2	Any Other Assignment by Licensee. Any other attempt to assign this Agreement by Licensee without ULRF’s prior written consent is null and void; provided, however, that ULRF shall not unreasonably withhold, condition or delay its written consent to any assignment desired by Licensee.

 

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16.3 Conditions of Assignment. Prior to any assignment, the following conditions must be met:

 

(a)

Licensee must give ULRF thirty (30) days prior written notice of the assignment if such assignment is not made pursuant to Section 16.1 (or, if such notice is made pursuant to Section 16.1, within thirty (30) days after the effective date of the assignment), including the assignee’s contact information; and

 

(b)

the assignee must agree in writing to ULRF to be bound by this Agreement.

 

16.4

After the Assignment. Upon a permitted assignment of this Agreement by Licensee pursuant to this Article, the term “Licensee” in this Agreement will mean the assignee, and upon an assignment of this Agreement by ULRF to which Licensee provides prior written consent, the term “ULRF” in this Agreement will mean the assignee.

 

16.5	No Assignment by ULRF. This Agreement may not be assigned or otherwise transferred by ULRF without the prior written consent of Licensee.

17. MISCELLANEOUS

 

17.1	Marking. Licensee will mark all Licensed Products made, used, offered for Sale, imported, or Sold under this Agreement, or their containers, in accordance with applicable patent marking laws.

 

17.2

Use of Names and Trademarks. Licensee will not, without the prior written consent of ULRF, identify ULRF, UofL, or any of their affiliated entities in any promotional statement or use the name of any Inventor (with the exception of any Inventors who are employed by, partners in, owners of or consultants of Licensee) or any UofL employee or student, or any trademark, service mark, trade name, or symbol of ULRF or UofL in a commercial manner; provided, however, that this Agreement shall not limit in any manner any right of Licensee to use Dr. Ildstad’s name. Notwithstanding the foregoing or anything to the contrary herein, Licensee may state that it is a licensee of ULRF with respect to the Licensed Technologies and this Section 17.2 shall not prohibit Licensee from making any disclosure of Confidential Information permitted by the Confidentiality Agreement or as required by applicable law if Licensee is a publicly traded company. ULRF or UofL may state that the Licensed Patents are licensed to Licensee.

 

17.3

Entire Agreement; Amendment. This Agreement, including the attached Exhibits, and the Confidentiality Agreement, together constitute the entire agreement and the understanding of the Parties with respect to the matters contained herein, and supersedes all prior communications, representations, or understandings, whether oral or written, between the Parties relating to the same. This Agreement may be modified only by an instrument duly executed by authorized officials of the Parties and only if such instrument specifically states that it is an amendment to this Agreement. For the avoidance of doubt, the “BACKGROUND IN CONNECTION WITH THE AMENDMENT AND RESTATEMENT” and “BACKGROUND” portions of this document are for general background information only and are not, and shall not be deemed to be, operative or binding contractual provisions.

 

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17.4

Severability. In the event any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable, that provision will be curtailed, limited or deleted, but only to the extent necessary to remove such invalidity, illegality or unenforceability, and the remaining provisions are not in any way to be affected or impaired thereby. In the event such curtailment, limitation or deletion is not allowed by relevant law or if such curtailment, limitation or deletion changes any essential basis of the bargain set forth in this Agreement, the Parties agree to substitute a new provision as similar in effect to the deleted provision as may be allowed by relevant law.

 

17.5

Interpretation. Any reference herein to any defined term includes both the singular and the plural, whether or not both forms are included in the reference. References to any statutes or regulations mean such statutes or regulations as amended at the time of interpretation and include any successor legislation or regulations. All references to particular Exhibits, Articles or Sections mean the Exhibits to, and Articles and Sections of, this Agreement, unless otherwise specified. Any Exhibits are hereby incorporated by reference and deemed a part of this Agreement. Unless the context otherwise requires, capitalized terms used herein will have the respective meanings specified or referred to in Article 1, or elsewhere herein. Any words not herein defined will have their ordinary meaning. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” The word “or” shall be construed to have the same meaning and effect as “and/or” unless preceded by the word “either.”

 

17.6

Waiver. The failure of either Party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement will not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other Party. None of the terms and conditions of this Agreement can be waived except by the written consent of the Party waiving compliance.

 

17.7

No Agency. The relationship between the Parties is that of independent contractors. Neither Party will be deemed an agent of the other in connection with the exercise of any rights hereunder, nor will either Party have any right or authority to assume or create any obligation or responsibility on behalf of the other.

 

17.8

Governing Law. This Agreement will be governed solely by the laws of the Commonwealth of Kentucky, without applying any law that would result in the application of a different body of law; provided that questions affecting the construction and effect of any patent will be determined by the law of the country in which the patent has been granted. The Parties agree that the United Nations Convention on Contracts for the International Sale of Goods will not apply to this Agreement.

 

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17.9

Jurisdiction and Forum. The state courts located in Franklin County in the Commonwealth of Kentucky will have exclusive jurisdiction over any claim or dispute concerning or arising out of this Agreement. The Parties hereby irrevocably consent to the exclusive jurisdiction of such courts and irrevocably waive any claim of inconvenient forum; provided that, notwithstanding the foregoing, either Party will have the right to seek injunctive relief and the enforcement of judgments in any court of competent jurisdiction.

 

17.10

WAIVER OF JURY TRIAL. EACH PARTY TO THIS AGREEMENT WAVES ANY RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF A CONTRACT CLAIM WITH THIS AGREEMENT.

 

17.11

Compliance with Laws. This Agreement will be subject to all United States laws and regulations now or hereafter applicable to the subject matter of this Agreement. Licensee will comply with all applicable international, national, state, regional, and local laws and regulations in performing its obligations hereunder and in Licensee’s use, manufacture, Sale, offer for Sale, or import of Licensed Products or in Licensee’s practice of Licensed Methods. Without limitation, Licensee will observe all applicable United States and foreign laws and regulations governing the transfer to other countries of technical data related to Licensed Products or Licensed Methods, including, without limitation, the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR). Licensee will obtain, and will require Affiliates and Sublicensees to obtain, such written assurances regarding export and re-export of technical data (including Licensed Products made by use of technical data) as may be required by EAR, and any similar foreign laws or regulations, and Licensee hereby gives such written assurances as may be required under those Regulations to ULRF.

 

17.12

Export Controls. Licensee understands that ULRF and UofL are subject to United States laws and regulations (including the Arms Export Control Act, as amended, and the Export Administration Act of 1979) controlling the export of technical data, computer software, laboratory prototypes, and other commodities, and ULRF’s obligations to Licensee under this Agreement are contingent on and subject to compliance with such laws and regulations. The transfer of certain technical data or commodities may require a license from an agency of the United States Government or written assurances by Licensee or a Sublicensee that Licensee or a Sublicensee will not export such technical data or commodities to certain foreign countries without prior approval of such agency. ULRF neither represents that such a license will not be required nor that, if required, it will be issued.

 

17.13

Execution in Counterparts; Electronic Signatures. This Agreement may be executed in counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument even if both Parties have not executed the same counterpart. Signatures provided by facsimile transmission or by electronic delivery in .pdf format shall be deemed to be original signatures.

 

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17.14

Section 365(n). All licenses granted under or pursuant to this Agreement by ULRF to Licensee are, and shall otherwise be deemed to be, for purposes of § 365(n) of the United States Bankruptcy Code (the “Code”), licenses to rights to “intellectual property” as defined under the Code. The Parties agree that Licensee, as a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Code. The Parties further agree that, in the event of the commencement of bankruptcy proceeding by or against ULRF under the Code, Licensee and its Affiliates and Sublicensees (and their respective sublicensees) shall be entitled to retain all of their rights to all Licensed Technology under this Agreement.

 

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Therefore, the Parties have executed this Agreement by their duly authorized officers or representatives on the Execution Date.

 

UNIVERSITY OF LOUISVILLE RESEARCH FOUNDATION, INC.				REGENEREX, INC.
/s/ T. Allen Morris				/s/ Suzanne Tollerud
T. Allen Morris, Ph.D., M.B.A. Director, Office of Technology Transfer				Suzanne Tollerud Director of Business Operations

 

Attachments:		Exhibit A: Licensed Patents
		Exhibit B: Fees and Royalties
		Exhibit C: Diligence Milestones

[Signature Page to Amended and Restated Exclusive License Agreement]

 

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EXHIBIT A – LICENSED PATENTS

 

[***]		[***]		[***]		[***]		[***]
[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]

 

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[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]
		[***]		[***]		[***]		[***]

[***]

(the “Jointly-Owned Patent Rights”)

 

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EXHIBIT B - FEES AND ROYALTIES

NOTICE

THIS EXHIBIT B CONTAINS FINANCIAL AND COMMERCIAL INFORMATION DEEMED BUSINESS SENSITIVE AND CONFIDENTIAL OF THE LICENSEE. ULRF AGREES NOT TO DISCLOSE THE TERMS OF THIS EXHIBIT TO ANY THIRD PARTY WITHOUT THE WRITTEN CONSENT OF THE OTHER PARTY, EXCEPT AS NECESSARY TO ENABLE THE PARTIES TO PERFORM UNDER THIS AGREEMENT OR AS MAY BE REQUIRED AND CONTEMPLATED IN THE CONFIDENTIALITY AGREEMENT.

 

1.

Royalties. On a Licensed Product-by-Licensed Product, Indication-by-Indication and country-by country basis during the Term, Licensee agrees to pay to ULRF royalties (“Royalties”) as a percentage of Net Sales for all Licensed Products Sold during the Term by Licensee, Affiliates, Sublicensees or any third party otherwise authorized by Licensee to Sell Licensed Products according to the following schedule:

 

a.

For Licensed Products that are Covered by Licensed Patents, Licensee agrees to pay to ULRF royalties at the rate of: (i) three percent (3%) of annual Net Sales less than $250 million in the aggregate; (ii) three and one-half percent (3.5%) of annual Net Sales from $250 million in the aggregate up to $750 million in the aggregate; and (iii) four percent (4%) of annual Net Sales above $750 million in the aggregate. Amounts owed under this Section 1(a) will be paid and reported on a semi-annual basis, as described in Section 6.2.

 

b.

For Licensed Products that include Licensed Technical Information but are not Covered by Licensed Patents, Licensee agrees to pay to ULRF royalties at the rate of : (i) one and one- half percent (1.5%) of annual Net Sales less than $250 million in the aggregate; (ii) one and three quarters percent (1.75%) of annual Net Sales from $250 million in the aggregate up to $750 million in the aggregate; and (iii) two percent (2%) of annual Net Sales above $750 million in the aggregate. Amounts owed under this Section 1(b) will be paid and reported on a semi-annual basis, as described in Section 6.2.

If Licensee reasonably determines it is necessary to obtain third party licenses in order to commercialize the Licensed Products, and the total combined royalty burden with respect to the Licensed Products (royalties owed to ULRF plus third party technologies) exceeds a combined threshold royalty of four percent (4%) of Net Sales, then the Royalties payable to ULRF under this Agreement for that License Year may be reduced by an amount proportionate to the amount by which the total royalty paid by LICENSEE exceeds the threshold as follows:

R2 = R1 (1-[T-TCR]/T),

where T = the total, combined royalty burden;

TCR = the Royalty threshold for stacking

R1 = the unstacked earned royalty due to ULRF; and

R2 = the adjusted Royalties to be paid by LICENSEE to ULRF.

 

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Provided, however, the Royalty rate owed to ULRF shall not be reduced by greater than fifty percent (50%) of the applicable Royalty rate stated in Section 1a and 1b above.

Notwithstanding anything to the contrary in this Agreement, with respect to Licensed Products that are not Covered by any Licensed Patent other than a Jointly Owned Licensed Patent, only seventy- five percent (75%) of the Sales of such Licensed Products shall be included in the calculation of Net Sales.

 

2.

Sharing of Non-Royalty Sublicensing Income. With respect to any Sublicenses granted by Licensee under Article 3, Licensee will pay to ULRF the applicable ULRF Share Percentage (as defined below) of Non-Royalty Sublicensing Income within [***] of Licensee’s receipt of any Non-Royalty Sublicensing Income. For Sublicenses that are restricted to territories for which Licensed Products are not Covered by Licensed Patents or to the extent Non-Royalty Sublicensing Income relates to Licensed Products that are not Covered by Licensed Patents, the percentage of Non-Royalty Sublicensing Income due and payable to ULRF shall be reduced by [***] percent ([***]%) [***].

“ULRF Share Percentage” shall mean: (a) with respect to Non-Royalty Sublicensing Income received by Licensee under a Sublicense entered into by Licensee during the [***] License Years, [***] percent ([***]%); (b) with respect to Non-Royalty Sublicensing Income received by Licensee under a Sublicense entered into by Licensee during the [***] License Years, [***] percent ([***]%); (c) with respect to Non-Royalty Sublicensing Income received by Licensee under a Sublicense entered into by Licensee during the [***] License Year, [***] percent ([***]%); (d) with respect to Non-Royalty Sublicensing Income received by Licensee under a Sublicense entered into by Licensee during the [***] License Year, [***] percent ([***]%), and (e) with respect to Non-Royalty Sublicensing Income received by Licensee under a Sublicense entered into by Licensee after the [***] License Year, [***] percent ([***]%).

Notwithstanding anything to the contrary in this Agreement, with respect to any Non-Royalty Sublicensing Income that is received by Licensee in consideration of a Sublicense to any Jointly Owned Licensed Patent, and no other Licensed Patents, the amount of such Non-Royalty Sublicensing Income shall be [***] percent ([***]%) of the amount that would otherwise be payable to ULRF pursuant to this Section 2.

 

3.	Prior Patent Costs. None. Not Applicable.

 

4.	Milestone Payments.

Licensee agrees to pay to ULRF the following one-time, non-creditable, non-refundable license milestone fees (each, a “Milestone Payment”) in accordance with the terms below:

 

•

Dosing by Licensee, or a Sublicensee as a service provider to Licensee, of a Licensed Product to the first subject or patient for the first phase III clinical trial: $125,000

 

•

FDA or other Regulatory Approval of a Licensed Product: $500,000

 

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•

FDA or other Regulatory Approval of the second Indication of a Licensed Product: $500,000

 

•

Achievement of $100M in aggregate Net Sales of Licensed Products: $500,000 Payment for each above milestone shall be paid within six (6) months from the date that specific milestone occurs. If Licensee receives a milestone payment that is Non-Royalty Sublicensing Income from a Sublicensee for the achievement of one of the above milestones, then Licensee will pay the greater of: (1) the above milestone payment or (2) the applicable ULRF Share Percentage of the amount received from the third party for that milestone and, in the case of (2), the above milestone payment shall be deemed paid. For example, if Licensee receives a milestone payment in the amount of $5,000,000 from a Sublicensee for the completion of a phase III clinical trial for a Licensed Product and the applicable ULRF Share Percentage is 25%, then Licensee would be responsible to pay ULRF 25% of that (amounting to $1,250,000), which is greater than the $125,000 payment listed above. If the Net Sales $500,000 Milestone Payment above is paid by Licensee, then Licensee shall have the right to reduce any subsequent ULRF Share Amounts that would otherwise be payable to ULRF based on Non-Royalty Sublicensing Income received by Licensee from a Sublicensee for the achievement of any commercial Licensed Product milestone(s) (e.g., net sales of Licensed Products) by an aggregate of $500,000.

 

5.	Shadow Equity Payment.

On October 30, 2018, Licensee converted from a limited liability company into a corporation and, immediately thereafter, had 150,000,000 shares of common stock authorized and 34,875,000 shares of common stock issued and outstanding. There are no shares of preferred stock of the Licensee outstanding as of the date hereof. Upon execution and delivery of this Agreement, Licensee hereby grants to ULRF “Shadow Equity” consideration equal to 348,750 shares of common stock (for clarity, in no event will this number of shares be less than one percent (1%) of all issued and outstanding shares on the date of conversion to a corporation). On or prior to (a) the Company’s first underwritten public offering of its common stock (an “IPO”), or (b) any transaction that is treated as a Deemed Liquidation Event, the Licensee, in its sole and absolute discretion, shall notify ULRF of its decision to either (i) issue to ULRF the aforementioned 348,750 shares of common stock, or (ii) make to ULRF a cash payment equal to (x) the aforementioned 348,750 shares of common stock multiplied by either (x) the price per share of common stock in the IPO, as set forth on the cover page of the final prospectus related thereto, or (y) the price per share of common stock received by a holder thereof in connection with such Deemed Liquidation Event; provided that such cash consideration shall be subject to any holdbacks, escrows or other contingences applicable to holders of common stock generally in connection with such Deemed Liquidation Event. In the event that Licensee shall deliver any shares of common stock to ULRF pursuant hereto, then ULRF shall enter into a lockup agreement for such duration and in the form requested by the underwriters of the IPO in the same manner as Company employees and other insiders. Distribution of shares or cash consideration shall occur within sixty (60) days of the closing of such transaction. For the avoidance of doubt, in no event shall any bona fide equity financing, which does not acquire ownership of a majority of the outstanding shares of capital stock of Licensee directly from the holders thereof, constitute a

 

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Deemed Liquidation Event hereunder (including, without limitation, any financing contemplated by Clarus Ventures and certain other investors pursuant to that certain stock purchase agreement, by and between the Company, Clarus Ventures and certain other investors listed therein for a financing of up to one hundred million dollars ($100,000,000), as the same may be amended from time to time after the date hereof). This Shadow Equity Payment provision is intended to survive termination or expiration of this Agreement.

For purposes of this Section 5, each of the following events shall be considered a “Deemed Liquidation Event”:

 

a.

a merger or consolidation in which

 

i.

the Licensee is a constituent party or

 

ii.

a subsidiary of the Licensee is a constituent party and the Licensee issues shares of its capital stock pursuant to such merger or consolidation, except any such merger or consolidation involving the Licensee or a subsidiary in which the shares of capital stock of the Licensee 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.

(1) the sale, lease, transfer, exclusive license or other disposition, in a single transaction or series of related transactions, by the Licensee or any subsidiary of the Licensee of all or substantially all the assets of the Licensee and its subsidiaries taken as a whole, or (2) 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 Licensee if substantially all of the assets of the Licensee 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 Licensee.

 

6.	Annual License Maintenance Fee

Licensee agrees to pay to ULRF a non-creditable, non-refundable annual license maintenance fee (the “Annual License Maintenance Fee”) on each anniversary of the Effective Date and according to the schedule below starting on the third (3^rd) anniversary date:

 

•

fifty thousand dollars ($50,000) due on the 3rd, 4th and 5th anniversary dates; and

 

•

seventy thousand eight hundred and thirty three dollars ($70,833) due on the 6th through 17th anniversary dates.

 

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7.

Notwithstanding anything to the contrary in this Agreement, (a) the calculations set forth in Sections 1 and 2 of this Exhibit B shall be calculated only on relevant amounts actually received by Licensee, and (b) Licensee shall not in any event be required to pay to ULRF any amounts in excess of the Net Sales or Non-Royalty Sublicensing Income actually received by Licensee.

 

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EXHIBIT C - DILIGENCE MILESTONES

NOTICE

THIS EXHIBIT C CONTAINS COMMERCIAL AND PROPRIETARY INFORMATION DEEMED BUSINESS SENSITIVE AND CONFIDENTIAL OF THE LICENSEE. ULRF AGREES NOT TO DISCLOSE THE TERMS OF THIS EXHIBIT TO ANY THIRD PARTY WITHOUT THE WRITTEN CONSENT OF THE OTHER PARTY, EXCEPT AS NECESSARY TO ENABLE THE PARTIES TO PERFORM UNDER THIS AGREEMENT OR AS MAY BE REQUIRED AND CONTEMPLATED IN THE CONFIDENTIALITY AGREEMENT.

 

1.	Non-Fee-Based, Diligence Milestones: Subject to the Section 2 of this Exhibit C below:

 

•

Licensee will raise two million dollars ($2M) cash, in the form of equity investment, grant funding and/or partnership funds by December 31,2018;

 

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Licensee or Sublicensee will enroll the first patient in a Phase III clinical trial for the Regulatory Approval of a Licensed Product by December 31, 2019;

 

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Licensee will spend at least two hundred thousand U.S. dollar ($200,000.00) each calendar year on the development of Licensed Products until the first Sale of a Licensed Product.

 

2.

Extension and Modification: Notwithstanding anything to the contrary in this Agreement, if Licensee fails to meet or expects that it will fail to meet a diligence milestone (as may be modified pursuant to this paragraph) by the milestone due date (as may be extended pursuant to this paragraph), Licensee may request an extension and/or modification of the diligence milestone, and ULRF will provide a reasonable extension and/or modification provided that Licensee reasonably demonstrates that it has been and is diligently and in good faith endeavoring to make progress towards achieving the applicable milestone.

 

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SCHEDULE 7.1(e)

GOVERNMENT AND FOUNDATION FUNDING

 

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EXECUTION COPY

Exhibit 10.16

REGENEREX, INC.

DEFERRED COMPENSATION PLAN

This Regenerex, Inc. Deferred Compensation Plan (the “Plan”) is adopted by Regenerex, Inc. (the “Company”) for the purpose of providing a deferred compensation arrangement to any independent members of the Board of Directors of the Company and their respective Beneficiaries in consideration of services rendered to the Company and as an inducement for their continued services in the future.

ARTICLE I: DEFINITIONS

Whenever used herein, the masculine pronoun shall be deemed to include the feminine, and the singular to include the plural, unless the context clearly indicates otherwise, and the following definitions shall govern the Plan:

1.1. “Account” means an account established under the Plan for each Participant who has made an Election with respect to Eligible Cash Compensation, to which there shall be credited or contributed such amounts as the Company shall determine in accordance with this Plan, including the Participant’s Credited Investment Return (Loss) determined under Article III, and from which there shall be reduced by any distributions made to a Participant or Beneficiary.

1.2. “Applicable Laws” means the requirements relating to the administration of this Plan under applicable state corporation laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the shares of common stock of the Company are listed or quoted and the applicable laws of any foreign country or jurisdiction where Eligible Cash Compensation will be deferred under this Plan.

1.3. “Beneficiary” means those persons, trusts or other entities entitled to receive payments which may be payable hereunder upon a Participant’s death as determined under Article IV.

1.4. “Benefit” means the amounts credited or contributed to a Participant’s Account pursuant to such Participant’s Election, plus or minus all Credited Investment Return (Loss).

1.5. “Board of Directors” or “Board” means the Board of Directors of the Company, or, for purposes of administering this Plan, a committee or subcommittee thereof designated by the Board to administer this Plan, provided that, any Director who participates in this Plan as a Participant shall not be a part of such committee or subcommittee.

1.6. “Bylaws” means the bylaws of the Company, as amended or restated from time to time.

1.7. “Charter” means the charter of the Company, as amended or restated from time to time.

1.8. “Code” means the Internal Revenue Code of 1986, as amended from time to time.

 

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1.9. “Company” means Regenerex, Inc.

1.10. “Credited Investment Return (Loss)” means the hypothetical investment return which shall be credited to the Participant’s Account pursuant to Article III.

1.11. “Distribution Date” means any date on which distribution of a Participant’s Account Benefit is made pursuant to Article III and such Participant’s Election.

1.12. “Effective Date” means December 20, 2018.

1.13. “Election” means a written election to participate and to defer compensation by a Participant in such form and consistent with the terms of the Plan as the Company may prescribe from time to time.

1.14. “Eligible Cash Compensation” means annual Board or committee retainers and meeting fees payable in cash by the Company.

1.15. “Participant” means each Director of the Board of the Company, to the extent he has made an Election under the Plan.

1.16. “Plan” means this Regenerex, Inc. Deferred Compensation Plan, as it may be amended from time to time.

1.17. “Securities Act” means the Securities Act of 1933, as amended from time to time.

1.18. “Section 409A” means Section 409A of the Code and the regulations and guidance promulgated thereunder.

ARTICLE II: ELIGIBILITY

2.1. Eligibility. Eligibility for participation in the Plan shall be limited to independent members of the Board of Directors of the Company. The Participants shall be eligible to defer Eligible Cash Compensation in accordance with this Plan and rules established by the Board. Each person who becomes a Participant shall execute an Election in the form prescribed by the Company.

2.2. Cessation of Participation. Participation in the Plan shall continue until all of the payments to which the Participant is entitled thereunder have been paid in full. For purposes of any calendar year or other period as to which a deferral election relates, the substantive provisions of the Plan that are not specifically modified or amended in a manner permitted under Section 409A by the Board, whether pursuant to an amendment to the Plan or otherwise, shall continue to be applicable.

2.3. Deferral Elections Generally. To the extent permitted under Section 409A and other Applicable Laws, the Board may permit an Election by each Participant with respect to Eligible Cash Compensation for any calendar year or other specified period. The Board may, by rule or Election or otherwise, provide or permit an Election as to the amounts, timing and other provisions applicable to any deferral election of Eligible Cash Compensation for any calendar year or other period to continue to apply to Eligible Cash Compensation for future calendar years, without the requirement to make a new Election, unless changed in a timely manner in accordance with the requirements of Section 409A.

 

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2.4. Time of Election of Deferral. Except as provided in the next sentence, an election to defer Eligible Cash Compensation must be made before the year in which the Eligible Cash Compensation is earned. To the extent permitted under Section 409A, the Board may permit a Participant, in his first year of eligibility for the Plan, to make a deferral election within 30 days of first becoming eligible, provided that such a deferral election may relate only to Eligible Cash Compensation attributable to the period following the deferral election. Any change to an Election may be effective only with regard to Eligible Cash Compensation earned commencing with the next calendar year and only to the extent permitted without penalty in accordance with the requirements of Section 409A.

ARTICLE III: DEFERRAL OF ELIGIBLE CASH COMPENSATION

3.1. Establishment of Accounts. The Company shall cause an Account to be kept in the name of each Participant and each Beneficiary of a deceased Participant who has made an Election with respect to Eligible Cash Compensation, which shall reflect the value of such Participant’s Benefit, as adjusted from time to time to reflect Credited Investment Return (Loss).

3.2. Crediting of Accounts. Except as otherwise determined by the Board, the Company shall credit to each Participant’s Account a notional amount equal to the gross amount of the Eligible Cash Compensation deferred under the Plan.

3.3. Vesting. Except as otherwise determined by the Board in advance of the Election deadline, amounts credited to an Account in respect of Eligible Cash Compensation (and the earnings (losses) credited thereon) shall be 100% vested.

3.4. Credited Investment Return (Loss). Except as otherwise determined by the Board, the Account shall be credited with any earnings (or losses) in accordance with investments designated by the Board after consultation with the Participant. For the avoidance of doubt, the Board shall not be bound by any investment preferences of the Participant.

3.5. Timing of Distribution. The vested portion of a Participant’s Account shall be paid (or payment shall commence) in accordance with the terms of the Participant’s Election.

3.6. Method of Distribution. Except as otherwise determined by the Board and/or as elected by a Participant pursuant to an Election permitted by the Board, all payments from a Participant’s Account shall be made in cash.

ARTICLE IV: BENEFICIARIES

4.1. Designation of Beneficiary. Each Participant shall have the right to designate, on such form as may be prescribed by the Company, a Beneficiary to receive any payments due under Article III which may remain unpaid at the Participant’s death and shall have the right at any time to revoke such designation and to substitute another such Beneficiary.

 

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4.2. No Designated Beneficiary. If, upon the death of the Participant, there is no valid designation of a Beneficiary, the Beneficiary shall be the Participant’s estate.

ARTICLE V: ADMINISTRATION OF THE PLAN

This Plan shall be administered by the Board (excluding any Participants). The Board has sole discretion to interpret the Plan and to determine all questions arising in the administration, interpretation, and application of the Plan. The Board’s powers include the power, in its sole discretion and consistent with the terms of the Plan, to determine who is eligible to participate in this Plan, to determine the eligibility for and the amount of benefits payable under the Plan, to establish rules for determining when and how elections can be made, to adopt any rules relating to administering the Plan and to take any other action it deems appropriate to administer the Plan. The Board may delegate its authority hereunder to one or more officers of the Company. Whenever payments are to be made under this Plan, such payments shall be made consistent with the terms of the applicable Election and no interest shall be paid on such amounts for any reasonable delay in making the payments. The Board’s decisions under the Plan shall be final and binding on all Participants, as well as the Participant’s heirs, assigns, administrator, executor, and any other person claiming through the Participant. This Plan shall be interpreted and administered in a manner that complies with Section 409A.

ARTICLE VI: MISCELLANEOUS

6.1. The right of a Participant or his or her designated Beneficiary to receive a distribution hereunder shall be an unsecured claim against the general assets of the Company, and neither the Participant nor a designated Beneficiary shall have any rights in or against any specific assets of the Company. The contents of each Account shall be considered assets of the Company until distributed to a Participant or his or her designated Beneficiary. This Plan shall not be construed to require the Company to fund, prior to payment, any amounts payable under this Plan.

6.2. If, in the Company’s opinion, a Participant or Beneficiary for any reason is unable to handle properly any payments payable to him or her under the Plan, then the Company may make such arrangements which it determines to be beneficial to such Participant or Beneficiary, to the extent such arrangements have not been made by such Participant or Beneficiary, for the distribution of such payment, including (without limitation) the distribution of such payment to the guardian, conservator, spouse or dependent(s) of such Participant or Beneficiary.

6.3. The right of any Participant, any Beneficiary, or any other person to the payment of any amounts under this Plan shall not be assigned, transferred, pledged or encumbered.

6.4. This Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Participant and his heirs, executors, administrators and legal representatives.

6.5. Nothing contained herein shall be construed as conferring upon any Participant the right to continue in the service of the Company as a member of the Board of Directors. Nothing in this Plan or any Benefits shall in any way interfere with or limit the right of the Company, or any affiliate of the Company, to terminate any Participant’s status as a member of the Board of Directors at any time, as applicable, or confer upon any Participant any right to continue in the service of the Company or any affiliate of the Company.

 

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6.6. If the Company, the Participant, any Beneficiary, or a successor in interest to any of the foregoing, brings legal action to enforce any of the provisions of this Plan, the prevailing party in such legal action shall be reimbursed by the other party for the prevailing party’s costs of such legal action including, without limitation, reasonable fees of attorneys, accountants and similar advisors and expert witnesses.

6.7. This Plan shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable principles of conflict of laws) except to the extent the laws of the State of Delaware are superseded by or conflict with Applicable Law.

6.8. This Plan constitutes the entire understanding and agreement with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations or warranties among a Participant and the Company other than those set forth or provided for herein.

6.9. If any provision of this Plan is held to be illegal or invalid for any reason, that illegality or invalidity shall not affect the remaining portions of this Plan, but such provision shall be fully severable and this Plan shall be construed and enforced as if the illegal or invalid provision had never been included in this Plan. Such an illegal or invalid provision shall be replaced by a revised provision that most nearly comports to the substance of the illegal or invalid provision. If any of the terms or provisions of this Plan or any Election conflict with the requirements of Applicable Laws, those conflicting terms or provisions shall be deemed inoperative to the extent they conflict with Applicable Law. In the event of any conflict or ambiguity between an Election and the Plan, the terms of the Plan shall govern.

6.10. No person constituting, or member of the group constituting, the Board shall be liable for any act or omission on such person’s part, including but not limited to the exercise of any power or discretion given to such member under this Plan, except for those acts or omissions resulting from such member’s gross negligence or willful misconduct. The Company shall indemnify each present and future person constituting, or member of the group constituting, the Board against, and each person or member of the group constituting the Board shall be entitled without further act on his or her part to indemnity from the Company for, all expenses (including the amount of judgments and the amount of approved settlements made with a view to the curtailment of costs of litigation) reasonably incurred by such person in connection with or arising out of any action, suit or proceeding to the fullest extent permitted by law and by the Charter and Bylaws of the Company.

6.11. The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the payment of any cash hereunder, payment by the Participant of, any federal, state or local taxes required by law to be withheld. In addition, on the occurrence of any event with respect to any Eligible Cash Compensation deferred pursuant to this Plan that requires the Company to withhold taxes, the Participant shall make arrangements satisfactory to the Company whereby such taxes may be paid.

 

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6.12. The Board may at any time amend, suspend or discontinue this Plan, provided that such amendment, suspension or discontinuance meets the requirements of Applicable Laws, including without limitation, any applicable requirements for stockholder approval. Notwithstanding the above, an amendment, suspension or discontinuation shall not be made if it would substantially impair the rights of any Participant under any Benefits previously granted in connection with a deferral of Eligible Cash Compensation elected by a Participant pursuant to this Plan, without the Participant’s consent, except to conform this Plan and any Benefits granted in connection with this Plan to the requirements of Applicable Laws.

6.13. Claims and Appeals.

(a) Claims Procedure. The Participant or any other person who believes he or she is entitled to any payment under the Plan may submit a claim in writing to the Board within ninety (90) calendar days of the earlier of (i) the date the claimant learned the amount of his benefits under the Plan or (ii) the date the claimant learned that he or she will not be entitled to any benefits under the Plan. If the claim is denied (in full or in part), the claimant will be provided a written notice explaining the specific reasons for the denial and referring to the provisions of the Plan on which the denial is based. The notice also will describe any additional information needed to support the claim and the Plan’s procedures for appealing the denial. The denial notice will be provided within ninety (90) calendar days after the claim is received. If special circumstances require an extension of time (up to ninety (90) calendar days), written notice of the extension will be given within the initial ninety (90) day period. This notice of extension will indicate the special circumstances requiring the extension of time and the date by which the Board expects to render its decision on the claim.

(b) Appeal Procedure. If the claimant’s claim is denied, the claimant (or his authorized representative) may apply in writing to the Board for a review of the decision denying the claim. Review must be requested within sixty (60) calendar days following the date the claimant received the written notice of their claim denial or else the claimant loses the right to review. The claimant (or representative) then has the right to review and obtain copies of all documents and other information relevant to the claim, upon request and at no charge, and to submit issues and comments in writing. The Board will provide written notice of its decision on review within sixty (60) calendar days after it receives a review request. If additional time (up to sixty (60) calendar days) is needed to review the request, the claimant (or representative) will be given written notice of the reason for the delay. This notice of extension will indicate the special circumstances requiring the extension of time and the date by which the Board expects to render its decision. If the claim is denied (in full or in part), the claimant will be provided a written notice explaining the specific reasons for the denial and referring to the provisions of the Plan on which the denial is based. The notice also will include a statement that the claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents and other information relevant to the claim and a statement regarding the claimant’s right to bring an action under Applicable Law.

 

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ARTICLE VII: SECTION 409A

7.1. Although the Company does not guarantee the particular tax treatment of any Benefits in connection with a deferral of Eligible Cash Compensation under the Plan, such Benefits are intended to comply with, or be exempt from, the applicable requirements of Section 409A and the Plan and any Election made hereunder shall be limited, construed and interpreted in accordance with such intent. In no event whatsoever shall the Company or any of its affiliates be liable for any additional tax, interest or penalties that may be imposed on a Participant by Section 409A or any damages for failing to comply with Section 409A.

7.2. Notwithstanding anything in the Plan or in an Election to the contrary, the following provisions shall apply to any Benefits in connection with a deferral of Eligible Cash Compensation under the Plan that constitute “non-qualified deferred compensation” pursuant to Section 409A. A termination of service shall not be deemed to have occurred for purposes of any provision of this Plan or an Election providing for payment upon or following a termination of the Participant’s service unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision, references to a “termination,” “termination of employment” or like terms shall mean “separation from service.” Notwithstanding any provision to the contrary in the Plan or the Election, if the Participant is deemed on the date of the Participant’s termination to be a “specified employee” within the meaning of that term under Section 409A(a)(2)(B) of the Code and using the identification methodology selected by the Company from time to time, or if none, the default methodology set forth in Section 409A, then with regard to any payment due upon a “separation from service,” to the extent required to be delayed in compliance with Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of the Participant’s “separation from service,” and (ii) the date of the Participant’s death. All payments delayed pursuant to this Section 7.2 shall be paid to the Participant on the first day of the seventh month following the date of the Participant’s “separation from service” or, if earlier, on the date of the Participant’s death. Whenever an Election specifies a payment period without reference to a particular date, the actual date of payment within the specified period shall be within the sole discretion of the Company.

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To record the adoption of the Plan, the Company has caused its authorized officer to execute the same, effective as of the 21^st day of December, 2018.

 

REGENEREX, INC.
By:		/s/ Scott Requadt
Name:		Scott Requadt
Its:		Chief Executive Officer

 

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